Monday, September 18, 2006

RBC CM Cuts TD Banknorth Estimates

RBC Capital Markets, 18 September 2006


• Reduced 2006E/2007E cash EPS to $2.18 and $2.34 from $2.24 and $2.46 per share.

Investment Opinion

• Margin Pressure: Rising deposit and borrowing costs, a shift in consumer sentiment toward higher yielding CDs, and extremely competitive pricing for high quality commercial business and commercial real estate loans should apply more significant than previously expected pressure to BNK's margin in the second half of 2006.

• Increased Marketing Costs: BNK has ramped up marketing in the Mid-Atlantic region in an effort to create better name brand recognition in the aftermath of its recently closed acquisition of Hudson United. Costs associated with this effort are expected to remain elevated through the end of this year.

• Loan Growth Trends: After posting robust growth in 2Q06, we now expect 3Q06 loan growth trends to moderate somewhat due to extremely competitive pricing for high quality commercial lending opportunities. Mid-to-upper single-digit annualized growth is now expected to persist through the end of this year.

• Fee-Based Revenue Growth Also Under Competitive Pressure: Slowing deposit and loan growth is now expected to result in slower than previously expected deposit and loan fee revenue in the second half of this year.

• Adjustments: In addition to lowering 2006 and 2007 EPS estimates, we also lowered our 12-month price target to $28 from $30 to reflect reduced earnings expectations.

• Thoughts On The Stock: The operating environment is likely to remain challenging for BNK through the end of this year. We are now forecasting a 12% contraction in cash EPS in 2006 and a moderate positive EPS growth rate of 7% in 2007. At 12.3x our current 2007 cash EPS estimate, we view the stock as fairly to fully valued, and we view the company as an ongoing acquirer. Therefore, we would continue to avoid the stock.

• Rating: The stock trades at a slight premium to our revised fundamental price target of $28 per share, justifying our Sector Perform rating with Average risk, in our opinion.


TD Banknorth's stock currently trades at 14.6x 2007E GAAP EPS, 12.3x 2007E cash EPS, 0.8x stated book value and 3.9x tangible book value, compared with our mid-size commercial bank peer group averages of 14.6x (GAAP multiple - we don't have cash estimates for the peer group), 2.1x and 3.5x, respectively. We view the company as capable of delivering 10-12% EPS growth over the long-run, which justifies a comparable target multiple in our opinion. Our price target of $28 (previously $30) implies a multiple of 12x our 2007 cash EPS estimate (previously 12x our 2007 cash EPS estimate). We remain enthusiastic about the company's long-term fundamental prospects, and believe TD could positively influence the stock from time to time through open market purchases. But, we also recognize that fundamentals are likely to remain under pressure through the end of this year, we continue to point out that the remaining 40-45% of BNK will not likely be sold to Toronto-Dominion for as long as 3-5 years, and view the company as a likely active acquirer into the foreseeable future. Therefore, we expect the stock to remain range-bound over the near-term.

Price Target Impediment

A significant deterioration in the Northeast economy, a spike in short-term interest rates, a continued and sustained decline in long-term interest rates or any significant difficulty integrating acquisitions could hamper the company's ability to achieve our earnings estimates, which could force us to revisit our current price target. Conversely, stronger than expected balance sheet growth or a steeper than expected yield curve could enable the company to beat our estimates, potentially rendering our current price target too low.

Company Description

TD Banknorth, Inc., headquartered in Portland, Maine, is one of the country's 20 largest commercial banking companies with 600 branches, $40 billion in assets and $27 billion in total deposits. The company operates in Maine, New Hampshire, Vermont, Massachusetts, Connecticut, New Jersey, New York and Pennsylvania. TD Banknorth is a majority-owned subsidiary of TD Bank Financial Group, which is headquartered in Toronto.