Briefing highlights
- Analyst cuts TD stock target
- TD shares regain shares after Friday rout
- What to watch for on housing, debt
- Fed expected to raise rates this week
- What else to watch for in next few days
- Six steps to protect your business from Trump
- Vista Equity to buy Canada's DH Corp.
- Intel to buy driverless tech firm Mobileye
TD in spotlight
Stock analysts have started to cut their targets for Toronto-Dominion Bank shares as its executives face a brand-management issue.
This comes as TD shares regain some ground.
“Premium valuation no longer justified, at least in the near term,” Gabriel Dechaine of National Bank Financial said in a research note, downgrading the stock to “sector perform” from “outperform” and cutting the target to $69 from $74 in the wake of news reports with allegations from unnamed employees who said they breached sales rules.
“The allegations against TD will weigh on stock performance (indeed, they already have).”
As The Globe and Mail’s David Berman and James Bradshaw report, TD shares slumped 5.6 per cent on Friday after the Canadian Broadcasting Corp. ran the second piece in a week quoting unnamed sources.
TD responded several times, the latest late Sunday, saying it “does not believe certain media coverage is an accurate portrayal of our culture, or that it reflects the experience of most of our colleagues, but we take the concerns very seriously” and will review the allegations.
Regardless, analysts such as Mr. Dechaine are citing what happened to U.S. bank Wells Fargo, which was caught up in a saga related to unsavoury sales practices, and paid a hefty fine.
Analysts aren't commenting on the validity of the allegations, only on the impact of the publicity.
Which could be steep.
“For perspective, WFC has underperformed its peers by 16 per cent since Sept. 8, 2016,” Mr. Dechaine said.
“In turn, we believe it is appropriate to eliminate the premium valuation we accord to TD ... in order to reflect the stock’s heightened risk profile,” he added.
“This adjustment results in our target price falling to $69 from $74. With a lower return to target and a cloud of controversy that could depress TD’s multiple for several months, we believe a sector perform rating is appropriate.”
Royal Bank of Canada analyst Darko Mihelic also cut the price target, to $68 from $73, to “account for possible reputational risk.”
“Any potential impact from recent allegations on sales practices could, in our view, have an important and material impact on TD’s reputation,” RBC said, cutting the bank to “sector perform” from “outperform.”
“TD has historically been known for its strong Canadian franchise and its best-in-class customer service,” its research note added.
“Amidst a very competitive environment in Canada, we believe significant damage to TD’s brand could have a material impact on both earnings and TD’s premium relative valuation to peers. Recent allegations, whether true or fales, will likely take time to investigate and we are unlikely to receive full clarity or comfort over the shorter term.”
Analyst Ian Sealey of Citigroup, however, said he believes the market hit was "overdone,, and held to his "buy" recommendation and $78 stock target.
He added, though, that "regardless of the veracity of the allegations, this is likely to be a blow to a bank that prides itself on customer service."
He wondered, as well, if this could change the perception of Canadian banks.
"The Canadian banking market has avoided the mis-selling scandals seen in the U.S. and Europe, and is renowned for its strong customer service (particularly TD), successful cross-selling, and consequently high profitability," Mr. Sealey said.
"The lack of scandals has also led to Canada avoiding the regulatory scrutiny of sales practices seen in other markets, in particular the U.K," he added.
"We think this could now change, putting some pressure on profitability."
TD shares are now up, as this NYSE reading shows.
“We have a balanced approach in how we evaluate and compensate our people based on a variety of factors, including customer experience, team and individual sales, and how well they demonstrate our company values,” TD said.
“While we have sales goals to help manage our business, we know that we only succeed by doing the right thing for our customers,” it added.
“We have procedures in place designed to monitor sales practices and to detect issues should they arise, and we continuously improve our practices, including in response to industry events.”
What to watch for this week
From debt and housing to manufacturing and interest rates, the next few days are jam-packed.
We get two readings on the housing front, the first on Tuesday with the monthly reading of the Teranet-National Bank home price index, and the second on Wednesday when the Canadian Real Estate Association releases its monthly sales and price report.
We already have a good sense of what the latter will show, given the monthly reports already released by several local real estate boards.
So: Big February gains in the Greater Toronto Area and a big sales slump in Vancouver.
“It looks as though the new mortgage rules, which took effect in the second half of October, didn’t make a dent,” Bank of Montreal senior economist Benjamin Reitzes said of Toronto.
“Meantime, Vancouver has gone the other way, with sales collapsing about 40 per cent year over year, and price gains slowing sharply.”
Across Canada, Mr. Reitzes expects the CREA report to show sales down 2 per cent in February from a year earlier, with average prices up 2 per cent. The MLS home price index, a better measure, is expected to show a rise of 14.5 per cent.
