TD would unlock value by selling Schwab stake, CIBC says

TD Ameritrade

Toronto-Dominion Bank sees “significant value” from Charles Schwab Corp.’s purchase of TD Ameritrade Holding Corp. — but that will only be realized if the Canadian lender opts to unload its minority stake in the combined entity, according to one analyst.

Schwab agreed Monday to buy the U.S. discount broker that’s 43% owned by Toronto-Dominion in a stock deal valued at $26 billion. The Canadian lender said it supports the transaction, and will exchange its ownership investment for a 13.4% stake in San Francisco-based Schwab. Toronto-Dominion said in a statement that it expects to record a “sizeable” revaluation gain when the deal closes next year.

“There is significant value being created by this combination — value that in TD’s case will only surface if or when the bank decides to monetize its stake,” CIBC Capital Markets analyst Robert Sedran said in a note to clients, adding that the deal will have a “minor near-term impact” for the bank.

As part of the deal, Toronto-Dominion will get two seats on Schwab’s board and the firms agreed to a revised insured deposit account agreement that gives the Toronto-based lender a continued earnings stream. Currently, Omaha-based TD Ameritrade has a so-called sweep agreement that shifts its deposits to Toronto-Dominion’s balance sheet for a service fee. Starting July 2021, those deposit accounts, which were $103 billion as of July 31, can be reduced at Schwab’s option by up to $10 billion a year, with a floor of $50 billion. The fee under the 10-year agreement will be set at 15 basis points on closing.

The earnings and capital “plusses and minuses” from the deal more or less balance each other out from Toronto-Dominion’s perspective, according to Sedran. The deal is “modestly accretive” to adjusted earnings in the second and third year, given the anticipated expense savings, he said.

The transaction is expected to reduce the bank’s adjusted earnings by about C$25 million ($19 million), or 1 cent a share, in its first year, while adding C$65 million, or 4 cents, to earnings in the second year. The earnings lift will rise by the third year to C$125 million, or 7 cents, according to Toronto-Dominion.

“We’re looking forward to being large beneficiaries of those synergies as they come through,” Toronto-Dominion Chief Executive Officer Bharat Masrani said Monday in an investors’ call. “I think this is the right thing for TD to do and we look forward to an ongoing relationship with Schwab and participating in this terrific combination.”

Toronto-Dominion sees a potential for a C$4 billion to C$6 billion increase in the value of its investment from the deal. Shares of Toronto-Dominion rose 0.5% to C$77.44 at 11:02 a.m. trading in Toronto. A 13% stake in Schwab would be worth about $8.2 billion based on the current share price for the company.

“Given that the need for scale in the ebroker sector necessitates a bigger entity than TD would like to allocate sufficient capital to, the reduction in its relative stake should not come as much of a surprise,” Barclays Plc analyst John Aiken said in a note. “As we believe that TD feels it has greater strategic priorities for its capital, we agree with the strategic rationale for a reduced ownership stake.”

— Doug Alexander (Bloomberg)