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Toronto-Dominion Bank: The CET1 Ratio Fell By A Full 110 Points In 6 Months, But The Dividend Should Be Fine



Toronto-Dominion Bank (NYSE:TD) (hereafter 'TD Bank') is a major Canadian bank with operations in the USA. Upon reading the bullet points of the bank's Q2 results, I noticed the CET1 ratio fell by a full percent from 12% to 11% compared to a year ago, so I was curious to find out more about this drop and how safe TD's current 5%+ dividend yield is. Other banks like the Bank of Montreal (BMO) (read here) and Laurentian Bank (OTCPK:LRCDF) (read here) also saw their CET1 ratios drop, but not by as much as TD Bank.

The loan loss provisions are in line with the banking income

In the second quarter of the current financial year, TD Bank wasn't immune to the general issue of lower interest income as most banks have been reporting a hit to the interest income. TD saw its interest income drop by approximately C$850M, but, on the other hand, it was able to reduce its interest expenses by C$1.44B, which means the net interest income increased by more than 10% to C$6.46B. Additionally, TD's fee income was roughly C$4.1B, which is lower than in the same quarter last year, but it also means the higher net interest income was a big help in compensating the lower fee income.

Source: quarterly reports

The operating income before loan losses came in at C$4.74B, which is an increase of about 10% compared to the C$4.31B in Q1 last year. So, although the provision for loan losses five-folded to C$3.22B, Toronto-Dominion Bank remained very profitable with a net income of C$1.45B after taking the payments to preferred shareholders into account. Yes, that's less than half the net income of last year, but this is entirely caused by the higher loan loss provisions. Excluding these higher provisions, TD Bank would have shown a much higher net income.

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The Investment Doctor profile picture

The Investment Doctor is a financial writer, highlighting European small-caps with a 5-7 year investment horizon. He strongly believes a portfolio should consist of a mixture of dividend and growth stocks.

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Comments (19)

Purewater profile picture
Given the massive, ridiculous housing bubble in Canada, this is a terrible idea
TD had long been on my watch list with an entry price I was never sure if it would ever come. Then covid hit and TD dropped well below my planned entry price so I entered at 55 CAD. When it went below 50, I was still sure 55 was good, but under 50 would have been better. Fortunately, it did not go much lower long enough to start having doubts about my purchase. Intend to keep it for many years.
Cheese Head profile picture
You know the banks are hurting when they instate discounted DRIP with discount to conserve cash, for TD's next dividend it is a 2% discount: td.mediaroom.com/...

Table showing prior dividends without discount: www.td.com/...
The Investment Doctor profile picture
It's not really to conserve cash, but to preserve equity and CET1 ratios. But the ground reason of your argument is correct.
TD is is probably one of the half-dozen best names on the TSX and a mainstay of Canadians' portfolios, retirement accounts, mutual funds, and pension funds. It is probably the best name of the Big 5 Canadian chartered banks, and RY is probably its only rival. Canadian resident taxpayers have the advantage of the dividend tax credit. This is a Buffett-type company which can be held in a portfolio indefinitely. You are unlikely ever to be able to buy it "at the bottom".
Ludo5312 profile picture
Agreed. Although I am super glad that the smallest of the Canadian 6 was not overlooked in a RRSP portfolio!
Long TD.TO. Thanks. I think it's the middle of the road for dividend vs safety.
Matthew Brown profile picture
Middle of the road for dividend safety? They have been paying dividends, uninterrupted since the 1800’s. Never cut.
The Investment Doctor profile picture
There always is a first time...
Matthew Brown profile picture
When it comes to RY, BNS, TD - there hasn't been.
I believe you will probably miss out on a good opportunity. The world does not stop while you are gathering more information. You have to learn facts, but you also need to learn when to pull the trigger.
The Investment Doctor profile picture
Hi Walker, who/what is your comment related to? Me waiting for this Q's results?

Yeah, maybe I'm too careful. But I also don't want to rush into something without fully understanding it.
craftbrewinfo profile picture
Dumped my US Bank holdings but kept TD. Unfortunately I have not added to my position because of all the other great buys since the dip. but they are going ex-dividend in July, so I will use this time to add some more shares.
capemd1994 profile picture
I did add @ < $40. US and I will again if TD drops again.
The Canadian Bank oligopoly is one of the best dividend growth opportunities in the market.
Ludo5312 profile picture
I think it is much better to split your allocation for this and other Canadian banks into a few parts and buy. There will be ups and downs. Just looking over the last decades (subtract a crisis in 2008), there have been mainly ups and that 2008 time was a major buying opportunity. Conservative and well regulated!
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