UPDATE: This article adds historical context for the possible penalties, an analyst's comments and previous concerns about the stagnation of TD's U.S. business.
TD Bank Group expects regulatory fines for its U.S. anti-money-laundering failures could total $3 billion as
The Toronto-based company said Wednesday that it has taken an additional $2.6 billion provision for potential penalties from U.S. regulators, on top of $450 million it had set aside earlier this year.
TD said it expects a "global resolution" of investigations by the U.S. Department of Justice and the Treasury Department's Financial Crimes Enforcement Network to be finalized by the end of 2024.
The Canadian bank, which is scheduled to report its third-quarter earnings on Thursday morning, also said it sold 40.5 million shares in Charles Schwab that it owned, which will cushion its capital from the effect of the provision.
TD's risk management capabilities have been under scrutiny for more than a year, following the demise of its planned acquisition of First Horizon and its subsequent disclosure of a Justice Department probe.
Bharat Masrani, TD president and CEO, said in a statement Wednesday that the bank is working "constructively" with U.S. regulators and law enforcement, and "looks forward to bringing additional clarity to our shareholders, clients and other stakeholders."
"We recognize the seriousness of our U.S. AML program deficiencies and the work required to meet our obligations and responsibilities is of paramount importance to me, our senior leaders, and our Boards," Masrani said.
The bank said earlier this year it knew what went wrong with its AML processes, but it has been short on details about both the failures and its interactions with regulatory agencies. TD has reported spending more than $500 million on efforts to enhance its systems.
Masrani said Wednesday that the bank's remediation program is well underway and that TD has added new talent, invested in data and technology, training and process design.
Earlier this summer,
If the penalties do total about $3 billion, they would be some of the largest laid against a bank in U.S. history. TD said Tuesday that it expects both monetary and nonmonetary consequences from regulators.
In 2011, HSBC was fined $1.9 billion by U.S. regulators for AML violations, also in relation to drug cartel money. The bank's growth was hampered for nearly a decade by a consent order as well.
John Aiken, an analyst at Jefferies, wrote in a note following TD's announcement that the $3 billion provision is higher than analysts had expected but below a critical level of $4 billion that he had assessed previously.
"While the market now has certainty surrounding the amount of the charge, this is offset by the fact that it is larger than expectations and the impact this has on capital," Aiken said. "The valuation impact will hinge on tomorrow's earnings, but it is already behind the eight ball."
Shutting the door on the investigation by year-end will be a positive, but there's still uncertainty in what other regulatory restrictions TD could face going forward, he said.
On TD's second-quarter earnings call in May, Bank of America analyst Ebrahim Poonawala pointed to concerns of a "stagnation of the U.S. franchise." Leo Salom, who heads TD's U.S. operations, said at the time that the company was "deliberately pacing" its expansion of branches, which it calls stores.
"I'm not making the claim that we cannot grow the stores," Salom said in May. "But I also want to be very clear that we are in the midst of discussion with regulators, and I don't want to prejudice any of those conversations at this point."
