Toronto-Dominion Shocks and Disappoints

Nov.21.08 | About: Toronto-Dominion Bank (TD)

Shock and disappointment is the mood on the Street one day after Toronto-Dominion Bank (NYSE:TD) announced it will report weaker-than-expected fourth quarter earnings next month.

TD  said adjusted earnings per share will be C79¢ in the quarter compared with C$1.44 this time last year, due largely to a C$350-million writedown on credit trading losses. TD said its corporate segment will also record a C$153-million loss due to securitization and funding hits. 

"While we had expected several banks to incur year-end charges, it is surprising that TD had problems of this scale," said BMO Capital analyst Ian de Verteuil in note to clients, leaving his "market perform" rating and $70 price target unchanged until the end of earnings season.

UBS analyst Peter Rozenberg reduced his fiscal 2009 earnings per share estimate by 2% from C$5.78 to C$5.67 and cut his price target on the stock from C$69 to C$67. He maintained his "buy" rating.

"While we expected trading losses, the announcement was disappointing and underlined broader systematic risks for all banks, concern regarding the economic outlook, and for TD, a lack of diversification in Wholesale," Mr. Rozenberg wrote in a research note.

He added that TD's retail division remains solid, but growth "is expected to moderate due to the recession.

Blackmont Capital analyst Brad Smith said TD's credit losses could have been worse if not for some recent accounting amendments that allowed TD to reclassify retroactively $7.5 billion in credit related trading assets from "trading" to "available for sale" on the books.

"Through this action, C$561 million (C70¢ per share) of net unrealized valuation losses were effectively diverted directly to shareholders equity without being reported in the quarterly profit and loss statement," Mr. Smith told clients.   

In addition to TD's credit trading losses, the Blackmont analyst was also concerned with unrealized losses at TD's U.S. affiliate, TD Bank N.A. that rose $868 million ($1.08 per share) in the quarter "due to price erosion in its mortgage-backed security portfolio,"

He maintained his "hold" rating and left his C$63 price target unchanged.