A pedestrian passes by a TD Bank location at Union Station in Toronto.Sammy Kogan/The Globe and Mail
Toronto-Dominion Bank TD-T is adjusting its growth strategy in the United States, easing back on its plan to accelerate branch openings as the lender assesses the extent of the blow from the U.S. probe into its anti-money-laundering procedures.
Investors and analysts have been urging the bank to provide details on the potential monetary and non-monetary penalties stemming from an investigation by three U.S. regulators and the Department of Justice. The probe derailed a major planned acquisition in the country by TD last year, prompting the bank to seek out other avenues for growth in the market.
Leo Salom, the head of TD’s U.S. division, said last year the bank intended to open 150 U.S. retail branches by 2027, focusing on Florida, North Carolina, South Carolina, Georgia and Atlanta.
During a conference call discussing TD’s second-quarter earnings results Thursday, Mr. Salom said the bank is “deliberately pacing” its retail expansion in the U.S. as it awaits penalties from regulators there.
“Our first priority is making sure that we address fully and completely the AML and governance and control issues that we’re facing in the U.S., and that is drawing a significant amount of our investment dollars as we address that with the seriousness and the importance that it requires,” Mr. Salom said in response to an analyst question.
In 2023, TD opened 17 branches – which it calls “stores” – in the U.S. But in the first six months of this year, its retail network shrank by 10 stores. Mr. Salom said the bank will focus on its digital and mobile strategies to grow its customer base and business in the market.
“It doesn’t mean that medium to long term the stores won’t be important, but I do think that in the immediate short term, the focus is going to be in those two fundamental areas,” Mr. Salom said. He added that TD is also renovating its existing branches in the U.S., enhancing its ATM network and boosting its digital merchandising program.
While analysts have estimated that the financial penalty from U.S. regulators could be as high as US$2-billion, greater concern falls on the potential non-monetary penalties that might constrain TD’s expansion in its main growth market.
Regulators could bar the bank from expanding through acquisition. Or they could cap its asset growth, which limits a bank’s ability to expand its balance sheet, a key factor in how lenders make money.
“I’m not making the claim that we cannot grow the stores, but I also want to be very clear that we are in the midst of discussion with regulators, and I don’t want to prejudice any of those conversations at this point,” Mr. Salom said. “I know that there’s a lot of questions about what we can and cannot do. And the one thing that I will commit to this group is as soon as we’re in a position to provide greater clarity, we will certainly do that.”
TD posted second-quarter profit Thursday that beat analysts’ estimates, largely due to a boost in capital markets earnings. But profit fell 22 per cent from the same quarter last year as the bank incurred costs related to the U.S. investigation.
The bank set aside US$450-million in provisions to cover penalties from the probe. Discussions with the regulators are continuing and the bank expects further penalties, but the extent and timing of those are unknown.
The provision, along with a separate provision for a civil matter, reduced the lender’s common equity tier 1 (CET 1) capital ratio – a measure of a bank’s ability to sustain loans that default – by 15 basis points to 13.4 per cent. (A basis point is one-hundredth of a percentage point.)
TD has also launched an overhaul of its U.S. and global anti-money-laundering program and has invested more than $500-million to enhance its platforms and remediate the weaknesses.
The U.S. investigations are connected to a US$653-million money-laundering and drug-trafficking case, The Globe confirmed earlier this month.
TD has said that it is unable to disclose details about the failings in its anti-money-laundering practices and the extent of regulatory repercussions; however, following the revelations of the drug-trafficking case, the bank said that it did not effectively monitor, detect, report or respond to money-laundering activity, and that some employees broke the lender’s code of conduct.
“From time to time, we find we’ve fallen behind in a particular area,” TD chief risk officer Ajai Bambawale said in response to an analyst question during a conference call. “And we’re out there owning the issue that we fell behind in our program, and our program did not pick up things it should have should have picked up. But really, if I go right to the root cause of what happened, there were some procedural weaknesses in the U.S. that caused bad actors to exploit us, and we were also disappointed that some of our colleagues didn’t follow our code of ethics.”
TD has faced scrutiny in Canada as well. In April, federal financial crimes watchdog Financial Transactions and Reports Analysis Centre of Canada (FinTRAC) levied its largest-ever monetary penalty of $9.18-million on the bank, stemming from five violations of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its regulations.
The Globe reported Wednesday that Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, identified deficiencies with TD’s regulatory compliance management program during a recent assessment and that the bank is working to remediate those gaps, citing sources familiar with the matter.
The Globe is not identifying the sources because they were not authorized to speak to the media about confidential regulatory matters.
The RCM framework is a set of controls that banks must have in place to comply with the various laws and regulations governing their operations in Canada, the U.S. and other countries. OSFI considers it to be a crucial element of a financial institution’s overall risk management program and it includes technology, processes and other oversight functions.
In response to an analyst’s question during the earnings conference call, Mr. Masrani dismissed the significance of OSFI’s orders, saying they are part of normal interactions with regulators.
“We are a large global player. We have lots of discussions with many regulators that are normal course business as usual,” he said.
Mr. Bambawale added that it is typical for banks to engage in these types of conversations with regulators.
“You can ask any other CRO anywhere in the world. Do they invest in risk programs? Whether it’s cyber, whether it’s third party, whether it’s fraud and other programs, the list goes on and on – compliance – that is normal course for any bank to be investing in their risk programs and also the dialogue which is referenced in the article,” Mr. Bambawale said in response to an analyst question. “The dialogue with regulators actually happens every day.”