As a CA$135b market capitalisation company operating in the financial services sector, The Toronto-Dominion Bank (TSE:TD) has benefited from strong economic growth and improved credit quality as a result of post-GFC recovery. Economic growth fuels demand for loans and affects a borrower’s ability to repay which directly impacts the level of risk Toronto-Dominion Bank takes on. As a consequence of the GFC, tighter regulations have led to more conservative lending practices by banks, leading to more prudent levels of risky assets on their balance sheets. The level of risky assets a bank holds on its accounts affects the attractiveness of the company as an investment. So today we will focus on three important metrics that are insightful proxies for risk.
What Is An Appropriate Level Of Risk?Toronto-Dominion Bank is engaging in risking lending practices if it is over-exposed to bad debt. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. Loans are written off as expenses when they are not repaid, which comes directly out of Toronto-Dominion Bank’s profit. Since bad loans only make up a very insignificant 0.46% of its total assets, the bank exhibits very strict bad loan management and is exposed to a relatively insignificant level of risk in terms of default.
How Good Is Toronto-Dominion Bank At Forecasting Its Risks?
Toronto-Dominion Bank’s ability to forecast and provision for its bad loans indicates it has a good understanding of the level of risk it is taking on. If the bank provision covers more than 100% of what it actually writes off, then it is considered sensible and relatively accurate in its provisioning of bad debt. Given its high bad loan to bad debt ratio of 119.26% Toronto-Dominion Bank has cautiously over-provisioned 19.26% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
Is There Enough Safe Form Of Borrowing?Toronto-Dominion Bank operates by lending out its various forms of borrowings. Customers’ deposits tend to carry the smallest risk given the relatively stable interest rate and amount available. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since Toronto-Dominion Bank’s total deposit to total liabilities is within the sensible margin at 75% compared to other banks’ level of 50%, it shows a prudent level of the bank’s safer form of borrowing and an appropriate level of risk.
How will TD’s recent acquisition impact the business going forward? Should you be concerned about the future of TD and the sustainability of its financial health? The list below is my go-to checks for TD. I use Simply Wall St’s platform to keep informed about any changes in the company and market sentiment, and also use their data as the basis for my articles.
- Future Outlook: What are well-informed industry analysts predicting for TD’s future growth? Take a look at our free research report of analyst consensus for TD’s outlook.
- Valuation: What is TD worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether TD is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
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