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The newly crowned NBA champion Boston Celtics play their home basketball games in an arena known as the TD Garden. That might be the only thing going well in America for Canada’s TD Bank. On Wednesday, the former Toronto-Dominion Bank announced it would set aside a staggering $2.6bn — in addition to a previous $450mn provision — to soon settle claims from US regulators over lax money laundering controls. Allegations about Chinese drug traffickers using the bank to wash fentanyl transactions have swirled for some time.
TD Bank currently has nearly C$2tn ($1.5tn) of assets, with the US retail bank generating about a quarter of its Canadian counterpart. TD’s share price hit an all-time high in February 2022. At that time it announced its landmark American deal, an acquisition of Tennessee-based First Horizon for $3bn. But the tie-up, which would have taken TD into the American banking top-tier, never closed because of the ongoing regulatory concerns.
TD — whose market capitalisation is C$142bn — had been playing offence for years. But it is now on the defensive after its sloppiness has caught up with it.
In conjunction with the $2.6bn set aside, TD said it would sell a chunk of its stake in Charles Schwab worth about that amount. These are shares in the brokerage that it received when TD divested to Schwab its brokerage TD Ameritrade.
Analysts did not get much clarity from TD management on Thursday’s earnings call when they asked why the bank recently bought back C$1bn of shares. That capital could have been allocated to keeping more of the Schwab stake and the meaningful earnings power that came from it.
Management was generally cagey about just what a final resolution with US authorities could resemble. However, the costs related to beefed-up monitoring and compliance was noticeable. So was the CET ratio that had now drifted to below a loose 13 per cent target.
The worry for investors is that TD is the new Wells Fargo — whose compliance failures once led the Federal Reserve to cap its asset total, a restraint on growth and, essentially, profits.
Banking is very much a scale game where thin margins can be enhanced through acquisitions. The US population is eight times that of Canada and its fast-growing regions in the south and west are eyed by lenders wanting to participate in that prosperity.
But the tedious mechanics of managing financial institutions is easy to flub in favour of focusing on grand strategy. Maybe paying attention to the Celtics could provide some insights to TD management.