Toronto-Dominion Bank TD-T reported its first quarterly loss in 21 years on Thursday after it set aside a US$2.6-billion provision to pay anticipated regulatory fines over anti-money laundering failures.
TD has been mired in multiple U.S. regulatory and criminal probes over serious deficiencies in anti-money laundering (AML) programs, which missed financial crimes carried out through its branches.
The bank said Wednesday that it is bracing for a total fine of more than US$3-billion ($4-billion) – its “current estimate.” That would be the largest penalty a Canadian bank has paid to solve a regulatory problem, and the second-largest fine levied against any bank over similar issues. TD expects to reach a settlement with regulators that will include other, non-financial penalties by the end of the calendar year.
A breakdown of the big Canadian banks’ third-quarter earnings
The announcement gave shareholders a measure of clarity about the scope of punishment and the timeline for negotiations with regulators that have largely played out in secret, dragging on for well over a year. Yet TD still faces a long, costly road to a final resolution of its AML issues and regulatory headaches.
“Discussions have been productive and while we are not through the tunnel yet, we can see the light at the end of this journey,” chief executive officer Bharat Masrani said Thursday, on a conference call about TD’s fiscal third-quarter results. “While there’s still much work ahead, we are pleased with the progress we’ve made.”
Analysts and investors are fretting over the prospect that regulators might put constraints on TD that would restrict the growth of its U.S. business until its AML problems are fully resolved. In one prominent example, bank regulators put a years-long cap on California-based Wells Fargo & Co.’s assets in 2018 after employees were alleged to have opened scores of false accounts.
The fear is that any significant limit on TD’s ability to expand its U.S. business, which has long been an engine for increasing the bank’s profits, could ultimately prove more costly even than the multibillion-dollar fines. TD’s AML issues already scuttled its attempt last year to buy U.S. regional bank First Horizon Corp. for US$13.4-billion, as the bank was unable to secure necessary approvals from regulators.
Analysts tried repeatedly on Thursday to coax details from TD’s leaders about what kinds of “non-monetary” penalties regulators might impose on the bank, but Mr. Masrani said he would not speculate about the outcome of its negotiations with regulators.
Shareholders are also worried about the rising costs TD is incurring as it revamps its AML program – work that Mr. Masrani emphasized is “well under way” – and the prospect that some of that spending will be continuing. The bank has already spent more than $500-million to address shortcomings and added about 500 staff to work on the remediation plan.
“Would it be fair to suggest that, regardless of what comes out from these non-monetary [penalties], bottom line you feel confident in the ability to grow earnings in 2025?” Cormark Securities analyst Lemar Persaud asked TD’s leaders on Thursday. “How will the earnings power of the U.S. franchise play out?”
The head of TD’s U.S. business, Leo Salom, responded that the bank is working to improve its AML programs, “but still grow the franchise that we have.”
“There are reasons to be optimistic about the U.S. operation, but I wouldn’t want to comment right now with regards to what the final global resolution [with regulators] will bring forward,” he said.
Quantifying potential fines over AML lapses is a “clearing event” for TD, but “the bank’s long-term outlook in the U.S. is cloudy,” said National Bank Financial Inc. analyst Gabriel Dechaine, in a note to clients.
The AML issue is the most visible of several problems that have plagued the bank and dragged down its share price. A number of senior TD leaders have left the bank, which is battling perceptions that its highly regarded culture, which made the bank stand out, has eroded. There is also widespread speculation about succession plans for Mr. Masrani, who has been CEO for 10 years, and whether TD has a strong enough bench of internal candidates to replace him.
Greater certainty about TD’s regulatory fines “clears the deck” for succession plans to move ahead, “which could include an external candidate,” Mr. Dechaine said.
TD lost $181-million, or 14 cents per share, in the quarter that ended July 31. Excluding certain items such as the massive regulatory provision, TD said its profit was $3.65-billion, roughly unchanged from the same quarter last year. That amounted to $2.05 a share on an adjusted basis, which fell short of the $2.07 analysts had expected.
The bank’s share price fell $1.70 or 2.1 per cent to $79.59 on the Toronto Stock Exchange on Thursday.
TD kept its quarterly dividend unchanged at $1.02 a share.
The bank set aside higher loan loss provisions of nearly $1.1-billion, anticipating that more customers could default on loans as high interest rates and a slowing job market put pressure on households and businesses. That matched analysts’ expectations, but was up 40 per cent from $766-million in the same quarter last year.
TD also recorded a $110-million restructuring charge, wrapping up a cost-cutting program launched last year to strip out $800-million in annual costs, in part by cutting jobs and offloading some real estate, to help offset higher spending on AML controls.
TD’s large provision against regulatory fines drove a $2.28-billion loss in its U.S. retail banking division. Adjusted profit was $1.29-billion, down $77-million from a year earlier. By contrast, retail banking in Canada had a strong quarter, with profit up 13 per cent to $1.87-billion, as revenue increased 9 per cent to $5-billion and loan volumes rose 6 per cent.