Wednesday, February 22, 2006

RBC CM's Preview of TD Bank Q1 2006 Earnings

RBC Capital Markets, 22 February 2006

TD leads off the banks’ Q1/06 reporting schedule on February 23. Our normalized cash EPS estimate of $1.08 is $0.01 below the Thomson First Call mean estimate, although with gains TD should report well over $3.00.

Investment Opinion

Cash EPS Expected Up 5% YoY. Our cash EPS estimate of $1.08 indicates a 5% lift YoY (up 2% QoQ), which excludes over $2.00 for the TD Waterhouse dilution gain on its vend-in to Ameritrade this quarter. Further excluding our estimates for higher loan losses (back toward normal levels) and for lower securities gains, we expect ~10% underlying earnings growth.

Full Year Consensus EPS Estimate for TD Seems Too Low. For both 2006 and 2007, we still think the Street consensus earnings outlook is too low. Our 2006 cash EPS of $4.68 reflects roughly 11% core growth plus $0.10 accretion for Ameritrade and Hudson United. Our 2007 $5.30 cash estimate includes another $0.26 accretion (mostly from the Ameritrade deal), yet if included in consensus implies only 4.5% organic growth.

League-leading Credit Reserves. Last quarter, TD’s impaired loans dropped again to $774 million or 0.39% of total loans – TD’s reserve coverage bloated to a league-leading 370%. Of all Canadian banks, given excess capital, coverage and business mix, in our view TD looks best set to weather any unforeseen credit issues. Our Q1/06 loan loss provision estimate of $107MM is 14% higher than Q4/05 and up 33% versus year ago levels, representing a very acceptable 0.27% of loans and acceptances.

Looking for a Dividend Increase. TD is on schedule to raise its dividend this quarter (usually every 2nd quarter) since the last hike was in August 2005. We are forecasting a 3¢ lift to $0.45 per share. TD’s Tier 1 capital ratio should jump to 11.7% as a result of the TD Waterhouse gains, up from 10.1% in Q405 and down from the pre-Banknorth level of 13.0% a year ago.

Valuation. Our price target of $72 (unchanged) is set at 13.5x our 2007 cash EPS estimate of $5.30. Our premium target P/E reflects TD’s leading domestic franchise, a management that we rate as peerless and the unique structure for growth in the U.S. with Banknorth and Waterhouse. Our target P/E is set at a 3% premium to the group, above the five-year average discount of 1%; however, TD has traded at an average 6% forward P/E premium to its Canadian bank peers since 1998 and we would view positive execution experience on BNK as an avenue to revaluation. Our price target is indicated at ~2.8x our projected book value of $25.54 (as at Oct 31/06).