Toronto-Dominion Bank

Investment Brief
May 30, 2022
Investment Focus
TD-TSX | TD-NYSE
TD reported solid FQ2/22
Price: $95.99
Accountability Research Corporation – Investment Brief

results. We expect
Target: $105.00 continued growth against a
Expected Return: 9% backdrop of rising rates,
BUY higher margins in
Canadian and US retail,
solid expense control, and
Earnings Above
Quality: Average the acquisition of First
Horizon. TD offers
Quality of fit: 15 / 25 attractive exposure to retail
Completeness: 18 / 25 banking and rising rates,
Appropriateness: 20 / 25 and broad diversification
Management: 21 / 25 by geography and business line.
Total: 74 / 100
Investment Highlights
Dividend Yield: 3.7% Canadian Retail. Segment net income was up 2% yoy on higher
Market Cap: $173 billion revenue, offset by higher PCL, increased insurance claims and
Shares Out: 1,805 million
expenses, and higher non-interest expenses. ROE was 44.6%,
Avg. Volume: 7.2 million
F2022E Rev: $42.7 billion down sequentially from 44.8%. NII was up 10% yoy, as average
F2023E Rev: $48.6 billion loan volumes increased 9% (+8% personal, +16% business), and
F2022E EPS: $8.20 average deposit volumes were up 8% (+7% personal, +10%
F2023E EPS: $9.00 business, +10% wealth). NIM was 2.62%, up 1bp yoy.

U.S. Retail. US Retail Banking net income was up 7% yoy (down

Toronto-Dominion Bank
conducts a general banking
business through branches and
offices located mainly in Canada
and the U.S. The Bank and other
subsidiaries offer a broad range
of banking, advisory services,
and discount brokerage.
Mark Rosen, MBA, CFA, CFE
mrosen@accountabilityresearch.com
9% adjusted) on higher revenue, offset by lower PCL reversal,
and higher non-interest expenses. Net interest income was up 6%
in USD on higher business and personal deposit volumes and
margins, and increased earnings on investments, offset by lower
income from PPP loan forgiveness and lower sweep deposit
balances. NIM was 2.21%, flat sequentially and up 6bp yoy. Non-
interest income was up 29% in USD (down 4% adjusted) on an
insurance litigation recovery as well as higher fee income from
increased client activity, offset by lower gains on the sale of
mortgage loans.
Wholesale. Segment net income was down 6% yoy on higher
revenue, offset by lower PCL reversal and higher non-interest
expenses. Revenue was up 8% yoy on higher trading-related
revenue, offset by lower underwriting fees. Net interest income
was up 17% yoy, and non-interest income was down 4% yoy.

Valuation. TD is trading at 11.7x and 10.7x our F2022E and

F2023E EPS, respectively. Our target price is based on 12.5x our
forward EPS estimate.

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ARC Investment Brief – Toronto-Dominion Bank

FQ2/22 Recap
This is only an Investment Brief. Please refer to our Full Report for additional information.

Canadian Retail – Net income in Canadian Retail was up 2% yoy to $2.24 billion. Earnings
benefitted from higher revenue, offset by higher PCL, increased insurance claims and expenses,
and higher non-interest expenses. ROE was 44.6%, down sequentially from 44.8%, and down from
51.3% yoy.

Net interest income was $3.15 billion, up 10% yoy, on volume growth. Average loan volumes
increased 9% (+8% personal, +16% business), and average deposit volumes were up 8% (+7%
personal, +10% business, +10% wealth). NIM was 2.62%, up 1bp yoy, on higher margins on
deposits offset by lower margins on loans.

Non-interest income was $3.48 billion, up 9% yoy, on prior year insurance customer rebates, and
higher fee-based revenue in wealth and banking, offset by lower transaction revenue in wealth and
a decrease in the fair value of investments supporting claims liabilities.

PCL was $60 million, compared to $33 million three months ago, and ($37) million a year ago. On a
sequential basis, PCL on impaired loans was up, while PCL reversal on performing loans was lower
reflecting improved credit conditions offset by elevated economic uncertainty. On a yoy basis, PCL
on impaired loans was down, while PCL reversal on performing loans was lower yoy.

Non-interest expenses were up 9% yoy on higher spending to support growth, higher technology
and marketing costs, and higher employee costs and variable comp. The efficiency ratio was
44.3%, down from 44.4% in the year ago quarter. Insurance claims and related expenses were up
34% yoy on higher current year claims, offset by a decrease in the fair value of investments
supporting claims liabilities.

