Toronto-Dominion Disappoints On Earnings

(TD) reported fiscal third-quarter 2013 (ended Jul 31) adjusted earnings of C$1.65 per share, which compared unfavorably with the year-ago earnings of C$1.91. Moreover, adjusted net income came in at C$1.59 billion ($1.54 billion), down 12.7% from the year-ago period.

Results were disappointing mainly due to a decline in fee income and higher operating expenses, partially offset by increased net interest income. Rise in asset holdings was a tailwind for the quarter.

After taking into consideration certain non-recurring items, net income for fiscal third-quarter came in at C$1.52 billion ($1.47 billion), down 10.3% year over year.

Behind The Headlines
Total revenue (on an adjusted basis) was C$5.86 billion ($5.68 billion), rising marginally on a year-over-year basis. The rise was driven by growth in net interest income, partially offset by decline in non-interest income.

Adjusted net interest income surged 8.6% year over year to C$4.15 billion ($4.03 billion). However, adjusted non-interest income came in at C$1.72 billion ($1.67 billion), falling 15.0% from the year-ago quarter.

Adjusted non-interest expenses were C$3.66 billion ($3.55 billion), up 13.3% year over year. Adjusted efficiency ratio increased to 62.5% from 55.4% as of Jul 31, 2012. An increase in efficiency ratio indicates decline in profitability.

Total provision for credit losses came in at C$477 million ($463 million), increasing 8.9% from the comparable quarter last year.

Total assets came in at C$835.1 billion ($812.30 billion) as of Jul 31, 2013, up 3.6% year over year. Return on common equity, as adjusted, was 13.0% in the reported quarter, down from 16.4% as of Jul 31, 2012.

Other Developments In The Quarter
In Aug 2013, Toronto-Dominion signed a deal with National Bank of Canada (NTIOF) to divest TD Waterhouse Institutional Services, the bank’s institutional service business. The deal is worth $250 million and is subject to price adjustment based on asset retention. The agreement is expected to close by the end of this year subject to regulatory approval.

Moreover, in the same month, Toronto-Dominion became the primary credit card issuer for Aeroplan, the royalty program of Aimia Inc., with effect from Jan 1, 2014.

Capital Deployment Activities
Along with its earnings release, Toronto-Dominion declared a quarterly dividend of C$0.85 per share, up 4.9% compared with the prior-quarter payout. The dividend will be paid on Oct 31 to shareholders of record at the close of business on Oct 3.

Our Viewpoint
We expect Toronto-Dominion’s acquisition activities to positively impact its financials in the long run. Further, the company’s capital deployment activities will surely boost investors’ confidence. However, rising expenses, weak economic recovery and stringent regulatory requirements will remain a drag on its financials.

On Aug 29, another Canadian bank, Canadian Imperial Bank of Commerce (CM) reported fiscal third-quarter adjusted earnings of C$2.29 per share. This compared favorably with the year-ago earnings of C$2.06.

Toronto-Dominion currently carries a Zacks Rank #3 (Hold). A better performing stock is Grupo Financiero Galicia S.A. (GGAL), which has a Zacks Rank #1 (Strong Buy).