Canadian bank stocks have trailed the broader markets since the start of 2024 due to rising interest rates and macro headwinds such as inflation and a sluggish macro economy. A higher cost of debt typically increases delinquency rates across business segments, making bank stocks extremely cyclical.
While the TSX index trades near all-time highs, shares of Toronto-Dominion Bank (TSX:TD) are down almost 30% from all-time highs. However, the pullback has increased its dividend yield to 5.3%, making TD stock attractive for income-seeking investors. Let’s see if this top TSX dividend stock should be part of your equity portfolio in June 2024.
How did TD Bank perform in Q1 of 2024?
TD Bank reported earnings of $3.8 billion or $2.04 per share in the fiscal second quarter (Q2) of 2024 (ended in April). Its loans and assets under management grew by 7% and 6%, respectively, compared to the year-ago period. With interest rates expected to remain elevated for longer, TD should benefit from higher net interest income.
Alternatively, a challenging macro environment meant the bank’s provision for credit losses or PCLs was higher compared to Q1, negatively impacting its earnings. However, it managed to improve the bottom line by focusing on cost savings and operating leverage. TD emphasized the execution of its restructuring program and prioritized investments in its risk and control infrastructure.
The banking giant also ended Q1 with a CET1 (common equity tier-one) ratio of 13.4%, which is the highest among its peers in North America. The CET1 ratio showcases a bank’s ability to navigate an economic downturn, and a higher ratio is favourable. TD explained that its CET1 ratio reflects organic capital generation and maintains sufficient capital to address uncertain market conditions.
Strong performance across businesses
TD Bank is a diversified banking company. Its Canadian personal and commercial banking business delivered strong loan and deposit volume growth in Q2. Despite a highly competitive market, TD Bank’s real estate secured lending segment performed well in the April quarter. In fact, the bank recorded its 12th consecutive month of market share gains in this segment due to the launch of TD Mortgage Direct, a new distribution channel.
In the credit cards segment, TD grew loans by 11% while it ended Q2 with more than five million active mobile customers, a new digital milestone.
Its middle market loan balance increased by 20%, and lending fees grew 59% year over year. Additionally, in the asset management segment, it grew its market share in exchange-traded funds and recently added seven fixed-income funds to the product suite.
TD’s wholesale banking delivered record revenue for the second consecutive quarter in Q2, reflecting broad-based growth across the business, which includes underwriting, sales, and trading.
Is TD Bank stock undervalued?
Bay Street forecasts TD Bank’s adjusted earnings per share to increase from $8 in fiscal 2023 to $8.06 in fiscal 2024 and $8.38 in 2025. So, priced at less than 10 times forward earnings, TD Bank stock is cheap and should be on your watchlist, especially if interest rates are lowered in the next 12 months.
Despite the cyclicality associated with bank stocks, TD has raised its dividends by 9.4% annually in the last 20 years, which is exceptional. Analysts remain bullish on TD Bank stock and expect it to gain over 12% in the next 12 months.
