No Need for Stress Tests Here

05/13/2009 9:01 am EST

Focus: GLOBAL

Tom Slee

Retired- Financial Advisor, Money Manager, Gordon Pape Enterprises LTD

Toronto-Dominion bank has preserved a healthy dividend by risking-and losing-less than its US rivals, writes Tom Slee in The Canada Report.

Toronto-Dominion Bank (NYSE: TD) is one of Canada's Big Five banks. Based in Toronto, it employs 74,000 people and serves 17 million customers worldwide. In addition to its Canadian operations, TD has a significant US presence through brokerage firm TD Ameritrade and banking subsidiaries TD Banknorth and TD Bank. The company also has operations in such fields as commercial banking, insurance, mutual funds, and wealth management.

Canada's banks are now recognized internationally (including by President Obama) as being among the strongest in the world, thanks to their traditional conservative approach and tight government regulation. No Canadian bank has had to be bailed out by Ottawa, and all the major banks have been able to boost their Tier 1 capital ratios in recent months through new issues of common and preferred shares.

The Canadian banks have not escaped unscathed from the global financial firestorm, but by comparison with their US and European counterparts they are faring much better. All reported first-quarter profits and all are paying good dividends.

TD Bank, with C$585 billion in assets, is one of the strongest of the group and now ranks as the eighth largest bank in North America. Among Canadian banks, only Royal Bank (NYSE: RY) ranked higher, at number seven.

TD reported cash earnings of $810 million or 96 cents a share for the first quarter of fiscal 2009 (all figures in Canadian dollars). Admittedly, that was nothing to write home about. TD made $1.42 a share in the same quarter a year ago. However, the results were in line with expectations, and TD's capital numbers were good. The Tier 1 ratio improved to 10.1% from 9.8% during the quarter.

That having been said, TD, along with the other banks, is facing some serious difficulties. Margins are under pressure, and personal and commercial unrealized loan losses jumped $1.2 billion to $2.6 billion in the quarter. Wealth management earnings fell sharply. Given the serious economic slowdown, these trends are likely to continue in the coming quarters. Nevertheless, the results were encouraging. Moody's confirmed its Aaa rating, and the dividend appears safe.

Obviously, if the global recession were to worsen, TD and all other banks could be faced with significant new write downs, which in turn would impact profits and conceivably put the dividend at risk (although none of the Big Five have cut their dividend since the Great Depression). That concern is one of the main reasons why the stock is trading [far below] its 52-week high of $72.50, reached in May 2008. The other reason, and a risk to keep in mind, is that the Canadian dollar lost about 25% of its value compared to the US dollar over that time.

TD shares pay quarterly dividends of 61 cents (C$2.44 a year). At the current rate of exchange, the yield is 4.9%. US investors will be subject to a 15% withholding tax on dividends, which may be recovered through the foreign tax credit. (The stock closed at $42.41 in New York Tuesday—Editor.)

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