TD Bank (TSX: TD) Shares: Buy Before Fourth Quarter Earnings?

Canadian banks, including Toronto-Dominion Bank (TSX: TD) (NYSE: TD), we had a difficult time this year. But looking at the shares of TD Bank, we couldn’t really tell. It fell only 8% from pre-pandemic levels. Its dividend remained unchanged. And it produces a generous 4.52%

But does this really mean that everything is okay? Can we really still rely on TD Bank shares as a safe and secure pillar as we have done in the past?

The TD will report its fourth quarter results on Thursday, December 3. There are many risks that leave me on the sidelines. For example, loan loss provisions (PCLs) increased significantly in 2020. And with the second wave of COVID-19 on the rise, there will be more. There are many things that I will review and listen carefully in TD Bank’s earnings results and call.

Here are the risks as I see them.

TD Bank is fighting against the rising PCL

The pandemic blockades have destroyed businesses. They left the economy on hold for dear life, counting on government aid. In turn, this has meant a skyrocketing PCL for all banks. PCLs are simply an estimate of the credit losses a bank could suffer due to credit risk. So, as credit risk is clearly increasing across the board, so are PCLs. TD Bank’s PCLs increased 200% this year to exceed $ 6 billion.

But TD still has a solid financial base. It is well capitalized and diversified. But how long can it last before it falters? The second wave of COVID-19 is accelerating. More blocks are coming. It could be worse than what TD expected. For sure it was worse than most of us expected. This would mean higher, not lower, PCLs.

On a positive note, the PCLs stabilized in the last quarter. TD Bank took provisions in the third quarter 32% less than in the second quarter. It was a glimmer of hope, but only a glimmer. Fourth quarter earnings are likely to turn up again.

Watch out for signs of dividend cuts: this would sink TD Bank shares

TD’s dividend story is exemplary. Since 2000, dividends have grown at an annualized rate of around 10%. Furthermore, the bank has consistently stayed within its targeted payment range of 40-50%.

But these days are different. TD’s latest payout ratio was 59%, as the bank grapples with the financial fallout from the pandemic. For example, adjusted net income has so far fallen by 27% in 2020. Furthermore, PCLs have risen by a shocking 200%. These numbers are huge. They foresee a very difficult 2021. And now the second wave of COVID-19 is catching on. It will leave more financial problems.

Safe, reliable and growing dividend is one of the main reasons investors own TD Bank stock. The events of 2020 have called this “safe” dividend into question. This is my opinion. I don’t hear much about it though. Shares in TD Bank have their own reputation, and a reputation can be a difficult thing to change. And while this is a good reputation, it can cause problems for investors. If the stock does not take this risk into account, any changes to the dividend would plunge it overnight.

Management’s prospects for 2021 are fundamental

I’ll be tuned into TD Bank’s earnings call on Thursday. An important part will be the management perspective. The world today is so uncertain and changing rapidly. Canadian banks will survive in the long run. We just have to successfully navigate the short term in the meantime.

Motley Fool: the bottom line

For as long as many of us can remember, TD Bank shares have been the reliable bank shares. But times are changing. This once in a lifetime COVID-19 pandemic crisis has been a major blow. It wiped out jobs and slowed the economy dramatically. Shares of TD Bank are trading very close to pre-pandemic levels. But even this cannot come out unscathed. I would wait until after the fourth quarter earnings release to buy TD Bank shares under weak conditions. He’s coming.

Silly collaborator Karen Thomas owns shares in TORONTO-DOMINION BANK.