TD Bank takes US$450-million provision related to probe with regulator over anti-money laundering weaknesses

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Toronto-Dominion Bank TD-T is setting aside US$450-million to cover penalties it’s facing as a result of a lengthy U.S. regulatory and law enforcement investigation that derailed the bank’s takeover of Tennessee-based First Horizon Corp. last spring.

Last year, TD said that it anticipated fines or other penalties stemming from probes by the U.S. Department of Justice and other agencies related to its anti-money-laundering practices.

The provision announced late Tuesday – which the bank said relates to penalties by one undisclosed regulator – is the first indication Canada’s second-largest lender has provided on the impact of the investigation as its stretches into its second year.

Investors and analysts have closely watched TD’s anti-money-laundering issues, drilling into questions on the matter on quarterly earnings calls and at annual shareholder meetings. But the bank has consistently said it cannot disclose any information on its discussions with regulators.

The probe prompted TD to terminate its takeover of First Horizon, a deal that would have significantly accelerated TD’s strategy in the United States, its most strategically important market. The acquisition would have allowed TD to scoop up hundreds of retail branches and tens of billions of dollars in its biggest growth market.

“TD’s AML program was insufficient to effectively monitor, detect, report, and respond to suspicious activity,” the bank said in a press release. “Work has been under way to remedy these deficiencies. TD is a strong institution with the capital, liquidity, and capacity to fund the critical effort currently under way to strengthen its AML program, invest in the business, and continue to serve its customers and clients with excellence.”

TD said discussions with three U.S. regulators and the Department of Justice continue, and that it anticipates additional monetary penalties.

In the U.S., multiple regulators oversee the banking sector. While TD did not disclose the agencies involved, banking regulators in the U.S. include the Office of Comptroller of the Currency, Federal Reserve Board and the Financial Crimes Enforcement Network.

The provision – money that the bank is setting aside – does not reflect the final amount of the potential monetary penalties or any non-monetary penalties.

TD said in a press release that the extent of the penalties are “unknown and not reliably estimable at this time.”

Jefferies analyst John Aiken said the provision does not provide full clarity, and that these types of issues typically require years of remediation after a regulator has issued its complete range of monetary and non-monetary penalties.

“In our review of precedent transactions, we note that it has taken between three to more than 10 years before consent orders have been lifted,” Mr. Aiken said in a note to clients. “Granted, we do believe that TD is being proactive and attempting to limit the timeline.”

In response to shareholder questions at its annual meeting on April 18, TD chief executive officer Bharat Masrani asked investors for patience regarding disclosures on the AML matter.

“Without a doubt, shareholders have some anxiety regarding our issue in the U.S.,” Mr. Masrani said at the meeting. “I’ve said to our shareholders as I’ve said today: Be patient, we will be able to share more details on that. But fundamentally, your bank is doing very well.”

Some analysts have estimated that the total fine could range from US$500-million to US$1-billion.

In January, The Globe and Mail reported that TD had implemented an action plan to improve its anti-money-laundering controls and risk-management practices in response to concerns from regulators. TD brought on a new chief global AML officer and associate vice-president and head of its Canadian financial intelligence unit to oversee the shift, and hired McKinsey & Co. and other external consultants for support on regulatory and other matters in the U.S.

The bank’s plans to fix weaknesses in its AML processes are dragging on its earnings. Last year, TD said it expects to post an adjusted net loss of $200-million to $250-million per quarter this year in its internal corporate segment, driven by investments in its risk and control infrastructure.

Instead of taking over First Horizon, TD is planning to open 150 U.S. branches by 2027 across Florida, North Carolina, South Carolina and Georgia.

Meanwhile, the bank has faced concern from investors over its CEO succession plan. Some analysts have cited a lack of experience among top executives prepared to take on the CEO role.

Mr. Masrani has been in the seat for a decade, which is the typical term for a Canadian bank CEO.

In December, the departure of Canadian banking head Michael Rhodes – who had been considered a candidate for the top job – triggered a shakeup in TD’s most senior ranks.

At the annual shareholder meeting, Mr. Masrani said the bank has very “robust succession plans.”

“When the time comes you will see that TD, like it has for many years, will see a seamless and terrific executive takeover for my position,” Mr. Masrani said.