A person walks past a TD Bank branch in Toronto's financial district on Sept. 20, 2022.Alex Lupul/The Canadian Press
Toronto-Dominion Bank TD-T will face challenges growing profit next year as the bank curbs its U.S. retail business and remediates the anti-money-laundering gaps that resulted in severe penalties from U.S. regulators and law enforcement.
Canada’s second-largest lender suspended its financial targets for 2025 and signalled Thursday that investors will have to wait until next year for updated growth expectations. TD also said it has launched a strategic review aimed at revamping its businesses and bolstering its beleaguered share price.
TD suspended its previously set growth targets of 7 per cent to 10 per cent in adjusted earnings per share, 16-per-cent return on equity and positive operating leverage. TD’s share price tumbled 7 per cent in Toronto on Thursday, deepening the bank stock’s plunge this year to 13.6 per cent.
Incoming chief executive officer Raymond Chun, who is the bank’s chief operating officer, was front and centre on TD’s fourth-quarter earnings call on Thursday morning, appealing to investors for patience as he fielded most of the questions on the bank’s new strategy. He is set to succeed current CEO Bharat Masrani in April.
“AML remediation remains our top priority. We have assembled an AML team with experienced executives and specialists from across the industry,” said Mr. Chun, who was tapped as the next CEO in September.
“I’ve been clear that my expectation is that accountability goes beyond the AML team. We’ve established clear accountability and alignment across all three lines of defence, starting on the front line and carrying through to the risk management and audit teams – both for the U.S. and the enterprise more broadly.”
In October, the bank pleaded guilty in the U.S. to conspiracy to commit money laundering, and agreed to pay a penalty of more than US$3-billion and address strict requirements to resolve the issues.
To address the orders from U.S. banking regulators and the Department of Justice, the bank has been revamping its risk and compliance team, overhauling its governance structure, updating its policies and processes and upgrading its technology platforms.
But the requirements are sweeping, and it will take years for the bank to fully satisfy U.S. authorities. TD’s large U.S. footprint has been strapped with a cap on its assets, significantly restricting its growth in its top growth market.
A breakdown of the big Canadian banks’ fourth-quarter earnings
TD said Thursday that it has launched a strategic review to reassess opportunities to grow by investing in its own businesses, boosting productivity and efficiency, and reallocating capital to bolster value for shareholders.
The lender plans to update its medium-term targets in the second half of 2025, which Scotiabank analyst Meny Grauman said is disappointing.
“We know that there are many moving parts here, but the features of the bank’s settlement have been known for some time by the market and likely even longer internally, and we would have hoped that TD would have been able to provide a little more concrete guidance to investors here right now,” Mr. Grauman said in a note to clients.
“Waiting another half a year or more for management to tell us what the longer-run implications of its U.S. consent order are leaves the stock without a proper anchor.”
Among its biggest challenges, TD is faced with trying to maintain its substantial footing in the competitive U.S. banking market while maintaining an indefinite cap on the assets it is allowed to have in its U.S. retail banking business, limiting it to the level it had as of Sept. 30, or US$434-billion.
To ensure that it can adapt to customer financial demands without exceeding the cap, TD plans to reduce its U.S. assets by 10 per cent. At the end of the fourth quarter, the bank had reduced its U.S. assets to US$431-billion by paying off some of the money it borrowed short term – a tool that banks use to meet sudden financial obligations.
In response to an analyst question on whether TD would consider divesting part of its business in the U.S., Mr. Chun said that “everything is on the table” and that the review will be comprehensive.
In its earnings results, the bank added that a TD entity has been disqualified from acting as an investment adviser or underwriter for investment companies in the U.S.
As part of U.S. regulatory remediation requirements, the Federal Reserve Board required TD to conduct an independent review of the bank’s board of directors and management.
Critics have called on TD to reassess the makeup of its board of directors, citing a lack of financial crime and compliance expertise among its directors. In a proposal last month, two shareholder advocacy groups cautioned that the governance issues that contributed to the compliance failures are systemic and could allow for other gaps.
TD board chair Alan MacGibbon said that the board is actively recruiting new directors to strengthen its oversight. In the past three fiscal years, the board has appointed six independent directors with experience in legal, financial, banking and capital markets, technology and data.
“We have also established dedicated committees for regulatory remediation oversight and benchmarked our corporate governance program,” Mr. MacGibbon said in TD’s annual report, released Thursday. “In addition, we are reviewing our board committees and anticipate changes in chairs and composition in the new year.”
The bank posted higher fourth-quarter profit, but missed analysts’ estimates as the lender set aside higher-than-expected reserves for loans that could default, and weaker results in its U.S. business.
Jefferies analyst John Aiken said TD is “throwing in the towel for 2025.”
“What is important for TD is the expectations for 2025 and beyond,” Mr. Aiken said in a note to clients. Given the compromised financial targets, “we do not believe that the fourth quarter will provide any valuation relief and investors will need to be patient for a catalyst to release the pent-up value in TD.”
TD is the final major bank to report earnings for the fiscal fourth quarter. Royal Bank of Canada, Canadian Imperial Bank of Commerce and National Bank of Canada beat analyst estimates, while Bank of Montreal and Bank of Nova Scotia missed expectations.