TD Bank U.S. laundering probe risks an earnings hit, analysts say

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With new allegations emerging surrounding U.S. anti-money-laundering investigations into Toronto-Dominion 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 U.S. 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 person 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.

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“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 Thursday, 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 $2 billion, rather than previous expectations of $500 million to $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 CAD$1 billion ($730 million) in the report’s worst-case scenario, a figure that includes CAD$250 million of higher ongoing compliance costs per year, limits on earnings growth and five years in the “penalty box” with U.S. authorities.

The bank’s shares slumped 4.7 per cent at 12:10 p.m. in Toronto, after declining 1.7 per cent Thursday following the Journal anti-money-laundering report.

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“TD is a strong institution with the capital, liquidity and capacity to fund the critical effort currently underway to strengthen its AML program, invest in the business and continue to serve its customers and clients with excellence,” bank spokesperson Lisa Hodgins said in an emailed statement 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 already set aside an initial provision of $450 million for just one of those.

“We believe that a total penalty amount of $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 U.S. agencies, which could include penalties such as an asset cap on growth or restrictions on mergers and acquisitions for a period of time.

U.S. consent orders in the 2010s and this decade against HSBC Holdings Plc 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’re assuming that the issues involving Toronto-Dominion are less severe.

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“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.”

‘Bad look’

Toronto-Dominion first disclosed last year that it was under investigation by the Department of Justice, and has said repeatedly that it can’t 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 4 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 U.S., 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.com 

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