Toronto-Dominion Bank (TD) (TSE:TD), Canada's second-largest financial institution with significant retail banking operations in the United States, has had a difficult year. From a business perspective, the company recently settled an anti-money laundering (AML) violation with the U.S. Department of Justice (DOJ) and reported poor results.
However, amidst this weakness, long-term opportunities are emerging, and this represents a rare occasion where a major financial institution can be purchased for a price-to-earnings ratio less than 10x. I believe it's worth patient investors considering TD at this point. Therefore, I have a Buy rating on TD stock.
TD has 4 main divisions, namely:
Canadian banking services
Retail banking in the United States
Wealth management
Wholesale Banking
TD's entry into the United States was spurred by the 2005 acquisition of Vermont-based BankNorth. It then consolidated its presence in the United States by acquiring another East Coast institution, Commerce Bank, in 2007. By the time I began visiting New York for work in 2013, the green TD logo was present everywhere in Manhattan.
Interestingly, however, the U.S. retail banking segment has not been TD's primary growth driver in recent years and accounted for about a third of overall adjusted net income in the third quarter. 2024. Canadian banking continues to be the backbone of the company, and that's a good thing, given TD's recent troubles south of the border. Additionally, the Wealth Management and Wholesale Banking divisions tend to produce less predictable results and, notably, the IPO market has been relatively poor of late.
It's important to mention that TD also has a roughly 10% stake in shares of Charles Schwab (SCHW), whose shares have rallied about 30% in recent months.
It's always difficult to buy a stock on bad news, but I have taken a bullish stance on TD stock following the recent regulatory issues in the United States. The company was accused by the DOJ of violating anti-money laundering rules by administering weak controls and oversight of cash movements. It has been alleged that at least three money laundering rings may have moved more than $650 billion in funds through TD accounts.
TD reached a US$3.1 billion settlement with the Justice Department in October, a fine that could have been higher if TD had not cooperated with investigations. Although shares fell approximately -6.4% on the day of the announcement, the size of the fine was not surprising, since TD had already set aside over $3 billion in provisions. What probably caught the market off guard was the asset limit imposed by regulators. TD must meet an asset cap of US$434 billion within its US retail banking division. This essentially eliminates any growth prospects for TD's own U.S. banking operations.
However, the bank's U.S. operations have long performed poorly, and an optimistic view of the situation is that TD can refocus on operational efficiency rather than growth. Meanwhile, of course, TD shares have retreated into value territory.
On Thursday, December 5, TD released its fourth quarter and full year 2024 results (Canadian banks set their fiscal year from November 1 to October 31). Diluted earnings per share were C$1.97 for the fourth quarter and C$4.72 for the full year, representing an EPS decline of almost 15%. However, investors should not forget about the settlement costs of around $3.1 billion. On an adjusted basis, Q4 and 2024 EPS figures came in at CA$1.72 and CA$7.81, respectively, which is still slightly lower than it was in 2023.
U.S. operations largely explained the weakness due to higher provisions for credit losses, higher non-interest expenses and lower revenue. TD is working to strengthen its transaction monitoring processes, including related hiring and training. It's no surprise that spending is increasing. Nonetheless, TD's Canadian banking operations continue to bear fruit, and that division's fourth-quarter 2024 net income increased 9% compared to the same period last year.
This matches what the Royal Bank of Canada (RY) reported for the fourth quarter earlier this week. Meanwhile, Bank of Montreal (BMO), which also released its results, revealed that its adjusted net profit from Canadian banking operations fell 17% year-over-year. TD's results therefore remain satisfactory where it matters most. A concerning point in TD's press release, however, is the announcement that management is “suspending the following mid-term financial targets: adjusted EPS growth of 7-10%, return on equity of over 16%.” and positive operating leverage.”
Although analyst ratings are subject to updates after TD's earnings release, Wall Street generally views TD shares as undervalued. I also share this point of view.
Among the nine Wall Street analysts who cover TD Bank, there are three buy ratings, five hold ratings and one sell rating. While this represents a Hold consensus rating, the The average price target for TD stock is $62.15.which suggests an upside potential of around 17.7% from the recent trading price.
Following today's further share price decline, TD stock is trading at just 9.65 times its adjusted EPS for the past year. As the company continues to address anti-money laundering controls and invests in risk management, earnings growth will be challenged. I am disappointed that TD management suspended previous guidance instead of choosing to update it, which could raise concerns about limited visibility from the management team.
That said, CEO Bahrat Masrani is expected to retire in the coming months, and it makes sense to give the new CEO the opportunity to redefine his short-term financial goals.
Ultimately, I'm confident TD will get back on track. It may take a while, but at the current stock price, the valuation is too good to pass up. It's rare for a major bank to be put up for sale at less than 10 times earnings. At this multiple, I can withstand a temporary growth freeze and continue to hold a buy rating on TD.
