Regulatory sanctions in the U.S. against Toronto-Dominion Bank — including curbs on U.S. retail banking — will weigh on earnings in the year ahead, says Morningstar DBRS.
On Thursday, the bank resolved an array of regulatory and legal cases against it in the U.S. to address allegations of failings in its anti–money laundering (AML) controls. The bank accepted sanctions, which included a US$3.09 billion fine, an asset cap imposed by the Office of the Comptroller of the Currency on two of its U.S. units, and a tougher approval process for certain growth efforts.
“Overall, we expect the asset cap, combined with ongoing [AML] remediation efforts, will subdue the bank’s earnings power over the intermediate term,” said DBRS in a new report, which noted that the full remediation of TD’s AML controls will likely take several years.
“To put timing into perspective, it took M&T Bank Corp. four years to exit its AML-related enforcement action, and M&T’s issues were not as severe,” it said.
However, DBRS also suggested that the impact of the sanctions should prove manageable.
“The bank has the flexibility and ability to pivot its growth focus to other business lines to minimize the impact on earnings in the medium to long term, while its ability to maintain strong levels of liquidity and solid capital levels remain supportive of our credit ratings,” it said.
In particular, it suggested TD could mitigate the earnings impact in the medium to long term by focusing on growth in Canada and in its TD Securities Inc. unit, including in the U.S., as TD Securities is not affected by the asset cap on U.S. retail banking.
And the bank is still well-positioned to serve its U.S. customers, DBRS said.
“We estimate that the bank is operating with a roughly US$40 billion to US$50 billion surplus in U.S. assets that can be redeployed to create loan capacity to support existing or new U.S. customer relationships,” it said.
DBRS also said the bank has strong capital and liquidity levels that are well above the regulatory minimums, and provide balance sheet flexibility.
“We consider this to have been a significant corporate governance failure for the bank,” DBRS concluded. “Nevertheless, the global AML resolution should allow TD to move forward, easing the cloud of uncertainty that has been hovering over the bank during a tumultuous period.”