Monday, April 30, 2007

RBC CM Initiates Coverage of TD Bank at Outperform

RBC Capital Markets, 30 April 2007


We are initiating coverage of TD Bank with an Outperform, Average Risk rating on its shares.

Investment Opinion

• TD trades at an industry multiple in spite of having an above average outlook for earnings growth in 2007 and 2008, in our view. We believe TD can achieve above average earnings growth on TD Ameritrade synergies, increased TD Banknorth and TD Ameritrade ownership, and better retail banking momentum in Canada, while being less exposed to business loan loss deterioration and potentially volatile wholesale revenue.

• Ongoing weak fundamentals at TD Banknorth and recently lowered guidance at TD Ameritrade are reflective of market conditions, not permanent issues, in our opinion. We believe that weakness in TD's share price related to short-term issues at those two subsidiaries should be viewed as a buying opportunity.

• Valuation. Our 12-month price target of $78 is a combination of our sum of the parts and price to book methodologies. It implies a multiple of 13.1x 2008E cash EPS, compared to the current 12.9x multiple on 2007E earnings and a 5-year average forward multiple of 12.1x. Our P/B target of 2.4x in 12 months is at the low end of the bank sector given a lower ROE. Our sum of the parts target of 13.5x 2008E earnings is higher than our target industry average, reflecting a superior domestic retail franchise and lower exposure to low-multiple wholesale businesses.