1 Top Bank Stock to Benefit From an Improving U.S. Economy

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) will benefit from stronger U.S. economic growth.

| More on:

It hasn’t been all plain sailing for Canada’s banks. A saturated mortgage market, slowing housing market, increased regulations, and heavily indebted households are all poised to weigh on growth. That has garnered considerable negative attention for the major banks, including Canada’s second-largest bank by assets, Toronto-Dominion Bank (TSX:TD)(NYSE:TD), which is down by 2% since the start of 2018. 

Now what?

The bank is the second most-shorted stock on the Toronto Stock Exchange after the iShares S&P/TSX 60 Index ETF (TSX:XIU), indicating that short sellers are betting on a major market meltdown. During that meltdown, Toronto-Dominion will be among the worst affected. It is easy to understand the rationale for this play. Recent scandals, the saturated nature of Canada’s financial services market, and lack of growth opportunities, as well as a cooler housing market and the vulnerability of Canada’s heavily indebted households to a financial crisis will all impact the bank.

Nevertheless, the impact won’t be as severe as many pundits believe.

The bank has also positioned itself for growth, focusing on expanding its U.S. retail banking operations where it is ranked as a top-10 bank.

Trump’s fiscal stimulus, including slashing the corporate tax rate from 35% to 21%, will not only act as an important tailwind for economic growth south of the border, but it will also help Toronto-Dominion’s U.S. earnings. Stronger U.S. growth will trigger rising employment, greater consumption, higher business confidence, and hence, increased demand for personal as well as business credit. The sharp decline in the corporate tax rate will further boost Toronto-Dominion’s U.S. net earnings, which make up a third of the bank’s total earnings.

A firmer U.S. economy and greater growth will more than offset Canada’s cooling mortgage market and more restricted business as well as mortgage underwriting opportunities. First-quarter 2018 net income from Toronto-Dominion’s U.S. retail banking business shot up by an impressive 19% year over year, and there is every sign that such impressive growth will continue.

Neither Toronto-Dominion’s financial position nor its loan book are at risk, meaning that any Canadian economic downturn will not have any real impact in the bank. It is well capitalized with a common equity tier one capital ratio of 10.6% and an impressively low net-impaired ratio compared to total loans of 0.37%, which is an eight-basis-point improvement over a year earlier.

More importantly, 41% of Toronto-Dominion’s domestic mortgages are insured, meaning that it is able to transfer the risk of default to the mortgage insurer. The remaining 59% of mortgages that are uninsured have conservative loan-to-value ratio of 51%, providing considerable room for the bank and borrowers to renegotiate the loan in the event of financial stress.

It is likely — because of its solid U.S. operational footprint and focus on cutting costs, while driving greater returns from existing customers — that Toronto-Dominion’s earnings will continue to grow.

In response to rising government bond yields, the bank raised its mortgage rates to their highest in five years, boosting Toronto-Dominion’s profitability. It is also investing heavily in digitizing its operations, which will allow it to more adequately service customers while reducing costs, further expanding margins. 

So what?

Despite the short sellers, Toronto-Dominion is an attractive, valued addition to any portfolio at this time. While investors wait for the bank to unlock further value and for its stock to appreciate, they will be rewarded by its regularly growing and sustainable dividend, which yields 3.4%.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned. 

More on Dividend Stocks

House Key And Keychain On Wooden Table
Dividend Stocks

2 Real Estate Stocks to Add Growth to Your Portfolio

The right real estate investments, whether they are properties or real estate stocks, usually offer a decent mix of income…

Read more »

Canadian energy stocks are rising with oil prices
Dividend Stocks

2 Canadian Energy Stocks With Ridiculously Fast-Growing Dividends

Canadian energy stocks are gushing cash and there's plenty left for shareholders. Here are two stocks for ridiculously fast-growing dividends

Read more »

retirees and finances
Dividend Stocks

Retirees: 2 Top TSX Dividend Stocks to Buy for TFSA Passive Income

These industry leaders pay attractive dividends for a portfolio focused on passive income.

Read more »

Canadian stocks are rising
Dividend Stocks

2 High-Quality Real Estate Plays to Buy for High-Yielding Dividends

Take advantage of the housing market cooldown by investing in these two quality REITs.

Read more »

A miner down a mine shaft
Dividend Stocks

2 Mining Stocks That Have Double-Up Potential

Here's why Nutrien (TSX:NTR)(NYSE:NTR) and Agnico Eagle (TSX:AEM)(NYSE:AEM) are two mining stocks to consider right now.

Read more »

Cogs turning against each other
Dividend Stocks

Safe Stocks for a Market Drop

If you're getting sleepless nights from the market downturn, you can consider safe stocks to invest in for the long…

Read more »

Dividend Stocks

2 Canadian REITs on Sale: A Passive Landlord’s Dream Come True!

It's time for investors to explore Canadian REITs that are discounted and become passive landlords!

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

Retirees: Top TSX Stocks to Earn Worry-Free Passive Income

These TSX stocks have consistently returned cash to their shareholders irrespective of the volatility and market conditions.

Read more »