Most Canadian banks experienced a lacklustre 2019 with the Big Five failing to outperform the broader market. Canada’s second-largest lender, Toronto-Dominion (TSX:TD)(NYSE:TD) rose by a paltry 7% compared to the S&P/TSX Composite Index gaining 19%.
The worst-performing Big Five bank was Canadian Imperial Bank of Commerce, which gained a mere 6% while Bank of Montreal was the best, rising by almost 13% and triggering speculation that the Big Five are attractively valued and will deliver value during 2020.
While many analysts are predicting that the Big Banks will struggle during 2020, Toronto-Dominion may be the only bank to buck the trend.
Canada’s second-largest lender has built a large U.S. presence, with it now a top-10 rated bank south of the border to see those operations responsible for generating almost 40% of Toronto-Dominion’s total net income during 2019.
This will serve as a considerable advantage for Toronto-Dominion compared to its more Canada-focused peers because the U.S. economy is expected to grow at a greater clip than Canada during 2020.
The International Monetary Fund (IMF) predicts that U.S. gross domestic product (GDP) will expand by 2.1% compared to Canada’s 1.8%, leading to greater demand for credit and other financial services.
This is because there is a correlation between higher demand for loans as well as savings products during times of economic growth, boding well for higher earnings from Toronto-Dominion’s U.S. business.
That will also help to offset the loss of earnings growth because of Canada’s weaker housing market, soft wage growth and high levels of household debt which are weighing on spending as well as demand for credit.
Toronto-Dominion should experience stronger earnings growth in 2020 than witnessed in 2019 because of an expected improvement in Canada’s housing market, a key growth driver for the Big Five banks and its exposure to the U.S.
The push to digitize its operating platform and service offerings will reduce costs, increasing the efficiency of Toronto-Dominion’s operations thereby boosting earnings over the long term.
Notably, Toronto-Dominion possesses a solid balance sheet and high-quality credit portfolio. It finished 2019 with a net impaired loans ratio of a mere 0.33%, indicating that it would take a substantial decline in credit quality for the bank’s loan portfolio to be impacted.
That becomes particularly apparent given that by the end of 2019, 31% of all Canadian residential mortgages were insured, providing an important backstop should a sharp downturn in credit quality were to occur.
Furthermore, uninsured mortgages had a conservative loan to value ratio of 54%, creating a handy buffer to manage any credit downturn.
Toronto-Dominion is also more than adequately capitalized, with a common equity tier one capital ratio of 12.1%, well above the regulatory minimum.
The bank’s appeal is further enhanced by its sustainable dividend, which is rewarding shareholders with a juicy 4% yield. Toronto-Dominion has a long history of rewarding investors with regular dividend hikes, having done so for the last nine years straight.
Toronto-Dominion is an ideal opportunity for investors seeking broad exposure to the U.S. and Canadian economies. It has a long history of earnings growth, which has allowed the bank to regularly reward shareholders with dividend hikes and a juicy 4% yield.
There’s every indication that Toronto-Dominion will experience and improved 2020 as the Canadian housing market picks up, making now the time to buy.
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Fool contributor Matt Smith has no position in any of the stocks mentioned.
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