Toronto-Dominion Bank(NYSE: TD), also known as TD Bank, is one of the largest banks in North America. Although its home market is Canada, much of its growth is coming from the U.S. market. That turned into a big problem in 2023 thanks to an acquisition that ended up getting scuttled. There's more pain to come on that front, too. But don't think TD Bank's growth is going to stop.
TD Bank had a mixed year in 2023
In 2022, TD Bank inked two acquisition deals. One was for First Horizon(NYSE: FHN), which would have materially expanded its banking footprint on the East Coast of the United States. The other was for Cowen, an investment banking firm, to augment TD Bank's investment banking activities.
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The Cowen deal was closed in early March 2023. The First Horizon deal was scuttled just a little later in May 2023. That's why it was a bit of a mixed bag on the growth front for TD Bank in 2023.
The bigger problem, however, is that the First Horizon deal was called off because regulators were upset with TD Bank's efforts to control money laundering. There are three negatives here on the growth front. First, it seems highly likely that TD Bank will resolve the issues, but that it will also end up paying a fine related to its weak money laundering controls. Second, until the issue is resolved, more U.S. acquisitions are probably off the table. And third, potential acquisition targets may not want to work with TD Bank until this history is well in the rearview mirror.
In other words, TD Bank's growth could slow down materially from here. The problem could linger for a little while as it works with regulators on a resolution and then has to build back trust with potential takeover targets. It's understandable that investors would be a bit downbeat on the stock. Notably, the bank's 4.6% dividend yield is near its highest levels over the past decade.
TD Bank isn't done growing
Clearly, TD Bank is facing headwinds, some of its own making. That's not good news. But there's no reason to think the investment-grade-rated bank's dividend is at risk even in the event of a material economic downturn. In fact, its Tier 1 Capital Ratio, a measure of a bank's ability to handle financial adversity, is the second highest in North America at 14.4%.
While growth may not come as rapidly, TD Bank hasn't stopped expanding. It opened 18 new locations in the U.S. market in the third quarter alone. Sure, that's far less exciting than buying hundreds of locations in one quick transaction, but slow and steady isn't a bad thing. Moreover, with a largely East Coast presence, TD Bank has a lot of room to expand its geographic footprint before it has exhausted its opportunity in the U.S. market.
As for the potential fine: Clearly, TD Bank can't talk about that issue in any detail, but it has basically said that a fine is on the way. That will make whatever quarter it gets charged to look really ugly. But the bank is strong and should be able to take the hit in relative stride. Once that's in the past, it can start to look for acquisitions again. So the short-term pain of a fine will actually help to clear the slate for future growth.
TD Bank has some warts
There are some material negatives in front of TD Bank. But investors who think in decades should step back and consider just how bad the current state of affairs really is. In the end, TD Bank continues to grow its business. It's in a strong financial position, and once it takes the regulatory hit, it can look to expand via acquisition again. If you don't mind muddling along for a little while, collecting a historically high yield, you might want to look at TD Bank today.
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Reuben Gregg Brewer has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
