TD tops expectations as higher rates bolster revenue

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Toronto-Dominion Bank received a boost from rising interest rates as lending margins swelled in its Canadian and U.S. retail divisions, offsetting climbing loan loss reserves amid economic uncertainty.

Canada’s second-largest lender posted a bump in revenue that helped first-quarter earnings beat analyst expectations as higher borrowing costs bolstered its net interest margins – the difference between what the bank pays on deposits and earns on loans. TD issued the results a day after its plan to acquire Tennessee-based First Horizon Corp. was upended as regulatory approvals, further delaying the deal’s closing date.

TD earned $1.58-billion or 82 cents a share in the three months that ended Jan. 31. That compared with $3.73-billion or $2.02 in the same quarter last year. Excluding certain items, including a settlement charge in a lawsuit, the bank said it earned $2.23 a share. That beat the $2.19 analysts expected, according to Refinitiv.

Toronto-Dominion Bank is the last of the Big Six banks to report first-quarter earnings as profits in the sector slumped on larger loan loss reserves and narrowing lending margins. Royal Bank of Canada, Canadian Imperial Bank of Commerce, Bank of Montreal and National Bank of Canada posted dips in profit that still beat analyst estimates, while Bank of Nova Scotia missed expectations.

TD’s revenue rose 8 per cent in the quarter to $12.2-billion. Profit from Canadian personal and commercial banking was $1.73-billion, an increase of 7 per cent from a year earlier, while earnings in its U.S. arm jumped 25 per cent to $1.59-billion.

Banks can charge more interest on lending products as interest rates rise. With TD’s large base of cheap deposits, its wide spreads in its Canadian and U.S. retail divisions propped up the lender’s total net interest margin, excluding one-time items, by two basis points. (One hundred basis points equal one percentage point.)

But higher interest also weighs on demand for loans, and mortgage growth is slowing as central banks have hiked rates to temper inflation. Meanwhile, bank leaders have also signalled they are bracing for a potential slowdown as the threat of a recession looms.

TD’s margin expansion bucked the trend as net interest margins at its peers slumped two basis points, according to CIBC analyst Paul Holden.

Economic uncertainty is also prompting banks to ramp up the money that they set aside for loans that could turn sour. In the quarter, TD set aside $690-million in provisions for credit losses, or PCL – the funds banks reserve to cover loans that may default. That was higher than analysts anticipated, and included $137-million against loans that are still being repaid. In the same quarter last year, TD reserved $72-million in provisions.

“On a positive note, margins were strong, outperforming peers, and expenses were contained, while on a negative note, the bank saw a larger-than-expected PCL jump,” Keefe, Bruyette & Woods analyst Mike Rizvanovic said in a note to clients.

TD’s earnings for the quarter were affected by three large, unusual items. It took a previously announced legal provision of $1.6-billion to settle a lawsuit from investors accusing it of contributing to one of the world’s largest Ponzi schemes by former Texas billionaire Allen Stanford. The bank denies any allegations of liability.

It also recorded an $876-million loss on an interest-rate hedging strategy on its US$13.4-billion acquisition of First Horizon. In the previous quarter, the bank took a $2.3-billion gain on the same hedge.

In an annual filing Wednesday, First Horizon disclosed that TD recently told its management team that the Canadian bank does not expect to receive the required regulatory approvals in time to complete the deal before May 27, which is when their merger agreement is set to expire.

TD also missed a Nov. 27 deadline for concluding the deal. Since the deal did not close by that date, TD has to pay First Horizon a premium equal to 5.4 cents a share each month until the closing, and the lender posted a $127-million charge in the quarter.

Meanwhile, its US$1.3-billion acquisition of New York-based investment bank Cowen Inc. closed Wednesday after receiving regulatory approvals.

“We believe that we will not be able to close this transaction by that date and therefore we started to talk about an extension with First Horizon,” TD chief executive Bharat Masrani said during a conference call with analysts. He added that TD is not able to provide further details on regulatory discussions or timing, but that the bank is still committed to the deal.