The Canadian bank stocks have taken huge hits to the chin over the past month. Some banks have taken on more damage than others, with U.S.-exposed TD Bank (TSX:TD) trailing behind the Big Six pack of late. Indeed, short-sellers have been on the big bank’s tail. Though short interest seems to be rising amid the bank’s well-known slate of risks, I’d argue that shorts are likelier to get squeezed given the time-tested resilience of the Canadian banks.
TD Bank, in particular, is a very well-managed financial institution that has more than enough wiggle room to make it through a so-called mini-banking crisis. Even with the “perfect storm” of headwinds that could weigh on future quarters, I remain confident that TD Bank will be quick to find its footing, as it always does when moving through difficult times.
Don’t bet against TD Bank stock
Now, the shorts may be piling in due to TD’s exposure to U.S. regional retail banking. And though regional bank depositors have seen their confidence be tested, I don’t think investors should be in a hurry to bet against a name like TD Bank. Sure, expanding into U.S. regional banking could help the Canadian bank beef up its growth rate over the next 10 years. That said, having exposure to such regionals does not necessarily imply a riskier growth profile.
TD has been wheeling and dealing of late, picking up the likes of Cowen in a deal worth US$1.3 billion. The deal got the green light by regulators quite quickly and is now closed. With its acquisition of First Horizons still pending, I think TD has very interesting options it can take advantage of.
First Horizons deal on the horizon?
Undoubtedly, shares of First Horizons have tumbled sharply in the wake of SVB Financial’s untimely failure. Though shares have recovered modestly as the dust settled in recent weeks, the market still seems to think that there’s a chance that TD could walk away from the deal or push to get a better price than the original US$13.4 billion.
Of course, there will be potential penalties for not going forward with the deal according to the initial terms. However, I think we’ve reached a point where renegotiating may be the bank’s best move at getting the best bang for its buck.
Currently, TD’s management team remains committed to First Horizons. It’s an interesting regional bank that would allow TD to push into a very interesting region of the U.S. market. Of course, there are a new slate of risks unearthed by recent regional banking failures. And I believe TD needs to factor that into the acquisition price. Though introducing new risks into one’s establishment is never ideal, I think that if the right price can be hit that TD could ultimately walk away with a magnificent deal.
Personally, I think US$13.4 billion doesn’t make a lot of sense for a bank with a market cap that’s still below the US$10 billion mark (at writing). Further, if TD walks, the stock could have permission to march higher as shorts look elsewhere for stocks to bet against.
TD Bank: What about valuation?
TD Bank stock trades at 10.10 times trailing price to earnings after recovering modestly (around 8%) from its recent lows.
The shorts have piled in of late, but they could rush to the exits just as quickly if TD exercises its options with First Horizons, while managing through other headwinds that I believe have already been baked into the stock for many months now. TD stock is in a grueling bear market and has underperformed the pack of late. This could change, as Mr. Market comes to his senses.
TD stock recently received an upgrade from CIBC capital markets, which notes of the opportunity to cut its First Horizons deal.
