TD Securities upgrades TD Bank

TD Bank's oil and gas loan exposure is estimated to be just one per cent cent of total loans

You might be surprised to hear banking analysts comment on their own companies given the obvious potential conflicts of interest, but half of the Big 6 in Canada self-cover, as they say.

One of those analysts is Mario Mendonca at TD Securities. He raised his rating on Toronto-Dominion Bank to purchase from hold on Tuesday because of the improving outlook because of its U.S. personal and commercial (P&C) banking business.

“Stronger economic growth and better housing demand in the U.S. (particularly in accordance with Canada) should support employment and therefore better commercial and consumer loan growth as well as mitigate credit risk,” the analyst said inside a research note.

Mendonca’s estimates indicate Canadian P&C loan growth slightly above three per cent in 2015 and 2016, versus 6 to 8 per cent in the U.S. He noted the size and growth of the U.S. commercial business makes up about most of the difference.

The analyst also highlighted the likelihood of interest rate hikes within the U.S., which serves as another indicator that economic growth there could potentially exceed Canadian GDP by a wide margin, thereby benfiting banks with increased U.S. exposure.

Mendonca noted that TD\’s expense-restructuring initiatives within the U.S. should produce improvements in the efficiency ratio, although these efforts are not expected to possess a meaningful effect on U.S. P&C earnings until 2016.

The analyst also cited the bank’s lower contact with the gas and oil sector relative to its peers in hiking his price target to $62 per share from $59. He noted that TD’s gas and oil loan exposure is just one per cent cent of total loans, well below the group average of approximately three per cent.

“Lower direct exposure to oil & gas, greater exposure to the U.S. and Ontario, and low contact with unsecured lending in the oil provinces suggest that TD will not be significantly impacted by a prolonged period of low oil prices,” Mendonca said.