Toronto-Dominion Earnings: Additional Net Interest Income Pressure and Regulatory Disclosures

Wide-moat-rated Toronto-Dominion TD reported adjusted earnings per share of CAD 1.99, a 5% year-over-year decline and a sequential increase of 3%. Results continue to be a bit messy, with a number of adjusting items related to the canceled First Horizon acquisition still hitting the income statement. It also became a bit more clear that issues with the bank’s anti-money laundering/Bank Secrecy Act compliance likely played a role in regulators withholding approval of the acquisition. The bank cited that there are ongoing investigations involving the U.S. Department of Justice related to these issues, and the bank expects monetary and/or nonmonetary penalties to be imposed. It is difficult to know what exactly these penalties will be, but consent orders and fines are typical in such instances. The bank’s current estimate of reasonably possible losses related to all legal and regulatory matters, which could include additional matters not related to this specific investigation, ranges from CAD 0 to CAD 1.29 billion. While this type of fine would not be material, it is never ideal to fall under the regulator’s gaze in this way, and it can lead to other sources of value destruction.

The bank’s regulatory issues aside, financial results were also not impressive. Net interest income, or NII, remains under pressure, down 2% sequentially, and we do not expect the pressure to relent next quarter. The bank’s U.S. exposure is not helping here. Trading fees were solid, however, card fees, brokerage fees, and net insurance revenue are falling slightly behind our expectations. Expenses, on an adjusted basis, were up 4% sequentially. With NII remaining under some pressure, expenses rising, and Schwab-related earnings also declining, earnings growth is likely to be subdued for the time being. Overall, as we incorporate slightly lower NII expectations and lower fee expectations, we view this as a slight negative for our current fair value estimates of CAD 94/$70.