WITH new allegations emerging surrounding US anti-money-laundering investigations into Toronto-Dominion (TD) Bank, the lender could face a much higher fine than previously expected as well as a significant hit to its long-term financial performance, according to analysts at National Bank of Canada.
The US Department of Justice is investigating the Canadian bank over its ties to a US$653 million drug money laundering case in New York and New Jersey, according to a source familiar with the matter. That’s on top of another case in which one of the bank’s New Jersey branch employees was charged with accepting bribes to facilitate the laundering of drug money.
“The allegations against TD lead us to assess more severe ‘worst-case’ scenarios than what we previously contemplated,” National Bank analysts led by Gabriel Dechaine wrote in a note to clients late on Thursday (May 2), after The Wall Street Journal first reported Toronto-Dominion’s connection to the drug-money-laundering case.
National Bank’s analysis of the latest revelations “suggests that these issues might not only result in a much larger fine than initially contemplated” – about US$2 billion, rather than previous expectations of US$500 million to US$1 billion – “but they could also have longer-term implications for TD’s financial performance”, Dechaine and his colleagues wrote.
Toronto-Dominion’s future earnings potential could be slashed by more than C$1 billion (S$987 million) in the report’s worst-case scenario, a figure that includes C$250 million of higher ongoing compliance costs per year, limits on earnings growth and five years in the “penalty box” with US authorities.
The bank’s stock slumped by as much as 6.8 per cent on Friday, eventually closing down 5.9 per cent, its biggest one-day decline since the outset of the pandemic in March 2020.
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Toronto-Dominion shed C$8.2 billion in market capitalisation Friday after already dropping by C$2.4 billion on Thursday when shares sunk in the wake of the Journal’s anti-money-laundering report. Shopify briefly passed it as the second-largest company by market capitalisation on the Toronto Stock Exchange.
“TD is a strong institution with the capital, liquidity and capacity to fund the critical effort currently underway to strengthen its AML programme, invest in the business and continue to serve its customers and clients with excellence,” bank spokesperson Lisa Hodgins said on Friday. “As we have said, we anticipate and continue to plan for additional monetary penalties, which are not reliably estimable at this time.”
In addition to the Department of Justice investigation, the Toronto-based lender faces three separate regulatory probes, and it has already set aside an initial provision of US$450 million for just one of those.
“We believe that a total penalty amount of US$2 billion is realistic. However, fines alone aren’t the only financial consideration,” the National Bank analysts said.
The major issue is the prospect of a consent order from one or more US agencies, which could include penalties such as an asset cap on growth or restrictions on mergers and acquisitions for a period of time.
US consent orders in the 2010s and this decade against HSBC Holdings and Wells Fargo & Co – for laundering tied to cartels and false-account activity, respectively – are relevant precedents, though they are “worst-case scenarios”, the National Bank analysts said, adding that they are assuming that the issues involving Toronto-Dominion are less severe.
“Not only were the direct financial penalties assessed against each institution very large,” Dechaine and his colleagues wrote, “the long-term implications were materially negative to future performance”.
Toronto-Dominion first disclosed last year that it was under investigation by the Department of Justice, and has said repeatedly that it cannot estimate the final size of any fines or other penalties it might face tied to the anti-money-laundering investigations.
“At a high level, we learned why this is going on,” said Dan Rohinton, portfolio manager at iA Global Asset Management. The firm’s retail mutual funds have about four million Toronto-Dominion shares. “I don’t want to say this too flippantly, but this isn’t a run-of-the-mill internal control issue. This is a priority issue for the US, where drug overdose deaths are around 100,000 per year.”
Investors are still going to be waiting for clarity, Rohinton said, adding that they will want information on the size of the penalties and the scale of ongoing investments Toronto-Dominion is likely to make to correct for any potential compliance failures.
“It’s a bad look,” he said. “I do think this is more negative than when we just knew that TD was under investigation through multiple agencies.” BLOOMBERG