TD Bank Is Delivering Results; Should It Be in Your Portfolio?



TD Bank (NYSE:TD) is one of the fastest growing larger banks in North America. This is driven in large part by its retail banking in the United States and Canada as well as their equities trading platform TD Ameritrade. The question I have is can this growth continue? An examination of TD’s financial results for the second-quarter ended April 30, 2014 provides some context.

TD has had a great quarter. The company reported diluted earnings per share were $1.04, compared with $0.89 in the comparable year ago quarter, which is a 16.8 percent increase. Adjusted diluted earnings per share were $1.09, compared with $0.95. Reported net income was $1.99 billion, compared with $1.72 billion in the comparable year ago quarter. Adjusted net income was $2.07 billion, compared with $1.83 billion a year ago. Combined with last quarter’s results, reported diluted earnings per share were $2.11 for the first six months of fiscal 2014, compared with $1.82 for the same time period last year. Adjusted diluted earnings per share were $2.15, compared with $1.94 last year while reported net income was $4.03 billion, compared with $3.5 billion a year ago. Let me be clear — this quarter was strong.

Results for the quarter reflected strongearnings contributions from all business segments. Ed Clark, Group President and Chief Executive Officer, stated:

By any measure, our results this quarter were outstanding. Adjusted earnings were $2.1 billion, up 14 percent from the same period last year, driven by strong organic growth and contributions from our recent acquisitions. These results demonstrate the considerable earnings power of our business model. At the half-year mark, earnings growth has exceeded our expectations. In addition to great execution on acquisitions and good organic growth in a tough operating environment, we benefitted from strong credit performance and favorable currency translation. This is enabling us to invest more in our businesses for the long term, and will help us to achieve results in our 7-10 percent earnings target range this year. Looking ahead, our strategy remains focused on delivering legendary experiences, attracting new customers and leveraging the power of TD across our businesses.

Canadian retail generated net income of $1.3 billion for the second-quarter, an increase of 12 percent on an adjusted basis compared with the same quarter last year. Earnings were driven primarily by good loan and deposit volume growth, favorable credit, positive operating leverage, strong growth in wealth assets, and the new TD Aeroplan credit card portfolio. Tim Hockey, Group Head, Canadian Banking, Auto Finance, and Wealth Management stated that, “Our Canadian Retail segment fired on all cylinders this quarter. The ongoing focus on our customers’ needs and commitment to investing in our business positions us well for growth over the long term. We will continue to leverage all of our channels to deliver a seamless experience to new and existing customers.”

U.S. retail generated net income of U.S. $495 million, an increase of 15 percent compared with the second quarter last year. Excluding the Bank’s investment in TD Ameritrade, the segment generated net income of U.S. $425 million, an increase of 13 percent. Results were driven primarily by strong loan and deposit volume growth, favorable credit, good expense management, and the Target credit card and Epoch acquisitions, partially offset by lower gains from security sales. TD Ameritrade contributed US$70 million in earnings to the segment, an increase of 35 percent compared with the second-quarter last year due to strong trading and revenue growth.

Mike Pedersen, Group Head, U.S. Banking stated that, “The U.S. retail segment delivered impressive results, with solid fundamentals driven by improving credit. While there are signs of improvement in the U.S. economy, we are also facing challenges, including ongoing low interest rates and increased competition. Moving forward, we will continue to invest in growth while managing expenses.”

Wholesale Banking net income for the quarter was $207 million, a decrease of 6 percent compared with a strong second-quarter last year. Bob Dorrance, Group Head of the Wholesale Banking division stated that, “We are pleased with our second-quarter results. Our revenues reflected stronger banking and capital markets originations activity and good trading results. We are confident that our diversified, integrated business model will continue to deliver solid earnings.”

Overall, the quarter was incredibly strong. Management of each of TD Bank’s major segments really delivered. Earnings were up double digit percentage points year-over-year, which is quite remarkable relative to comparable financial company’s earnings reports. With the performance TD is delivering, coupled with the fact that the stock is still “cheap” only trading at 14 price to earnings multiple with a 3.6 percent yield, this stock has legs.

Disclosure: Christopher F. Davis holds no position in TD Bank and has no plans to initiate a position within the next 72 hours. He has a strong buy rating on the stock and a $61 price target.

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