Canadian-based Toronto Dominion Bank Financial Group (NYSE:TD) reported strong profits in its fiscal third quarter, with impressive retail banking growth. The company continues to increase its lending as well as its expansion into the U.S. market.

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A Healthy Bank
Toronto Dominion reported diluted earnings per share of $1.23 (all figures in U.S. dollars, unless otherwise specified), compared to 96 cents per share in last year's same quarter. Net income rose to $1.12 billion from $868 million. Retail banking in both Canada and the U.S. contributed strongly to the increase. The U.S. segment reported its highest earnings since TD Bank entered the U.S. market, while the Canadian personal and commercial banking segment posted its third record quarter in a row. Credit quality continued to improve.

Perils of Financials
Banks have been leading players in the massive economic downturn of the Great Recession. That's why TD Bank's performance is all the more impressive. Bank Of America (NYSE:BAC) and Citigroup (NYSE:C), two of the U.S. mega-banks that were hard hit in the recession, have both improved their earnings, but their earnings performance is not on the same footing yet as Toronto Dominion's. TD Bank had lower earnings in fiscal 2009 than it did in fiscal 2008, but the falloff was nothing like that of Citi and BAC. Not only has the different economic environment of Canada benefited Toronto Dominion in its performance, but its business mix and approach is different. For example, the bank was able to grow its lending in its U.S. retail segment by 20% since the economic downturn started in 2007. (Learn about assessing a bank investment; read Analyzing A Bank's Financial Statements.)

Other Canadian-Based Banks
So if TD Bank has escaped many of the problems of the U.S. mega-banks, notably the huge writedowns from bad bets on subprime U.S. mortgages as well as steep losses from exotic trading products, how are other Canadian-based banks doing? Royal Bank of Canada (NYSE:RY) recently reported a drop due to its trading division. Bank of Nova Scotia (NYSE:BNS), on the other hand, used its strong retail banking to overcome weakness in its trading segment to post a healthy profit. The same dynamic was operative for the Bank of Montreal (NYSE:BMO), where strong retail profits overshadowed an underperforming trading unit.

Should You Invest in TD Bank?
Many investors are more familiar with the U.S. mega-bank stocks, such as Citi and BAC. Both are trading nearer their 52-week lows than their highs, but of course this doesn't necessarily mean they're bargains. The weak U.S. economy, plus the shadow of new government financial regulation, as well as these banks' shaky business performance through the recession might still make them subpar long-term investments.

TD Bank has some cautions, though. While it has been more prudently run than the U.S. mega banks, with its increasing penetration into the U.S. market, the weak economic recovery remains a concern. On the Canadian side, observers of the Canadian economy warn of the potential fallout from a Canadian housing bubble. While the growth of mortgage debt has slowed down in Canada, it hasn't decelerated as it has in the U.S. economy, one might argue, out of necessity. And as far as TD Bank's future business performance, the company admitted that the profits aren't expected to grow as fast as this quarter's did.

The Positives for TD Bank
Historically, prudent, conservative management is one big plus. The fundamentals are sound. The retail lending unit should continue to lead the way, and with TD's business roughly split half-and-half between the US and Canada, this mix should still be to its benefit. The Canadian economy has been healthy in recent years, the US economy has not. With the warning about the Canadian housing market, it's worth monitoring TD's results when considering buying the stock. It's a well-positioned, well-run financial company doing business in a reasonable economy, which has not been the case for U.S. banks for several years. (To learn more about the Canadian banking system, check out CDIC Protects Canadians From Bank Failure.)

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Tickers in this Article: TD, BAC, C, RY, BNS, BMO

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