John Aiken says the Canadian bank could see heavy impact from AML probe
U.S. investigations into TD Banking Group’s Bank Secrecy Act/Anti-Money Laundering program could have costs far beyond the multi-million-dollar fines imposed by regulators according to a veteran analyst.
John Aiken of Jefferies says that the Canadian big six bank could face years of potential growth south of the border and a problem that could well take longer to remedy than first thought. In a client note Aiken warned that the bank’s initial provision of US$450 million is likely only a small share of total penalties, which could be $2 billion.
“With the bank allegedly a focal institution in a drug money-laundering scheme, the worst-case scenario has become more likely with TD potentially entering a lost decade,” Aiken opined. “Growth in the U.S. will likely be constrained and the timeline for a fix is extended by several years.”
But the analyst added that there is no certainty on how the regulators and U.S. Department of Justice will proceed with their investigations or what the outcomes may be. He acknowledged that the penalties could far exceed the current estimates.
Late last week, TD’s group president and chief executive officer, Bharat Masrani, addressed the media reports about the probe.
“"Criminals relentlessly target financial institutions to launder money and TD has a responsibility and an obligation to thwart their illegal activity," he said in a statement. "I regret that there were serious instances where the Bank's AML program fell short and did not effectively monitor, detect, report or respond. This is unacceptable and not in line with our values. As we have previously said, these matters are not in any way related to TD's good faith dealings with our customers."
He noted that the bank had taken steps to fix the issues including hiring experienced AML executives and professionals, implemented new widespread training programs, and heightened account monitoring and mandatory reviews through significant investment in new technology.
"Our efforts have resulted in tangible improvements, with more work ahead. We continue to cooperate closely with our regulators to accelerate our progress and meet our obligations," said Masrani.
Investor overreaction
Investors have been rattled by the investigation – its valuation dropped to a 21 year low at one point - but KBW analyst Mike Rizvanovic believes they may have panicked.
"While the optics around the new anti-money-laundering details are negative, we believe the market has overreacted," Rizvanovic told Morningstar. "While we believe TD's shares will trade at a discount in the near term, we see relative upside for patient investors.”
Some commentators believe the bank’s leadership could be challenged as the investigation proceeds, although there is no obvious successor should shareholders move to replace Masrani.
