Canada’s TD Bank has recently encountered a significant setback in the U.S. after agreeing to pay $3.09 billion in fines for failing to prevent money laundering. This penalty, the largest ever under the U.S. Bank Secrecy Act, represents about a third of the bank's net income from the previous year. Additionally, regulators have imposed a cap on TD’s ability to take on new U.S. deposits, further complicating its operations in the region.
Key Takeaways
TD Bank has agreed to a $3.09 billion fine for money laundering violations.
The fine is the largest ever under the U.S. Bank Secrecy Act.
Regulators have imposed a cap on new U.S. deposits for TD Bank.
The bank failed to monitor over 90% of transactions on its network.
The asset cap could significantly impact TD’s earnings and growth in the U.S.
Background of the Incident
TD Bank, Canada’s second-largest bank, has long relied on its U.S. retail banking operations as a stable source of revenue. However, recent events have turned this once-prized asset into a liability. Prosecutors revealed that TD Bank failed to monitor a staggering 90% of transactions, leading to serious lapses in compliance.
Employees reportedly joked about the bank’s motto, “America’s Most Convenient Bank,” suggesting it was appealing to criminals. One notable case involved a customer who laundered over $470 million in drug proceeds, bribing bank employees with more than $57,000 in gift cards.
Implications of the Fine
The $3.09 billion fine is not just a financial blow; it also comes with severe operational restrictions. The imposition of an asset cap on TD’s two U.S. retail banking subsidiaries means that the bank will be unable to expand its deposit base in the U.S. This restriction mirrors the situation faced by Wells Fargo, which has been under a similar asset cap since 2018.
Comparison with Wells Fargo:Wells Fargo’s assets capped at $1.95 trillion since February 2018.The bank has seen a 10% decline in revenue compared to 2017 due to this restriction.
Financial Impact on TD Bank
The asset cap will have immediate repercussions for TD Bank’s earnings. The U.S. retail banking operations account for over 20% of the bank’s overall balance sheet and generate approximately 30% of its total earnings. While the cap does not affect TD’s U.S. capital markets or Canadian operations, it will necessitate ongoing investments to improve compliance and restructure its balance sheet.
Projected Actions:TD plans to reduce U.S. assets by about 10%.The bank aims to sell up to $50 billion in lower-yielding investment securities to reinvest the proceeds.
Market Reaction
The market has reacted negatively to the news, with TD Bank’s share price trailing behind its peers over the past year. Historically, TD has traded at a premium to its Canadian rivals, but the current price-to-forward-earnings ratio of 10.2 times places it at the bottom of the pack. Analysts expect this gap to persist as the bank navigates the fallout from this scandal.
In summary, TD Bank’s recent troubles in the U.S. highlight the challenges of maintaining compliance in a complex regulatory environment. The hefty fines and operational restrictions will likely have lasting effects on the bank’s growth and profitability in the region.
Sources
For Canada’s TD Bank, the US has become more rags than riches, Financial Times.