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The US$3.1-billion fine levied against Toronto-Dominion Bank by U.S. authorities this week came as no surprise to those who have followed the bank’s anti-money-laundering troubles. But a decision to cap the Canadian lender’s growth south of the border came as a shock, one that analysts say will ensure the scandal’s shadow lingers over the bank, clouding its long-term outlook.

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On Thursday, TD attempted to do damage control, describing 2025 as a “transition” year and unveiling a host of steps it will take in an attempt to mitigate the impact of the curbs on its personal and commercial banking businesses. Those steps include selling about 10 per cent of its U.S. assets to create liquidity and support the financial needs of its customers, alongside measures to improve return on equity metrics in the near term.

Despite those efforts, Jefferis Inc. analyst John Aiken said that it’s going to be an “absolute nightmare” to forecast TD’s earnings in the coming quarters.

“TD laid out its pan, but we don’t know the specifics,” he said. “We don’t know what’s going to happen when. We don’t know what the unintended consequences (of the caps) are going to be. This is an incremental level of uncertainty that was not generally expected.”

National Bank of Canada analyst Gabriel Dechaine, in a note to clients on Thursday, described TD’s long-term outlook as “murky.”

There seems to be more than what meets the eye as far as the monetary and non-monetary conditions that TD accepted to resolve its anti-money laundering issues in the United States, his note suggested.

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Aside from the fine and a cap on TD’s assets in personal and commercial banking, conditions include remediating TD’s anti-money laundering programs and allowing third-party oversight in the process.

“In our opinion, the term ‘non-monetary’ is misleading since the requirements/ restrictions … have monetary impacts,” said Dechaine. “The remediation processes, for instance, have a direct impact on the bank’s cost base. TD quantified US$500 million of compliance costs in fiscal 2025 (already in our forecasts), a figure that could be repeated in fiscal 2026.”

The asset cap restriction will limit growth in a market that accounted for 30 per cent of the lender’s earnings in the last year, he added.

There’s also the possibility of more TD bank employees being criminally charged for their involvement in the money laundering schemes, which could keep a cloud hanging over the bank for years.

The U.S. justice department has already charged two TD bank employees and has said that its criminal investigation into “employees at every level of TD Bank are active and ongoing … no one involved in TD Bank’s illegal conduct will be off limits.”

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The charges laid out against TD employees were “definitely not a positive” and the bank has some work to do to “un-tarnish the brand,” said Aiken. But he also noted that TD hasn’t seen a mass exit of customers even though issues linked to money laundering have been ongoing for a while now. “That bodes well,” he said.

From a nearer-term standpoint, the steps taken by TD to comply with the conditions of U.S. authorities are expected to dampen earnings from its U.S. segment in 2025.

Analysts from the Canadian Imperial Bank of Commerce and the Bank of Nova Scotia have reduced TD’s expected earnings per share next year by one per cent.

Aiken said that TD’s description of 2025 as a transition is equivalent to a year of “lower earnings growth.”

In the long run, TD may look to expand or focus more on its businesses that haven’t been limited by U.S. authorities, such as its wealth segment or even its businesses in Canada, Aiken said. The restriction is only on its retail banking business in the U.S. which represents everyday banking in the personal and commercial sector.

While such a move makes “a ton of sense” it won’t be easy. “If TD is trying to get outsized growth in Canadian banking, presumably there’s going to be a competitive response in other Canadian banks,” Aiken said. “It’s not necessarily going to be a slam dunk.”

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It’s still not certain how long the caps placed by U.S. authorities will last, but Matthew Lee, an analyst at Canaccord Genuity Group Inc., expects them to continue for at least three years. He, however, added that the timeline may be “optimistic” considering historical cases like Wells Fargo & Co., whose 2018 consent order remains active, and HSBC Holdings PLC, which took over a decade to resolve.

Aiken agrees to a similar timeline but doesn’t expect the situation to last as long as the HSBC situation, since the U.S. authorities commended TD for co-operating with the investigations.

“It depends on how TD is fulfilling the requirements of the sanctions,” he said. “But it would be absolutely stunning if the consent order is lifted in three years.

• Email: nkarim@postmedia.com

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