If TD Bank Group has its way, the handcuffs that bank regulators placed on its U.S. retail operations Thursday won't be a major drag on its overall business.
Overhauling its controls to prevent money laundering across its stateside operations will be costly. TD will also be shackled indefinitely by an asset cap that regulators have only ever used on Wells Fargo, which has been bound to stagnant asset growth for nearly seven years.
But TD executives say the Canadian banking giant can tap its unfettered Wall Street operations and businesses north of the border, even as its U.S. retail lines go through what they called "a transition year."
The Toronto-based bank was slapped Thursday with a $3 billion fine and the asset cap, which applies to its U.S. retail operations, as part of settlements with U.S. law enforcement and regulators. TD also pleaded guilty to criminal charges after failing to maintain adequate controls for money laundering.
To stay comfortably below its new $434 billion U.S. asset cap, the bank has hatched a near-term plan to rework its U.S. operations. It's planning to shrink intentionally and to make targeted retreats from certain businesses.
"With the asset cap, we want to be much more deliberate," Leo Salom, CEO of TD's U.S. subsidiary, told analysts on Thursday.
Even so, business decisions will take the backseat to the top priority of overhauling TD's money-laundering protections, Salom emphasized. "Getting this remediation done and getting it done completely and comprehensively is my first priority," he said. "Nothing else matters if we can't do that."
Just like Wells Fargo, TD will have to make some creative and perhaps painful decisions as it looks to stay under its asset cap.
Since keeping its asset size flat doesn't give TD much wiggle room to make more loans to its clients, the bank is engineering a reduction in assets to build some space. It plans to cut its U.S. assets by about 10%, a move that Salom said will "create capacity" to make more loans for clients looking to grow.
It helps that TD's asset cap isn't completely comprehensive — applying only to its two U.S. retail banks, not its powerhouse TD Securities operations or its far larger Canadian businesses.
While the U.S. segment won't grow, the bank's scale gives it an edge, said Carl De Souza, a sector lead for North American financial institutions ratings at Morningstar DBRS.
"What I think the bank has done well is it's taken proactive action in anticipation of this type of thing happening," De Souza said. "That gives them levers and flexibility to pull going forward to minimize the impact."
TD is stepping back from financing auto dealers' operations and other businesses its executives described as more "non-scalable and niche." It's also selling some of its "jumbo" residential mortgages, which are larger than the loans Fannie Mae and Freddie Mac will buy. And it will look to exit its correspondent mortgage business, which it had picked up through an acquisition years ago.
"That obviously should give us the capacity to continue to try to deepen relationships with our core retail and commercial banking clients," Salom said.
The retreat from certain businesses, even if the returns in those areas are relatively low, will weigh on TD's earnings since it will have fewer loans to collect interest on. TD executives estimated the hit to the company's net interest income in 2025 as $200 million to $225 million.
TD will pair the business line exits with a restructuring of its bond portfolio — essentially getting rid of some $50 billion of securities that pay relatively low interest. TD will replace those securities, which it had bought when interest rates were low, with similar ones that pay significantly more now that rates have gone up.
The trade will significantly lower TD's capital cushion, which executives said would likely take a one-time $1.5 billion hit next year. But the company will earn back the hit over the next two to three years, executives said. They project a bump-up in TD's interest income by $300 million to $500 million next year as a result of the bond portfolio restructuring.
"It's our way of being able to improve the near-term financial profile while taking the necessary steps that we need to make in terms of repositioning the bank to operate within the asset cap," Salom said.
Although TD's U.S. retail bank has made up some 30% to 40% of its core earnings in recent years, Jefferies analyst John Aiken wrote in a note that he expects a "strategic pivot" away from the business.
"Given the severity of TD's AML failures and the implications of the asset cap to its relative earnings growth outlook, we anticipate that it will be some time before TD's valuation will begin to regain some of its lost ground," Aiken wrote.
TD had long eyed an expansion of its U.S. branch footprint. A prior attempt to do so by acquiring First Horizon was scrapped last May, as the Canadian banking giant struggled to get regulatory approval for the deal. The Wall Street Journal later reported TD's poor anti-money-laundering protections were the biggest stumbling block.
TD executives didn't provide detail Thursday about the extent to which they've curtailed prior plans to open new branches. But the OCC's order says TD cannot open any new branches "or enter any new market" without receiving a non-objection from regulators.
In May, Salom
Amid the AML woes, CEO Bharat Masrani announced last month that he would step down and pass the torch to Raymond Chun, the company's current head of Canadian personal banking.
Chun's minimal direct exposure to TD's U.S. bank will likely lead to less of a focus on those operations, Aiken wrote.
Chun said Thursday that TD has the "scale and resilience" to deliver as it moves ahead, noting that more than 70% of the company's earnings come from businesses outside of the U.S. retail bank.
"The opportunities in Canada and in TD Securities are significant," Chun said. "This is a difficult chapter for TD. And I want to underscore that we will make the necessary changes to put the bank on a stronger foundation."
