TD bank execs face questions over AML fines and earnings miss

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Toronto-Dominion Bank executives faced tough questions from analysts Thursday morning after an earnings miss and disclosure that Canada’s second-largest bank has set aside US$2.6 billion to resolve a series of investigations into the failures of its anti-money-laundering (AML) controls in the United States.

Among the answers being sought is whether penalties — monetary or otherwise — from the four regulatory probes and a Department of Justice investigation will crimp the bank’s growth in the important U.S. market.

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TD chief executive Bharat Masrani said the bank is in ongoing negotiations with authorities, so he could not add details about the expected penalties, including whether an asset cap will be imposed on U.S. operations, which analysts said would crimp TD’s earnings growth relative to its peers over the next several years and impact the bank’s valuation multiple.

Masrani said that reaching a global settlement with authorities by year-end and addressing the shortcomings through a massive remediation program are front and centre.

“This is a priority. The U.S. business is an important part of the bank and our future,” he said on a conference call to discuss the bank’s third-quarter earnings before Wednesday evening’s disclosure of the new provisions, which come on top of US$450 million set aside in April.

“We must focus on the work required to meet our obligations and responsibilities and build the future on stronger foundations. As I’ve said before, the failures were serious. We own it. We know what the issues are, and we are fixing them.”

TD posted a rare loss of $181 million (14 cents a share) in the third quarter, including one-time items related to the money-laundering probes. Adjusted diluted earnings per share were $2.05 compared with $1.95 in the corresponding period a year earlier. Analysts’ average estimate for the quarter was $2.07 a share.

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The Canadian banking division posted a 13 per cent increase in net income in the quarter, but the lender’s insurance division was hit with higher claims in the quarter as a result of wildfires and weather-related damage, which hurt its wealth-management results.

Meanwhile, adjusted earnings in the U.S., excluding the AML provisions, rose modestly, but capital market earnings were down as revenues eased and provisions increased.

“Even outside the AML provisions, TD came in modestly below expectations as capital markets and the contribution from insurance disappointed,” John Aiken, an analyst at Jefferies Financial Group Inc., said in a note to clients. “The provisions took their toll on TD’s capital, which sits below 13 per cent at the end of the quarter.”

TD on Wednesday also said it would sell down its interest in Charles Schwab Corp. to 10.1 per cent from 12.3 per cent to shore up its capital. Some analysts questioned whether that was necessary since the bank’s closely watched common equity tier 1 (CET1) regulatory capital ratio remains at 12.8 per cent.

“It’s not clear to me why you needed to sell down your Schwab stake to shore up capital,” Meny Grauman, an analyst at Bank of Nova Scotia, said on the call. “It seems like there’s something else going on here in terms of considerations.”

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Masrani said accounting rules regarding the amount set aside to cover expected fines from the money-laundering probes are very clear and added that economic conditions contributed to the desire to bring the bank’s CET1 ratio back up to around 13 per cent.

“We think it’s prudent to have capital. There’s still a lot of volatility and, you know, economic conditions are not as predictable as one would like. So, this is just to be prudent,” he said. “Given TD’s history and the way we manage capital … we’re comfortable with how we got to where we did.”

The expectation that US$3 billion in fines will put the money-laundering probes in at least three states — New York, New Jersey and Florida — behind TD has revived talk on Bay Street about CEO succession.

Masrani, 67, has been at the helm for around 10 years, and the speculation is that he has stuck around to help steer the bank out of the current crisis, which came to light more than a year ago. In the meantime, potential successors have left the bank.

“We continue to actively pursue a resolution of our AML matters (and) discussions have been productive,” he said. “Though we are not through the tunnel yet, we can see the light at the end of this journey.”

• Email: bshecter@postmedia.com

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