These days, it’s hard to read financial news and not wince. Although stock market returns have been good year-to-date, there are a number of ominous signs on the horizon. Between a sluggish housing market, inverting yield curves and slow fourth quarter GDP growth, the bad news has generally outweighed the good. In fact, the majority of economists asked about a potential recession have said they’re expecting one no later than 2018.
Which brings us to Toronto-Dominion Bank (TSX:TD)(NYSE:TD). TD Bank has been one of Canada’s strongest bank stocks, beating the rest of the big six over the past five years. However, with significant exposure to Canada’s slowing housing market and increasing provisions for loan losses, some are wondering if now might not be the best time to buy TD’s stock. Short sellers seem to agree, with many of them betting that TD will go down in the near term.
It’s true that certain risk factors are on the rise that could negatively impact TD’s business. However, the company is fundamentally as solid as ever. The following are three reasons why, even despite a possible economic slowdown, you should consider buying TD bank stock.
It benefits from a weak Canadian dollar
TD bank has more U.S. exposure than any other Canadian bank, through its fast-growing U.S. retail business. This business naturally makes most of its loans and takes most of its transaction fees in U.S. dollars, which are currently strong against the Canadian dollar.
The lower the Canadian dollar goes, the more valuable these earnings become (if you’re buying TD bank stock in Canada with Canadian dollars). CIBC (TSX:CM)(NYSE:CM) recently released a report saying that the Canadian dollar was set to fall to as low as $0.60 USD. Should that materialize, buying TD bank stock right now will prove to have been a wise idea–particularly if TD’s U.S. retail business keeps growing.
It has a conservative credit risk culture
TD is well known for its conservative lending practices, which result in it taking fewer risky loans than many other banks. Of course, this puts a cap on potential earnings. However, it also limits the bank’s exposure to defaults and bankruptcies. So while TD bank is much less likely to grow like lightning than a comparably sized U.S. bank, it’s also less likely to go belly up. In the meantime, the bank has a better long term earnings trajectory than any other Canadian bank, making it a good middle ground play.
It survived the last recession just fine
A final point worth mentioning about TD Bank is that it has a long history of weathering recessions without a scratch. Through the late 2000s recession, TD bank shares fell significantly in value, but the company kept making money.
This is in contrast to many other banks, particularly in the U.S., which either collapsed or had to receive government support in the same period. Thanks to its conservative risk management practices, TD Bank is perfectly positioned to get through recessions without too much trouble, which makes it a great pick in the current slowing economy.
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 Andrew Button has no position in any of the stocks mentioned.