TD reports strong loan growth, increased reserves in wake of deal delay

Stronger-than-expected loan growth helped Toronto-Dominion Bank outpace earnings expectations on Thursday.

TD reported earnings per share of $2.23 in Canadian dollars during the first quarter of 2023, exceeding estimates of $2.20. Outstanding loans rose by double digits for the sixth consecutive quarter.

The results come a day after a regulatory filing revealed that Canada's second-largest bank doesn't anticipate that regulators will approve its deal for Memphis, Tenn.-based First Horizon Corp. by May 27, as it had previously projected.

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TD CEO Bharat Masrani said Thursday that he wouldn't speculate on the potential timing of an extended closing date or whether the anticipated extension could change the deal's $13.4 billion purchase price.

"I can tell you that we are fully committed to the transaction," Masrani said. "This is a great transaction that offers scale and new capabilities to our U.S. franchise."

In February, TD and First Horizon said they had extended the deal's closing date from Feb. 27 to May 27. First Horizon said in a regulatory filing Wednesday that TD had indicated it wouldn't receive approval from regulators by the late-May date. The two banks have started discussing a new closing deadline, Masrani said.

The setback is "not entirely unprecedented," Brian Foran, senior analyst at Autonomous Research, wrote in a research note.

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Banks that have announced deals over the past two years have been met with longer-than-usual approval timelines as federal banking regulators reassess the impact of industry consolidation on consumers.

Columbia Banking System waited 15 months before it could check off the necessary approvals for its Umpqua Holdings acquisition in January 2023. And it took New York Community Bancorp and Flagstar Bancorp more than 19 months to close a deal that was announced in April 2021.

Delayed approval from regulators and a darkening macroeconomic forecast prompted banks to call off at least 10 mergers in 2022. That was up from three abandoned deals in 2021. 

Some progressive groups have asked regulators to reject TD's bid for First Horizon, arguing the deal would harm small-business lending and low-income communities. TD released the details of its community benefits plan earlier this month. The plan includes an agreement to expand banking services in low-to-moderate income areas in 22 states and Washington, D.C.

According to Autonomous analysts, there has been speculation that TD's capital ratio could be an obstacle to closing the First Horizon deal, given the $1.3 billion cost of TD's recent acquisition of U.S. brokerage Cowen and its $1.2 billion settlement of litigation related to the Ponzi scheme run by disgraced financier Allen Stanford.

Masrani said Thursday that TD "feels very comfortable" that it will remain above its 11% common equity Tier 1 capital requirement. TD reported a capital ratio of 15.5% at the end of the first quarter.

During the quarter, which ran from November to January, the Canadian bank set aside $690 million Canadian for potential loan losses, well above the $72 million Canadian it reserved a year ago. Continued credit normalization in TD's U.S. and Canadian consumer lending portfolios helped prompt the reserve increase, the bank said.

"The bank's allowance coverage remains elevated to account for ongoing uncertainty relating to the economic trajectory and credit performance," said Ajai Bambawale, chief risk officer at TD.

Net income was $1.58 billion Canadian, a 58% decline from the first quarter of last year. Revenue of $12.2 billion Canadian increased 8% from the first quarter of 2022. 

TD's stock price fell about 2% on Thursday, regaining some ground after the bank's earnings call. Its shares also fell on Wednesday when investors learned of the latest delay in the First Horizon deal.