CRIMINAL CAPITALI$M PAYES
TD tops estimates on trading amid money-laundering overhaul
, Bloomberg News
TORONTO-DOMINION BANK (TD:CT)
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Toronto-Dominion Bank beat analysts’ estimates on strong performance in its capital-markets division and the company said that a “comprehensive overhaul” of its U.S. anti-money-laundering program is “well underway.”
Canada’s second-largest lender earned $2.04 a share on an adjusted basis in the fiscal second quarter, it said in a statement Thursday, topping the $1.85 average estimate of analysts in a Bloomberg survey. Toronto-Dominion closed its acquisition of U.S. investment bank Cowen Inc. in last year’s second quarter, and the combined capital-markets unit reported that net income more than doubled to $441 million on an adjusted basis.
“We had strong contributions from trading, investment banking — and that would include advisory underwriting as well — and then lending revenues too,” Chief Financial Officer Kelvin Tran said in an interview. “So, fairly broad-based. We’re very pleased with that.”
While the bank’s overall revenue grew from a year earlier, its provisions for credit losses totaled $1.07 billion in the three months through April, more than the roughly $1 billion analysts had forecast.
North American consumers are increasingly struggling to make credit-card payments, and the bank’s Canadian homeowners are struggling with rising mortgage costs as interest rates remain elevated. Business bankruptcies are also increasing in Toronto-Dominion’s home market.
Overshadowing its financial results, Toronto-Dominion faces multiple U.S. law enforcement and regulatory investigations into laundering of funds tied to illegal drug sales. The bank said last month it has set aside US$450 million in relation to one of three regulatory probes on the issue, and it’s been investing heavily to improve its internal controls, driving up expenses.
On a conference call with analysts Thursday, Chief Executive Officer Bharat Masrani called the issue “unacceptable” and said he hoped the bank would reach a resolution of the probes “as soon as possible,” but otherwise offered little new commentary.
The money-laundering failures weren’t a problem at the “enterprise level,” said Ajai Bambawale, the bank’s chief risk officer.
“If I go right to the root cause of what happened, there were some procedural weaknesses in the U.S. that caused bad actors to exploit us,” he said. “And we were also disappointed that some of our colleagues didn’t follow our code of ethics.”
Analysts questioned Toronto-Dominion executives on whether the bank is constrained in expanding its retail footprint in the U.S., where it has about 1,200 branches, primarily on the East Coast. Leo Salom, who leads the American division, said that while the lender is making big investments to improve its money-laundering controls, it’s “deliberately pacing” a previously planned addition of locations.
Numerous questions
“I’m not making the claim that we cannot grow stores, but I also want to be clear that we are in the midst of discussion with regulators and I don’t want to prejudice any of those conversations at this point,” Salom said. “I know that there’s lots of questions about what we can and cannot do.”
The lender’s net income totaled $2.56 billion, slightly less than the average estimate of $2.58 billion, as a result of loan-loss provisions and higher expenses, including costs tied to the anti-money-laundering probes.
It also said it incurred a charge of $103 million for a special assessment by the U.S. Federal Deposit Insurance Corp. related to bank failures plus $165 million for severance payments and other ongoing cost-cutting. The bank said it will wrap up its restructuring program — which it said will lead to annual savings of $725 million on a pretax basis — after spending a final $50 million in the third quarter.
The bank scrapped its proposed US$13.4 billion acquisition of Memphis-based First Horizon Corp. a year ago after it became clear that the companies could not win timely regulatory approval of the deal owing to the inquiries into Toronto-Dominion’s anti-money-laundering controls.
That left the Canadian bank with a surplus of capital and it has been regularly buying back shares in recent quarters. Its ratio of Common Equity Tier 1 capital to risk-weighted assets declined to 13.4 per cent at the end of April, in part owing to the regulatory provision booked in the quarter.
The bank’s results reflect broad-based strength across all of its operating segments, several analysts said Thursday. But the focus will remain on U.S. anti-money-laundering issues, which is “the elephant in the room,” Bank of Nova Scotia analyst Meny Grauman said in a note to clients.
