Analysts Praise TD's Equity Issue, Call It a New Standard

TD Bank’s (TD) announcement that it will issue common equity to enhance its capital position is a “pragmatic move,” says Credit Suisse analyst James Bantis, given the current market conditions.

By entering into an agreement with a syndicate of underwriters to issue 30.4 million common shares at C$39.50 – for gross proceeds of C$1.2-billion, TD’s pro-forma Tier-1 capital ratio has been boosted to about 9%, compared with 8.3% on Nov. 1, while the issuance will be about 4% dilutive to common shareholders.

Given the bank’s pre-announced fourth quarter credit trading losses, and the effects of Basel II on its investment in TD Ameritrade, TD Bank “was in an unfavourable position to deal with unexpected credit market or counterparty shocks going forward.” Now, however, Mr. Bantis says TD is “no longer a noticeable outlier to its Canadian banking peers.”

UBS analyst Peter Rozenberg said he expects the stock will respond favourably, due to reduced capital concerns which should narrow its current valuation discount.. “We think that a 9% Tier 1 is the new standard by which other banks will now be judged,” he said, maintaining his “buy” rating but lowering his target price to C$65 from C$67. The stock current trades at about C$40.

Meanwhile BMO Capital Markets analyst John Reucassel says that TD’s move to issue equity could “break the ice” for Manuife Financial Corp. (MFC).

He said in a note to clients:

We believe that this could provide Manulife with an opportunity to also raise equity and strengthen its capital position in the face of volatile equity markets and a difficult credit environment in 2009.

A C$3-billion equity issue would be about 7% dilutive to earnings per share at Manulife.

A combination of new regulatory capital rules on segregated fund guarantees, a C$3-billion bank loan, plus a C$3-billion equity issue would provide Manulife with a strong capital position to meet anticipated challenges in 2009 and could help maintain valuation on the shares. He rates Manulife shares a “market perform” and a target price of C$30. The stock now trades in the C$20 range.