Down 15% since the end of 2021, Toronto-Dominion Bank (TSX:TD) has clearly been cut down to size by the deteriorating economic environment. But that’s a big drop — one that has many investors questioning what to do next. Is TD Bank stock through the worst of it, or is there more pain to come?
Last quarter: Trouble brewing for TD
TD Bank’s last quarter, its third quarter (Q3) of fiscal 2023, saw revenue increase 12% to $13 billion. It was a very strong result — until we look further down the income statement. At this point, we’ll see that reported net income fell 7.8% to $2.96 billion, and adjusted net income fell 2.2% to $3.7 billion. This translated to a 10% decline in reported earnings per share (EPS) and a 5% decline in adjusted EPS.
At that time, TD Bank’s management described pockets of slower growth, such as in real estate lending as well as higher costs. They also described a challenging operational environment in the U.S., as the market had to grapple with large bank failures. Finally, higher interest rates continued to weigh on the bank, and it ramped up provisions for credit losses (PCLs), anticipating the damage to come. In the quarter, TD recorded $766 million of PCLs. This compares to the $351 million in PCLs in the same quarter last year.
For its part, TD Bank seems to be weathering these difficulties well. This can be evidenced in the strong loan growth in the quarter. It can also be seen in the bank’s success in the wealth management business, which saw market share growth in exchange-traded funds, and financial planning.
Disappointing results in the last two quarters
Yet, despite its company-specific successes, TD Bank has been performing below expectations for the last two quarters. In fact, earnings have come in as much as 6% below consensus expectations in these quarters. Naturally, this has resulted in reductions to the stock’s earnings estimates for this year and next.
The coming quarter, which will be released on Thursday, will provide us with an update to the burning questions that are on all of our minds: how will TD Bank’s business fare in the increasingly challenging macro economic environment of today?
Expectations have already come down, but will they need to come down even further? The current consensus expectation for TD Bank’s Q4 is for EPS of $1.90. This compares to the $2.18 posted in Q4 last year. It represents a 13% year-over-year decline and an acceleration of the earnings decline.
The bottom line
In assessing TD Bank, I would urge you to maintain a long-term perspective. Yes, TD Bank’s stock price is trading 23% lower than it was in 2022. But it’s still trading 14% higher than the end of 2019.
In determining whether TD Bank stock is a buy, sell, or hold, I’m focusing on three high-level ideas. Firstly, the consumer is at risk from higher interest rates, which is a negative. Secondly, TD Bank has been seeing negative momentum, posting results that are down year over year and below expectations. Lastly, in my view, TD Bank’s stock price is not trading at low enough valuations and still has downside risk. Therefore, I think the stock is a sell or a hold for the dividend. I’ll keep a close eye on it and be ready to add more of this leading Canadian bank to my portfolio when the price dips lower.