Toronto-Dominion Bank Attractive Post Price Decline

Summary

• Earnings are expected to be driven upwards by loan growth.
• Loan growth's positive effect on the bottom line is expected to be partly offset by higher provisions charge and lower net interest margin.
• Dividends expected to be increased again next year to C$3.1 or US$2.4 per share, implying a dividend yield of 4.3%.
• Target price for October 2020 implies 10% upside from last closing price.

Toronto-Dominion Bank's (NYSE:TD) price has declined sharply since it announced its last quarter results, which has made the stock attractive. TD's earnings are expected to increase in 2020 due to anticipated rise in loans. On the other hand, some pressure is expected on the bottom line from an increase in provisions for credit losses and a compression in net interest margin. Due to the prospects of earnings increase I'm expecting the bank to raise its dividends again next year.

Normalization of Provisions for Credit Losses to Constrain Earnings

TD booked high provision charge of $891 million in the last quarter that constrained earnings. Going forward, provisions are expected to rise even further as the credit cycle will normalize after years of remarkable asset quality. Further, high consumer leverage in Canada is expected to lead to delinquencies. As mentioned in the third quarter conference call, the management expects provisions charge for credit losses to go up to around 50bps (of total loans) next year compared to the current level of around 44bps. Taking management's guidance, I'm expecting TD's provisions to increase by 19% year over year to $3.6 billion in FY20.

Economic Resilience to Help Sustain Loan Growth

Despite headwinds, the Canadian economy showed resilience and grew by 1.3% in the third quarter. Likewise, the US economy is showing strength despite trade tensions and overall global economic slowdown. The Federal Reserve Bank of St. Louis estimated United States' leading index at 1.27, which shows that the economy is expected to continue to expand in the coming quarters at a rate similar to the earlier part of 2019.

Low interest rates in the United States are also expected to increase demand for loans. Based on these macroeconomic factors I'm expecting TD's overall loan portfolio to increase by 4.1% year over year in 2020. The following

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