“We continue to view TD’s U.S. anti-money-laundering investigations as the biggest event impacting the company and consider this well-priced into its stock,” Royal Bank of Canada analyst Darko Mihelic said in his own note.
The bank’s shares have slumped almost 11 per cent since the start of the year. They were little changed at $76.52 at 10:26 a.m. in Toronto.
Professor says TD's board should discuss 'tenure of the CEO' amid regulatory probes
, BNN Bloomberg
A professor says Toronto-Dominion Bank’s board of directors should consider succession plans for the lender’s chief executive officer as its U.S. money laundering woes are a top concern ahead of its earnings release Thursday.
Richard Leblanc, a professor of governance, law and ethics at York University, said in an interview with BNN Bloomberg Wednesday that the U.S. Department of Justice's investigation has cast a “shadow” on TD Bank. Earlier this month, Jefferies Analyst John Aiken said that TD potentially faces a “lost decade” due to its role in an alleged money laundering scheme.
Leblanc said that given the situation, TD Bank’s board should have a conversation on the “tenure of the CEO.”
“So Succession planning should be on the TD board's radar screen and in particular, ‘should we go outside (the organization)?’ (or) ‘Do we have internal talent that is CEO-ready?’” Leblanc said.
He noted that Bharat Masrani, TD Bank’s CEO, is 67 years old and has been in his current role for 10 years.
“The argument for waiting it out is that you've got a seasoned CEO at the helm and they understand what has occurred. They're able to make it right,” Leblanc said.
“The counterpoint to that is, it's a time for change and the board sets the tone from the top. The argument also is that the people that got you into the mess are not the people to fix the mess, hypothetically speaking.”
On Thursday TD Bank reported its second-quarter earnings beating estimates with strength in its capital markets division. The company also said its U.S. anti-money-laundering program is undergoing a “comprehensive overhaul.”
TD Bank reported it earned $2.04 a share on an adjusted basis, higher than the $1.85 average estimate among analysts in a Bloomberg survey.
Net income during the quarter was slightly below expectations due to loan-loss provisions and higher costs, some of which were related to its anti-money laundering situation. Second quarter net income reached $2.56 billion compared to an average estimate of $2.58 billion.
According to Leblanc, TD is alleged to have laundered hundreds of millions of dollars at U.S. locations through employees accepting gift cards. He also highlighted that the Office of the Superintendent of Financial Institutions (OSFI) regulates anti-money laundering and internal controls and the the system should have worked.
“However, when you get large very quickly and you acquire and have a foray into the U.S., those are risks that any good board of directors would be asking the CEO about,” Leblanc said.
In an interview with BNN Bloomberg Wednesday, Peter Routledge, superintendent of financial institutions at OSFI, said he would not discuss the TD case directly but spoke broadly about the regulator's role when anti-money laundering issues occur.
“When an AML (anti-money laundering) problem arises, whether it's here in Canada, we consider it a threat to an institution's integrity and security. And we would expect a board of directors to address that threat promptly and seriously, he said.
“When we have situations where that doesn't come to pass, we follow our regulatory discipline and our supervisory discipline and engage privately but very seriously.”
Routledge said integrity and security risks are rising due to geopolitical tensions and emerging technologies.
He added that the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) handles anti-laundering policies and procedures and gathers necessary information.
“Our job is to understand what FINTRAC finds or what a foreign regulator finds and engage with boards of directors, so they're putting in place enhanced protections for their institutions’ integrity and security in the face of intensifying money-laundering risk,” Routledge said.
Since the allegations, TD said it has already invested over $500 million to enhance its anti-money laundering controls and hopes to come to a global resolution.
Earlier this month, Bloomberg News reported that TD Bank is facing probes from three regulatory bodies as well as the U.S. Department of Justice, which is investigating the Toronto-based lender over ties to a US$653 million drug laundering case in New York, New Jersey and Pennsylvania.
Analysts at National Bank estimated the fines related to the alleged activity could be around US$2 billion. The analysts also noted that in a worst-case scenario, the lender's future earnings potential could be reduced by over $1 billion.
With files from Bloomberg News.
