Business Brief: The trouble with TD

First we take Manhattan. Then we get caught up in a global drug war.

Not as catchy as Leonard Cohen had it, and not how Toronto-Dominion’s top executives saw it playing out when they decided to push hard into New York City in 2012. Today, we look at how that move came back to haunt the bank.

Up top

• Developing: Canadian multinational Alimentation Couche-Tard Inc. is in talks to acquire 7-Eleven, the world’s largest convenience store chain, its Japanese operator revealed today.
• Closing the “escape hatch” Dozens of financial criminals have managed to escape paying tens of millions of dollars in regulatory penalties by declaring bankruptcy, according to market watchdogs in British Columbia and Ontario.
• Catching the wave: Montreal-based online lender Nesto Inc. is aiming to grab a larger slice of the mortgage market as a wave of homeowners face mortgage renewals at higher rates.
• Rate expectations: Forecasters expect Tuesday’s consumer price index will show inflation slowed to 2.4 per cent from 2.7 per cent in June – setting the stage for the Bank of Canada to continue cutting interest rates throughout the fall.

In focus

TD’s dirty laundry

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That move on New York City more than a decade ago paid off: TD climbed its way to a top-three market share for retail banking in the metro area. It was a much-celebrated victory that became the stuff of internal legend. But that success came at a steep cost.

• In May, it was revealed that TD was not only involved in a global drug ring’s US$653-million money-laundering scheme, but a central part of it.
• In a 2021 criminal complaint, the U.S. Department of Justice said criminals routinely targeted TD branches in Queens to launder bundled stacks of money, sometimes by bribing tellers.

A year-long investigation by financial reporters Tim Kiladze, Rita Trichur, James Bradshaw and Stefanie Marotta revealed the problems at TD run much deeper than rogue employees: a demoralizing cultural shift; increasingly dense layers of bureaucracy that have stifled decision-making and financial performance; and an exodus of respected leaders, to name a few.

I asked Kiladze to tell me how the story came together:

‘It was like a dam broke’

For the past few years, there’s been talk on Bay Street that TD’s performance was slipping, but it was challenging to prove. The bank’s profits seemed fine, and Bay Street loves to gossip, so it was very possible that it was nothing more than the usual mudslinging.

Then, in May, 2023, TD terminated its US$13.4-billion takeover of Memphis-based First Horizon Corp., and we quickly learned it had something to do with anti-money laundering problems. A few months later, in August, 2023, TD disclosed that it was involved in a U.S. Justice Department investigation and that it would likely face financial penalties.

It was like a dam broke. In a flash, the whispers turned into actionable intel and so we spent the past year talking to people in and around TD, rivals, AML experts and institutional investors, among others, to figure out what was going on.

It turns out TD’s AML woes are only one element of a much broader story. There’s been a cultural shift inside the bank, and it’s impacted everything from the bank’s leadership succession plans to its financial performance. The shift has had a huge impact on morale, and a growing number of senior leaders have been leaving the bank.

What makes this all the more compelling is that it’s happened at TD, of all places. This is a bank that puts so much pride in its culture, and rivals were secretly jealous of it. Yet that culture has eroded, and TD’s shares have lost their premium valuation, in part because investors have less confidence in leadership.

You can read the full investigation here.

Charted (lunar phase edition)

The stock play on super moons

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Today is an auspicious one for financial astrologists – the growing number of people who study celestial bodies, their movements and how they influence the market. Not only is tonight‘s moon a super one, it’s also blue.

We will leave the Farmer’s Almanac to more expertly explain what those things mean, but in short: It will appear to be closer and brighter.

That rare combination is expected, among astrologists, to bring super-charged spiritual energy. For investors, a quote on the event from this comprehensive overview seems to be the most relevant: “Expect the unexpected, given that the full moon in Aquarius will tensely aspect Uranus in Taurus.”

Headlines from a few recent articles on financial astrology point to the usual suspects for the trend:

• “Can the stars predict the stock market? Gen Z thinks so”
• “Stock-obsessed Gen Z are using astrology and tarot to invest”
• “Gen Z stock traders embrace astrology to navigate financial markets”

But financial astrologists have been around long enough to foresee dozens of recessions. Over a century ago, J. P. Morgan habitually checked with his personal astrologist over the timing of business deals. (There is debate over whether he actually said “millionaires don’t use astrology, billionaires do,” but it tracks.)

The ubiquity of TikTok and Instagram is giving financial astrologers a bigger audience. As a result, more people than ever are looking to cosmic consultants for advice. Advice like:

• “Pluto in the 10th house is a great placement for wealth! Venus in the 10th house may increase your chances of being able to afford very expensive or luxurious items!”
• “If you want to know how to generate income and your career – you also need to be looking at the planetary rulers and signs for your 10H, Midheaven, 6H, and the aspect all of these make as a whole.”

I honestly don’t mean to judge. And besides: We live in an age where a very online man called Roaring Kitty can shake markets by posting a clip from Braveheart.

When I went searching for information on a company set to report financials next week, one of the first results was a “powerful investment tool” that chewed over Wall Street expectations, earnings revisions and business conditions, and observed: “The earnings report might help the stock move higher if these key numbers are better than expectations. On the other hand, if they miss, the stock may move lower.”

I suddenly found myself searching for what “10th house” I live in.

All the same, we tend to agree with the expert in this CNBC story last month who warned against using astrology to pick stocks: “It’s ‘neither optimal nor ideal.’”

If you know what is, email me: cws@globeandmail.com

The outlook

Today: Canadian household and mortgage credit for June. The Conference Board reports its U.S. leading index for July. Japan core machine orders. Earnings include Estée Lauder Companies Inc. and Palo Alto Networks Inc. Don’t forget to look at the moon.

Tomorrow: We’ll have live coverage of the morning’s Canada’s consumer price index for July on reportonbusiness.com. Canada also reports its new housing price index. Earnings include Lowe’s Companies Inc.

Wednesday: Japan reports its trade deficit. The pace of the country’s exports continued months of gains last month, but showed signs of cooling amid mounting economic concerns in China. Earnings include Analog Devices Inc.; Macy’s Inc.; Target Corp. and TJX Companies Inc.

Thursday: Earnings from TD will capture the spotlight, as the lender becomes the first of the Big Six to report third-quarter earnings. Other reports include Canadian Solar Inc; Dollar Tree Inc., Intuit Inc., Build-A-Bear Workshop.

Friday: U.S. Fed chair Jerome Powell speaks on the economic outlook at the Jackson Hole Economic Policy Symposium. Statistics Canada reports retail sales for June.

Morning markets

World markets were mixed after global stocks saw their best week in nine months on expectations the U.S. economy would dodge a recession and cooling inflation would kick off a cycle of interest rate cuts. Wall Street futures were little changed, while TSX futures were flat.

Overseas, the pan-European STOXX 600 gained 0.25 per cent in morning trading. Britain’s FTSE 100 was down 0.03 per cent, Germany’s DAX added 0.16 per cent and France’s CAC 40 added 0.33 per cent.

In Asia, Japan’s Nikkei closed 1.77 per cent lower, snapping a five-day winning run that pushed it up 8.7 per cent last week. Hong Kong’s Hang Seng advanced 0.8 per cent.

The Canadian dollar traded at 73.08 U.S. cents.