Toronto-Dominion Bank (TSX: TD)(NYSE: TD) was among the stocks hit particularly hard in the COVID-19 market crash. Falling 35% from top to bottom, it dipped further than most non-energy stocks. With high exposure to mortgages, consumer credit and oil/gas loans, the bank was dealing with major problems.
Now, however, it’s beginning to look like things may not be so bad. Recently, TD CEO Bahrat Masrani announced that the company would not be laying people off in the wake of COVID-19 — a move that may indicate that TD executives don’t expect prolonged fallout from the pandemic and the oil price collapse.
If that’s the case, the stock is an undeniable buy right now. To see whether that is the case, let’s take a look at the headwinds TD bank is currently facing.
Headwinds TD bank is currently facing
TD Bank’s current headwinds come in three basic forms: mortgages, consumer credit and oil & gas loans.
The mortgage problem is basically a temporary one brought on by COVID-19. With the pandemic putting people out of work, many Canadians aren’t paying rent or making mortgage payments. In anticipation of this trend, all of the Big Six banks are deferring mortgage payments for six months on a case-by-case basis.
In theory, the banks should collect this money at a later date, but people won’t necessarily come out of the lockdowns with six months of payments in their savings accounts. Increased defaults therefore seem likely.
A longer-term problem is that of consumer credit. Canadians have extremely high levels of debt relative to income: Canada’s household debt-to-income ratio is a whopping 175, which is far higher than Italy, China, or even the United States.
With that much debt comes potential for defaults, so it’s therefore no surprise that TD has been increasing its Provisions for Credit Losses (PCLs).
Finally, there’s the matter of oil & gas loans. Canadian banks issue a lot of loans to oil & gas companies due to the energy sector’s outsized role in the Canadian economy.
With oil in the gutter, many of those companies are at risk of default. TD’s exposure to these loans isn’t as great as, say, CIBC’s, but it’s still significant.
Why these issues may not be as big as some people think
That said, TD Bank’s problems may not be as big as some believe as TD Bank’s business is geographically diversified. With about 33% of its earnings coming from the U.S., TD bank is insulated from domestic problems.
This is particularly true if you compare the bank to a domestic-oriented competitor like CIBC. The U.S. has economic problems of its own; however, the biggest two (consumer credit and oil & gas loans) are less significant there than in Canada.
Additionally, TD is a proportionately smaller player in the U.S. than it is in Canada, giving it more room to grow in that market. For these reasons, TD is one of the best buys among the Big Six banks right now.
