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- By Nathan Parsh
Like many of the other Canadian financial institutions, The Toronto-Dominion Bank (NYSE:TD) has enjoyed quite the ride over the past few months. Shares of the bank are higher by 14.2% over the last three months compared to a 7% return for the S&P 500 Index.
The gains in Toronto-Dominion are even higher at almost 30% since I looked at the company in early June. At that time, I felt the Covid-19 pandemic had caused Toronto-Dominion and other Canadian banks to become oversold.
The bank has enjoyed a rebound coming off the worst of the virus' impact on the markets. Despite this gain, I believe Toronto-Dominion still has solid total return prospects going forward. It is why we bought shares of the name in both September and October.
Let's look closer at the bank's most recent quarterly results and examine its valuation to see why I continue to be a buyer of Toronto-Dominion.
Toronto-Dominion reported earnings results for the fourth quarter of fiscal 2020 on Dec. 3 (the bank's fiscal year ends Oct. 31). For the quarter, adjusted earnings per share improved 3 cents, or 2.5%, to $1.24. This was 26 cents above what Wall Street analysts had expected. Revenue grew 4.2% to $7.6 billion, which topped estimates by $351 million.
In Canadian dollars, adjusted earnings per share were up 0.6% while adjusted revenue grew 0.8%. Revenue totals excluded Toronto-Dominion's divestiture of TD Ameritrade, adding an after-tax net gain of 2.3 billion Canadian dollars ($1.79 billion) to results.
For the fiscal year, adjusted earnings decreased $1.03, or 20%, to $4.05 while revenue was higher by 2.8% to $29.8 billion.
Much of the declines for earnings for the fiscal year were due to higher provisions for credit losses, or PCL. PCL were up 139% in fiscal 2020 compared to fiscal 2019. Most of the increase in PCL occurred during the second and third-quarter.
Fourth-quarter PCL decreased 58% compared to the third-quarter of the year and just 2.9% year-over-year to CA$917 million. Impaired loans, those that the bank likely be unable to collect all amounts due, decreased 57% to CA$359 million. Performing loans, which are those that have payments less than 90 days overdue, declined 59% to CA$558 million.
Canadian Retail, which accounts for about 58% of revenue, was down 2% compared to the previous year. Net income improved 3% to CA$1.8 billion. Loan volumes improved 3% due to record auto finance and higher insurance premiums. Deposit volume growth was very strong at 20%. PCL were lower by 37% from the previous year and down 74% sequentially. Offsetting these positives was a 25-basis point decline in net internet margins from the third quarter of the year to 2.71%. This was due to lower average interest rates. Expenses grew 3% to CA$2.7 billion.
Revenue for the U.S. retail segment decreased 8% to $2.1 billion with net income decreasing 27% to $658 million. The declines were primarily due to lower contributions from TD Ameritrade following the divestiture. Reduced trading commissions and lower asset-based revenue also factored in the declines.
U.S. Retail Bank was lower by 41% to $403 million as loan and deposit growth were more than offset by higher PCL. PCL more than doubled to $433 million year over year, but declined 34% from the previous quarter. Impaired loans were cut by more than half while performing loans decreased 27%. The net interest margin was down 91 basis points to 2.27%, again due to lower rates. Expenses decreased 1% to $1.25 billion.
Wholesale Banking revenue grew 48% to CA$1.25 billion. Net income surged 200% to CA$486 million. This was due to higher trading revenue, loans fees, debt underwriting fees and amassive improvement in impaired and performing loans. Also aiding results was the lack of a derivative valuation charge that was incurred in the fourth quarter of fiscal 2019. Expenses of CA$581 million was a 3% improvement from the previous year.
Toronto-Dominion's common equity Tier 1 capital ratio was 13.1%. This was a full percentage point better than in fourth-quarter 2019 and a 62 basis point improvement from the third quarter.
Toronto-Dominion is also taking steps to meet consumer demand for use of technology in banking. Last quarter, digital adoption among Canadian Retail customers grew 360 basis points year over year to 59%. Digital use amongst U.S. Retail customers climbed 250 basis points to 48.3%. Self-serve digital transactions as a percentage of all financial transactions grew 710 basis points to 92% in Canada and was higher by 990 basis points to 79.7% in the U.S. Total mobile users grew 13% to 9.6 million between the two regions. Some of this growth is probably due to the pandemic limiting face-to-face interactions, but digital usage is likely to remain in high demand as customers become accustomed to banking online.
Analysts surveyed by Seeking Alpha expect that Toronto-Dominion will earn $4.55 per share in fiscal 2021. This would be a 12.3% improvement from the most recent fiscal year. Based on Friday's closing price of $55.47, shares of Toronto-Dominion have a forward price-earnings ratio of 12.1. This actually matches the stock's 10-year average price-earnings ratio, according to Value Line.
Longer term, shares might be cheaper than normal. Using earnings per share estimates of $5.08 for fiscal 2022, the price-earnings ratio drops to 10.9.
GuruFocus believes there is still upside potential in the name even though it trades right at its historical average valuation.
GuruFocus believes Toronto-Dominion has a GF Value of $60.17. Using the most recent closing price results in a price-to-GF Value of 0.92. This places shares at about 8.5% below their intrinsic value according to GuruFocus.
At its GF Value, Toronto-Dominion's annualized dividend of $2.37 would result in a yield of 3.9%. Therefore, shareholders could be looking at a total return of 12.4% were the stock to trade at its GF Value.
Toronto-Dominion delivered a fourth quarter that easily topped estimates. There were some weak spots, such as lower fees from trading activities, but most of the bank performed well.
Provisions for credit losses were down significantly from the previous quarter and higher just marginally compared to the fourth quarter of the prior year. The declines in provisions for credit losses was a positive point in the bank's favor as Covid-19 restrictions were eased in many areas.
Investors who have missed the stock's rally over the last few months shouldn't ignore Toronto-Dominion simply because the stock is higher. Including dividends, there appears to be at least double-digit upside potential for the stock.
Given the bank's solid recent performance, potential benefit from a Covid-19 recovery, the possibility of double-digit returns and a dividend that wasn't cut in the last recession, I continue to be a buyer of Toronto-Dominion.
Disclosure: The author maintains a long position in the Toronto-Dominion.
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This article first appeared on GuruFocus.