Toronto-Dominion Bank: Attractive Valuation And Superior Capital Ratios

Investment Thesis

In the world of banking, it is easy to get lost in the sea of numbers, balance sheets, and profit margins. However, one key aspect that separates successful banks from the rest is a clear identity around a set of values supporting a tried and tested business model. By branding itself America's Most Convenient Bank, TD Bank (NYSE:TD) has aligned its operational focus, competitive advantage, and identity to deliver on its promises to shareholders, customers, and the broader community.

TD Bank's unwavering commitment to retail banking, convenience, and accessibility has propelled it to become the seventh-largest bank in the US within just fifteen years. By offering extended branch hours, including evenings and weekends, the bank has set itself apart from competitors while catering to the unique needs of individual customers and small businesses. Navigating through its website, one can't help but notice the seamless user experience, transparent fee structures, and easy-to-understand services that maintain a level of sophistication suitable for an increasingly tech-savvy customer. This customer-centric approach, combined with strategic acquisitions and mergers since the mid-2000s has allowed TD Bank to rapidly expand its presence, particularly along the East Coast, and solidify its position as a leading financial institution in the competitive US banking landscape.

Valuation

The recent collapse of Silicon Valley Bank sent shockwaves throughout the financial markets, leading to panic selling and a sudden drop in bank stocks. While many investors were left scrambling to protect their portfolios, I saw this as a prime opportunity to capitalize on the undervalued banking sector. In my opinion, banks such as TD Bank, trade at attractive valuations, present an exciting chance for investors to reap substantial profits.

Currently, banks are trading at a forward PE ratio between 7x - 10x, making them appealing from a valuation perspective. TD with a PR ratio of 9x falls within this range. While not the cheapest option available, its valuation is in line with industry averages, and in my view, attractively priced.

Investing in TD Bank at this level is not only about the numbers, but also about the strength of the bank's business model, and its potential for growth. The Canadian financial giant has a proven track record and a strong focus on retail banking. Its position as America's Most Convenient Bank has allowed it to carve out a niche for itself in the US, and achieve remarkable growth in just fifteen years. Furthermore, TD demonstrated resilience in the face of economic turbulence. For more than a hundred years, TD never missed a dividend payment. To be exact, 166 years of continuous dividend distribution.

Capitalization

In the current market climate, the financial stability and strength of banks are paramount to ensure they weather economic uncertainty. One metric to consider when making an investment decision in the financial sector is the Common Equity Tier 1 (CET1) ratio, which measures a bank's core capital against its risk-weighted assets. A higher CET1 ratio signifies a stronger capital base and a more resilient financial institution. When examining the latest filings (mostly Q1 2023 reports) of major banks, TD stands out with a CET1 ratio of 15.5% outperforming its peers as shown in the table below.

Profitability

With an ROE of 15.78%, TD Bank surpasses competitors like JPM, C, WFC, BAC, GS, and BK. This superior ROE is indicative of TD's strong financial management and focus on maximizing shareholder value. Moreover, its relatively stable performance over time, when compared to banks like BAC and BK highlights its ability to maintain profitability in times of market turbulence.

TD also showcases an impressive net income per employee, outperforming other banking giants such as JPM, BAC, and Citi, and, among US leading banks, is second only to GS. This performance highlight's the scalability of the company's business, and the success of its strategy to enhance its value proposition through cross-border banking, retail focus, and digital innovation.

How I Might Be Wrong

While TD Bank has demonstrated financial stability and strength, as mirrored in the charts above, one should note that it is not immune to macroeconomic challenges facing the economies of both Canada and the US. A severe recession due to the Fed's monetary tightening or a financial crisis due to the spill-overs of the Silicon Valley Bank collapse could negatively impact TD Bank's profitability and stock price.

TD recently reached a $1.2 billion settlement with the US Department of Justice "DOJ" concerning the Allen Stanford Ponzi Scheme. TD hasn't admitted to any wrongdoing and stressed that its banking relation with Mr. Stanford was limited to "correspondent banking services" to entities associated with Mr. Stanford. Authorities however claim that TD overlooked numerous warning signs. This is one example of the regulatory risks that TD and its shareholders face in the financial sector. I hope that TD learned from its mistakes, but such incidents raise concerns over the company's governance.

Summary

TD has been successful in carving out a unique place for itself in the US by focusing on retail banking and emphasizing convince accessibility and exceptional customer service. Within a span of fifteen years, the Canadian financial giant has become the 7th largest US bank in terms of deposits. TD Bank's stock valuation is in line with the industry average, and its CET1 capital ratio outperforms peers, signaling strong capitalization. The company's ROE and net income per employee figures also demonstrate superior profitability, financial stability, and focus on maximizing shareholder value, supported by a long history of continuous dividend distribution.