In the wake of its settlement with U.S. regulators and law enforcement over its failed anti–money laundering (AML) controls, troubled Toronto-Dominion Bank is being downgraded by S&P Global Ratings.
The rating agency said it lowered its long-term issuer credit rating on TD Bank to ‘A+’ from ‘AA-,’ its short-term issuer credit rating on the bank to ‘A-1’ from ‘A-1+,’ and its ratings on various subsidiaries following settlements with U.S. authorities for failings in its AML controls — resolutions that included a US$3.1-billion fine along with growth caps on certain U.S. businesses.
“Although the fine imposed by the U.S. regulators is manageable, totalling about 39% of 2023 net income, the findings regarding TD’s U.S. management hamper our view of its conservative risk management and effective corporate governance, and, in turn, compromise the bank’s creditworthiness,” S&P said in a report outlining the downgrade.
“In our view, management failed to live up to standards expected of one of the world’s highest-rated banks,” S&P said. “The bank has taken several steps to address the deficiencies identified at its U.S. subsidiary banks, but we think it will take time to improve the risk management culture across the group, overhaul its practices, strengthen the organizational structure, and demonstrate the effectiveness of these measures.”
Additionally, the rating agency noted that the cap on growth imposed by the U.S. Office of the Comptroller of the Currency (OCC) highlights the severity of the deficiencies in TD’s AML controls specifically, and its operational risk management overall.
“[W]e believe the OCC’s unprecedented action to impose an asset cap will complicate TD’s U.S. strategic aspirations,” it said. “The U.S. is a competitive market, and has heretofore been a key contributor to the group’s revenue and profits.”
“We believe successful remediation may be protracted and expensive, so bank management will need to carefully manage potential profitability challenges for the duration of the asset cap,” it said.
Despite the downgrade, S&P said it has a positive view of the bank’s large, diverse franchise and its capital, funding and liquidity ratios.
Additionally, S&P said the bank “has various levers to create balance-sheet flexibility in the U.S. under the asset cap.”
It also noted that the asset cap imposed in the OCC settlement doesn’t apply to TD Securities or any of the bank’s Canadian or global businesses — and the bank had already provisioned for the fine, it said.
S&P maintained a stable outlook on the bank’s credit ratings, based on expectations that “over the next two years, TD Bank will strengthen its AML operational risk management processes and controls as it works to meet the requirements imposed by U.S. regulators in a timely manner, that no further sizable fines or regulatory matters will emerge, and that the company’s strategies to mitigate the asset cap won’t meaningfully impair the profitability and customer flows associated with its long-standing U.S. franchise.”
“We also expect TD to maintain its commitment to the U.S. while taking steps to mitigate the impact the asset cap may have on the strength of its franchise,” it said. “At the same time, we forecast the company will maintain overall good profitability, asset quality and capital.”