Toronto-Dominion Bank: Firm May Face Billions in Anti-Money-Laundering Fines and Other Restrictions
The Wall Street Journal reported that wide-moat-rated Toronto-Dominion Bank will face around USD 3 billion, or about CAD 4.15 billion, in penalties for its failure to have proper anti-money-laundering practices in place in its US operations. As part of the settlement, regulators are also expected to place an asset cap on the firm’s US business. Despite the size of such a settlement, we do not expect to materially alter our CAD 88/USD 64 fair value estimate for Toronto-Dominion as the amount of the fine roughly matches what was already included in our projections. That said, we still see the shares as roughly fairly valued, despite the market’s negative response to the Oct. 10 news.
An anti-money-laundering fine has been expected for some time, and while the size was unknown, there was plenty of warning that the scale was going to be significant. In its third-quarter results, the bank set aside an additional CAD 3.36 billion for potential penalties. This was on top of the CAD 615 million it set aside initially. Our own modeling included slightly larger losses of CAD 4.2 billion, which is in line with what was reported Oct. 10. Additionally, with the bank already selling a portion of its position in Schwab to cover the cost of the fine, such a penalty will not leave meaningful pressure on the firm’s balance sheet.
An asset cap would have a longer-lasting effect, but the bank’s US operations were already facing some growth headwinds as credit deteriorates and its US deposits shrink, falling 4.8% year over year in the last quarter. The bank’s Canadian personal and commercial banking generates substantially better returns then its US business, with a segment-adjusted return on equity of 34.1% versus 11.3% for US, limiting the effective impact of a cap on the firm’s overall results.
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