TD Bank: Where to From Here? | Hamilton ETFs

[Music] so TD is suffering under the weight of concerns of anti-money laundering risks pertaining to its us Commercial Bank the details of which were reported in the Wall Street Journal in fact these issues were severe enough that the regulator in the United States would not approve its previously announced acquisition of First Horizon and in early June a second instance of us anti-money laundering was reported uh having taken place reportedly in Florida so by the end of May TD is easily the worst performing Bank Canadian Bank stock year to date it's under performed by about 12% which is a very large amount in fact TD is now the cheapest Canadian Bank stock by measured by pe multiple the first time in about 20 years specifically it trades at about a 1.2 times discount uh after having traded at a premium to its peers for many years suffice to say TD Bank Shares are pricing in an awful lot of risk so let's give some background on TD Bank USA so between 2005 and 2010 roughly TD spent about us7 billion to acquire several us Commercial Banking platforms the largest of which was Commerce bankcorp unfortunately for TD Commerce bankcorp closed in early 2008 on the eve of the global financial crisis and because these Acquisitions took place at a time when the US banking sector was much more robust TD paid a very high valuation to build the platform on a weighted basis they paid over three times Book value so TD now has a large US Commercial Banking platform with exposure to several metropolitan areas namely New York City Philadelphia Boston and Miami and in fact this platform is now quite large it's now onethird of the bank so it's very very important so I think it's fair to say that in the last 20 years TD Bank has transformed itself from a Canadian focused Retail Bank anchored by Canada Trust into a North American retail and Commercial Bank bottom line the current challenges facing this us platform are very important to TD Bank share price so moving on to why TD Bank Shares are underperforming in our view the market is worried about four distinct but related issues the first and the most obvious one is the potential for very large fines from the US Department of Justice and other Regulators it is very likely that these fines are measured in the billions now TD has taken a litigation reserve of us 450 million but it's highly likely that they'll have to build upon that the second thing the market is worried about is the unknown unknown impact of restrictions on the bank's operating activities for example consent orders enhanced oversight an ongoing prohibition of Acquisitions in the United States and any other unknown or unforeseen conditions the third thing the market is worried about is what's the impact of all of this on the US platform's earnings power could it result in higher expenses for example in higher um Staffing compliance uh different processes technology things like that or does it weigh on the bank's Revenue growth because the bank is focused internally uh instead of externally on growth and the fourth but perhaps not as obvious but maybe more subtle uh issue Weighing on in the background is the unknown impact this could have on any management changes Andor normal succession planning so given the potential severity of the regulatory response and combine that with the fact this impacts onethird of the bank onethird of the bank's earnings the market is obviously pricing in a very negative outcome having said that until the regulator weigh in investors just won't know what the impact is going to be what do we think could happen from here so first of all let's let's talk about what this is not so over the last 20 plus years Canadian bank investors have gotten very comfortable with they're used to the following scenario Canadian Bank a records a very large charge whether it's for litigation whether it's a fine whether it's uh uh a lawsuit anything along those lines the market uh concludes uh that the impact on regulatory capital is a material uh and the stock recovers and as if nothing ever happens uh we don't think that is the appropriate analogy for now in fact we think this issue could persist for several years we think probably the best analogy is the consent order imposed upon Wells Fargo which happened many years ago and contributed for a very long period of underperformance from what was at that time considered to be a very blue chip band so what are the possibilities for TD Bank shares uh going forward so so the first one is the best case scenario which is that the fines and conditions are if not minor are seen to be manageable and the stock benefits from a pretty powerful rally second scenario would be there are severe restrictions there is a very large fine call it over $2 billion but the stock gets a lift just solely off of added Clarity and the third scenario is really the worst case scenario which is that the restrictions are very severe the impact on earnings are very negative the fines are very large and do have a NE negative impact on Capital and TD Bank stock shares TD shares excuse me continue to languish so in our view we think it's very likely that there will be some impairment of earnings from this us subsidiary we think it's also very likely that just the intense focus on fixing these issues internally does weigh on Revenue growth for the platform and given all of the volatility of the platform or uh and uh this regulatory overhand hang it we think it's likely that TD trades at at least a modest discount off of some reduced earnings level Hamilton ETFs is one of Canada's leading providers of Canadian bank and Canadian financials ETFs with a combined AUM in the category in excess of $2 billion so what are the some of the ways that we offer to gain exposure to the Canadian banking sector the first is the Hamilton Canadian bank mean reversion index ETF which trades under the ticker HCA this ETF adopts a mean reversion strategy and it allocates 80% of the fund to those three banks that are oversold it allocates 20% of the fund to those three Canadian banks that are overbought so the idea of the fund is the banks that have lagged will catch up and then that should uh and if so that will contribute to outperformance this might be a timely idea for those investors who interested in TD and Bank matal in particular because they had very challenging quarters TD bimo and BNS at the moment represent 80% of the ETFs net asset value will National Roy in CIBC represent 20% second way that we offer exposure to the Canadian banking sector is the Hamilton Canadian Bank equal weight index ETF which trades under the ticker HB this ETF has assets under management in excess of $600 million it is an equal weight basket of six Canadian Banks and we all know that macro risk and the increasing differentiation uh and foreign expansion of the Canadian Banks is making it increasingly difficult each year to determine or pick the top performing Canadian Bank in any given period so this ETF offers a simple and inexpensive solution to gain exposure to the sector r large its management fee is just 19 basis points and the third ETF that we offer is the top performing Canadian Bank ETF since Inception when it was launched and that is the Hamilton can enhanced Canadian Bank ETF which trades under the ticker hcal or hcal this ETF invests in an equal weight basket of Canadian banks of the six Canadian Banks but adds a modest 25% leverage so in our view this ETF is most appropriate for those investors with a longer term time Horizon and for those that believe the canadi mix will be up over time so with that said please go to our website Hamilton ET f.com for other commentary videos and insights and please sign up for updates thank you [Music]