TD Bank tops quarterly profit forecasts despite rising costs, higher loan-loss provisions

TD Bank tops quarterly profit forecasts

Toronto Dominion Bank TD-T +0.74%increase reported lower third-quarter earnings as costs rose faster than revenue and the bank set aside more loan loss provisions, but is starting to reap the benefits of rising interest rates in its core retail banking operations.

TD earned $3.21-billion, or $1.75 per share, in the quarter that ended July 31. That compared with $3.54-billion, or $1.92 per share, in the same quarter last year.

But TD’s earnings were affected by an interest rate hedging strategy implemented as the bank works to close its US$13.4-billion acquisition of U.S.-based bank First Horizon Corp., which created a net loss of $678-million.

Adjusting to exclude the hedging costs and other items, TD said it earned $2.09 per share, above analysts’ consensus estimate of $2.04 per share.

TD and CIBC’s net income margins, Canadian retail segment

The bank kept its quarterly dividend unchanged at 89 cents per share.

Among the five major banks that have reported earnings so far, TD is the third to surpass earnings estimates. Banks have been stockpiling provisions for credit losses – the funds set aside to cover loans that could default in future – in a reversal after a string of recent quarters in which they recovered loan loss reserves built up early in the COVID-19 pandemic.

In the fiscal third quarter, TD set aside $351-million in provisions, which was less than expected. Of that, $11-million was earmarked against loans that are still being repaid.

“This might be the first bank where we could view their reserve build as a little on the ‘light’ side,” said Darko Mihelic, an analyst at RBC Dominion Securities Inc., in a note to clients.

TD’s chief financial officer, Kelvin Tran, said in an interview that the bank updated some of its economic models to be more conservative. “There’s a lot of uncertainty in the market and we’re going to have to see how it plays out,” he said.

TD reported rising profits from retail banking, its core business, as it starts to benefit from rising interest rates. In Canada, retail profit was up 6 per cent to $2.25-billion, with loan volumes up 9 per cent. And in the U.S., retail profit rose 11 per cent to $1.44-billion.

TD is the most sensitive to interest rates of the major Canadian banks, and as central banks have rapidly increased benchmark rates, TD’s profit margins on loans are increasing. The bank’s U.S. net interest margin increased by 46 basis points year over year, and its Canadian margin was up 9 basis points. (100 basis points equal one percentage point).

“Everything else being equal, we would expect our margin to continue to expand,” Mr. Tran said.

Wholesale banking profit fell 18 per cent to $271-million in a challenging quarter for capital markets. But the division’s revenue declined by just 1 per cent.

On Wednesday, TD announced two new appointments to its board of directors: Mary Winston, a former chief financial officer at retailers such as Family Dollar Stores Inc. and Giant Eagle, as well as Cargojet Inc. founder and CEO Ajay Virmani.


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