TD, CIBC make it six-for-six in bank earnings bonanza
Toronto-Dominion Bank Chief Executive Officer Bharat Masrani said he’s still interested in a major acquisition to add to the firm’s U.S. retail operations, and that he’s unfazed by the recent valuation surge for the regional lenders that would be his most likely targets.
“With respect to major mergers and acquisitions in the United States, we’re very open,” Masrani said in an interview Wednesday, on the eve of the bank’s annual meeting. “If we can find some opportunity that fits all our criteria, we will look at it very seriously, and our capital gives us that flexibility.”
Toronto-Dominion stockpiled capital at the onset of the COVID-19 pandemic in North America, but government stimulus programs in the U.S. and Canada have prevented the expected wave of consumer defaults. That has left the bank with about $12 billion (US$9.6 billion) in capital beyond what it would need to maintain the 11 per cent common equity tier 1 ratio that banks typically target. That gives Toronto-Dominion the financial capacity for a significant acquisition.
So far, though, the bank has struck only minor deals, including snapping up Wells Fargo & Co.’s Canadian direct equipment finance business and buying a 15-person quantitative fixed-income trading operation in the U.S.
While the speculation was that Toronto-Dominion would use the disruption of the pandemic to strike a deal similar to those it used to build its U.S. operations during the global financial crisis, months have passed without an announcement. In the meantime, the 50-company KBW Regional Banking Index has more than doubled over the past 12 months, pulling many potential targets out of bargain territory. Toronto-Dominion’s shares have surged 45 per cent in the same period.
Still, the rebound in bank stocks isn’t an impediment to a deal, said Masrani, whose bank had 1,223 U.S. branches at the end of its most recent fiscal quarter.
“A seller always feels that valuations are not high enough, and as an acquirer, we always feel that they’re over the top,” Masrani said. “But there are always opportunities. That’s what makes markets.”
Toronto-Dominion rebounded quickly from the COVID shock, boosting profit in its fiscal fourth quarter even compared with pre-pandemic times, and accelerating that growth in the three months through January. With the Canadian and U.S. economies poised for strong growth this year as vaccines roll out and economies open up, Masrani said he’s now focused on Toronto-Dominion playing a role in ensuring that the recovery includes the marginalized groups that were disproportionately affected by the pandemic.
Masrani’s at the bank’s annual meeting on Thursday highlighted the $130 million the bank provided to community groups last year “to help create a more-inclusive future.” He also announced an additional $5 million in giving through the TD Community Resilience Initiative to help organizations address the pandemic’s impacts on “vulnerable and racialized communities.”
“That’s a big lesson learned here, that as we work together, we can do much better and start addressing some of these fundamental issues,” Masrani said in the interview. Many communities “were disadvantaged to start with, and the pandemic actually made that situation even worse, so this is an opportunity to say, ‘How can we have more inclusive growth?’”
Toronto-Dominion had no direct exposure to the implosion of Archegos Capital Management, he said. Banks including Goldman Sachs Group Inc., Morgan Stanley and Wells Fargo dumped multibillion-dollar blocks of stock to recover capital loaned to the hedge fund.
“We pride ourselves in saying that we don’t make bad loans during the good times in order to be able to make good loans during bad times,” said Masrani, who previously served as Toronto-Dominion’s chief risk officer. “That’s an important attribute within the bank.”