TD at Risk: New U.S. anti-money-laundering allegations could lead to a higher fine for Toronto-Dominion Bank and a significant impact on its long-term financial performance, according to National Bank of Canada analysts.
U.S. Department of Justice Investigates Canadian Bank’s Role in Drug-Money Laundering Case
- Canadian bank ties to US$653 million drug-money-laundering case in New York and New Jersey.
- One New Jersey branch employee charged with accepting bribes for drug money laundering.
- National Bank analysts assess more severe scenarios after Wall Street Journal reported Toronto-Dominion’s connection.
National Bank Analysis of Toronto-Dominion’s Financial Performance
- Potential larger fine of US$2 billion compared to initial expectations of US$500 million to US$1 billion.
- Long-term implications for TD’s financial performance.
- Worst-case scenario: future earnings potential slashed by over $1 billion.
- Includes higher compliance costs, earnings growth limits, and five years in the “penalty box” with U.S. authorities.
- Bank’s Stock Slump 6.8% on Friday.
- Closed down 5.9%, biggest one-day decline since pandemic’s inception in March 2020.
Toronto-Dominion’s Market Capitalization Drops
- Toronto-Dominion’s market capitalization dropped by $8.2 billion on Friday, following a $2.4 billion drop on Thursday due to the Journal’s anti-money-laundering report.
- Shopify Inc. briefly surpassed it as the second-largest company by market capitalization on the Toronto Stock Exchange.
- The bank plans additional monetary penalties and is facing three separate regulatory probes.
- The initial provision of US$450 million has been set aside for one of these probes.
U.S. Consent Orders Concerning Toronto-Dominion
- Potential consent orders from U.S. agencies could include penalties like asset cap on growth or merger restrictions.
- Precedents include U.S. consent orders against HSBC Holdings Plc and Wells Fargo & Co. for cartel-related laundering and false-account activity.
- Direct financial penalties against each institution were large, with long-term implications negatively impacting future performance.
Toronto-Dominion’s Anti-Money-Laundering Investigation
- Toronto-Dominion disclosed its investigation by the Department of Justice last year.
- The company has stated it cannot estimate the final size of fines or penalties related to anti-money-laundering investigations.
- Portfolio manager Dan Rohinton, from iA Global Asset Management, emphasized the importance of this issue for the U.S., where drug-overdose deaths are around 100,000 per year.
- Investors are awaiting clarity on the size of penalties and the scale of ongoing investments to correct potential compliance failures.
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