Is TD Bank (TSX:TD) Stock a Good Bet for a Recession?

The Toronto-Dominion Bank (TSX:TD)(NYSE:TD) has done well in recent years, but could it withstand a recession?

| More on:
Close up of newspaper headline for financial crisis news

Image source: Getty Images.

In the last global recession, bank stocks were among those hardest hit. With high exposure to an ailing mortgage market, many were caught with their pants down as new mortgages dried up and homeowners became insolvent.

The result was a financial crisis that culminated in many U.S. banks having to be bailed out. Canadian banks for the most part avoided the fate of their American counterparts. However, when the next recession comes around, that may change.

Many Canadian banks have large and growing U.S. divisions that they are coming to rely on for earnings growth. The Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is by far the biggest of these. With its U.S. retail division now contributing up to 30% of earnings, TD has become the most American of Canadian banks.

As you’re about to see, that could be a good thing or a bad thing, depending on the exact nature of the next recession. In this article I’ll be looking at a few factors that could influence how things play out.

Canadian consumer credit exposure

Because of its U.S. focus, TD has the least exposure to the Canadian credit market (proportionately) of all six big banks. This would be a good thing in the event of a recession that affects Canada but not the U.S.

Hedge fund bosses, including Steve Eisman, have been sounding the alarm recently about declining Canadian consumer credit quality. It’s not known exactly how bad Canadians’ credit scores have gotten, but it is well known that consumer debt levels are nearing all time highs. In the event of a Canadian recession, defaults would likely increase. TD would be protected from this to some extent by its geographic diversification.

U.S. presence

TD has a large and growing U.S. presence – particularly in East Coast markets like New York State. This U.S. business is a big part of why TD has grown more than other Canadian banks in recent years, as it routinely increases earnings by 20% or more year over year.

In the event of a recession affecting both the U.S. and Canada, this asset could quickly become a liability.

The U.S. banking system is much less regulated than Canada’s, and has experienced far more banking crises throughout history. In the past 119 years, the U.S. has gone through at least three banking crises: one in 1907, one in 1930, and one in 2008.

These were not mere downturns in earnings, but existential threats to the banks in question. Canada, by contrast, has never experienced such a serious crisis.

For TD, this could be a problem.

As an increasingly U.S.-focused bank, its retail banking operations are highly exposed to the U.S. financial environment. While TD itself is known for tight lending rules, the fact that it’s earning a lot of revenue in the U.S. could be a risk factor. With far less regulatory oversight, the U.S. banking system is always at greater risk of a crisis, and there’s nothing to prevent TD’s U.S. operations from getting caught up in one.

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 owns shares of TORONTO-DOMINION BANK.

More on Dividend Stocks

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »

sale discount best price
Dividend Stocks

1 Dividend Stock Down 11 Percent to Buy Right Now

Do you want a great dividend stock down 11% that can provide years of growth potential? Here's one heavily discounted…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Are you looking for dividend stocks to buy right now? Here are two top picks!

Read more »

edit Taxes CRA
Dividend Stocks

Tax Time: How to Keep More of Your Money

Nearly everyone hates paying taxes, although Canadians can lessen the financial pain with the right tax strategies.

Read more »