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Banking on Double-Digit Growth

By Ari Charney on October 15, 2015

It’s one of the most dramatic role reversals in North America: U.S. consumers have become far more conservative than their Canadian counterparts.

Of course, it wasn’t always this way. After all, we Americans are often caricatured for our insatiable demand, and businesses and bankers are only too happy to let us pile on debt to satisfy it.

But perhaps we’ve been chastened.

The ratio of household debt to disposable income hit an all-time high at the end of 2007, at 132.8%. Then came the great unwinding courtesy of the Global Financial Crisis.

Through a combination of forced deleveraging and perhaps a bit of good old-fashioned personal thrift, that ratio has dropped to a far less worrisome 105.7%.

To be sure, the current level is still well above our long-term average, at 77.2%. But it’s a big step in the right direction.

By contrast, aside from a few momentary dips in debt, Canadian consumers have steadily increased their borrowing. And the ratio of household debt to personal income for our neighbor to the north has hit a new all-time high of 164.6%. Yes, you read that right.

Of course, there are a few key differences between the U.S. figure and the Canadian one that make the latter somewhat less troubling than it first appears. And so far at least, Canadian borrowers have been managing their debt responsibly, thanks in large part to historically low interest rates.

Even so, at these elevated levels, there’s a limit to how much more of Canada’s growth can be driven by its debt-burdened consumers, especially as the country works through the oil shock.

This situation is already being reflected in the shifting strategies of Canada’s big banks. Amid economic uncertainty and an increasingly tapped-out consumer, the country’s Big Six have been forced to cut costs in order to boost their bottom lines.

As the consultancy McKinsey & Co. recently observed, “Cost-cutting is about the only cylinder still firing in the profit engine.”

Canada’s banks are still solid by and large, but executives are clearly positioning their firms to withstand a more challenging operating environment.

As income investors, we’ve come to enjoy the nice yields and healthy dividend growth from our favorite banks. So we’d like to see savings from cuts in some areas redeployed to investments in new growth in other areas.

And this week, Toronto-Dominion Bank (NYSE: TD, TSX: TD) unveiled just such a strategy during a series of Investor Day presentations. The bank hopes to achieve adjusted earnings growth of 7% annually over the next five years, which is a somewhat stronger growth trajectory than what analysts are currently forecasting.

On the cost-cutting front, TD believes it can wring greater efficiencies from the businesses it’s acquired over the years and make some of those savings permanent.

“TD has grown dramatically over the past 10 years, both organically and through acquisitions. Over this time, integrating new and growing businesses has been a key focus for us,” CEO Bharat Masrani said. “We are now turning our attention to optimizing them.”

Naturally, as technology allows customers to conduct more and more of their banking online, some savings will come from reducing the number of bank branches. At the moment, TD has nearly 1,200 branches across North America.

At the same time, TD is exploring ways to use technology to streamline the customer experience, with hopes of retaining existing customers and winning new ones.

On the growth front, the bank sees opportunities for double-digit growth from business credit cards and wealth management.

TD once lagged its peers in credit cards, but bought its way to the top. Nevertheless, it’s still way behind in penetrating the business credit card market. In the coming years, the bank will attempt to double its share of that market. And for the overall credit card business, it plans to acquire 1 million new cards per years by 2018.

In wealth management, TD has a commanding presence in direct investing (39% market share) and a sizable footprint in money management (10% market share in institutional money management and a 9% market share in mutual funds).

The bank expects to boost profits from retail investors by spurring trading activity through a new investing platform, while adding higher-margin products to its suite of offerings. The company also says it will increase the number of affluent and high net worth clients by adding 500 advisors by 2018.

In asset management, new product launches will target gaps in TD’s offerings and those of its peers, while it will continue to promote its products to retail investors through its branches.

Thus far, the market’s response has been muted. And analysts are still updating their models, so it remains to be seen how sentiment might change.

As it stands, TD already enjoys largely bullish sentiment on Bay Street, at 12 “buys,” eight “holds,” and one “sell.” And while the bank currently trades at a slight premium to its peers, its valuation is still quite reasonable compared to the broad market, with a price-to-earnings ratio of 12.1 versus 20.1 for the S&P/TSX Composite Index.

The bank has grown its dividend 10.4% annually over the past five years, which is among the strongest dividend growth of its Big Six peers. Analysts currently project further dividend growth of 9% annually through 2017.

Shares of TD currently yield 3.9%

Be sure to check out the latest issue of Canadian Edge to learn more about a stock with a nearly 7% yield underpinned by its critical role in feeding the world’s growing population.


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