Canadian Market Expansion And AI Investments Will Improve Future Operational Efficiency

Key Takeaways

• U.S. balance sheet restructuring and AML compliance efforts are expected to enhance return on equity, net margins, and reduce regulatory risks.
  
• Canadian market expansion and digital innovation investments are anticipated to drive revenue growth and improve operational efficiency and margins.
  
• Regulatory costs and strategic restructuring could constrain margins and earnings, while trade uncertainties may impact loan growth and revenue stability.

Catalysts

Provides various financial products and services in Canada, the United States, and internationally.

• U.S. balance sheet restructuring, including selling $9 billion in lending portfolios and reducing borrowings, is expected to improve return on equity and support net interest income for fiscal 2025-2026.
  
• Progress in U.S. AML remediation with enhanced transaction monitoring and centralized case management systems should bolster compliance and reduce future regulatory expenses, positively impacting net margins and mitigation of risk-related expenses.
  
• Canadian market expansion efforts, such as enhanced proprietary distribution strategies and strong growth in credit card spending, are anticipated to drive revenue growth in Canadian Personal and Commercial Banking.
  
• Strategic investments in digital innovation, particularly AI-driven customer service advancements, aim to enhance customer experience and operational efficiency, likely improving margins through cost reductions and increased revenues.
  
• Share buyback programs funded by the sale of the stake in Schwab are set to bolster earnings per share by reducing the number of shares outstanding, while maintaining high levels of capital for future organic growth opportunities.

Toronto-Dominion Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Toronto-Dominion Bank's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.5% today to 24.2% in 3 years time.
• Analysts expect earnings to reach CA$14.0 billion (and earnings per share of CA$8.56) by about March 2028, up from CA$8.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.7x on those 2028 earnings, down from 18.1x today. This future PE is greater than the current PE for the US Banks industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 0.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.07%, as per the Simply Wall St company report.

Toronto-Dominion Bank Future Earnings Per Share Growth

Risks

• The ongoing U.S. AML (Anti-Money Laundering) remediation process involves considerable expense and regulatory scrutiny, which could impact the bank’s expenses and net margins.
  
• Trade uncertainties and potential tariffs pose a risk to economic conditions, potentially affecting loan growth and overall revenue.
  
• There is a risk of increased provisions for credit losses due to policy uncertainties and trade impacts, which could affect earnings.
  
• The bank’s focus on balance sheet restructuring, including selling $9 billion in loans and exiting some lower-yielding portfolios, might constrain net interest income growth.
  
• The strategic review may identify further areas for portfolio exits or restructuring, potentially leading to short-term costs or write-downs that could impact net earnings.

Valuation

• The analysts have a consensus price target of CA$90.0 for Toronto-Dominion Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$99.0, and the most bearish reporting a price target of just CA$65.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$57.8 billion, earnings will come to CA$14.0 billion, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 7.1%.
• Given the current share price of CA$85.31, the analyst price target of CA$90.0 is 5.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.