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Morningstar | Decent 2Q for Toronto Dominion; Hoping More Growth Will Materialize With Heightened Investments

Wide-moat Toronto-Dominion Bank reported decent fiscal second-quarter results. The wholesale banking unit made a comeback in the quarter, and the U.S. segment saw exceptional growth, leading to revenue growth of 8%, adjusted earnings growth of 7%, and adjusted EPS growth of 8%. We do not plan on making any material changes to our fair value estimates for Toronto-Dominion.

The adjusted return on common equity recovered, returning to 17% for the quarter. With half of the year done, EPS growth is at 4.4%, a bit below the low end of management’s midterm goal of 7%. Even with solid EPS growth of 8% for the rest of the year, the bank would have full-year EPS growth of 6%, just missing the low end of guidance. Even so, this would be entirely due to the tough first quarter of the year, which was largely affected by cyclical swings in the capital markets. Overall, underlying operations still appear quite strong at TD, particularly in the U.S., where net income was up 23%. Credit also appears relatively stable, as gross impaired formations are dropping back down again, and the provision for credit losses retreated to a more normalized level, with the PCL ratio below 40 basis points again. The key now for TD will be if its latest investments in employees and capabilities pay off with increased growth, particularly in the U.S. commercial and wholesale platform, as well as Canadian retail.

Growth for the Canadian retail segment slowed down, as expense growth of 11%, due to heightened investments, led to adjusted net income growth of only 2%. Loans grew at 5%, while wealth assets grew at 13%. Canadian home equity loans grew at roughly 6% annualized compared with first-quarter 2019. TD has been consistently outgrowing peers in this portfolio, and it will be an area to watch as the cycle develops. U.S. retail was the strongest segment during the quarter, with the underlying business growing net income at 12%, and TD Ameritrade seeing 27% growth. The wholesale banking unit sprang back, bringing revenue growth back to 0% after a negative first quarter, although increased expenses as TD tries to expand this unit led to net income growth of negative 17%.