Well, that time is upon us again – bank earnings season. And with that, Toronto Dominion Bank (TSX:TD) reported earnings that beat expectations as it benefitted from strong fundamentals in all of its segments. Yet, TD Bank’s stock price remains well below its 2022 highs.
Let’s explore whether TD Bank stock is the best bank stock for you right now.
TD Bank’s mixed second quarter
With TD Bank’s better-than-expected earnings result, I think that many of our concerns were put to rest, as the majority of the bank’s business segments performed really well.
In the Canadian personal and commercial banking segment, volume growth and positive operating leverage drove a 10% increase in revenue and a 7% increase in net income. In the wealth management and insurance segment, net income increased 19% to $621 million.
Overall, revenue increased 11% to $13.8 billion, and was higher than expectations. Similarly, adjusted EPS came in at $2.04 versus $1.94, higher than expectations that were calling for EPS of $1.85. “Unadjusted” EPS came in at $1.35 compared to $1.69 last year, for a 20% decline. This was negatively impacted by credit loss provisions, restructuring charges, and increases in non-interest expenses.
Finally, I think it’s useful to highlight TD Bank’s provision for credit losses (PCLs), which came in at $1.1 billion in the quarter. We might be getting somewhat immune to these big numbers, but this is big. PCLs were up $70 million sequentially and $472 million versus last year.
Money-laundering charges
TD Bank has been in the news recently for its failure to catch and stop money laundering activity. This has prompted an investigation by the U.S. Department of Justice. The total cost of these mistakes could top $2 billion. This scandal has placed a dark cloud over the bank and its stock. Efforts to reduce money laundering activity will need to be revamped, both in the U.S. and Canada going forward.
TD Bank stock: Trading below $77
In the last few years, TD Bank stock has been hit hard. This hit first happened mainly due to concerns over the health of the consumer and questions about how higher interest rates will affect their financial health. The banking system has been preparing for the pain related to this, and rising PCLs have been the norm.
More recently, TD Bank stock has also been feeling the pressure from the money-laundering investigation. With this, TD Bank’s stock price has fallen 30% from its 2022 highs and 21% year to date. The stock trades at less than 10 times earnings and a mere 1.3 times book value. These valuations are below the banking peer group and below historical levels.
The bottom line
TD Bank has survived many crises in its long history – this will be no different. The economy will re-balance, and the money-laundering investigation will resolve. In the end, we will be left with what we have always been left with – a well-diversified bank with strong positions both in Canada and the U.S., and with strong capitalization ratios. TD Bank stock and its leading franchise is on sale right now.
