TD Bank’s earnings growth beats expectations
Retail banking units in Canada and U.S. both managed to expand margins
Toronto-Dominion Bank is feeling bullish about its future following strong first-quarter results, a corporate tax cut in the United States and a regulatory shift back in Canada.
TD wrapped up another steady season of earnings for Canada’s big banks on Thursday, reporting profit for the quarter ended Jan. 31 of $2.4 billion, a seven-per-cent dip from last year. This was despite booking a one-time, net charge to earnings of $453 million, which was triggered by tax reform in the U.S.
Notwithstanding the tax hit and other items, TD’s adjusted earnings were $2.9 billion for its first quarter, up 15 per cent over last year, “reflecting growth across all business segments,” the bank said. Adjusted earnings per share were $1.56, beating analysts’ expectations. TD, Canada’s second-largest lender by market cap, suggested that it could now end up beating its own expectations as well.
“All of our businesses are performing well and the operating environment remains favourable,” Bharat Masrani, president and chief executive officer of TD, said in a release.
“While there are risks on the horizon, if these positive conditions persist, adjusted earnings growth for the full year may exceed our medium-term targets.”
What’s more, TD said that its common equity tier 1 ratio, a measure of a bank’s capital strength, is on the rise with a recent regulatory change around the so-called capital “floor.”
The bank’s CET1 ratio for the first quarter was 10.6 per cent, down 10 basis points from the previous quarter.
However, the bank said that when it was adjusted for the methodology change, the ratio would improve to approximately 11.8 per cent on a pro forma basis, which Masrani said “affords us considerable flexibility to deploy capital.”
Barclays Capital analyst John Aiken said in a note that the capital ratio was the “only relative knock” on TD, but that the issue “should resolve itself next quarter, with a change in the regime.”
On a conference call with analysts, Masrani talked about the deploying of capital, saying the bank’s framework for that starts with determining what levels it needs to support its businesses, and then if there any internal investments that may have to be made. He said the bank looks at acquisitions on an ongoing basis, mentioning the U.S. southeast as an especially attractive market for the lender, as well as credit cards.
“There are opportunities out there, but we want to make sure they ’re the right ones for TD,” Masrani said.
“As a bank, we want to remain disciplined. Just because we may have capital flexibility, that does not mean we will be chasing acquisitions that do not make sense for the bank.”
TD also said U.S. tax reform is expected to provide an annual benefit of US$300 million, including the expected contribution of the bank’s stake in brokerage TD Ameritrade.
“The bank disclosed that earnings growth is likely to exceed its target range in F2018, helped by an anticipated $300 million benefit from U.S. tax reform (without guidance, we had conservatively assumed $100 million),” said Robert Sedran, analyst at CIBC World Markets, in a note.
TD’s U.S. retail banking unit recorded a 28-per-cent jump in adjusted earnings for the first quarter compared to last year, reaching $1.02 billion, as the business was lifted by the lower corporate tax rate. Meanwhile, TD said profit for its Canadian retail banking business was about $1.76 billion for the first quarter, up 12 per cent from a year ago.
The bank said revenue increased seven per cent to $5.55 billion, which it chalked up to ongoing gains in loan and deposit volumes, “strong” levels of client trading, and a growing wealth business.
“TD had the strongest results that we have seen in the quarter and they could well represent an inflection point, if it can continue the trajectory in its U.S. operations,” Aiken said.
“TD showed strong lending growth and managed margin expansion on both sides of the border, something that its peers cannot claim.”