TD Bank's cancelled purchase of First Horizon Corp. struck a blow to its growth strategy and wiped out an opportunity to scoop up hundreds of retail branches and tens of billions of dollars in assets in the fast-growing U.S. market.Alex Lupul/The Canadian Press
Toronto-Dominion Bank TD-T is shifting its U.S. expansion strategy to put more focus on internal growth after the cancelled takeover of First Horizon Corp. created uncertainty about whether it can buy another U.S. bank while its regulatory issues remain unresolved.
The derailed deal struck a blow to TD’s growth strategy, wiping out the opportunity to scoop up hundreds of retail branches and tens of billions of dollars in assets in the bank’s fastest growing market in the United States. TD said it did not have a timeline on when it would receive regulatory approvals and did not provide further details, leaving investors without clarity on the issues threatening to delay its growth trajectory.
During a conference call with analysts last Thursday discussing its second-quarter financial results, TD declined to answer questions on whether it could strike another deal, but unveiled the initial stages of a plan to grow organically in the U.S. by opening new retail locations – a change in strategy that could stall its growth ambitions by several years, according to Bank of America analyst Ebrahim Poonawala.
“It’s a bit of a set back and First Horizon would have accelerated their presence in the southeast market, and organically it might take five to seven years to achieve what they would have achieved on day one,” Mr. Poonawala said in an interview. “But that doesn’t mean that TD can’t return to back to bank M&A after they resolve whatever issue forced them to walk away.”
In early May, TD cancelled its US$13.4-billion acquisition of Tennessee-based First Horizon after challenges acquiring regulatory approvals delayed the deal’s closing timeline indefinitely. Media reports citing unnamed sources said the regulators’ concerns stemmed from issues with TD’s anti-money-laundering practices.
In addition to hindering TD’s ability to do another major deal, the regulatory concerns could also deter a bank from brokering a deal with TD until the issues are resolved.
TD is a lagging bank stock, and a rare opportunity
“A bank deal would be hard to do, given that they just walked away from a bank deal,” Mr. Poonawala said in an interview. “And if you’re a potential seller, you’re going to require a lot of assurances from TD or even the U.S. regulators that this deal could get approved before signing on the dotted line.”
TD executives would not comment on the reasons for the delayed regulatory approvals during the conference call. Chief executive officer Bharat Masrani said that the bank will consider opportunities to add capabilities across the bank’s business segments, pointing to TD’s US$1.3-billion takeover of New York-based investment bank Cowen Inc., which closed in early March.
“It’s an ongoing exercise for us, either it’s capability builds or where there’s an extension to our businesses and we will continue to look at those as they present themselves,” Mr. Masrani said during the conference call.
In its earnings results, TD said that the loss of the First Horizon takeover, as well as the worsening economic outlook, will cause the lender to miss its target range for growth in earnings per share over the medium term of 7 per cent to 10 per cent.
The takeover of First Horizon would have grown TD’s U.S. footprint by US$89-billion in assets and more than 400 retail branches across a dozen states. It also would have expanded its operations in the southeastern U.S., while moving into Tennessee, Louisiana, Virginia, Georgia and Texas.
To revive its U.S. ambitions, TD said it will open 150 U.S. retail branches by 2027, focusing on Florida, North Carolina, South Carolina, Georgia and Atlanta. The lender is also investing in growing its digital and mobile banking platforms, as well as building a national commercial banking footprint, the head of TD’s U.S. arm, Leo Salom, said during the conference call.
“We’ve already got an interesting commercial footprint, but we want to continue to expand there,” Mr. Salom said, adding that TD also sees growth opportunities in existing markets in Boston, Philadelphia and New York. “But the southeast is going to be a very important part of the overall equation.”
Meanwhile, the bank is sitting on the highest capital cushion among its peers, and investors are eager to hear how TD will deploy that extra money that was initially earmarked for a major U.S. acquisition. With the bank sitting on more than $18-billion of excess capital representing 13 per cent of TD’s market capitalization, according to research by Keefe, Bruyette & Woods (KBW), the lender announced plans to repurchase 30 million shares – representing a slim 1.6 per cent of its outstanding shares.
Holding onto large piles of money drags on a bank’s return on equity – a key industry metric that measures profitability – which can affect the valuation of a company’s share price.
TD’s shares have already been pummelled in recent months, dropping 12 per cent to make it the worst performing Canadian bank stock this year. Until TD reveals further details on the factors that caused the deal to fail, the uncertainty could continue to weigh on its shares.
“When you keep investors in the dark, it’s never a good thing,” KBW analyst Mike Rizvanovic said in an interview.
Mr. Masrani said that he is “comfortable” with TD’s high capital levels given that its return on equity is within its historical range.
“You should not assume that just because we have capital in our pockets that it’s burning a hole there, and that we need to be impatient as to how we manage that,” Mr. Masrani said during the conference call.