U.S. Attorney General Merrick B. Garland speaks at a press conference announcing that TD Bank will plead guilty to money laundering charges and pay a $3-billion settlement, in Washington D.C. on Oct. 10.Carol Guzy/The Globe and Mail
The most striking thing about U.S. Attorney-General Merrick Garland’s takedown of Toronto-Dominion Bank TD-T on Thursday wasn’t the criminal conviction, the massive US$3.09-billion in penalties or the freeze on future growth in the U.S. market.
The shocking element of Mr. Garland’s press-conference critique was the TD employee e-mails he read aloud. They spoke to a culture that is going to haunt the bank as incoming chief executive officer Raymond Chun and his team try to win back clients, boost profits and restore the lustre of a bank that’s historically boasted a premium stock market valuation.
Time after time, year after year, TD branch staff, managers and compliance officials joked about laundering money for drug dealers. In three separate e-mails that Mr. Garland read aloud at the press conference, TD employees’ reaction to suspicious activity, such as customers dropping off $1-million in cash and withdrawing the same day in cheques, was to send a note ending with LOL – laugh out loud – to colleagues.
“In one instance a compliance employee asked a manager what ‘the bad guys’ thought about the bank. The manager replied: ‘Lol. Easy target,’ ” Mr. Garland said.
When bankers consistently tack “LOL” to e-mails and texts about working with criminals, there is a serious problem.
On Thursday, after Mr. Garland finished his demolition job, TD executives were properly contrite. In an analyst call, CEO Bharat Masrani – who will retire in April – along with Mr. Chun and the team spent a great deal of time talking about remediation plans. Going forward, 97,000 TD employees will understand dropping LOL into an internal e-mail is a career-ending move.
What Mr. Chun and colleagues had difficulty articulating is how this former stock market darling is going to boost its profits as predictably as it did in the past to win back investors.
TD had a unique growth story, forged by two generations of acquisitions. The bank built a network of 1,150 TD branches stretching from Maine to Florida – more outlets than TD boasts in its homeland. Quarter after quarter, a U.S. division branded as “America’s Most Convenient Bank” churned out reliable returns.
By freezing TD’s U.S. retail assets at US$434-billion, their level at the end of September, American regulators have removed the engine driving TD’s growth.
To serve U.S. clients without increasing U.S. assets, TD is going to have to make tough choices. In the press conference, Leo Salom, the head of TD’s U.S. retail operations, said part of the bank’s strategy is to exit a few businesses – he put it as a plan to “manage down non-scalable or niche portfolios that have minimal franchise value.”
Banks cannot shrink their way to premium stock market valuations.
Mr. Chun and Mr. Masrani pointed out U.S. sanctions have no impact on the bank’s Canadian retail franchise. In a telling line, they noted the regulators placed no limits on TD Securities, which has significant U.S. investment banking and commercial lending operations.
TD has an extremely strong balance sheet, even after paying fines for money laundering. The bank has a piggy bank it can tap any time, in the form of a significant stake in online brokerage Charles Schwab.
When he takes the top job, Mr. Chun could use capital no longer required to expand U.S. retail operations to ramp up TD’s corporate loan portfolio. TD has the financial firepower to compete with the largest U.S. lenders in fields such as leveraged loans or non-investment grade credits. (That’s the polite term for junk bond issuers.)
TD could boost its wealth-management platform by snapping up money managers. The bank could, and probably will, devote even more of its excess capital to buying back its own shares.
Growth strategies based on more corporate lending or asset management acquisitions are far more risky than bolting more branches and customers onto TD’s vast U.S. retail network. Until the bank earns the trust of U.S. regulators, which will take a minimum of three years, Mr. Chun is going to struggle mightily to match the premier valuation investors awarded TD through most of his career at the bank. At TD, there is no reason to LOL.
U.S. Attorney General Merrick B. Garland announced Thursday that TD Bank will pay approximately US$3-billion in a historic settlement with U.S. authorities who said Thursday that the financial institution's lax practices allowed significant money laundering over multiple years.
The Associated Press