TD Bank’s (TSX:TD) Q2 2020 Earnings Weren’t That Bad

Digging through TD Bank’s (TSX:TD)(NYSE:TD) Q2 2020 earnings reveals that the bank’s quarter was far less catastrophic than many feared.

| More on:

On Thursday, TD Bank’s (TSX:TD)(NYSE:TD) Q2 2020 earnings were released. These results included the three-month period ending on April 30. This means that these results reveal the first glimpse of the impact that COVID-19 has had on TD. The results were not as bad as many feared.

Provisions for credit losses (PCLs) were not as bad as they could have been

The headline story this earnings season for Canadian banks has been provisions for credit losses (PCLs). PCLs are a measure of the value of loans that the bank has determined may be at risk. The higher the PCLs, the more problematic it is for the bank.

Additionally, from an accounting perspective, PCLs reduce earnings and therefore, bank earnings took a significant hit across the board this quarter as a result of rising PCLs at all Canadian banks.

At TD, PCLs rose from just over $900 million in Q1 to just over $3.2 billion in Q2. This represents over a 250% increase and makes TD’s PCLs higher than rival RBC’s, who reported just over $2.8 billion in PCLs in its Q2 earnings report. While the headline number is large, this certainly did not completely derail TD’s business.

Canadian Retail PCLs were approximately $1.2 billion, and U.S. Retail PCLs were just over US$800 million. This demonstrates a relatively even distribution of PCLs between Canada and the United States. These numbers are certainly manageable, although it will be important to continue to monitor these figures for further deterioration.

Net income was still strong

Despite all of the chaos happening in the world during this quarter, TD still made over $1.5 billion in net income on just over $10.5 billion of revenue during Q2. A large part of this came from the Canadian Retail division, with almost $1.2 billion in profits coming from that division alone.

While TD has focused heavily on the United States as its primary growth driver in recent years, these results demonstrate that Canadian Retail is still the division that provides the stability at the core of TD.

These net income figures are truly remarkable and demonstrate the resilience of the business model that makes TD a wise pick even in uncertain times.

Dividends remain on track

TD also declared a $0.79 quarterly dividend, which indicates that the dividend has not been cut, and even remains on the same trajectory as it was pre-COVID-19. This is because TD just increased the dividend earlier this year. Therefore, TD has another half-year before it must confront the decision of whether or not to raise the dividend.

The dividend remains (barely) fully covered for the time being, with the payout ratio just over 98% for Q2. TD should be able to continue to cover the current dividend if PCLs do not rise further.

Takeaway

TD’s earnings were not as bad as many had feared. PCLs were within the range of expectations and net income is still sufficient to cover the dividend.

TD is therefore a safe dividend stock to ride out the current market turbulence with and should provide some safety for income-oriented investors.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kyle Walton has no position in the companies mentioned.

More on Investing

gas station, convenience store, gas pumps
Investing

Where Will Couche-Tard Stock Be in 5 Years?

I think Couche-Tard will be in much better shape in five years' time. Here's why.

Read more »

Senior uses a laptop computer
Retirement

Dividend Fortunes: 2 Canadian Stocks Leading the Way to Retirement

These two TSX stocks with an excellent track record of dividend growth are ideal for your retirement portfolio.

Read more »

how to save money
Tech Stocks

Should You Buy Shopify Stock Hand Over Fist Before November 12?

Here are the top reasons why you may want to consider buying Shopify stock before its upcoming earnings event.

Read more »

Happy golf player walks the course
Stock Market

CRA: How This Tax Break Can Help You Save $2,355.75 in 2025

The Basic Personal Amount is a universal tax break that can lower the tax liability of Canadian residents in 2025.

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Best Stock to Buy Right Now: Cenovus vs Baytex?

It may not seem like a good time to buy most energy stocks, but there are always exceptions.

Read more »

profit rises over time
Dividend Stocks

Buy 2,990 Shares of This Stock for $165.25/Month in Passive Income

A high-yield dividend stock can transform your investment into monthly passive income streams.

Read more »

close-up photo of investor Warren Buffett
Dividend Stocks

3 Warren Buffett Stocks to Buy Hand Over Fist in November

Warren Buffett has been buying Occidental Petroleum (NYSE:OXY) hand over fist. He previously owned the similar Canadian oil giant Suncor…

Read more »

dividend growth for passive income
Dividend Stocks

Is Intact Financial Stock a Buy for its 1.8% Dividend Yield?

Intact Financial's dividend is not that attractive, but its strong history of execution and dividend growth are compelling factors for…

Read more »