Bank reporting season has wrapped up yet again, with Canada’s big five reporting (as usual) solid full year financial results on the back of a booming housing market and growing demand for credit. However, Canada’s second largest lender Toronto Dominion Bank (TSX:TD)(NYSE:TD) saw its shares slump last Friday after missing analysts’ fourth quarter expectations. This was despite the bank reporting a strong full year 2013 result and announcing a surprise stock-dividend and dividend increase.
Here were the keys to TD’s report:
1. Solid annual financial performance
With Canada’s housing market soaring to new heights and growing consumer demand for credit, TD Bank reported solid 2013 results. Full year revenue shot up almost 7% year-over-year to $27 billion and net income by 3% to almost $6.9 billion.
Earnings were lifted by a strong performance from its Canadian Personal and Commercial (P+C) Banking business. This segment was able to profit from growing domestic demand for credit, in particular mortgages and consumer credit. All of which drove loan and deposit volumes higher and when coupled with lower credit losses saw the segment’s adjusted net earnings pop by 11%.
Wealth Management was also a strong performer, posting a tidy 15% increase in earnings on the back of higher fee revenue, increased trading activity and the acquisition of New York money manager Epoch.
As such retail earnings as a whole – which include personal and commercial banking, wealth management and insurance in both Canada and the U.S. – jumped an impressive 19%, highlighting the strength of the bank’s core operations. All of which only continues to confirm the profitability of Toronto Dominion.
2. Key risk indicators are healthy
Not only did TD post a solid financial performance, but its capital adequacy and credit quality remain strong. A key measure of capital adequacy – its Basel III tier 1 common equity capital ratio – has appreciated 20 basis points to 9% since being introduced at the start of 2013. This is well above the minimum ratio mandated by the Superintendent of Financial Institutions and superior to many smaller banks.
Credit quality continues to remain high, with impaired loans as a percentage of the total loan portfolio dropping 20 basis points year-over-year to 0.50%. Provisions also tapered downwards, to be 50 basis points lower year-over-year at a particularly acceptable 0.38%.
Indicating that not only is Toronto Dominion’s core business strong, but that its capital adequacy and credit quality remain high, reducing risk for investors.
3. Continues to deliver solid share holder value
Despite missing fourth quarter earnings estimates TD’s overall business performance remains strong. For the full year it reported a healthy return-on-equity of 15% and return-on-assets of 2.5%.
This illustrates that the bank is continually unlocking considerable value from its existing assets and delivering solid returns for shareholders. These performance ratios were higher than the industry averages of 11% and 0.8% respectively.
4. Another dividend hike boosts its yield
In a surprise move TD announced that it would increase its annual dividend by 1 cent per share and pay a stock dividend with a 2-for-1 stock split effect in January 2014. This increase modestly boosts TD’s dividend yield to a healthy 3.8%.
But more importantly, TD still has a particularly conservative dividend payout ratio of 47%. Not only indicating that the dividend payment is sustainable but that there is still considerable room for future dividend growth.
5. Still appears good-value for income hungry investors
Even after this stellar full year performance coupled with the dividend increase Toronto Dominion appears attractively valued. Trading with a price-to-book ratio of 1.9 and a price-to-earnings ratio of 14 coupled with a dividend yield nudging 4% I believe it’s an appealing investment for income hungry investors.
Foolish final thoughts
Clearly the market was disappointed with TD missing fourth quarter estimates. But it appears that many market pundits ‘threw the baby out with the bath water’, marking down its shares despite the bank delivering a solid full year result. This was further sweetened with it rewarding investors with yet again another dividend hike.
