Toronto-Dominion Bank has long commanded a premium valuation over rival bank stocks, which has been justified by strong profit growth.
But this justification is starting to fade, raising the question of whether TD's lofty valuation will become an impediment: The share price could lag its peers if the stock looks more pricey than special.
According to Bloomberg, TD shares trade at nearly 14.2 times trailing 12-month profit – the highest price-to-earnings ratio among Canada's Big Six banks and well above the sector's average of 13.1.
The shares also trade at a premium based on a number of profit estimates from analysts.
For RBC Dominion Securities, TD shares trade at 12.4 times their estimated 2017 earnings, versus an average of just 11.6 times earnings for the Big Six. Estimates from CIBC World Markets show a similar valuation.
Over the long-term, this premium has made sense: TD has stood out among its peers with stellar performance as it expanded its retail footprint in the United States and successfully integrated its acquisition of Canada Trust.
According to Bloomberg, the bank's average profit growth over the past five years is 7.8 per cent – tied for first place with Royal Bank of Canada but well ahead of other banks.
In terms of share price performance over the past 10 years, TD is in a class of its own: The share price (excluding dividends) has risen 90 per cent, or 26 percentage points above RBC and more than double the pace of either Bank of Nova Scotia or Bank of Montreal.
But the problem with this illustrious history is that investors are no doubt wondering if TD is still capable of living up to such expectations.
In 2016, TD's share price surged 22.1 per cent – but it trailed five of its peers, besting only Canadian Imperial Bank of Commerce. The lagging performance suggested that investors saw better deals elsewhere.
No wonder. For all of 2016, profit on a per-share basis (after adjusting for some one-time items) rose just 5.6 per cent over 2015. That marks a notable slowdown from adjusted profit growth of 8 per cent in 2015 and 15 per cent in 2014.
Profit from the all-important Canadian retail market – which accounted for nearly two-thirds of TD's total net profit in 2016, and includes the bank's personal and commercial banking, insurance and wealth operations – rose less than 1 per cent. Strip out wealth and insurance, and TD's retail profit growth rose 2 per cent.
True, the obstacles to growth come largely from the Canadian economy, which has been slow. Canadian consumers are also swimming in debt, affecting loan growth, and weak commodity prices have been hanging over corporate credit quality.
TD, like its peers, has also been dealing with a remarkable consumer shift away from traditional branch banking toward online and mobile banking, pushing the bank to streamline its operations and bulk up its technology operations – a transformation that isn't cheap.
Still, TD's sluggish retail operations suggest that whatever consumer advantages the bank enjoyed over its peers have largely dissipated, at least for now.
Perhaps the bank's substantial presence in the United States can provide some reason for the premium valuation.
TD's U.S. operations generate more than a third of the bank's revenue, and profit growth there is much stronger than in Canada: In Canadian-dollar terms, profits rose 16 per cent in 2016, or more than 9 per cent in U.S.-dollar terms.
With bond yields on the rise in anticipation of stronger U.S. economic growth and rising inflation, TD should enjoy bigger profits on its loans.
Then again, most Canadian banks are also looking stateside, and for similar reasons: RBC has a growing U.S. presence with its recently acquired Los Angeles-based City National, BMO operates Chicago-based BMO Harris Bank and CIBC has made a deal for Chicago-based PrivateBancorp.
Given the number of Canadian banks looking for growth in the United States, TD's aspirations no longer look quite so special at a time when its Canadian growth has sagged.
TD's premium valuation is going to be put to the test this year.