Canadian Stock Series:TD Bank ——Shareholder Returns Surpass 10%, Money Laundering Scandal Awaits Resolution

As of May 24, the company's stock price was 75.58 Canadian dollars, with a total market value of 133.644 billion Canadian dollars.

Toronto-Dominion Bank's main business can be divided into Canadian personal and commercial banking, U.S. retail business, wealth management and insurance business, wholesale banking, and corporate operations. These include:

Canadian personal and commercial banking: Provides services such as deposits, loans, credit cards, investment products, trade financing, and commercial real estate loans for individual or corporate clients.

U.S. retail business: Offers comprehensive banking services to individuals and families in the U.S. market, including savings accounts, checking accounts, personal loans, credit cards, and home mortgages.

Wealth management and insurance business:Wealth management: Offers investment management, wealth advisory, retirement planning, estate planning, and other services.Insurance business: Provides various insurance products, such as life insurance, health insurance, property insurance, and more.

Wholesale banking: Serves large corporations, financial institutions, and government agencies, including but not limited to loans, trade financing, risk management, capital market services, etc.

Chart: Main Business Composition (%)

Next, let's analyze the impact of each type of business on TD's revenue and the development prospects of each business.

This quarter, the total revenue of TD's Canadian personal and commercial banking sector was 4.839 billion Canadian dollars, a year-over-year increase of 9.88%; the adjusted net profit for the sector was 1.739 billion Canadian dollars, a year-over-year increase of 7.02%.

Such strong revenue and profit growth are mainly due to an increase in Canadian market loan amounts. According to the financial report data, the total amount of personal loans in the first quarter reached 443.5 billion Canadian dollars, a year-over-year increase of 6.92%; commercial loans totaled 120.8 billion Canadian dollars, a year-over-year increase of 7.47%, contributing significantly to the company's performance. Specifically:

(1) In the real estate mortgage loan sector, TD continued to maintain growth momentum in a competitive market. According to the earnings call guidance, due to the successful implementation of the mortgage loan direct sales policy, the company's market share in the mortgage loan market has grown for 12 consecutive months, reaching 23.8%. The channel was launched a year ago and quickly resonated with individual customers, modernizing the loan process.

(2) In the credit card business segment, TD customers' total loan amount increased by 11% year-over-year. As TD is a sponsor of the Blue Jays (a professional baseball team in Canada), eligible TD credit card holders can enjoy exclusive ticket purchase benefits at home games, which led to a large number of Blue Jays fans opening TD credit cards this quarter.

(3) In commercial banking, TD collaborated with the Business Development Bank of Canada to launch the Business Acceleration Loan program, enhancing financing channels for small and medium-sized enterprises, leading to strong growth in commercial loan amounts this quarter.

Going forward, we expect TD to continue to maintain strong loan business growth due to its significant influence and market share lead in the Canadian commercial banking market. Considering the current high interest rate levels in the Canadian market, TD's loan business is expected to generate stable revenue for the company in the coming period.

Chart: Canadian Personal and Commercial Banking Sector Profit (Million Canadian Dollars)

TD's U.S. retail banking business underperformed this quarter, with total revenue at 3.447 billion Canadian dollars, a year-over-year increase of 4%, and adjusted net profit at 1.272 billion Canadian dollars, a decrease of 16.75% year-over-year but a 7% rebound quarter-over-quarter.

Senior management explained that the decline was due to increased competition in the U.S. retail banking industry and expressed that the company's operating momentum is strong this quarter, with the potential for positive profit growth in the second half of the year.

(1) The earnings call indicated that TD had surpassed 10 million customers in the U.S. this quarter, with over 5 million active mobile customers. Additionally, TD saw a 25% year-over-year increase in new retail market accounts in the U.S., reaching 50,000 this quarter. Thanks to this, TD's personal loan balance grew 10% year-over-year to 128.9 billion Canadian dollars, and commercial loan fees increased 5.67% year-over-year to 132.3 billion Canadian dollars.

However, senior management also revealed that due to previously insufficient provisioning for assets in this segment, there was a risk of bad debts due to the large scale of risk assets, necessitating timely adjustments. Thus, from the financial statements, it is evident that non-interest expenses in this segment have been rising in recent quarters, with this quarter experiencing a 26.68% increase to a total of 2.6 billion Canadian dollars. This has led to a 16.75% year-over-year decline in retail business net profits, directly impacting the company's earnings growth rate.

(2) According to the J.D. Power 2024 U.S. Retail Banking Financing Satisfaction Study, TD's auto loan business ranks highest among non-captive auto finance lenders in the U.S. In addition, TD was once again recognized by Forbes as one of the best retail banks in the U.S., ranking highly among financial institutions. Therefore, we are optimistic about the future trend of this business. With the company's asset adjustment process progressing and the user base expanding, the retail business may experience positive growth in the second half of the year.

