The Toronto-Dominion Bank (TSX:TD) is one of North America’s cheapest and (on the top line at least) fastest growing bank stocks. The stock got cheap when, in 2023 and 2024, it was subjected to a US Department of Justice (DoJ) investigation into its anti-money laundering practices. The investigation ultimately found that TD allowed some of its tellers to commit money laundering, and the bank was fined $3 billion while having its US retail assets capped at $430 billion.
While the fine and asset cap that TD took last year were definitely damaging, they are now in the rearview mirror. TD has to restructure its US business in order to comply with the asset cap – it was just below the cap on its most recent quarterly report date, but bank assets tend to grow over time. So, TD may have to sell off some valuable US assets. Its lucrative Charles Schwab investment is one asset that’s considered potentially on the chopping block. So, sacrifices will have to be made.
However, the US asset cap only applies to the consumer-facing bank branches in that country. There are several other segments in TD’s business that could use funds raised by selling off US assets. There may be profitable investment opportunities in some of them, too:
- Investment banking. TD’s US investment banking segment is not subject to the asset cap and investment banking fees are growing this year. Another IB deal like 2023’s Cowen buyout might make sense here.
- Canadian banking. An infusion of cash would improve the Canadian retail bank‘s capital ratios, facilitating more loans.
- Dividends and share repurchases. The most clear and obvious use of cash from the sale of US retail assets, it could drive strong returns.
Decent top-line growth
Although TD’s earnings took a hit last year due to the money laundering investigation and subsequent penalties, the bank’s top line growth (i.e., revenue growth) was actually among the strongest in its peer group. With revenue up 10% in the fourth quarter, it beat most North American mega-banks in the same period. That indicates that there is a good foundation for the bank to thrive in future periods in which the fine is not holding earnings back.
Cheapness
Last but not least, TD Bank stock is quite cheap compared to its peer group. At today’s prices it trades at 9.5 times earnings, 2.5 times sales, and 1.2 times book value. This is considerably cheaper than most of TD’s competitors, which are averaging about 15 times earnings right now. Granted, the company’s profitability metrics took a hit this year due to the fine. But that will not affect its financial statements next year.
Foolish takeaway
TD Bank has definitely given investors a wild ride over the last five years. Between investigations, fines and asset caps, there’s been a lot to grind through. These bumps in the road led to a lot of stock price volatility, which contributed to the current opportunity to buy TD below 10 times earnings. Personally, I’m quite content to be holding TD stock today.
