With the end of 2019 almost here, we have the fourth-quarter fiscal results for the banking sector. Given the results of the final quarterly performances, it’s vital to reconcile our investment strategies when it comes to Canada’s most important financial institutions.
Toronto Dominion Bank (TSX:TD)(NYSE:TD) is among the top banks operating in Canada, and there are reasons to believe that you should be worried about the stock moving into 2020.
The bank is up 4.43% from the start of the year, but the number is slightly misleading here.
Toward the end of 2018, TD stocks started going on a nosedive. Toronto-Dominion hit its 52-week low of $65.56 per share as December 2018 came to a close. Since then, the stock has recovered, but it has shown a relatively flat performance since then.
There are fears that Toronto-Dominion stocks could crash in 2020, while there is a strong opinion about buying TD stocks on the dip. Let’s take a better look at the situation so you can determine if you should buy the stock or avoid it in 2020.
Increasing debt exposure
Perhaps, the most significant issue plaguing the banking sector in Canada is rising debt exposure. Canadians are heavily indebted.
Despite the lower interest rates, increasing loan loss provisions do not spell good news for the overall banking sector in the country.
According to Statistics Canada, the debt-to-income ratio for Canadians rose to 170% in 2019 — an alarming figure that is putting more Canadian families at risk.
The risk to Canadian households, in turn, puts the entire banking sector in a vulnerable position moving into 2020. If the credit ratios keep deteriorating and loan loss provisions increase further, it can be catastrophic for Toronto-Dominion and other bank stocks.
Weaker capital market division
Lower IPO activity and the general uneasiness in the markets are also weighing in on the situation. The wholesale banking segment at Toronto Dominion reported a sharp decrease in quarterly earnings growth year over year at a negative 2.90% in Q4 2019. The higher provisions for losses, lower equity underwriting, and advisory fees resulted in the drop.
A deep downturn in Canada’s economy could be the tipping point for all Canadian banks. The commercial and personal banking segment can see a reduction in investment and spending.
If things get terrible, rising unemployment can become devastating for indebted households, and in turn, on TD. Despite being one of the overall best-performing banks in Canada’s banking sector, even Toronto-Dominion is buckling under the challenging conditions right now.
Foolish takeaway
Toronto Dominion stocks are in a problematic predicament right now. The low interest rates are not helping, as they drive interest margins down for the bank, loan growth is stumbling in domestic operations, and credit losses keep piling up. I think 2020 could be a year where TD can stumble, and its shareholders might face hard times with the bank.
