Toronto-Dominion Bank and Its Future: Time to Sell?

The Toronto-Dominion Bank (NYSE: TD), together with its subsidiaries, is known as TD Bank Group. TD ranks as the sixth-largest bank in North America by assets, serving over 27.5 million customers across four core business segments in key financial hubs worldwide. As one of the world’s leading online financial service providers, TD boasts over 17 million active digital users. As of July 31, 2024, TD reported assets of $1.97 trillion.

However, recent events have cast uncertainty over the bank’s future. Last week, TD reported a third-quarter loss largely due to setting aside billions of dollars in preparation for fines linked to ongoing investigations into its anti-money laundering (AML) practices.

Is it time to exit this stock, or could there be a hidden opportunity? This article explores TD’s latest developments, its recent earnings, a fair value assessment, and insights from analysts and the options market to assess the stock’s prospects.

Earnings and More: A Closer Look

TD Bank’s third-quarter earnings surprised the market with a net loss driven by substantial charges linked to the AML investigation. The adjusted earnings per share (EPS) for Q3 stood at C$2.05 (US$1.51), missing the consensus estimate of C$2.07. The bank exceeded revenue expectations, posting C$14.18 billion (US$10.44 billion), though net interest income fell just short at C$7.58 billion.

The bank reported a net loss of C$181 million, primarily due to a C$2.6 billion charge tied to the AML probe, in addition to the C$615 million charge incurred in Q2. The investigation is centered around the adequacy of TD’s money laundering prevention measures in the U.S.

Despite this setback, TD’s Canadian and wholesale banking operations demonstrated year-over-year profit growth. However, the bank’s U.S. operations saw adjusted net income decline, while wealth management income remained flat. TD also reduced its stake in Charles Schwab (NYSE: SCHW) by selling 40.5 million shares, lowering its position to 10.1% from 12.3%, with no immediate plans to sell further shares.

Our Perspective

The magnitude of the fines TD ultimately faces will be crucial in determining the stock’s valuation. Analysts have estimated that TD could incur fines ranging from $2 billion to $4 billion as a result of the AML investigation. 

While TD’s US$3 billion in provisions related to the probe may represent a “clearing event,” the bank’s long-term outlook in the U.S. remains uncertain.

In addition to potential fines, TD may face non-monetary penalties, as indicated in its press release. These could include increased compliance costs or an asset cap on its U.S. operations, further complicating the bank’s growth prospects in the U.S. market.

Analysts’ Views

Wall Street analysts have an average “Buy” rating on Toronto-Dominion Bank, with price targets ranging from $56.99 to $67.49. The average target of $63.97 suggests a potential upside of around 8% from current levels.

Source: Seeking Alpha

Fair Value Assessment

Our analysis estimates TD’s fair value to be around $65 per share, based on four different valuation models: Dividend Discount Model (DDM) with stable growth, Price-to-Sales multiples, Price-to-Earnings multiples, and Price-to-Book multiples. This fair value assessment indicates a potential upside of nearly 10% from the current price, aligning closely with Wall Street’s projections.

Options Market Sentiment

The options market has shown bearish sentiment toward TD stock. Over the past 30 days, the net options flow registered a negative total of -1,182 contracts. 

Market predictions in August indicated uncertainty, while September saw a shift towards a “Bearish Breakout,” suggesting increased selling pressure. This downward trend is expected to persist into October, signaling potential further declines in stock value.

Source: Visual Sectors

Conclusion

Although both the consensus analyst price target and our fair value estimate suggest a modest upside of 8-10%, bearish sentiment from the options market, combined with the uncertainty surrounding the potential fines, makes this stock a risky bet for now. Given the ongoing regulatory challenges and the potential for further downside, it may be prudent to hold off on purchasing TD Bank stock at this time.