Toronto-Dominion Shares Slide as Deposit Costs Crunch Earnings

Toronto-Dominion Bank is feeling the impact of costlier deposits, which squeezed margins and contributed to the lowest profitability for its US business in more than a year.

(Bloomberg) — Toronto-Dominion Bank is feeling the impact of costlier deposits, which squeezed margins and contributed to the lowest profitability for its US business in more than a year. 

Canada’s second-largest bank saw US retail-banking earnings drop to C$1.38 billion ($1.02 billion) on an adjusted basis in the fiscal third quarter, a 6% decline from a year earlier. 

The bank’s US net interest margin — the difference between what it earns on loans and what it pays for funding — dropped sharply from the previous quarter, to 3%, while it also took a larger provision for loan losses. 

Those factors, plus higher staff costs, pulled down adjusted earnings per share down to C$1.99 in the quarter ended July 31, missing analysts’ estimates of C$2.04. The shares slipped as much as 2.7% in Toronto.

US regional banks have been shrinking their balance sheets in response to higher funding costs and anticipated new regulations following the failure of Silicon Valley Bank and other lenders. Toronto-Dominion, which has nearly 1,200 branches in the US, saw a slowing of US personal loans, which grew just 1.6% over the previous quarter. 

Earnings were also hampered by rising expenses and provisions for credit losses. Overall, the Canadian bank set aside C$766 million for troubled loans in the quarter, about 4% more than analysts had projected. Noninterest expenses were up 24% over the previous year.

Provisions for credit losses more than doubled from a year earlier in both the US retail and Canadian personal and commercial units. Chief Financial Officer Kelvin Tran said credit concerns are simply normalizing from low levels last year, and argued that consumers are still resilient.

“We see good spending, we track it looking at credit cards and that’s why you see our card balances continue to grow,” Tran said in an interview. “There’s nothing that would point us to a concern, at this point in time.”

Toronto-Dominion had a deal to buy Tennessee-based First Horizon Corp., but the transaction collapsed in May after the bank said it couldn’t secure timely approval from regulators. The deal was held up by regulatory concerns about TD’s handling of suspicious customer transactions, a person familiar with the matter told Bloomberg. 

TD paid a C$306 million termination fee to the US bank during the quarter. 

The aborted deal left the bank with a much fatter capital cushion than its rivals. Its common equity tier 1 capital ratio, a barometer of financial strength, clocked in at 15.2% as of July. That’s far above the regulatory minimum and has raised questions about how Toronto-Dominion will deploy that capital — and where it will find growth. 

In late May, the bank withdrew its target of increasing earnings per share by 7% to 10% a year over the medium term, citing the failure to get First Horizon and a softer economic outlook. 

TD said it plans to repurchase as many as 90 million shares, about 5% of its stock, subject to regulatory approval. Barclays analyst John Aiken said that ought to mitigate the market’s reaction to the earnings slump.

“Weakness from its US platform highlighted TD’s miss, which we would anticipate would attract some bears,” Aiken said in a note to clients. “However, after completion of its 30 million share repurchase program, TD tripled the amount in its new offering, which should offset any real disappointment related to earnings.”


(Updates with new information on US retail operations beginning in the first paragraph, share price, analyst commentary)

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