Analyst warns of possible higher fines and business restrictions for TD Bank

As disturbing new details emerge about a U.S.-led investigation into alleged deficiencies in Toronto-Dominion Bank’s anti-money laundering defenses, a National Bank of Canada analyst is revising his worst-case scenario for the bank and predicting fines as high as $2 billion. and possible restrictions on the bank’s operations that could hinder revenues.

A lengthy regulatory and law enforcement investigation that scuttled a multibillion-dollar U.S. takeover TD planned a year ago and clouded the bank’s future prospects links to a $653 money laundering and drug trafficking operation million dollars that has been set in motion. the crosshairs of US law enforcement agencies, it was revealed on Thursday.

Given the severity of the misconduct committed by some TD affiliates, “we believe TD could face not only a larger-than-expected fine, but also regulatory restrictions on its business activities,” it said. Gabriel Dechaine, a banking analyst at the National Bank. Financial Inc., in a note to clients.

The big question now: will TD ever get its premium back?

Some analysts had previously estimated that TD could face fines of $500 million to $1 billion as a result of multiple investigations by regulators. But after TD announced it has set aside a $450 million provision for fines from a single regulator, those previous estimates appear “far too low,” Mr. Dechaine said.

“We believe the cumulative fines could easily reach $2 billion,” he wrote. In addition, regulators could issue consent orders that could affect TD’s daily operations and financial performance, he said. Consent orders determine what a bank must do to address deficiencies identified by regulators, and what it cannot do until these issues are resolved. Although the bank takes corrective action, which increases compliance costs, the limitations of such an order could also potentially limit balance sheet growth.

Earlier this year, the US Office of the Comptroller of the Monetary Fund imposed a $65 million fine on City National Bank, the US-based subsidiary of Royal Bank of Canada, as well as a consent order requiring the bank to take a series of measures . reforms.

“Consent orders can impact a bank’s operations for years,” Mr. Dechaine said, citing a 12-year investigation into the U.S. operations of Britain’s HSBC Holdings PLC. “In our worst-case scenario analysis, we estimate that this issue could erode TD’s future earnings potential by more than $1 billion.”

That would wipe out 7 percent of TD’s expected 2024 earnings per share, based on analyst consensus estimates.

Late Friday morning, TD’s share price fell 3.9 percent on the Toronto Stock Exchange. Shares of the four largest Canadian peers – RBC, Bank of Montreal, Bank of Nova Scotia and Canadian Imperial Bank of Commerce – were all trading modestly higher.

TD has been under pressure for years to present a plan for its next phase of growth following an ambitious expansion into U.S. retail banking, and a deal to boost its influence in capital markets through New York-based dealer Cowen Inc. can be purchased for $1.3. billion last year. The Toronto-based bank planned to expand through a blockbuster $13.4 billion deal to acquire Tennessee-based First Horizon Corp. to buy, but terminated the pending deal a year ago after regulatory investigations into alleged anti-money laundering failures meant TD could not. obtain necessary approvals in a timely manner.

Historically, TD traded at a 4 percent premium to its peer group, but its shares are now at a 6 percent discount, Mr. Dechaine said. That has piqued the interest of some investors predicting a recovery, but Mr. Dechaine warned them to “place more weight on worst-case scenarios for the shares.”

A source with knowledge of the case confirmed that TD was a financial institution named in a US criminal complaint whose several bank branches were targeted by criminals to launder large sums of cash from narcotics sales. According to the US Drug Enforcement Agency, the criminal operation has contributed to a large number of overdose deaths in the US.

The Globe and Mail is not naming the source because they were not authorized to speak publicly on the matter. The Wall Street Journal first reported TD’s connection to the drug trafficking investigation on Thursday.

TD has consistently said it cannot release information about its discussions with regulators, but the bank expects additional penalties, including both fines and non-monetary penalties. The total amount of these fines is “unknown and cannot be reliably estimated at this time,” TD said in a statement this week.

The bank still faces possible fines from two other regulators, plus the Justice Department, “which has a history of imposing much higher fines,” Mr. Dechaine said.

TD declined to comment on lawsuits Thursday, but said in an emailed statement: “Criminals continually attempt to use banks to launder money. Unfortunately, our U.S. AML program has not effectively thwarted these activities,” referring to the anti-money laundering program. “This is unacceptable, and we must and will do better.”

With a report by Tim Kiladze.