Key Points
Toronto-Dominion Bank came under scrutiny from U.S. regulators for weak internal controls related to money laundering.
The Canadian bank is still under an asset cap in the U.S. market.
Toronto-Dominion Bank's (NYSE: TD) shares have risen more than 60% during the past year. Given that, you might assume that the Canadian banking giant is hitting on all cylinders today. However, that's just not the case. And these three things could put its business into a higher gear if they go right.
1. TD Bank needs to fix its U.S. business
The big problem for TD Bank, as this financial giant is commonly known, is its U.S. division. This business segment was expected to be the company's growth driver, given that its Canadian operations are largely mature. Only the company ran afoul of U.S. regulations around money laundering controls, leading to the U.S. division being placed under an asset cap by U.S. regulators in late 2024.
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The effective impact is that TD Bank's U.S. business can't grow until regulators are comfortable that the internal control issues have been resolved. TD Bank has been spending on technology and personnel to prove that the money laundering issue is behind it. Getting that work done is the big key.
2. TD Bank needs to get regulators to back off
Only after TD Bank is comfortable that it has resolved the internal control issue will it likely ask for regulators to reconsider the asset cap. It would be far worse to ask and have the regulators decide that there are still deficiencies.
Still, the second big step is to have the asset cap removed. That alone will likely lead to increased investor enthusiasm for the stock, since it opens up a vital growth engine TD Bank can't currently use.
3. TD Bank needs to find an acquisition
After TD Bank improves its controls enough to remove the asset cap, it still has to find another U.S. bank to buy to fulfill its ambitions of expanding in the U.S.. The internal control issue actually forced the company to cancel an acquisition.
Finding a new deal probably won't happen overnight, given the complexity of financial companies and the importance of finding a bank that fits with TD Bank's conservative business culture. However, when a merger is finally announced, it will signal that TD Bank is back in the growth game.
Nothing is going to happen quickly
The unfortunate part of all of this is that TD Bank's story isn't going to change overnight. It takes time to improve internal controls and for regulators to assess those controls. And it takes time to find appropriate acquisition candidates. Still, if you are watching TD Bank, these three things need to go right before it can truly hit on all cylinders again.
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Reuben Gregg Brewer has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