U.S. Retail – The US Retail segment posted net income of $1.37 billion, up 4% yoy. US Retail
Banking reported net income of $1.14 billion, up 7% yoy on higher revenue, offset by lower PCL
reversal, and higher non-interest expenses.

Revenue was $2.94 billion, up 13% yoy (12% in USD). Net interest income was up 6% in USD on
higher business and personal deposit volumes and margins, and increased earnings on
investments, offset by lower income from PPP loan forgiveness and lower sweep deposit balances.
NIM was 2.21%, flat sequentially and up 6bp yoy. Non-interest income was up 29% in USD on an
insurance litigation recovery as well as higher fee income from increased client activity, offset by
lower gains on the sale of mortgage loans.

TD holds a 13.5% equity stake (9.9% voting stake) in Charles Schwab. The investment added $224
million (US$177 million) to US Retail compared to $246 million (US$194 million) in the prior year.

PCL was ($18) million, compared to $21 million three months ago, and ($213) million a year ago.
On a sequential basis, PCL on impaired loans was down in USD largely due to the auto portfolio.
PCL reversal on performing loans was slightly higher. On a yoy basis, PCL on impaired was lower
on improved credit conditions and PCL reversal on performing loans was lower, reflecting improved
credit conditions offset by elevated economic uncertainty.

ROE was 14.2% (12.5% adjusted) compared with 12.6% sequentially and 13.9% yoy.

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Non-interest expenses were $1.63 billion, up 2% in USD, on higher employee-related expenses and
investments in the business, offset by prior year store optimization costs, lower pandemic costs,
and productivity savings. The efficiency ratio was 55.5% (60.1% adjusted) compared to 61.0% in
the prior year quarter.

Wholesale Banking – Segment net income was $359 million in the quarter, down 6% yoy, on
higher revenue, offset by lower PCL reversal and higher non-interest expenses. Revenue was
$1.25 billion, up 8% yoy, on higher trading-related revenue, offset by lower underwriting fees. Net
interest income was up 17% yoy, and non-interest income was down 4% yoy.

PCL was ($9) million, compared to ($5) million three months ago, and ($63) million a year ago. On
a sequential basis, PCL recovery on impaired was lower while performing was higher. On a yoy
basis, PCL on impaired was lower and the recovery on performing was lower.

Non-interest expenses were $776 million, up 10% yoy, driven by the ongoing investment in the
segment’s USD strategy and the acquisition in automated trading.

ROE was 13.1% compared with 16.2% sequentially and 20.0% a year ago. The efficiency ratio was
62.1% compared to 60.9% in the prior year quarter.

Credit Portfolio Risk

Consolidated PCL of $27 million compared to $72 million three months ago, and ($377) million a
year ago. On a sequential basis, PCL on impaired loans was down, driven primarily by US retail
offset by Canadian retail. PCL reversal on performing loans was higher driven by all segments
except Canadian retail. Total PCL as a percentage of credit volume was 0.01% compared to 0.04%
three months ago.

On a yoy basis, PCL on impaired loans was down, driven by improvement across all divisions. PCL
reversal on performing loans was lower, also driven by all segments.

Outlook and Valuation

TD previously announced the acquisition of First Horizon Corp for US$13.4 billion in cash,
accelerating its growth in the US southeast and providing access to several new territories from
which to expand. The deal is expected to be immediately accretive to EPS upon closing, and 10%
accretive to F2023E EPS on a proforma basis giving effect to all synergies, which management is
forecasting at US$610 million. Actual accretion in F2023 will be lower. Total merger and integration
costs are forecast at US$1.3 billion in the first two years after closing. TD is using the excess capital
on its balance sheet to fund the acquisition. Shares repurchases have been suspended. The deal is
expected to close in F1Q23.

The bank is reintroducing its DRIP discount (2%). Management is taking steps to build its capital
buffer ahead of the First Horizon transaction which could require higher initial capital due to the
impact of rising interest rates on fair value accounting, in addition to the government’s proposed
Canada Recovery Dividend tax on financial institutions, and greater overall economic operating
uncertainty.

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We forecast revenue growth of 7% and 14% in F2022 and F2023, respectively, alongside adjusted
EPS of $8.20 and $9.00.

We expect continued growth against a backdrop of rising rates, higher margins in Canadian and US
retail, solid expense control, and the acquisition of First Horizon. TD offers attractive exposure to
retail banking and rising rates, and broad diversification by geography and business line.

TD is trading at 11.7x and 10.7x our F2022E and F2023E EPS, respectively. Our target price is
based on 12.5x our forward EPS estimate.

This is only an Investment Brief. Please refer to our Full Report for additional information.

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