Bank braces for potential fines and growth limits as U.S. probe into anti-money laundering practices deepens
Toronto-Dominion Bank faces scrutiny from investors over insufficient details concerning a US regulatory probe into anti-money laundering practices, which threatens its growth prospects.
According to The Globe and Mail, the bank is reserving US$450m to address potential penalties arising from ongoing investigations by various US regulatory bodies and law enforcement. These investigations have already hindered TD's acquisition of Tennessee-based First Horizon Corp. last spring.
As the probe extends into its second year, both analysts and shareholders express concerns that this could adversely affect the bank's future performance.
Dan Rohinton, vice president and Portfolio Manager at iA Global Asset Management, shared his mixed feelings about the situation, noting a preference for resolution and transparency to mitigate ongoing uncertainty.
TD continues negotiations with three US regulators and the Department of Justice, anticipating further monetary penalties. The US$450m provision represents an initial set-aside and not the final estimate of potential fines, which some analysts predict could reach up to US$2bn.
Mike Rizvanovic, an analyst at Keefe, Bruyette & Woods, highlighted the dual implications of additional fines possibly exceeding US$1bn and non-monetary penalties that could affect TD's growth in the US.
He also noted the provision's indication of progress toward resolving regulatory issues, which could support the bank's stock price.
While the specific regulatory agencies involved have not been disclosed, typical US banking regulators include the Office of Comptroller of the Currency (OCC), Federal Reserve Board, and the Financial Crimes Enforcement Network.
The potential for non-monetary penalties, such as regular monitoring of TD’s anti-money laundering remediation efforts or restrictions on asset growth and acquisitions, is a significant concern for investors.
These measures could severely limit TD’s expansion and operational strategies in the US market.
Rohinton also discussed the challenges of regulatory limitations on a bank’s ability to grow and deploy capital effectively, emphasizing the importance of organic growth as the optimal use of capital.
Delays in resolving these regulatory issues could extend for years, as demonstrated by the nearly decade-long enforcement order the Federal Reserve imposed on HSBC, which only concluded in 2022.
RBC analyst Darko Mihelic remarked on the impact of these unresolved issues on TD’s valuation, noting the bank's current trade at a discount compared to its peers.
While he views the situation negatively due to the lack of clarity and potential high costs, he remains optimistic about the bank's prospects if the worst-case scenarios are avoided.
