Wednesday, April 26, 2006

TD Banknorth Q1 2006 Earnings

RBC Capital Markets, 26 April 2006

Earnings Summary: 1Q06 operating cash earnings declined by 8.3% year-over-year, and declined by 11% sequentially.

Overall, Trends Were Mediocre, In Our Opinion: Excluding acquisitions, consumer and commercial loans increased an estimated 1.5% -2.0%, total deposits contracted roughly 1%, the net interest margin contracted by 13 basis points, core fee income contracted fractionally and asset quality trends remained stable and solid.

Looking Ahead: We are expecting loan, deposit and fee income to bounce back from a seasonally weak first quarter, which combined with a relatively stable margin and the realization of cost savings from the HU deal, should allow BNK to return to a more normalized sequential EPS growth trajectory in the second half of this year.

Adjustments: We lowered our 2006 and 2007 operating cash earnings estimates to $2.23 and $2.48 per share from $2.38 and $2.62 per share to reflect the weaker than anticipated first quarter trends. We also lowered our 12-month price target to $27 from $28 per share.

Thoughts On The Stock: We think the company can return to more normalized growth in late 2006 and in 2007, but view the stock to be lacking positive near-term catalysts (no earnings growth, little if any buyback activity), and we view the company as an ongoing acquirer. Therefore, we would continue to avoid the stock.

Rating: The stock trades at a modest premium to our fundamental price target of $27 per share, justifying our Sector Perform rating with Average risk, in our opinion.