Money laundering penalties levied against Toronto-Dominion Bank this week by U.S. regulators could be a drag on the bank's stock price long-term, analysts warn.
On Thursday, TD agreed to pay fines totalling about US$3.09 billion after pleading guilty to multiple charges related to failings in the bank's anti-money laundering program.
The bank is now the largest in U.S. history to plead guilty to Bank Secrecy Act program failures and the first to admit to conspiracy to commit money laundering, according to U.S. Attorney General Merrick Garland, who made the comments in a Thursday afternoon press conference.
TD's share price tumbled more than five per cent Thursday after news of the penalties broke, and was down an additional more than four per cent as of midday trading Friday to hover around $78.39 on the Toronto Stock Exchange.
In addition to the financial penalties, U.S. regulators also imposed non-monetary sanctions in the form of an asset cap that puts limits on TD's ability to grow south of the border.
National Bank of Canada analyst Gabriel Dechaine said in a research note Friday that the term "non-monetary" is misleading since an imposed cap on assets of TD鈥檚 main U.S. subsidiaries could have significant financial implications for the company.
He pointed out TD's personal and commercial banking operations in the U.S. have accounted for 30 per cent of TD's total earnings over the past year, and the bank has already said it will reduce its U.S. asset base by around 10 per cent to maintain a buffer with the asset cap. (The asset cap does not apply to TD Securities or any of the bank's Canadian or other global businesses.)
"Non-monetary penalties and restrictions could weigh on the stock long-term," Dechaine wrote.
Investment bank Jefferies warned Friday that heightened expenses and a restructuring of its balance sheet to comply with the regulatory order will further dampen earnings from TD's U.S. retail segment in 2025.
"While the bank may eventually be able to generate peer average growth, we anticipate that it will take several years," a Jefferies research note stated.
Jefferies also suggested that TD will likely become more aggressive in its attempts to win business across its other business lines, in order to make up for its new restrictions in the U.S.
That could in turn lead to a competitive response by other Canadian banks, "which could lead to dampened profitability for the sector over the next couple of years," Jefferies said.
CI小蓝视频 analyst Paul Holden said in a note that the money-laundering settlement and asset cap is "worse" than he had been expecting for TD. CI小蓝视频 reduced its price target for TD stock from $100 to $96 on Thursday.
But Holden said TD is currently trading at a 12 per cent discount to the average of its big bank peers, and said he believes that is "too punitive" given that the U.S. asset cap reduces TD's growth potential, but does not eliminate it.
International credit rating agency Morningstar DBRS issued a note Friday in which it said TD's scale and diverse business model should allow it to shift its growth focus toward Canada and TD Securities, thus mitigating some of the medium- to long-term negative impact of the asset cap on earnings.
Morningstar DBRS said it believes TD will be able to move forward from this episode, but also issued a stern warning about possible repercussions if the bank were to suffer additional impacts to its reputation or earnings power.
"We note that our credit ratings have very little tolerance for any additional or new missteps or failures in remediation, or if overall profitability remains negatively impacted for a prolonged period," the ratings agency said.
TD is the second largest Canadian bank by market capitalization.
It admitted in its plea agreement that it allowed three money laundering networks to transfer more than US$670 million through TD Bank accounts over a six-year period.
This report by The Canadian Press was first published Oct. 11, 2024.
Companies in this story: (TSX:TD)
Amanda Stephenson, The Canadian Press
