David DriscollToronto-Dominion BankTD.TOPARTIAL BUYNov 14, 2016

The banks are very well positioned. Benefitting from GenAI and AI investments. Regulatory environment is in their favour with OSFI lowering threshold for risk-weighted assets, which means they have more capital to lend. Consumer is reasonably healthy. As long as interest rates don't go flying through the roof anytime soon, the banks can continue to do well.

Both fairly highly ranked, and moving up, in the Canadian equity universe. The banks have been dominating the top of the rankings, and the insurers have been catching up. TD is slightly higher ranked, with a bit better performance.

When two stocks are looking good and under accumulation, and you can't decide, you can always split your position between the two of them.

The Canadian banks have enjoyed strong growth in wealth management and capital markets, while retail segments are resilient. Also, the sentiment to the Canadian economy has lifted with initiatives to improve productivity. Because of the asset cap in the US (a penalty), TD used that to improve their business, lower costs and ready it for growth. The bank valuations are high, though.

Last quarter was good, beat across all segments. Solid, sequential improvement. The top is coming (he promises). In a non-registered account for some estate planning, why not sell a call around $180-200 in the next 6 months?

He will trim this if a client needs capital. TD holdings amount to 2.5-5% in portfolios. He trims stocks that have done well, including TD now. TD has excess cash that they could buy back stock, but he questions whether they should at current high PEs and all-time highs.

It's rallied hard since the money laundering penalty and has recovered, but the PE of all the Canadian banks have never been this high. TD trades at over 16x PE; the ceiling was 13x. Really rich. He's been trimming his bank stocks, but are good long term.

Consensus is that it's overvalued by ~5%. She'd take some profits.

She's been wrong about the Canadian banks the past year, that they're expensive. They were up 30% last year + 20% this year. These stocks are priced for perfection and trading well above historical averages in PE. Wait. Last year, they released provisions for loan losses into earnings, which was a temporary boost. Their only growth aspect this year is how many branches a bank can close, which is a weak growth driver. She hasn't bought any banks this year.

Strong name. Second-largest of the Big 5, with one of the largest US retail franchises among those 5. Redeemed from money-laundering scandal, and Q1 had record earnings. Stock's now run past consensus target. Not a bad idea to trim, wait for a better point to re-enter.

RY is her play in the sector.

Mortgage renewals are happening, but not a huge increase in defaults. Canada's being resource-dominant helps bank earnings, and this attracts foreign investors. Cloud of money laundering behind it. Could move higher if commodity trend continues.

That said, the move has been huge. Don't be surprised if stock stays flat a bit after next report, until next uptrend in earnings.

It has recovered from the money laundering scandal and owns the 6th largest bank in the US which has grown from nothing 15 years ago. The restrictions in the US are not all that difficult. He thinks US banks will continue to do well and dividends in Canadian banks will keep rising.. TD is still cheaper than other banks.

Compliance issues persist in US -- can't open new branches, can't make acquisitions until the Fed gives it the green light. Big runup due to banking sector tailwinds. Unless we really get higher inflation and interest rates rising, he imagines banks in Canada will continue to grow, though not at the pace of last year. 

Avoids the Canadian banks now, because valuations are too high vs. historical norms. Also, the credit cycle hasn't run its course, which is a risk and could impact earnings.

If you've held for years, no reason to sell today. He's not a buyer here, mostly fully priced. Fears of US growth are largely behind them. Real questions involve Canadian consumer and whether housing market comes back to life (engine of growth and profitability).

Canadian banks have run up so much it is time to trim and re-position portfolio sizes. Its assets in the US have been capped but TD has optimized their assets there. Ideally he would like the cap on US assets taken off so they can build up their retail operations there. It is lagging its peers in commercial banking in Canada.