TD risks ‘lost decade’ in US money laundering scandal, Jefferies says

(Bloomberg) — A veteran Canadian banking analyst says Toronto-Dominion Bank’s role in an alleged money laundering scheme has made the “worst-case scenario” more likely: a huge fine for the lender and years of restrictions on its growth in the United States.

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The U.S. Department of Justice is investigating the bank for its ties to a $653 million drug money laundering case in New York and New Jersey, a person familiar with the matter told Bloomberg last week. . The investigation focuses on how Chinese criminal groups used Toronto-Dominion and other banks to hide money from fentanyl sales in the United States, the Wall Street Journal reported May 2.

This follows another case in which one of the bank’s New Jersey branch employees was accused of accepting bribes to facilitate drug money laundering.

“Given that the bank is allegedly a central institution in a drug money laundering scheme, the worst-case scenario has become more likely, with TD potentially entering a lost decade,” said Jefferies analyst John Aiken. , in a note to clients on Monday. “Growth in the United States will likely be limited and the timeline for a solution will extend for several years.”

Toronto-Dominion dipped its toe into the U.S. regional banking market nearly two decades ago when it acquired a majority stake in Banknorth Group, and has been a serial acquirer ever since, focusing on the eastern U.S. markets. But the bank has been sidelined by its regulatory problems. A year ago, it abandoned a proposed acquisition of Memphis, Tenn.-based First Horizon Corp. because it couldn’t obtain timely regulatory approval.

The bank announced an initial $450 million provision for regulatory penalties last week ahead of the Journal report and said there is more to come as there are investigations from multiple regulators. “Simple math” means Canada’s second-largest bank will have to pay $2 billion, Aiken said.

“However, since there is absolutely no certainty about how regulators will proceed, standard deviations around this estimate will likely be measured in billions, rather than hundreds of millions,” Aiken wrote.

Toronto-Dominion has lost about C$10 billion ($7.3 billion) in market capitalization since the Journal reported Thursday on the connection to the drug money case. Friday’s 5.8% share price drop in Toronto was the worst since March 2020.

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Shares recovered somewhat on Monday, rising about 1% to C$75.51 as of 11:39 a.m. in Toronto.

The apparent compliance failures at TD could cast a shadow over the management team and lead shareholders to demand a restructuring, Aiken added. There has already been a change at the top of its U.S. retail division, and Leo Salom will assume that role in 2022. Few members of the executive committee have been in their positions for a significant period of time, Aiken said.

‘Unacceptable’ failure

“Criminals relentlessly target financial institutions to launder money and TD has a responsibility and obligation to thwart their illegal activity,” CEO Bharat Masrani said in a statement late Friday. “I regret that there were serious cases where the Bank’s AML program fell short and did not monitor, detect, report or respond effectively. “This is unacceptable and not in line with our values.”

Masrani said the bank has already invested hundreds of millions in improvements to its anti-money laundering controls in the United States and around the world, including hiring hundreds of new employees and investing in technology.

Keefe Bruyette & Woods analyst Mike Rizvanovic lowered his price target from C$92 to C$88, adding that while last week’s sell-off seemed overdone, the stock will take time to recover.

Meny Grauman, an analyst at Bank of Nova Scotia, said there is likely too much bad news being priced into stocks.

“A stock glut is likely to remain a reality for the foreseeable future, but we think last week’s sell-off simply went too far,” Grauman said in a note.

“It is very possible that this business will have limited growth for some time, but based on what we know, there is simply no basis to believe that TD’s earnings power in the United States has completely evaporated.”

Read more: TD Risks hit by money laundering probe, analysts say

–With the help of Christine Dobby.

(Updates with additional information and analyst comments starting in the fifth paragraph)

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