Analyst Paul Holden upgraded Canada's second-largest lender to outperform, from neutral, in a note to clients on Monday, partly driven by better-than-expected earnings from Charles Schwab and the underperformance of TD Bank's stock relative to its peers.
Although Holden trimmed his 12-month price target to $97 per share from $100, he still says “this is a good time to be adding to TD.”
Schwab, in which TD holds a 12 per cent stake, also addressed a number of potential risks during its latest earnings conference call, the analyst said, which helped ease concerns.
However, TD’s large U.S. presence is one of the reasons some investors are betting against the bank.
A recent analysis by S3 Partners found investors had shorted a collective $3.7 billion worth of TD’s stock, the most compared to any other bank.
Some investors say they're concerned about the U.S. banking sector after the failures of Silicon Valley Bank and the takeover of Credit Suisse, TD's planned acquisition of U.S. regional lender First Horizon, and its exposure to the Canadian housing market.
However, Holden says there are no signs of major earnings stress among the big U.S. banks that have reported earnings so far, and expects a similar result from TD.
“The bank may not shoot the lights out with FQ2 results, but it should also not be highly affected by the liquidity events of March,” he says. TD will report its second-quarter results on May 25.
The bank is also eyeing the deadline for its proposed takeover of First Horizon Bank (FHN) on May 27. TD offered to buy First Horizon for $25 per share in early March, but the U.S. lender’s stock has recently traded well below that.
“We expect TD and FHN will agree to extend the offer and believe that an extension of six months or longer is possible given regulatory uncertainty. As we previously wrote, there are multiple reasons to justify a lower offer price, and we think something around US$22.50 per FHN share is a reasonable expectation,” Holden says.
“Extending the offer at the original price of US$25 would be disappointing for TD shareholders. A longer closing period and a lower price would help address capital concerns for TD.”
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.