Act Fast: 75 Only!
Toronto-Dominion Bank (TSX:TD) was within striking distance of an all-time high earlier this year. Prior to the U.S. banking crisis of March and April, the stock was rallying, and was only $14 away from the $107.81 high set in early 2021.
This year, TD Bank is dealing with some issues. Its First Horizon deal got cancelled by U.S. regulators, and last quarter’s earnings growth was negative. TD’s FHN deal was cancelled because regulators believed the bank’s anti-money laundering practices to be inadequate. It was a bit of a setback, but TD’s revenue is growing, and it made progress in its U.S. market strategy by buying Cowen.
In this article, I will explore whether TD Bank can get back to $90 or higher in 2023.
Revenue is still growing
One cause for optimism toward TD Bank’s long-term prospects is the fact that the company’s revenue is still rising. In the second quarter, TD delivered $11.81 billion in revenue, up 7.2% year over year. Earnings declined, but not for the reasons you might think. TD’s net income declined in the second quarter primarily because of an increase in provisions for credit losses (PCLs).
PCLs are funds that banks set aside to cover potential losses from borrowers defaulting on their loans. A rise in PCLs means that a bank thinks there is an elevated risk of defaults. It does not mean that more defaults are actually occurring. There has been a mild rise in credit card delinquencies this year, but it’s in the low-single-digit range. So far, the risk of large credit events has not materialized.
Will it materialize? In TD’s Canadian banking operations, there is some risk of mortgage defaults because many Canadians have large variable rate mortgages. Housing in Canada is among the least affordable in the world, with the average Canadian house costing about 1.5 times the average U.S. house. Canadians are stretched thin, and the Bank of Canada continues raising rates. The more it does so, the more people will default on their variable rate mortgages. So, interest rate hikes are a risk to TD Bank. They are an opportunity as well, because when people don’t default on high interest loans, the bank makes more money off them. But the risk is real.
Yield curve inverted
Another risk for TD Bank right now is the fact that Canada’s treasury yield curve is inverted. The yield curve is a chart that shows treasuries ranked by maturity on the X-axis and yield on the Y axis. This chart currently slopes downward, meaning that short-term bonds pay more interest than long term bonds. This is a risk for banks, because they borrow on the short end of the yield curve and lend on the long end. Theoretically, their margins should be getting squeezed right now. That’s not what happened last quarter — margins at Canadian banks remained sky high — but there is a risk of it happening.
Foolish takeaway
Having looked at all the relevant factors, I think it’s entirely possible for TD Bank stock to reach $90 this year. I don’t know if it will retake the all-time high of $107.81, but it could get close. I hold the stock, and I plan to keep holding it.
