Expanding Fee-Based Services And Digital Innovations Will Drive Revenue Growth And Boost Earnings

Key Takeaways

• Strategic reviews, digital investments, and fee-based business expansions aim to enhance TD Bank's competitive position, revenue, and long-term earnings.
  
• U.S. AML efforts and core business refinements focus on reducing risks and improving margins through operational efficiency and revenue growth.
  
• U.S. AML remediation and compliance costs, alongside climate-related insurance risks and reliance on Schwab deposits, pose challenges to TD Bank's financial health and growth stability.

Catalysts

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

• TD Bank is undertaking a strategic review of its operations, which includes evaluating the business mix for profitability and risk-adjusted returns on capital. This review may lead to strategic investments or divestitures aimed at enhancing the bank's competitive position and could positively impact revenue and earnings in the long term.
  
• The U.S. anti-money laundering (AML) remediation efforts, although costly in the short term, are expected to strengthen TD's risk and control environment. Once completed, these improvements may reduce regulatory risks and legal costs, potentially leading to enhanced net margins.
  
• TD's expansion in fee-generating businesses like TD Securities and its focus on new offerings such as TD Active Trader Live and increased ETFs are expected to generate additional fee-based revenue, which could improve both revenue and return on equity (ROE).
  
• Investments in digital and mobile capabilities across its operations aim to enhance customer experience and operational efficiency. This strategy could improve net margins through cost savings and bolster revenue growth by attracting and retaining customers.
  
• The bank's focus on refining its core businesses, such as extending its credit card agreement with Nordstrom and growing its U.S. and Canadian deposit franchises, is expected to drive revenue growth and improve the efficiency ratio over time, positively affecting earnings.

Toronto-Dominion Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Toronto-Dominion Bank's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.6% today to 26.2% in 3 years time.
• Analysts expect earnings to reach CA$14.2 billion (and earnings per share of CA$7.87) by about December 2027, up from CA$8.8 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 13.0x on those 2027 earnings, down from 14.9x today. This future PE is greater than the current PE for the US Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 1.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Toronto-Dominion Bank Future Earnings Per Share Growth

Risks

• The ongoing U.S. AML remediation efforts involve significant investment and could continue to drain resources over a multi-year period, with potential impacts on the bank's expenses and net margins.
  
• Substantial legal and regulatory costs arising from issues such as the U.S. AML program and other compliance requirements could affect the bank's earnings and overall financial health.
  
• Record catastrophic insurance claims related to severe weather events suggest increased exposure to climate-related risks, which could adversely impact both revenues and net income in the insurance segment.
  
• The strategic review and suspension of medium-term financial targets imply potential challenges or reevaluation of growth strategies, which could introduce uncertainty around future earnings growth.
  
• The dependence on Schwab deposits, with recent noteworthy declines and potential variability, poses a risk to stable funding, which might impact the bank's revenue and earnings trajectory.

Valuation

• The analysts have a consensus price target of CA$84.36 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$94.0, and the most bearish reporting a price target of just CA$77.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$54.3 billion, earnings will come to CA$14.2 billion, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 6.8%.
• Given the current share price of CA$75.21, the analyst's price target of CA$84.36 is 10.8% higher.
• 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.