• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium
TD Bank Stock Update
After taking a fresh look at Toronto-Dominion Bank, we are updating our fair value estimate to CAD 93/USD 65 per share from CAD 92/USD 65. We maintain our wide moat rating but downgrade our Capital Allocation Rating to Standard from Exemplary due to the firm’s US anti-money-laundering failures. We view the shares as fairly priced.
We think TD Bank has a wide moat derived from cost advantages and switching costs, underpinned by its dominant share and superior returns in Canadian markets. The bank derives around 55% of its revenue from Canada and 40% from the US. It’s currently remediating its US retail bank segment’s anti-money-laundering system after receiving a USD 3.1 billion fine and an asset cap on its US banking subsidiaries in October 2024. We view the anti-money-laundering issues as mostly contained to the US retail business and expect the bank to have permanently higher operating costs. Nevertheless, we like TD’s solid Canadian banking businesses and are confident that the bank can generate excess returns over the next decade and, more likely than not, 20 years.
Our fair value estimate corresponds to 1.9 times tangible book value at the end of January 2025. We have incorporated the bank’s sale of its 10.1% equity stake in Charles Schwab and the share-buyback plan of around CAD 8 billion with the proceeds. We also estimate the bank will incur around CAD 2.5 billion in costs in 2025 from its US balance sheet repositioning. We expect TD to average around 3.5% annual loan growth over the next five years and project net interest income to grow at a 3.2% compound annual rate over the next five years. We forecast normalized return on tangible equity at 14%, well above our assigned cost of equity of 9%.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
