While Toronto-Dominion Bank (TSX:TD) is one of Canada’s best and brightest banks, there are some undeniable macro headwinds that threaten it. From the recent U.S. banking insolvency of Silicon Valley Bank, to rising rates and the threat of a recession, the environment is a lot riskier than it was just a few years ago. Can TD Bank stock thrive through all of this?
TD Bank recently reported earnings that exceeded analyst estimates on the strength of its retail banking segment. Can this momentum go on, or are the headwinds about to catch up to TD Bank stock?
Earnings report highlights strength and scale of TD’s diversified business
The first quarter of fiscal 2024 was anything but boring. A 16% increase in revenue was coupled with an 8% increase in earnings to $4.2 billion. Although there was certainly a lot of noise in the quarter, the adjusted results show a business that continues to thrive in the face of uncertainty. For example, the Canadian personal and commercial banking segment reported a 17% increase in revenue, as record credit card spending and organic loan growth boosted results.
U.S. retail banking also showed massive strength. Earnings of $1 billion were up 27% amid very strong loan growth. It’s clear that TD Bank continues to dominate the banking scene in Canada, and increasingly in the U.S. But what if we dig a little deeper? Are cracks beginning to show in TD Bank’s business?
The macro environment continues to shift
No bank operates on an island by itself – not even TD Bank. The recent news of the failure of Silicon Valley Bank in the US has hit bank stocks in North America. Because although there are few similarities between TD Bank and this U.S. bank that went under, it still sends a wave of shock and fear through the system.
As for TD Bank stock, this Silicon Valley Bank news did send it tumbling. While I do think that is a temporary hit, deeper issues lead me to fear that there may be more hits coming. For one, we have rising interest rates and its certain negative effect on consumers and the economy. For example, as homeowners renew mortgages at higher rate, some might be in trouble. Higher mortgage payments will lead to lower discretionary spending, and to lower savings – and the cycle begins.
TD is already recording higher provisions for credit losses (PCLs). In fact, PCLs came in at $690 in the quarter, compared to a mere $72 million last year. It’s clear that there’s been a deterioration in the credit outlook. While TD Bank still has a strong capital position, this will undoubtedly weigh on TD Bank stock in the upcoming quarters if it continues as I think it will.
After years of outperformance, is TD Bank stock due for a long breather?
TD Bank stock has certainly been a winner over the years. In fact, it has rallied an incredible 380% in the last 20 years. But recently, the risks for the bank have been mounting. Accordingly, TD’s stock price has already fallen almost 25% from its 2022 highs.
In conclusion, while TD Bank will continue to be supported in the long run by a growing North American population and its successful expansion strategy, the headwinds cannot be ignored. I believe that TD Bank’s stock price will see more hard times ahead. But the good news is that I think this weakness will very likely represent a strong long-term buying opportunity.