Don’t Bank on TD Recapturing Its Premium Multiple Anytime Soon

In October, U.S. regulators acted against TD Bank after uncovering that Chinese drug traffickers had bribed employees to launder at least US$653 million. Until TD addresses its anti-money laundering deficiencies to the regulators’ satisfaction, the bank is prohibited from growing its U.S. retail assets beyond US$434 billion, approximately their current level.

TD is now the cheapest Canadian bank, trading at a 19% discount to its peers. Despite repurchasing billions of dollars’ worth of its own shares last year, TD’s stock price fell nearly 11% in 2024, making it the only major Canadian bank to lose shareholder value. In contrast, the five largest Canadian banks collectively saw their stock prices rise by 18%.

We like the 5.5% dividend yield and single-digit earnings multiple. However, could this be “dead money” until the U.S. asset cap is lifted? And how long might that take?

Take the case of Wells Fargo as a precedent. After years of opening unauthorized accounts, Wells Fargo faced a $1.95 trillion asset cap imposed by regulators in February 2018. The stock dropped 9% that day, falling to $65. Nearly seven years later, Wells Fargo has appreciated by only 11% (excluding dividends), trading at $72 per share today. Before the asset cap, Wells Fargo traded at a 30% premium to its book value (essentially the net value of assets after debts). In the seven years since the restriction, it has traded at an average 3% discount to book value. Only last year did the stock regain its historical valuation—likely because many expect the asset cap to be lifted in 2025.

For context, TD has historically traded at a 60% premium to book value. Today, that premium has fallen to 30%. We believe that premium was attributed to their U.S. expansion plan launched so many years ago under CEO Ed Clark. After all, the bank has 1200 branches in the U.S. and 1100 in Canada. The asset cap is expected to be in place for several years.

Unlike Wells Fargo, TD benefits from a significant Canadian operation. It’s not often you hear a company cite Canada as its best growth market, but that’s TD’s current reality. With domestic mortgage rates declining, real estate activity has picked up in recent months. However, reduced immigration targets may dampen housing demand. Still, nearly half of TD’s adjusted earnings come from its Canadian personal and commercial banking division. The U.S. retail bank accounts for 30%, while 14% comes from wealth management and 8% from wholesale banking.

Last quarter, TD management withdrew its medium-term financial guidance, and CEO Bharat Masrani announced his retirement. Incoming CEO Raymond Chun has pledged to host an investor day later this year. However, in his initial remarks, Chun acknowledged that earnings growth will be difficult to achieve in 2025. Meanwhile, management will face the significant distraction of anti-money laundering remediation, contributing to the bank’s expected 5–7% total expense growth this year.

Although TD’s recent share price decline makes it more attractive, we believe the stock could mirror Wells Fargo’s trajectory, remaining stagnant for years. TD’s Canadian exposure is a relative strength, particularly as real estate activity picks up, but we have opted to explore other opportunities to capitalize on this theme.

-written by Jeff Pollock