Toronto-Dominion Bank (TD.TO)

US and Canadian financials had a big run and there is profit taking. TD-T was hurt more than others because of the scandal about sales pressures by employees. He would hold off. He only owns BNS-T and the rest of his bank holdings are US banks.

This group is best helped by rising interest rates. There was an inflection point in interest rates last June, which was ultimately a 30-year low, and over the next number of years we slowly see rates go higher. Given a choice of Canada versus the US, you may be in a better spot with US banks, which are very inexpensive. He would have a look at something like J.P. Morgan (JPM-N) which had a nice pullback in the last few days, or look at one of the investment banks like Morgan Stanley (MS-N). However, you will also be fine with this bank. (See Top Picks.)

This bank bore the brunt of the negative publicity on the CBC announcement. The reality is, this is a buying opportunity. It is now trading at a multiple that is less than the banking industry in general. Dividend yield of 3.6%. (Analysts’ price target is $71.50.)

If you liked this bank before the news broke, he doesn’t think anything has changed. What was revealed in the news was not positive, but he wouldn’t be surprised to see any “for-profit” organization that didn’t have a conflict of maximizing sales versus taking care customers. The question is, what kind of policy does the company have to prevent that conflict and to resolve it. According to TD’s official statement, they do have a strong policy, they do investigate it and they do take care of it. He would look at this as a buying opportunity.

Stumbled badly last week when they were implicated in aggressive sales tactics. He wouldn’t be surprised to see this situation roll out to the other banks as well. You have to look at the different business lines the banks are in. This has had a huge capital outlay initiating their position in the US market, that can have a long time to pay back to the current shareholders in Canada. He prefers Bank of Nova Scotia (BNS-T), Royal Bank (RY-T) and Bank of Commerce (CM-T).

Bank of America (BAC-N) or Toronto Dominion (TD-T)? He thinks the dip in the stock is a bit overdone, but could persist for a while, so there is time. This bank has US exposure, but there is going to be a bit of negative headline news regarding their sales practices. Canadian banks are not cheap, trading at 2X BV, compared to US banks at about 1.5X. Prefers J.P. Morgan (JPM-N), which is a bit more tilted to the investment banking side, and would see a bit more participation in the deregulation that he feels is coming. There is room for the Cdn$ to come down further.

Banks have 2 periods of seasonal strength, and we are just into one of them now. It runs from about the middle of March through until the reporting of their fiscal 2^nd quarter results, approximately the end of April. The stock has been hit in the last while, because of the controversy of bank employees being a little aggressive on marketing. That is a short-term factor. We are now into the period of seasonal strength. The recent weakness is probably an excellent buying opportunity.

He doesn’t have the slightest worry about the recent allegations made against this bank. Some of them are probably stretched, but don’t forget banks are profit engines, and are going to do whatever they can to upsell the clients on products and services. He has recently started buying this.

If he were going to buy a bank, it would probably be this. He doesn’t get the impression that this was a systemic problem, but even if it were, he doesn’t get the sense it would be worth taking $7 billion out of the bank’s market cap.

This dropped $3.25-$3.50 today. There was a report claiming employees were pressured to hit sales goals that could have breached the company’s ethics. Barclays says that they don’t think there will be repercussions. Any time these types of allegations come out, it certainly freezes investors in their tracks. This bank is a fantastic franchise. They have lots of compliance and corporate governance in place. If you are a 3-5 year investor, and you get a selloff like this, it is probably an opportunity. However, he wouldn’t add a full position today, but would probably add some today and look at adding some down the road.

He feels Canadian banks are fairly valued. This one is trading at about 13X forward earnings, a notch above historical levels. It is probably trading at 1.8-1.9X Price to book. Compared to the large US banks, some of the Canadian banks are a bit expensive. Within financials, he would probably look at some of the insurers at this time, because they are more leveraged to higher interest rates.

Has been somewhat disappointing in the last couple of quarters, particularly on the US side, and an area that is likely to come alive at some point. The move in the US to reduce regulations hampering US banks, should help this bank improve US profitability. Dividend yield of 3.48%. (Analysts’ price target is $72.)

He likes this bank, and would never sell it unless he thought it was completely overvalued or something material happened to it. The fire power of the banks has clearly been misunderstood by everybody on the street. This is the sweetest spot for Canadian banks in years. They are not expensive for what you are getting. (See Top Picks.)

As a group, he is not overly excited about Canadian banks. Prefers US banks, but owns a small position in this one. It has a very good ROE, and are able to compound the book rate at very high rate. Also, likes their US exposure. Very good capital markets franchise, a sector that he is very optimistic about. Trading at about 13X earnings which, over the long-term is a premium multiple, but with their growth profile, it makes sense to pay that premium.

Canadian banks are always a buy. They are benefiting from deregulation tailwinds south of the border. He would probably not sell. There is probably more to go even though they just hit a 52 week high. Buy, accumulate and use the DRIP plans.