What an epic rally it’s been for TD Bank (TSX:TD)(NYSE:TD) and its peers in the Canadian banking scene. Late last year, when sell-side analysts turned their back against TD Bank over the numerous headwinds, I told passive-income investors to stay the course and buy even more shares if they had the extra capital.
At the time, it was easy to bearish on Canada’s top banks. It seemed like nothing could go right after they slogged through a pandemic-plagued year full of steep provisions and thin net interest margins. The coronavirus crisis brought rates to the floor, and the rising rate environment was completely out of the question at the time. I couldn’t find many things to get excited about with TD Bank and its Big Six peers, except the discounted valuations.
Passive-income investors: Going against the grain with TD Bank
“As analysts turn their back against the well-run Canadian bank that I still think is worthy of a premium multiple versus its peer group, I think I’d be more inclined to scoop up more shares while they’re trading at a steep discount relative to historical averages,” I wrote in response to the TD downgrades back in October.
“Shares of TD Bank trade at 1.3 times book value, which is close to the lowest it’s been in recent memory. If any bank is going to bounce back from a crisis, it’s TD. While U.S. banking exposure will be viewed as a weak spot for the next 18 months or so, such exposure will be worthy of a premium after the dust has a chance to settle.”
As it turned out, I was right, and the bearish analysts were wrong. Instead of trying to “play” the U.S. election as most others were inclined to, I sided with history. TD Bank is a magnificent bank, and it’s bounced back from numerous crises, crashes, and bear markets. As such, I think it’s a mistake to discount TD’s rich history of recovering quickly from downturns. The opportunity to lock-in the swollen dividend yield was there, but if you flinched or doubted yourself, you missed out and will have to pay higher prices to get back in the name.
Miss the rally in TD stock?
Fortunately, TD Bank stock is undervalued, even after its ascent to $82 and change, where the stock sits today. Over the past six months, things have changed drastically. We’ve got clarity on that vaccine timeline, and we could find ourselves in a rising rate environment sooner than expected. Sure, the Fed isn’t thinking about raising rates yet, but the bond market signifies that they may have no choice but to react accordingly if the Fed is wrong about its benign inflation expectations.
Could TD Bank finally be in to see its NIMs expand? Possibly, making TD stock a great hedge if your portfolio is light on financials. But that’s not the only reason to own TD shares here.
Back to TD’s history of rising quickly out of crashes. Why is it among the first to come roaring out of the gate? It’s thanks in part to TD’s aura of conservative lending practices that appear ingrained in the bank’s corporate culture. When times are good, and credit is easy, TD isn’t going to take on absurd amounts of risk. It’s more than content picking the lowest-hanging fruit rather than climbing on a ladder made from popsicle sticks to harvest the fruit at the very top.
The Foolish takeaway for passive-income investors
Some banks have a track record of getting greedy when times are good. TD isn’t one of them. Last week, when Archegos Capital management imploded, the ripple effects of the mother of all margin calls were felt through the financial industry. TD Bank had no direct exposure to the Archegos, which deserves a round of applause.
I’ll end this piece with a recent quote from TD CEO Bharat Masrani:
“We pride ourselves in saying that we don’t make bad loans during the good times in order to be able to make good loans during bad times,” said Masrani.
