Toronto Dominion Bank: a Canadian banking leader with a number of competitive advantages

Lately, I like to look around for interesting banks that may represent an attractive investment opportunity. Again, I'll share with you an interesting tip that might make sense from an investment perspective. Today we're going to talk about Toronto-Dominion Bank, which (among other positives) has been paying dividends continuously for 164 years. Plus, it's one of the major banks in Canada and has some really decent competitive advantages.

Toronto Dominion Bank branch

I'm not going to drag this out unnecessarily and we'll jump straight into an analysis of this bank. What are those aforementioned competitive advantages? 👇

Toronto-Dominion $TD-1.7% is one of the two largest banks in Canada by assets and one of six that collectively hold roughly 90% of the nation's bank deposits. The bank derives about 55% of its revenue from Canada and 35% from the United States, with the rest from other countries. Toronto-Dominion has done an admirable job of focusing on its Canadian retail operations and has become a market leader in most of the key products in this segment. The bank also has the second market share for business banking in Canada. With over CAD 400 billion in Canadian assets under management and status as the top three dealers in Canada and as the number one card issuer in Canada, Toronto-Dominion should remain one of Canada's dominant banks in the years to come.

  • Toronto-Dominion also has a significant presence in the U.S. by having the most U.S. branches among Canadian banks.
  • Another interesting fact is that $TD-1.7% is a major player in the discount brokerage business (this sector reportedly has the potential for continued strong growth).
  • It is expected that $TD-1.7% will continue to demonstrate solid strength in domestic banking operations, manage credit and credit quality well, and continue to control expenses that will lead to a consistent return on equity over the long term.

Toronto-Dominion Bank $TD-1.7%

From the data, it appears that the bank is very well run and constructed to meet and improve conditions for customers who then have no reason to leave and change banks.

$TD-1.7% stabilizes product pricing, which provides less incentive for customers to change banks. The cost advantages stem from three primary factors: a low-cost deposit base, superior operating efficiency, and conservative underwriting, with regulatory costs also being a final factor to consider. These benefits manifest themselves in the form of lower operating costs, lower credit costs, lower regulatory costs and lower absolute levels and better risk diversification, all of which allow banks to achieve higher risk-adjusted returns.

The Canadian market is special in the banking sector

Barriers to entry are very high in the Canadian banking system. Regulations prevent foreign competition, as non-Canadian residents cannot own more than 25% of a bank's shares unless approved by the government(preventing foreign takeovers), and foreign banks can only operate in Canada under certain restrictions (preventing significant direct foreign competition). Domestic competition is also controlled because the Canadian banking system has historically evolved to favour a few large banks controlling most of the domestic market.

Larger banks help spread fixed costs over a larger operating base, which increases operational efficiency because the four largest Canadian banks are all larger than the largest regional bank in the U.S. Canadian banks, because their branch networks are spread across Canada, arguably have some of the strongest distribution networks in the country. This offers pricing advantages due to lower customer acquisition costs.

Canadian banks are on average more geographically diversified than, for example, most U.S. regional banks, which often have concentrations in individual states or local economies.

Analysts give a price target in the range of $74-$77 (this is multi-site data).

Words from analysts on the outlook after another strong quarter:

Our base case assumes that the net interest margin for Toronto-Dominion will increase as rate hikes in Canada and the U.S. begin to feed through to the balance sheet. We see average loan growth of about 4% in normal years, with an initial increase of 10% in 2022. This leads to NII (net investment income) growth of 11% in 2022 and 5% in 2023. Our forecast assumes below-average charge-offs in 2022 as the credit environment remains relatively benign and normalization takes place in 2023 and beyond. We assume that non-interest income will grow at an average rate of 4% over the next 5 years, with sub-1% growth in 2022 followed by 9% growth in 2023. This is driven by a decline in investment banking in 2022, some pressure on wealth-related fees in 2022, pressure on deposit service fees in 2023 and further fee fluctuations from 2022 onwards. We forecast expense growth of about 5.5% in 2022 and 2% to 3% thereafter. In summary, our forecasts result in an average return on tangible equity of 17%. We use a 9% cost of equity.

As always, we also have to look at the potential risks

Macroeconomic risks and risks associated with future acquisitions. Canada has some of the highest median housing prices/annual median household income ratios in several of its major housing markets and mortgage debt levels have been steadily increasing for over a decade.

  • But I would point out here that macroeconomic risks are such a ''short-term drag''. I would not see this as some long-term problem that could threaten the existence or operation of the bank.
  • Another point where investors should be vigilant: Many investors may be puzzled by the item of declining FCF and slightly increasing debt. TD is currently at a point where it is trying to streamline its business and complete its merger with First Horizon Bank and its acquisition of Cowen (both of which may be completed in early 2023).


$TD-1.7% currently trades at a P/E of 10 and a dividend yield of around 4.2%. The dividend has been paid for a whopping 164 years, which is impressive in itself.

Dividend summary 👆

Quarterly results

Adjusted earnings and expenses are up (numbers before brackets are Canadian dollars)

The bank reported adjusted net income of $3.81 billion, or $2.09 per share -versus $3.62 billion, or $1.96 per share in the prior year. Shares of $TD-1.7% posted its strongest retail results in the quarter on record, with sales of $7 billion, up 7% year-over-year. This was further boosted by its U.S. operations, with net income rising 11% to $1.44 billion for the quarter.

  • NII (net investment income) jumped 17.3% year-on-year to C$7.04 billion (US$5.50 billion).
  • Non-interest income of $3.88 billion (US$3.03 billion) fell 17.6%.
  • Adjusted non-interest expenses rose 8.2% to $6.03 billion (US$4.71 billion).

For a full summary of the results, click here

Balance sheet remains strong, capital to profitability ratio improves

Total assets were C$1.84 billion (US$1.44 billion) as of July 31, 2022, up nearly 1% from the end of the second quarter of fiscal 2022. Net loans grew sequentially by 3.4% to C$790.8 billion (US$617.7 billion) and deposits grew by 1.5% to C$1.2 trillion (US$0.94 trillion).

  • Total capital adequacy ratio was 18.8% compared with 18.5% in the previous year.
  • Toronto-Dominion's return on common equity (on an adjusted basis) was 16.3%, compared to 15.9% at July 31, 2021.

In conclusion, however, while I may like the bank, I don't find the current price attractive and I'm not willing to pay it (despite the potential for growth). However, that doesn't change the fact that this is one of the interesting options that I will continue to follow.

  1. How does $TD-1.7% sound to you?
  2. Are you interested in the analysis of the big banks?
  3. Also, do you have a favorite that is on your radar?

Please note that this is not financial advice. Every investment must go through a thorough analysis.

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It is expected that $TD-1.7% will continue to demonstrate solid strength in domestic banking operations, manage credit and credit quality well, and continue to control expenses that will lead to a consistent return on equity over the long term.