TD sets aside $2.6B for money laundering fines, sells Schwab shares

Toronto-Dominion Bank is setting aside $2.6 billion to cover fines it expects to pay for failures in its money-laundering controls, and the company sold part of its stake in Charles Schwab Corp. to fund it. 

Including a $450 million provision announced in April, the lender now estimates it will pay $3 billion related to its US compliance lapses. 

“The bank expects that a global resolution will be finalized by calendar year-end,” Toronto-Dominion said in a statement after markets closed Wednesday. 

Canada’s second-biggest bank said its ownership interest in Schwab will fall to 10.1% from 12.3% after selling 40.5 million shares of the discount broker. Toronto-Dominion acquired that stake in 2020 as part of a transaction to sell its interest in online brokerage TD Ameritrade Holding Corp. to Schwab. 

The shares were being marketed at $61.35 to $62.65 each, according to terms of the deal seen by Bloomberg News. The range represents a potential discount of as much as 5% to Wednesday’s closing price of $64.57 apiece, Bloomberg calculations show.

Analysts and investors had speculated that Toronto-Dominion could sell some or all of its interest in Schwab to help cover the financial penalties it’s facing in the criminal and regulatory money-laundering matters.    

“We recognize the seriousness of our US AML program deficiencies,” Chief Executive Officer Bharat Masrani said in the statement, adding, “The work required to meet our obligations and responsibilities is of paramount importance to me, our senior leaders, and our boards.”

BRIBE ALLEGATIONS

Last year, Toronto-Dominion’s landmark $13.4 billion deal to acquire First Horizon Corp. collapsed, with the Canadian lender saying it was unclear regulators would ever approve the deal. Soon after, TD acknowledged that it was receiving inquiries from the US Department of Justice, in addition to financial regulators and the Treasury Department. 

The core allegations are that it failed to catch money laundering and other financial crimes at several US branches where customer-facing employees took bribes to help move money. So far, federal prosecutors in New Jersey have filed at least four cases alleging serious misconduct by branch employees in New York, New Jersey and Florida. The bank has said it fired about a dozen front-line workers for code-of-conduct breaches. 

TD also replaced about 10 senior leaders in compliance and legal roles in the wake of the money-laundering allegations. But Masrani, who has been CEO for almost a decade, remains in his post despite swirling speculation that the board could look to replace him. 

On top of fines, analysts have suggested the bank could also face years of restrictions on either organic growth or acquisitions in the US, where it has built a significant retail business. It has more than 10 million clients in the country and a network of almost 1,200 branches along the US east coast.  

“While the market now has certainty surrounding the amount of the charge, this is offset by the fact that it is larger than expectations and the impact this has on capital,” Jefferies Financial Group Inc. analyst John Aiken said in a note to clients. “The valuation impact will hinge on tomorrow’s earnings, but it is already behind the eight-ball.”

Toronto-Dominion said the provision, which will be reflected in its fiscal third-quarter report on Thursday, will reduce its common equity tier 1 ratio to 12.%. That’s still above the 11% minimum ratio of capital to risk-weighted assets required by Canada’s bank regulator. 

TD said the provision will further dent its CET1 ratio by 35 basis points in the fiscal fourth quarter, but that the Schwab sale will increase the ratio by 54 basis points in the period.

“The big question remains: What could the non-monetary penalties be? Hard to tell at this point in time,” Desjardins Capital Markets analyst Doug Young said in a report. “And we highly doubt that management will comment on this right now.”