FINANCIALS: TD Bank: Another Large AML Hit, Weak Revenues. Spread Negative

TD Bank (TD: A1/A neg) results are solid at the underlying level, with loan losses stable and non-performers still at a relatively low level. However, spreads have marginally outperformed in the last month and there’s another CAD3.6bn of AML provisioning in here which means a pre-tax hit (underlying) is a major miss. The question for credit investors is, with a full AML resolution unlikelybefore year-end, is this provision figure large enough yet? We view this as spread negative in the near term.

• Credit stats: loan losses are stable q/q (at 40bp) but with a bump in wholesale banking (offset by other retail areas). This is actually broadly in line with consensus. Non-performers are only up 2bp q/q (to 44bp, a low absolute figure, we feel) with all the growth in wholesale, again. CET1 has missed as the bank has taken AML provisions of a further CAD3.6bn. So, ex-AML, credit stats are actually quite solid.
• Revenues are a 1% miss, with NII missing by 3% (some offset from non-II), something the equity market won’t like, we fear. Insurance took a hit from severe weather claims, too – a poor lateral for other Canadian banks/insurers. Costs are marginally above expectations, excluding the First Horizon termination costs and, much more importantly, those AML provisions. Pre-tax would have been a small miss, excluding these. Sadly, it’s a very large miss including these provisions.
• By business, wholesale and wealth & insurance both missed consensus, not great for other banks with large P&C businesses. Mgmt sees a “global resolution” of the AML issue by end-2024. There’s no guidance in here but FY24 consensus will need to adjust for this new provision.

Conf call is 1300 (London time) at: https://td.streamme.ca/Q32024