05 December 2008

TD Bank Q4 2008 Earnings

• BMO Capital Markets cuts target price to $53 from $70
• Desjardins Securities cuts target price to $72 from $81.50
• Genuity Capital Markets cuts target price to $54 from $65
• National Bank Financial cuts target price to $47 from $59
• RBC Capital Markets cuts target price to $48 from $49
RBC Capital Markets, 5 December 2008

We are reinstating our Underperform rating on TD's shares. We do, however, like TD's shares more than we did before we became restricted for two reasons:

• The bank strengthened its industry-lowest Tier 1 ratio by raising equity.

• The challenges related to the closing of the BCE privatization are a potential positive for TD. If the transaction does not close, TD would likely reverse provisions taken in past quarters.

We maintain our Underperform rating as capital ratios are still at the low end of the peer group, U.S. lending exposures are second highest among Canadian banks and overhangs related to Alt-A securities and the bank's basis trade remain. TD's Q4/08 cash EPS of $1.37 had been pre-announced, as had core cash EPS of $1.22.

• The two largest items of note were a credit trading loss of $350 million after tax, which was largely offset by the reversal of a substantial part of the bank's reserve for Enron litigation charges ($323 million after tax). EPS would have been approximately $0.70 lower had the bank not reclassified some securities into its available for sale portfolio.

• GAAP EPS declined 19% YoY ($1.50 in Q4/07) while core cash EPS were down 13% ($1.40 in Q4/07).

• Loan losses of $288 million were in line with our estimate. Impaired loans, loan formations, and provisions are all trending up (not surprisingly, in our view, and not unique to TD).

• The pro-forma Tier 1 ratio following the $1.4 billion common equity issue and the change related to the bank's ownership interest in TD Ameritrade is 9.1%.