Canadian Rate Cut Winners：TD, Maintaining a 10% Shareholder Return Amid Rate Cuts

TD Bank Group's business mainly covers the following areas:

（1）Canadian Personal and Commercial Banking: Provides services such as deposits, loans, credit cards, and investment products.

（2）U.S. Retail Business: Offers a full range of banking services for the U.S. market, including savings accounts, personal loans, credit cards, and mortgages.

（3）Wealth Management and Insurance: Provides investment management, wealth consulting, retirement planning, estate planning, as well as life insurance, health insurance, and property insurance.

（4）Wholesale Banking: Offers loans, trade financing, risk management, and capital market services to large corporations, financial institutions, and government agencies.

Chart: Composition of Main Business (%)

As of the second quarter of 2024, highlights of TD Bank Group's business include:

(1) Canadian Personal and Commercial Banking has seen a positive impact from the increase in loan amounts, achieving significant growth in revenue and net profit, reaching 4.839 billion CAD and 1.739 billion CAD, with year-on-year increases of 9.88% and 7.02%, respectively.

(2) Wealth Management and Insurance business revenue grew by 13.86% year-on-year, reaching 3.114 billion CAD, mainly due to the promotion of diversified financial products and the growth in market demand.

(3) Wholesale Banking has achieved significant growth in revenue and net profit, with year-on-year increases of 36.91% and 100%, reaching 1.94 billion CAD and 441 million CAD, respectively, demonstrating the extensive growth of the company's entire business, including underwriting, sales, and trading.

In terms of expenses, TD Bank's interest expense ratio in this quarter was nearly 5% higher than the same period last year, reflecting the bank's increased burden of paying interest fees to depositors in a higher interest rate environment. However, after the Bank of Canada cut interest rates in early June, we expect TD's deposit rates to be adjusted downwards in the coming period, which will help TD reduce its interest expenses.

Overall, although TD was dragged down by the high interest rate levels in the North American market in the second quarter, with a significant year-on-year increase in interest expenses, the faster growth in revenue successfully offset this negative impact. The company's adjusted net profit still achieved a positive year-on-year growth of 1.6%, reaching 3.6 billion CAD, marking the first time in five consecutive quarters that the company has achieved year-on-year profit growth. The diluted EPS also reached 2.04 CAD, up 5.15% year-on-year, demonstrating the company's strong profitability.

Similar to our analysis in previous articles, in the early stages of interest rate cuts, TD Bank may face the issue of lagging adjustments in deposit rates, leading to short-term pressure on deposit interest expenses. However, as market interest rates gradually adjust, it is expected that TD will be able to gradually reduce its interest expenses and improve profitability.

At the same time, the decrease in TD's loan rates after the interest rate cut will further stimulate users' demand for loans. If the increase in loan amounts can successfully compensate for the decrease in single loan income caused by low interest rates, then the interest rate cut will provide TD with opportunities to expand its loan business and increase interest income.

Financial report data reveals that for the fiscal year 2024, TD will implement a buyback plan of 90 million shares, and by the end of the second quarter, nearly 2/3 of the buyback plan has been completed. Based on the current total share capital of 1.759 billion, it is expected that TD can achieve a 5% buyback return for the entire fiscal year of 24, in addition to the company's current dividend rate of 5.17%, it is expected that the total shareholder return for the year will exceed 10%. At the same time, TD still has 1.07 billion CAD of operating cash flow at the end of the second quarter, and shareholder returns may have more room for improvement.

On May 3rd, U.S. law enforcement departments launched an investigation into the internal controls of Toronto-Dominion Bank and found that the bank was suspected of money laundering. Reports indicate that the focus of the U.S. Department of Justice's investigation into TD is the drug traffickers' suspected use of TD Bank to launder at least 653 million USD, and bribing TD bank employees.

The money laundering scandal has damaged TD Bank's assets and customer trust. Once the news was released, TD's stock price fell by 4.6% in a single day. Relevant analysis shows that TD's money laundering incident may face a high penalty of up to 2 billion USD (about 20% of the net profit of fiscal year 24), and regulatory authorities may implement restrictive measures, including limiting its balance sheet growth (similar to Wells Fargo), which may affect TD's operations for many years to come.

TD Bank Group's diversified business layout, strong capital strength, and continuous innovation capabilities have laid a solid foundation for its future success, with the bank's profitability and shareholder returns being very considerable. Against the backdrop of interest rate cuts, the reduction in deposit rates will further benefit TD in reducing interest expenses and gaining more profits.

However, while maintaining stable performance, TD also faces challenges such as the interest rate cut environment, shareholder return expectations, and the money laundering scandal. Only by taking effective measures to address these challenges and seizing market opportunities can TD hope to achieve long-term stable growth and create more value for shareholders.

The current Canadian interest rate has been reduced to 4.75%, and it is expected to be further reduced later. TD's expected adjusted dividend rate is around 10%, which will be highly attractive in the interest rate cut environment, far exceeding the risk-free interest rate. It is recommended that everyone can continue to pay attention.