TD - Earnings Will Matter in the End
Hope vs. Earnings - TD's recent movement in stock price is a telling tale.
Not long ago, I discussed TD Bank's challenges following its anti-money laundering issues, which caused the stock price to plummet into the low 70s. Recently, TD announced significant changes, and the stock price has rebounded to nearly the mid-80s, not far from its pre-AML news release highs. What has changed?
Do Stocks Trade on Earnings or Hope?
Here is a summary of what was announced as part of these changes:
Raymond Chun to become Group President and CEO on February 1, 2025, accelerating the transition from the previously announced date of April 10, 2025.
Board adopts new term limits. Four new directors to stand for election.
New chairs appointed for four of five Board committees.
Due to U.S. AML failures, executive compensation has been adjusted, resulting in significant reductions.
These changes are undeniably positive for a financial institution that has recently faced operational and public perception challenges. I commend TD's swift actions to move past this difficult period. However, the problems are far from resolved. The asset cap remains in place, U.S. expansion is a distant goal, the Canadian economy is weak, and any new strategy must be thoroughly tested before yielding positive results.
Examining the U.S. Retail segment's risk-weighted assets (RWA’s), it becomes apparent that a significant portion of TD's risk, approximately 45%, originated from this sector.
Yet, amid all this, the stock price is back in the 80s. Let's clarify - after trading sideways in the low to mid 70s from late 2017 to early 2020 before the pandemic, and then during the initial days of the AML issue, it hovered in the 80s throughout 2022 to 2024 before the official announcement of the resolution. So again, I ask, what has fundamentally changed for it to be trading again it the 80’s?
I understand that good news tends to attract more investors boosting asset prices in the short-term, often driven by HOPE. I'm not suggesting TD is a poor investment—it operates within an oligopoly in the Canadian financial market and has been one of the best performers in terms of growth in Canada. Over the long term, it should fare well. However, I am focusing on the present and emphasizing the challenges that lie ahead for this bank. This latest rise may just be a technical move until it trades down again.
For it to be trading in this zone, EARNINGS have to follow. EARNINGS are the bread and butter. In the end, price follows EARNINGS.
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