TD Deal Will Look Better in the Long Term

Toronto-Dominion Bank’s (TD) U.S. mega-deal has certainly woken up the sometimes staid Canadian banking sector. But the transaction, which transforms TD Banknorth — TD’s struggling U.S. retail banking operation — might not do much for the bank in the short term, say analysts.

“While TD Bank's shares have recently earned a reprieve from the ‘Banknorth penalty box’ for a variety of reasons, this transaction will put them back in there as investors take a ‘wait and see’ approach,” says Credit Suisse analyst Jim Bantis.

For now, the transaction disrupts Banknorth’s focus on organic growth and increases TD’s exposure to the weakening U.S. economy, says Mr. Bantis. National Bank analyst Rob Sedran adds that, “Near-term financial implications are negative,” because TD’s balance sheet is already stretched to accommodate the privatization of Banknorth earlier this year.

Despite the short term concerns, both Mr. Bantis and Mr. Sedran say the deal will look better in the longer term. The US$8.5-billion deal for Commerce Bancorp Inc (CBH) will be perceived as the right decision in five years, says Mr.Bantis.

“At this point of the TD Banknorth strategy, missing out on the eventual consolidation of the mid-Atlantic region would not have been an option for TD management,” he says. For now, the Credit Suisse analyst downgraded his rating on TD’s stock from outperform to neutral. Mr. Sedran maintains an outperform rating on TD.