The Toronto-Dominion Bank (TSX:TD), one of Canada's "Big 6" banks with a market capitalization of $95 billion, is navigating a challenging period marked by underperformance and regulatory scrutiny. As the financial institution embarks on a strategic review, investors and analysts are closely watching for signs of a turnaround in its fortunes. According to InvestingPro analysis, TD is currently trading below its Fair Value, suggesting potential upside opportunity for investors despite recent challenges. This comprehensive analysis examines TD's recent performance, future prospects, and the factors that could shape its trajectory in the coming years.
2024 Performance and Strategic Review
TD experienced a difficult year in 2024, emerging as the worst performer among the "Big 6" Canadian banks. The bank's stock delivered negative returns of approximately 56%, significantly underperforming its peers. This poor showing followed a similar trend in 2023, when TD was also the worst-performing bank stock among its Canadian counterparts.
In response to these challenges, TD has initiated a strategic review, which analysts view as a significant opportunity for the bank to reevaluate its entire strategy. This comprehensive assessment comes at a crucial time, as TD faces various constraints and seeks to realign its operations for improved performance.
Financial Outlook and Dividend Expectations
Despite the recent underperformance, analysts anticipate that TD will announce significant dividend increases in the near term. This expectation is well-founded, as InvestingPro data shows TD has raised its dividend for 14 consecutive years and maintained payments for 53 years straight. The bank currently offers an attractive 5.4% dividend yield, with a 4.12% dividend growth over the last twelve months. This expectation is based on the bank's annual review cycle and its current position above its targeted payout ratio range. The potential for increased dividends could provide some positive momentum for the stock and reassure investors about the bank's financial health.
However, the overall financial outlook for TD remains subdued. Analysts project modest core earnings per share (EPS) growth of approximately 1% for fiscal year 2025, which is the lowest among its peer group. This tepid growth forecast is attributed to several factors, including elevated costs that are expected to persist throughout the forecast period.
Regulatory Challenges and Resolutions
TD has faced significant regulatory challenges, particularly related to anti-money laundering (AML) investigations in its US Banking segment. In a major development, the bank has resolved these investigations with several regulators, agreeing to a substantial payment of approximately US$3.09 billion. Of this amount, US$3.05 billion had already been reserved.
As part of the settlement, TD faces an asset cap of US$434 billion for two of its US subsidiaries and must implement a Bank Secrecy Act/Anti-Money Laundering (BSA/AML) remediation program. Additionally, the bank has pleaded guilty to criminal charges, which could have implications for its reputation and future regulatory relationships.
Mortgage Broker Market and Growth Opportunities
While TD faces challenges in some areas, the growing mortgage broker market in Canada presents potential opportunities. Recent analysis indicates that mortgage brokers now account for 47% of mortgage originations in Canada over the past three years, up from 45% in 2019. This trend is particularly strong among first-time homebuyers, with 64% using brokers.
The increasing market share of mortgage brokers could provide TD with avenues for growth, especially as the bank seeks to expand its presence in this channel. However, TD will need to navigate the competitive landscape carefully, as most of the "Big 6" banks are now actively involved in the broker channel.
Bear Case
How might TD's underperformance in 2024 affect its future growth?
TD's poor performance in 2024, following a similarly weak showing in 2023, raises concerns about the bank's ability to compete effectively in the current market environment. The significant underperformance compared to its peers suggests underlying issues that may take time to resolve, potentially hampering future growth prospects.
The bank's projected core EPS growth of only 1% for 2025, the lowest among its peer group, indicates that the challenges faced in 2024 may have longer-lasting effects. This sluggish growth outlook could make it difficult for TD to regain market share and investor confidence in the short to medium term.
What impact could the AML settlement and restrictions have on TD's operations?
The resolution of the AML investigations, while providing closure on a significant regulatory issue, comes with substantial financial and operational costs. The US$3.09 billion settlement and the implementation of a BSA/AML remediation program will likely strain TD's resources and potentially divert attention from growth initiatives.
Moreover, the asset cap of US$434 billion imposed on two of TD's US subsidiaries could limit the bank's ability to expand in the crucial US market. This restriction may hinder TD's competitiveness and growth potential in a key geographic area, potentially affecting its overall performance and market position.
