Region: Canada
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Fundamental View
AS OF 25 Mar 2024Toronto Dominion is rated Aa2/AA-/AA- by Moody’s/S&P/Fitch, but bail-in senior debt for TD is rated A1/A/AA-.
TD’s overall credit profile is stable, supported by diversification by revenue & geography, history of strong risk management & conservative underwriting.
TD still has substantial excess capital above all-in requirements, having built up capital levels in advance of the First Horizon deal that ended up being terminated in 2023.
Business Description
AS OF 25 Mar 2024- Toronto Dominion is the second largest depository institution in Canada with C$1,911 bn in assets as of F1Q24 and a market cap of US$107 bn as of March 21, 2024. The company has C$1,181 bn in total deposits.
- As of 2023, TD ranked 9th in terms of U.S. deposits with approximately US$303.9 bn in deposits and 1,182 branches (SNL). The U.S. footprint is focused on the Atlantic coast including Delaware, New Jersey, New York, Massachusetts, New Hampshire, Connecticut, Maine, Vermont, and Pennsylvania.
Risk & Catalysts
AS OF 25 Mar 2024Toronto Dominion has a strong, largely retail-driven deposit base in both Canada and the U.S., which should mitigate the potential for a liquidity event.
Toronto Dominion has been active in M&A in the U.S., as well as portfolio acquisitions in Canada. In 2023, it completed the acquisition of Cowen, Inc., building out its U.S.-based capital markets business which it has also grown organically in recent years.
The termination of the FHN deal leaves TD with substantial flexibility afforded by the excess capital position (CET1 13.9%) and without a bank deal to integrate in uncertain operating conditions.
We view real estate-related risk in Canada as manageable for TD given low LTV of exposures in vulnerable markets and conservative underwriting.
Key Metrics
AS OF 25 Mar 2024$ mn | FY20 | FY21 | FY22 | FY23 | LTM 1Q24 |
---|---|---|---|---|---|
Revenue | 30,311 | 31,801 | 35,848 | 33,866 | 34,821 |
Net Income | 8,846 | 11,371 | 13,544 | 7,883 | 8,801 |
ROAE | 1.30% | 1.05% | 1.05% | 1.05% | 1.05% |
NIM | 1.72% | 1.56% | 1.69% | 1.75% | 1.73% |
Net Charge-offs / Loans | 0.34% | 0.18% | 0.15% | 0.24% | 0.27% |
Total Assets | 1,289,484 | 1,394,270 | 1,406,122 | 1,407,709 | 1,428,288 |
Unsecured LT Funding | 55,061 | 67,073 | 88,875 | 90,998 | 81,846 |
CET1 Ratio | 13.1% | 15.2% | 16.2% | 14.4% | 13.9% |
CreditSights View
AS OF 24 Jun 2024We maintain our Outperform recommendation for Toronto Dominion. Historically TD has traded as one of the tightest names in the Canadian bank peer group. However, over the past several quarters TD has still traded towards the tighter end of the sector but there has been less relative spread pickup for moving down in quality to names such as BMO, BNS, and CIBC. We therefore believe the best value in the sector in current conditions involves trading up in quality to TD and RBC (which we already rate at Outperform). TD has substantial excess capital as a result of the termination of the deal for First Horizon; CET1 was 13.4% at F2Q24. We view regulatory issues as an earnings headwind but manageable and not overly impactful to the long-term credit profile.
Recommendation Reviewed: June 24, 2024
Recommendation Changed: March 08, 2023
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Fundamental View
AS OF 14 Feb 2024BMO Financial Group is rated Aa2/A+/AA-, but bail-in senior debt for BMO is rated A2 by Moody’s and A- by S&P.
BMO is geographically diversified within Canada & via its commercial banking business in the U.S. BMO has improved its revenue mix by building wealth & capital markets, though the latter has been pressured across the industry over the past year.
Business Description
AS OF 14 Feb 2024- BMO Financial Group is the fourth largest depository institution in Canada with C$1,293 bn in assets as of F4Q23, with a market capitalization of C$70 bn. Total deposits were C$910 bn at F4Q23.
- BMO operates 1,892 branches in Canada and the United States as of fiscal 4Q23.
- As of F4Q23, BMO had 1,022 branches within the United States, mostly in the Midwest. BMO ranked 11th in deposit market share in the U.S. (SNL), with a top-2 share in Illinois.
Risk & Catalysts
AS OF 14 Feb 2024BMO has a strong core deposit base in Canada and in the U.S., which mitigates the potential for a liquidity event.
BMO closed the acquisition of Bank of the West from BNP Paribas in February 2023, significantly expanding its footprint in the U.S. We don’t expect deal integration to have much impact on the credit profile. Capital remains well above requirements following deal closing, with CET1 at 12.5% at F4Q23.
We view real estate-related risk in Canada as manageable for BMO given low LTV of exposures in vulnerable markets and conservative underwriting. Commercial real estate accounts for ~10% of total loans, and office is quite manageable at ~1% of total.
Key Metrics
AS OF 14 Feb 2024$ mn | FY19 | FY20 | FY21 | FY22 | LTM 4Q23 |
---|---|---|---|---|---|
Revenue | 17,137 | 17,461 | 20,509 | 26,727 | 21,694 |
Net Income | 4,333 | 3,790 | 6,167 | 10,519 | 3,246 |
ROAE | 1.18% | 0.94% | 0.59% | 0.59% | 0.59% |
NIM | 1.65% | 1.58% | 1.59% | 1.59% | 1.59% |
Net Charge-offs / Loans | 0.14% | 0.25% | 0.14% | 0.08% | 0.14% |
Total Assets | 647,624 | 713,376 | 797,018 | 835,374 | 931,165 |
Unsecured LT Funding | 62,002 | 51,916 | 51,915 | 64,886 | 63,418 |
CET1 Ratio (Fully-Phased-In) | 11.4% | 11.9% | 13.7% | 16.7% | 12.5% |
CreditSights View
AS OF 05 Jun 2024We maintain our Market perform for BMO, with our view largely unchanged by the announcement of the deal for Bank of the West, now closed. Results in F2Q24 remained noisy for another quarter and core results were somewhat weaker than expected as provisions continued to reflect credit normalization and impacts from higher rates. BMO has successfully integrated U.S. acquisitions over the past decade. On valuation grounds with the sector trading in a tight range at the 5Y part of the curve we have a preference for the highest quality names in the group such as RBC and TD, but like BMO relative to Scotia and CIBC.
Recommendation Reviewed: June 05, 2024
Recommendation Changed: August 26, 2020
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