As one of Canada’s top banks, Toronto-Dominion Bank (TSX:TD) has earned its spot. Its strong history, diversified business, and risk-controlled business model have made TD the resilient bank that it is today. But is TD Bank stock a buy after its most recent earnings were plagued with rising provisions for loan losses and restructuring charges?
TD Bank stock remains firm as Q1 results beat expectations
In the last five years, TD Bank’s stock price has risen 8.4%. This might come as a surprise to those of us who have watched the stock tumble 25% from 2022 highs. But the stock has performed reasonably well over the medium term.
It’s very interesting to note that in the five years ended 2023, TD’s revenue has doubled due largely to its acquisition of SG Cowan, and net income has fallen more than 10%. TD’s latest result, Q1 2024, showed more of the same trends that we have already been seeing in 2023. For example, revenue increased 5% due to higher fee income and the acquisition of Cowan. Also, expenses were up 12%, and TD’s earnings per share (EPS) declined 10% to $2. But the bottom-line result beat analyst expectations, and that is a big positive for the stock.
While we can expect slowing growth due to the macro environment, TD Bank continues to see operating momentum, as seen in its loan growth numbers. For example, Canadian business banking loans increased 8%, and U.S. retail loans increased 9%.
Provisions for credit losses (PCLs) rise sharply
One of the big negatives in TD Bank’s result was the sharp increase in its PCLs, which came in at $1 billion. This was higher than analyst expectations and an increase from $690 million a year ago. The bank commented on the credit environment today, comparing it to pre-pandemic levels, as rising unemployment and elevated interest rates have challenged consumers. However, we can expect that the quality of TD’s loan portfolio will shelter it somewhat from this negative trend.
So far, TD Bank seems to be weathering these difficulties well. This can be evidenced by the strong loan growth in the quarter. It can also be seen in the bank’s success in the wealth management business, and in its capital markets business, which is benefitting from the Cowan acquisition.
Restructuring charges to bring future savings
In the quarter, TD Bank recorded restructuring charges of $291 million. This was the result of severance charges, real estate optimization, and asset impairments, to name a few. We can expect more restructuring charges to come as the bank continues to work on improving efficiencies. When all is said and done, we can expect savings of $400 million pre-tax in 2024, and an annual run rate savings of $600 million.
TD stock’s valuation remains attractive
In assessing TD Bank stock, I’m maintaining a long-term perspective. TD Bank has decades of experience and has survived and thrived, despite many bad moments. I think that this time will be the same. Although growth will likely slow and the macro environment will remain tough, TD Bank remains one of the best stocks to buy now for its strong long-term investment case.