Bull Case
How could TD's strategic review lead to improved performance?
The strategic review initiated by TD presents a significant opportunity for the bank to address its recent underperformance and position itself for future success. By comprehensively reevaluating its operations, business mix, and strategic priorities, TD could identify areas for improvement and new growth opportunities.
The review may lead to streamlined operations, cost-cutting measures, or a renewed focus on high-growth segments. If executed effectively, these changes could result in improved efficiency, enhanced competitiveness, and ultimately, better financial performance. The strategic review could also help TD adapt to changing market conditions and customer preferences, potentially leading to increased market share and profitability.
What opportunities does the growing mortgage broker market present for TD?
The expanding mortgage broker market in Canada offers TD a promising avenue for growth. With mortgage brokers now accounting for 47% of mortgage originations, up from 45% in 2019, there is a clear trend towards increased broker usage, especially among first-time homebuyers.
By strategically positioning itself within this growing market, TD could capture a larger share of mortgage originations, particularly among younger demographics and new Canadians who are more likely to use brokers. This could lead to increased loan volumes, improved market share, and potentially higher profitability in TD's mortgage business.
Additionally, as international markets such as Australia and the UK show even higher broker market shares, there may be room for further growth in Canada. TD's participation in this expanding channel could provide a competitive advantage and drive long-term growth in its retail banking operations.
SWOT Analysis
Strengths:
- Strong presence in Canada and the United States
- Potential for significant dividend increases
- Established brand and customer base
Weaknesses:
- Underperformance compared to peers in 2024
- Elevated costs expected to continue
- Lowest projected core EPS growth among peer group for 2025
Opportunities:
- Strategic review for potential growth and efficiency improvements
- Expanding mortgage broker market in Canada
- Potential for operational improvements following AML resolution
Threats:
- Regulatory challenges and ongoing AML remediation requirements
- Competitive pressure in the banking sector
- Asset cap restrictions on US subsidiaries limiting growth potential
Analysts Targets
- BMO Capital Markets (January 6th, 2025): Upgraded to Outperform (no specific target provided)
- RBC Capital Markets (December 6th, 2024): Sector Perform, target C$77.00
- Barclays (LON:BARC) (October 11th, 2024): Equal Weight, target C$80.00
- RBC Capital Markets (August 23rd, 2024): Outperform, target C$88.00
- BMO Capital Markets (June 7th, 2024): Market Perform, target C$84.00
The Toronto-Dominion Bank faces a critical juncture as it works to overcome recent underperformance and navigate regulatory challenges. While the bank's strategic review and potential dividend increases offer hope for a turnaround, persistent elevated costs and modest growth projections present ongoing challenges. The expanding mortgage broker market provides a potential bright spot, but TD will need to execute its strategies effectively to capitalize on this opportunity and improve its competitive position. As the bank moves forward, investors and analysts will be closely monitoring its progress in addressing these challenges and leveraging its strengths to drive future growth.
This analysis is based on information available up to January 7, 2025. For deeper insights into TD's financial health, valuation metrics, and exclusive analysis, explore InvestingPro, which offers comprehensive research reports, Fair Value estimates, and additional ProTips. TD is among the 1,400+ US equities covered by InvestingPro's detailed research reports, providing actionable intelligence for smarter investment decisions.
InvestingPro: Smarter Decisions, Better Returns
Gain an edge in your investment decisions with InvestingPro’s in-depth analysis and exclusive insights on TD. Our Pro platform offers fair value estimates, performance predictions, and risk assessments, along with additional tips and expert analysis. Explore TD’s full potential at InvestingPro.
Should you invest in TD right now? Consider this first:
Investing.com’s ProPicks, an AI-driven service trusted by over 130,000 paying members globally, provides easy-to-follow model portfolios designed for wealth accumulation. Curious if TD is one of these AI-selected gems? Check out our ProPicks platform to find out and take your investment strategy to the next level.
To evaluate TD further, use InvestingPro’s Fair Value tool for a comprehensive valuation based on various factors. You can also see if TD appears on our undervalued or overvalued stock lists.
These tools provide a clearer picture of investment opportunities, enabling more informed decisions about where to allocate your funds.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.