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After taking its biggest single-day dive since the global financial crisis, TD rose by 1.4 per cent on Monday, regaining a bit of ground from the 5.7-per-cent decline in its previous trading session.CHRIS WATTIE/Reuters

Bay Street is scrutinizing Toronto-Dominion Bank's stock to account for the unfolding controversy over sales tactics, as some analysts and investors are urging caution toward the wounded shares.

A modest rebound on Monday left most of the stock's losses from last week's sell-off intact, which was triggered by allegations of mis-selling and regulatory violations by TD Bank employees driven by aggressive sales targets.

After taking its biggest single-day dive since the global financial crisis, TD rose by 1.4 per cent on Monday, regaining a bit of ground from the 5.7-per-cent decline in its previous trading session. While a move of that size is rare for Canada's big banks, Friday's dip didn't exactly make TD's shares cheap, said Barry Schwartz, chief investment officer at Baskin Wealth Management. "I would need to see it fall another 10 per cent from here to get really excited about it," he said. "If it gets knocked down à la Wells Fargo, I'll be all over it."

The blow to TD's reputation from stories first published by CBC last week, quoting employees portraying a "poisoned" work culture, invites comparisons to Wells Fargo's cross-selling scandal.

In that case, the U.S. lender opened up to two million unauthorized accounts, resulting in a $185-million (U.S.) fine and the departure of chief executive John Stumpf last fall.

"It is impossible to know at this early juncture just how prevalent improper sales practices were and if there truly is a troublesome culture that is pervasive at TD," Darko Mihelic, an analyst at RBC Dominion Securities, wrote in a research note. "Until we know, however, we pose a simple question – why take the risk on a premium-priced stock, especially when there are similar alternatives?"

TD shares have long traded at a premium to other Canadian banks by virtue of its consistency of profits, and its strong presence in the U.S. market, where improving economic growth readings and rising interest rates have pushed bank stocks skyward over the past four months.

TD participated in that rally, and was afforded a rich valuation to match, Mr. Schwartz said.

The stock's forward price-to-earnings ratio recently rose as high as 13.5 times, compared to an average multiple of about 11.5 times for Canada's big banks collectively.

Even after the sell-off on Friday, TD still trades at about 12.5 times, having closed on Monday just below $67 (Canadian).

"Take it down to $60, and I'd sell my soul for more TD," Mr. Schwartz said.

The temptation may be to buy a big Canadian bank stock on weakness, but TD could yet find its valuation under further pressure, said Bruce Campbell, a portfolio manager at StoneCastle Investment Management.

"We're watching from the sidelines," Mr. Campbell said. "Our target range would be the lower-$60s, at least in line with the group average."

Gabriel Dechaine, an analyst at National Bank Financial, wrote that the valuation TD has typically commanded is "no longer justified," citing the risk for "a cloud of controversy that could depress TD's multiple for several months."

He downgraded the stock to "sector perform" from "outperform" and cut the target to $69 from $74. Mr. Mihelic similarly downgraded TD and lowered his target price to $68 from $73.

There are other Canadian banks, Mr. Mihelic wrote, with similar market exposure to TD but without all the "reputational risk." Bank of Nova Scotia and National Bank of Canada rank as his top picks in the sector.

This type of controversy might be particularly damaging to TD, which "prides itself on customer service," Citigroup analyst Ian Sealey said in a note. Despite the heightened risks, Mr. Sealey said he considered the reaction in TD's share price "overdone," and maintained his "buy" recommendation and $78 target.

The bank itself, however, said in its latest response, that it "does not believe certain media coverage is an accurate portrayal of our culture, or that it reflects the experience of most of our colleagues."

"We will review all of the concerns raised and we are committed to doing the right thing," TD CEO Bharat Masrani said in a statement on Sunday.

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