Should You Be Worried About TD Bank Stock?

Canadian banks felt the tremors of the U.S. bank collapse, with TD Bank witnessing the biggest hit. Should you be worried about the bank?

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Toronto-Dominion Bank (TSX:TD) stock slipped 12.6% in the first half of March after three U.S. banks (Silicon Valley Bank, or SVB, Signature Bank, and Silvergate) collapsed due to a liquidity crunch. They failed to have enough cash to meet the withdrawal requests of depositors. It created a selloff in bank stocks worldwide. As it earns 37.6% revenue from the United States, TD Bank stock took the biggest hit among the Big Six. Should you be worried about the TD Bank holdings in your portfolio? 

TD Bank’s U.S. exposure 

TD Bank stock fell over 12.5%, as it was in the middle of the $13.4 billion ($25/share) acquisition of First Horizon to expand its U.S. retail banking operations. It had already purchased US$494 million in non-voting First Horizon preferred stock. But when the three U.S. banks collapsed, most U.S. regional bank stocks fell more than 20%. 

First Horizon stock fell 40% in the first half of March to US$14.82. Charles Schwab, in which TD Bank has a 10% stake, fell 26.6%. 

Also, Toronto-Dominion recently completed the $1.3 billion acquisition of Cowen to bolster its capital-markets franchise in the U.S.

Toronto-Dominion Bank has the second-largest revenue exposure to the United States (37.6% revenue) after Bank of Montreal (50.37%). Having significant exposure to the U.S. does not mean TD Bank is also vulnerable like U.S. banks. After all, it operates in the highly regulated Canadian banking system with strong risk controls and asset diversification. 

TD Bank’s business model

Founded in 1852, TD Bank has been at the forefront of adopting technology. Its business model focuses on taking deposits, giving loans, and earning from the interest rate difference and other bank fees. 

Building on this model, TD Bank is one of the biggest Canadian retail banks that helps people new to Canada open an account and access various financial services. It has been expanding in the U.S. retail and commercial banking space via acquisitions. It also has a wealth management and insurance arm and a wholesale banking arm that serves large corporate, government agencies, and financial institutions. These diverse business segments helped TD Bank offset weakness in wealth management due to market volatility with higher insurance and interest income. 

In its latest first-quarter earnings, ended January 31, 2023, the bank’s revenue surged 8%. But its net income fell 58% because of the one-off charge of $1.6 billion that it paid to settle a lawsuit related to the Stanford Financial Group Ponzi scheme. Adjusting for these one-time charges, the bank reported a net income of $4.16 billion. Its 34% net margin was better than most peers. But the margin expansion cycle will slow in 2023, as the interest rate hike eases. 

Should you worry about Toronto-Dominion Bank? 

A bank takes deposits from customers and gives loans. A rising interest rate increases the risk of default. Of the $1.2 trillion in deposits, TD Bank has issued loans of $836.7 billion and increased credit loss provisions from $72 million a year earlier to $690 million as on January 31. 

The 2008 crisis happened because of uncontrolled credit risk. The regulators imposed several reforms that required banks to maintain a certain amount of capital for their risky assets. TD Bank exceeds the minimum capital requirement by a good margin, hinting it is well capitalized against risky assets. 

But the 2023 U.S. bank crisis occurred, as rising interest rates reduced the value of long-term bonds, exposing them to liquidity risk in the event of large withdrawals. SVB depositors were concentrated in the technology vertical, and they increased withdrawals, forcing SVB to sell its long-term bonds for a huge loss. 

However, the same is not true for TD Bank, as it has liquidity for 12.5% of its $1.2 trillion deposits from a diversified customer base. TD Bank has maintained a strong capital buffer for credit risk. However, a bank run could cause a liquidity crunch. 

Final takeaway

TD Bank has risk controls and a diverse asset base to survive a recession while remaining profitable. Now is a good time to buy this bank stock and lock in a 4.9% dividend yield. 

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.

Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends Charles Schwab. The Motley Fool has a disclosure policy.

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