Of course, you can’t talk about housing in Canada without talking about record household debts, and the multitude of warnings about those swollen debts.
Expect to see a fresh record when Statistics Canada releases its quarterly report on debt and wealth in the fourth quarter, also Wednesday.
“The gain is expected to be quite modest, though, as historically Q4 sees smaller increases or outright declines as in each of the past four years,” Mr. Reitzes said.
“The persistent strength in housing in the GTA, a comeback in the Prairies, and buoyancy outside of Vancouver have kept mortgage growth solid around 6 per cent year over year, while consumer credit is running about half that pace.”
And remember the warning about the Ides of March?
Not only will we probably learn we still have record debts. Janet Yellen’s Federal Reserve is widely expected to raise its benchmark rate by one-quarter of a percentage point the same day.
“Yellen all but announced a hike as long as there were no adverse data surprises, and there haven’t been,” said CIBC World Markets chief economist Avery Shenfeld.
The Bank of England and Bank of Japan also have meetings over the next few days, and finance ministers and central bankers from the G20 countries meeting at the end of the week in Germany.
Just before the Fed decision, markets also get the latest readings on U.S. retail sales and inflation.
Economists generally expect to see that retail sales inched up by 0.1 per cent in February, and that annual inflation edged up to 2.7 per cent.
Wait, not done yet.
Statistics Canada closes out the week with what’s expected to be a sour report on manufacturing sales. Toronto-Dominion Bank believes shipments fell 1 per cent in January.
Shelter your business
A Canadian law firm is urging business clients to protect themselves rather than take “too much comfort” in Donald Trump’s soothing words on trade.
Fasken Martineau has issued a six-point guide amid vague and uncertain American trade policy in the Trump era.
The firm’s note to clients, from trade lawyer and partner Peter Kirby, comes as the Trump administration prepares to send the official notice to renegotiate the North American free-trade agreement.
“It would be a mistake for Canadian businesses to take too much comfort from Trump’s declaration that he only wanted to ’tweak’ U.S. trade relations with Canada,” Mr. Kirby warned in the recent bulletin.
“NAFTA is a tripartite deal that has resulted in deep economic integration among the three parties,” he added.
“What happens to one party will have a profound effect on the other two parties. The notion that the U.S. can tweak its relationship with Canada while bulldozing its relationship with Mexico ignores the economic reality of North American integration.”
Changes to the pact appear certain. And any change to either of the Canadian or Mexican trade regime with the U.S. will impact all three countries, the law firm said.
Mr. Kirby outlined six measures Canadian companies should take:
Put people in charge
They should gather and analyze information, followed by recommendations.
“This is advice that belongs on the first page of a Management 101 textbook, but it’s good advice,” Mr. Kirby said.
“If you want your organization to focus on how changes in trade policy will impact the business, you need to make someone responsible for doing that. So appoint an individual or individuals within the organization with responsibility for leading the effort to prepare for whatever is to come.”
Analyze the supply chain
There will probably be disruption here, which means companies should learn the vulnerabilities now and find other options.
“If Mexico is forced out of NAFTA, or if NAFTA rules of origin become more onerous, can you still produce Canadian goods that qualify for preferential treatment in the U.S.?” Mr. Kirby said.
“If you are currently using Mexican parts to make finished products you sell in the U.S., are there alternative parts suppliers and how much will it cost to change suppliers?”
Find new markets
Yes, we’ve heard this often but it’s clear there’s added importance now, given the heavy reliance on U.S. sales for many companies.
“Canadian companies should be looking at the opportunities presented by CETA, Canada’s new trade agreement with Europe, or by China’s Belt and Road initiative, the largest infrastructure project on the planet,” Mr. Kirby said.
“In addition, while the Trump administration may have killed the Trans-Pacific Partnership, Canada already has free-trade agreements in place with seven of the 12 TPP partners. Not counting NAFTA, Canada has 10 free-trade agreements in force, together, they allow Canadian goods duty-free access to 13 countries.”
Analyze exposure to potential trade measures
Mr. Kirby cited the long-running fight over Canadian softwood lumber as an example of the toll of a trade battle. Companies should expect more such fights and “punishing” levies, he warned.
“Is your business at risk? If it is, you can take action today to lessen your exposure to any investigation and, if there is an investigation, to lower any eventual duty rates.”
Tell Trudeau what you think
“Your company should identify its interests in the outcome of any renegotiations – be they offensive or defensive interests – and make them known to Canada’s negotiators,” Mr. Kirby said.
Assemble or join Canadian and cross-border lobbies
“In the context of trade negotiations, cross-border industry coalitions are among the most powerful voices. So consider organizing or becoming a part of a coalition to press for your particular interests … When industry speaks with a single voice, governments listen.”