TD Bank: A Safe Bet Among Financials?
By Vincent Trivett
Dullness is a virtue for banks. So are huge dividends.
Economic data in the US is improving again, and many investors are hoping that the recovery that was supposed to happen in the first half of 2011 is happening now. High among the beneficiaries of the long-awaited economic recovery would be the banks with a lot of consumer exposure.
Bank of America (BAC), the bank with the most battered share price, has the most room to move up, and it has, by over 40% year to date. The bank has been shedding non-core assets, and investors are hoping that most of the bubble-era junk (like goodwill from the acquisition of Countrywide) has been written off the balance sheet. The share price of BofA has returned to September 2011 levels, not far from the average price target.
The financial crisis punished banks that took too many risks. Only the dull survived intact. One Canadian bank, Toronto Dominion (TD), managed to grow steadily, and partly as a result of the financial crisis, was able to expand rapidly in the US. TD's aggressive growth and high dividends make the stock one of the highest yielding bets in the financial sector.
In the years leading up to the 2008 financial crisis, Canadian banks mostly stuck to good old vanilla banking, abstaining from subprime lending and the glamor and encounters with B-list celebrities that subprime lending made possible. Another reason why Canadian banks didn't suffer so much during the US housing crisis is that Canadian mortgages are normally full-recourse, so borrowers have serious consequences if they take on a mortgage they cannot afford.
They did not get bailed out (some consider a liquidity injection a bailout, but that doesn't even approach TARP) in 2008-2009 as a result. So banks like TD were able to stick it out through the carnage in the US and Europe.
“When we went into the United States, we refused to do subprime lending,” CEO Edmund Clark told Bloomberg News. “We said, ‘I don't care what the spreads are, we are not going to do that.'”
Comedians even poked fun at the conservative nature of their banks.
Besides having strolled through the financial crisis, the main attraction to TD's stock is its generous quarterly dividend of $0.68. Even with a share price significantly above that of US rivals, TD is a better dividend-for-your-buck deal. That dividend was raised twice in 2011 alone. Even while the financial crisis robbed US bank investors of dividends, TD kept doling it out.
The compound annual growth rate of total shareholder return for the last five years was 6.7%; more than double that of Wells Fargo (WFC), the big US bank with the strongest growth. Shares of TD have steadily increased by over 30% over the last five years, while their cousins in the states plummeted. Tier 1 Capital is at 13%, slightly higher than peers. TD earned more than ever in fiscal year 2011 (ending October 31, 2011), earnings per share increased by 18%.
Thanking investors isn't the only thing it is doing with these earnings. TD saw room to grow south of the border, and it's marching down the Eastern US. From zero presence in the US less than a decade ago, TD is now one of the top ten lenders in the US. TD has pumped $25 billion into opening 1,300 locations and making strategic acquisitions. The move to the US intensified during the economic downturn. It got in at the bottom of the market.
Most of the US locations are in more affluent urban areas. In the New York City area, for example, TD ranks fifth for having the highest number of branches among all major banks. CEO Clark told Bloomberg that the company aims to move into the third place in that ranking. It's also broadening its base for wealth management, discount brokerage, and investment advice.
TD branches are common in areas with heavy concentrations of Chinese-Americans, since many Chinese come to the US via Canada. With all of the bad press that banks have been having, TD could perhaps be poaching customers that are looking for a change.
One caveat to future for TD is the possibility of a Canadian housing bust. Home prices are going up, and household debt in Canada is approaching American levels. TD and other banks have taken sharp turns to prevent this from getting out of hand by raising rates and not extending credit to riskier borrowers. If those risks are minimized, TD should remain a solid buy for steady returns.
Fitch Ratings praises the bank's "strong earnings performance, good asset quality, and solid capital and liquidity positions." Fitch does warn that its outlook on TD could turn negative if "macro economic weaknesses, such as severe problems in the Canadian consumer sector or contagion from the US or Eurozone, weaken the bank's overall risk profile." According to Fitch, the acquisitions that TD made have been successful, but things could go south if management loses it's conservative character and "significantly increases its risk appetite through existing operations or through aggressive acquisitions."
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