What Should Investors Know Ahead of TD's Earnings?

In Q2, TD Bank faced scrutiny over its US AML program and has since committed over $500 million to a global overhaul, aiming to strengthen monitoring and reporting measures. As the bank continues to cooperate with authorities and make internal changes, including the appointment of a new compliance chief, investors will be keen to see any updates on regulatory developments, potential fines, and the impact on the bank's US growth aspirations.

Despite the AML concerns, TD Bank reported a robust 10% year-over-year revenue increase in Q2, with notable growth across various business sectors, especially in market-driven businesses. Loans and assets under management both saw healthy increases, indicative of the bank's capability to capitalize on higher interest rates while remaining resilient in a potentially slowing economy. As Q3 unfolds, stakeholders will look for evidence of sustained positive operating leverage and any signs of continued investment in infrastructure.

The bank's CET1 ratio, a measure of capital adequacy, was a solid 13.4%, reflecting organic capital generation and the impact of share buybacks. Strategic partnerships with tech giants like Google Cloud and Microsoft Azure may offer further insights into TD's commitment to innovation and the enhancement of customer experiences.

Since the Q2 earnings release, TD Bank's stock price has seen a rebound of over 7%, suggesting easing investor concerns over the US AML impact. Analysts warn that TD Bank may face a prolonged period of regulatory oversight, potentially limiting its growth opportunities in the US market and leading to sustained expenditures for the enhancement of its compliance systems. Even after resolving any penalties, the bank's efforts to fortify its internal controls and prove its dedication to regulatory adherence are expected to impose additional financial costs.

The controversy surrounding TD Bank has significantly influenced its stock performance. However, it's not all bad news. The resulting dip in share price has created what some investors see as an appealing buying opportunity. While there is a risk that TD may face stringent penalties and become a cautionary tale for the industry, the bank is taking commendable steps to rectify the situation. It's investing substantial resources to strengthen its compliance framework and has appointed a new compliance chief as of early July, demonstrating its cooperation with regulatory bodies.

Analysts have reached a consensus estimate that TD will report a 1.3% revenue decline and a 3.6% increase in adjusted EPS. The anticipation of a lower net interest margin in Canada but higher in the US could lead to a net gain in interest income, with limited loan growth and potential fee increases from the Wealth and Wholesale segments. TD also expects to incur C$50 million in restructuring charges, while loan-loss reserves should align with the higher end of the full-year guidance range.

Regarding contributions from partnerships, TD's Q2 results from Schwab are projected to translate into C$225 million of adjusted equity in net income, though deposit trends at Schwab pose challenges.

Scotiabank has recently lowered its price target on TD Bank to C$86 from C$87 as of Wednesday, maintaining an Outperform rating.

Investors are reminded of the attractive valuation of TD's shares compared to historical prices. With a current dividend yield of 5.2% (or a forward yield of 5.4%), TD's shares are significantly above the 10-year average. Yet caution is advised due to potential risks such as the high indebtedness of Canadian consumers, rising interest rates, and the ongoing impact of the US AML investigation.