TD bank provides various personal and commercial banking products and services to both Canada and the United States. TD offers personal deposits, (savings, chequing etc.) investment products, (financing, investing, cash management etc.) insurance, (health, life, auto etc.) and much more.
TD has a network of 1,085 branches, 3,440 automated teller machines, and 1,223 stores in order to efficiently serve their North American clientele. TD Bank was founded in 1855 and is headquartered in Toronto, Ontario.
As stated previously, TD operates in Canada and the USA, in TD’s investors presentation for Q1 2021, they have split the Canadian and American operations up to get a better idea of how they are performing in each country.
Between Q1 2020 and Q1 2021, there are 600,000 new users on the TD app, this represents an increase in users by 11% YoY. This means that 59.6% of TD’s customer base is currently using their mobile app. This increasing trend of customers using their app is great news for TD as they focused on adopting to digital banking.
Furthermore, Canadian retail net income is up by 14% YoY in this same timeframe (2020-2021). This translates into revenue and expense both increasing by 1%, which yields the same operating margins. Lastly, TD’s Canadian Provision for Credit Losses (PCL) is down by 43% QoQ, which means that TD is projecting less losses from credit defaults.
Additionally, the average deposits are up by 20.56% YoY, and their average loans are up 3.89% YoY. However, TD’s Net Interest Margin has decreased from 2.94% to 2.65%, net margin is just the difference in interest rates between their lending rate and their deposit rate. The average deposits and loans increasing YoY helps to counteract the lost revenue from the decreased Net Interest Margin.
Lastly, TD has $484B in Assets under their administration, and $1.4B of that is in “wealth revenue”. Wealth revenue is just the various fees associated with investing through TD.
USA experiences an additional 400,000 active mobile users this year, which results in an 11.8% increase in their active mobile user’s YoY. This is also good for TD’s plans for adapting to the digital banking landscape.
TD’s American revenue is down 5% this year, their expenses are up by 9% and their Net Interest Margins are down from 3.07% to 2.24% this year. All of these factors contribute to worse margins for the American branch of the business.
TD is rumoured to be looking into a major banking deal in the US. This would help to gain more American market share, and hopefully help TD to fix their decreasing margins.
For the Comps analysis, there were four other Canadian Banks that are of similar market cap that would be considered the top competition for TD. These banks are The Royal Bank of Canada (RBC), The Bank of Nova Scotia (Scotiabank), The Bank of Montreal (BMO), and The Canadian Imperial Bank.
Investment Valuation and Plan:
The DCF (linked below as an image) indicates that the fair value of TD’s stock ($TD.TO) is $85.24. This would imply a share price decrease of 1.1% from current share prices ($86.18).
Additionally, for more confidence in this valuation I made a Comps analysis with the aforementioned competitors to TD. I used P/B ratio to value these companies because the balance sheets of banks are composed of mainly liquid assets that can approximate their market value. This analysis indicates that TD is currently in the 3rd Quartile of valuations (top 75%), this means that the stock is considered to be overvalued when compared to similar Canadian banks. If TD were to be valued at the average of similar Canadian Bank valuations, there share price would be $84.25. If this were the case the share price would have to decrease by 2.24% from current prices ($86.18).
Because these 2 valuations are not too far off of current prices, it may be best to wait for TD to retreat back to an average valuation (share price of approx. $84.25-$84.75) before opening a position. This would help to mitigate the risk of such an investment.