Chart: U.S. Retail Banking Profit (Million Canadian Dollars)

In the wealth management and insurance sector, TD's revenue grew 13.86% year-over-year to 3.114 billion Canadian dollars, reflecting increased insurance premiums, asset growth, and higher daily rates for direct investment businesses.

In wealth management, TD saw growth in its ETF investments, with 7 fixed-income ETFs recently added to the company's asset management portfolio. Additionally, the company has seen considerable development in the pension fixed contribution field, with related fund products being rated by benefits providers as the top recommended products for elderly customers across Canada, further driving the scale of managed assets.

Likewise, in the insurance field, TD has become Canada's fastest-growing personal insurer. Over the past year, TD has held a market share in the personal insurance market in every province and plans to increase this ratio in the future.

Chart: Wealth Management and Insurance Business Profit (Million Canadian Dollars)

In the wholesale banking sector, the quarter's revenue saw a substantial year-over-year increase of 36.91%, reaching 1.94 billion Canadian dollars; the adjusted net profit more than doubled compared to the same period last year, reaching 441 million Canadian dollars. This showcases broad growth across the company's entire business, including underwriting, sales, and trading.

According to the earnings call guidance, besides significantly increasing the number of town hall meetings to acquire more institutional clients, TD also acquired TD Cowen this quarter, creating a specialized platform to provide investment and financing services for large institutions and corporations, further promoting the development of wholesale business. Currently, TD Cowen has become one of the top ten most influential comprehensive investment banks in North America.

Chart:Wholesale Business Profit (Million Canadian Dollars)

This quarter, Toronto-Dominion Bank's interest expenses were 15.531 billion Canadian dollars, a year-over-year increase of 30.74%, resulting from the continued expansion of the bank's asset management scale and persistently high market deposit rates. Non-interest expenses were 7.084 billion Canadian dollars, a year-over-year increase of 9.63%, nearly 1.9 billion of which was a one-time expense due to the acquisition of TD Cowen.

Overall, the interest rate was nearly 5% higher than the same period last year, reflecting the increased burden of interest expenses the bank pays to depositors in a higher interest rate environment.

Chart: Canadian Bank Deposit Rates (%)

Although TD's profitability this quarter was hampered by high interest rate levels, with a significant rise in interest expenses, the faster growth in revenue successfully offset this negative impact. Overall, the company's adjusted net income still achieved a 1.6% year-over-year positive growth, reaching 3.6 billion Canadian dollars. This marks the first time the company has achieved year-over-year profit growth in five consecutive quarters. Diluted EPS also reached 2.04 Canadian dollars, a year-over-year increase of 5.15%.

Chart: Adjusted Net Profit (Million Canadian Dollars)

Expected According to the financial report disclosure, TD plans to implement a share buyback program for 90 million shares in fiscal year 2024, and has already completed nearly two-thirds of this buyback. Based on the current total share capital of 1.768 billion, it is expected that TD could achieve a 5% buyback yield for the full fiscal year 2024. Combined with the current dividend yield of 5.24%, the total expected shareholder return for the year could exceed 10%. Additionally, with 1.07 billion Canadian dollars in cash flow from operating activities on TD's books, there may be even more room to increase shareholder returns.

On May 3, U.S. law enforcement authorities launched an investigation into the internal controls of The Toronto-Dominion Bank, uncovering allegations of money laundering. Reports suggest that the focus of the U.S. Department of Justice's investigation into TD is the suspicion that drug traffickers laundered at least 653 million U.S. dollars through the bank and bribed bank employees. While TD did not comment directly on these reports, it stated that there were deficiencies in its anti-money laundering defenses. Upon the news breaking, TD's stock price suffered a 4.6% drop in a single day, significantly impacting investor and shareholder confidence in TD.

Gabriel Dechaine, an analyst at National Bank, mentioned in a report that, in the worst-case scenario, this issue could erode over 1 billion Canadian dollars from TD's future profit potential and that regulatory authorities might impose restrictive measures, including limiting balance sheet growth (similar to Wells Fargo), which could affect the bank's operations for years.

Analysts suggest that the money laundering controversy could result in fines of up to 2 billion U.S. dollars for TD (approximately 20% of the net profit for fiscal year 2024) and could also lead to strict scrutiny from regulatory authorities in both the United States and Canada, severely affecting the bank's future growth potential. As of May 24, Canada's financial crimes regulatory authority, Fintrac, has already imposed a fine of 9.2 million Canadian dollars on the bank, and the company's stock price has declined 6.4% within 20 days.