With new claims coming out about U.S. investigations into money laundering, Toronto-Dominion Bankcould end up with a bigger fine than expected and it could hurt its financial performance in the long term, say analysts at National Bank of Canada.
The U.S. Department of Justice is looking into the Canadian bank's connection to a US$653 million drug-money-laundering case in New York and New Jersey, according to someone familiar with the situation. This is in addition to another case where a New Jersey branch employee was charged with taking bribes to help with money laundering.
National Bank analysts, led by Gabriel Dechaine, said that the claims against TD make them think about more serious ‘worst-case’ possibilities and they think the fine could be as high as $2 billion, instead of the earlier estimate of $500 million to $1 billion. They said it could also have long-term effects on TD’s financial performance.
In National Bank’s analysis, the worst-case scenario in the report suggests that Toronto-Dominion’s future earnings potential could be reduced by more than CAD$1 billion ($730 million), including higher ongoing compliance costs, limits on earnings growth, and five years of being restricted by U.S. authorities.
The bank’s shares dropped 4.7 per cent at 12:10 p.m. in Toronto, after falling 1.7 per cent on Thursday following the Journal's anti-money-laundering report.
“TD is a strong institution with the capital, liquidity, and capacity to fund the critical effort currently underway to strengthen its AML program, invest in the business, and continue to serve its customers and clients with excellence,” said bank spokesperson Lisa Hodgins in an email on Friday. She also mentioned that they expect additional monetary penalties, but they can't estimate the amount at the moment.
Aside from the Department of Justice investigation, the Toronto-based lender is facing three other regulatory probes, and it has already set aside $450 million for just one of those.
The National Bank analysts said that they expect a total penalty of $2 billion is possible. They also mentioned that it's not just about fines, there are other financial considerations as well.
The main concern is the possibility of a consent order from one or more U.S. agencies, which could include penalties like a limit on growth or restrictions on mergers and acquisitions for a period of time.
U.S. orders in the 2010s and this decade against HSBC Holdings Plc and Wells Fargo & Co. are relevant precedents, though they are “worst-case scenarios.” The analysts assume that the issues involving Toronto-Dominion are less severe.
The financial penalties given to each institution were not only big, but also had long-term negative effects on future performance, according to Dechaine and his colleagues.
Last year, Toronto-Dominion revealed that it was being investigated by the Department of Justice, and has consistently stated that it cannot predict how large the fines or penalties related to the anti-money-laundering investigations might be.
‘Bad look’
Dan Rohinton, a portfolio manager at iA Global Asset Management, explained that they have learned the reason behind the ongoing situation. He pointed out that this is not just a usual internal-control problem, but a critical issue for the U.S., especially considering the high number of drug-overdose deaths each year.
The Wall Street Journal reports that the investigation into TD is connected to money laundering for drugs.
- TD Bank sets aside $450 million in relation to the investigation.
- The CEO of TD Bank experiences a reduction in pay due to the U.S. money-laundering investigation.
- Rohinton mentioned that investors are still waiting for clear information, particularly about the size of the penalties and the extent of ongoing investments that Toronto-Dominion is expected to make to address any potential compliance issues.
He expressed that the current situation reflects poorly on the company, and it is perceived as more negative compared to when it was known that TD was under investigation by multiple agencies.
Bloomberg.com
