TD takes $2.6 billion hit on US probe and sells Schwab shares

(Bloomberg) — Toronto-Dominion Bank is setting aside $2.6 billion to cover fines it expects to pay for failures of its money-laundering controls, and the company has sold part of its stake in Charles Schwab Corp. to finance it.

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Including a $450 million provision announced in April, the lender now estimates it will pay $3 billion for U.S. compliance failures.

“The bank expects a global resolution to be completed by the end of the calendar year,” Toronto-Dominion said in a statement after markets closed on Wednesday.

Canada’s second-largest bank said its stake in Schwab would drop to 10.1 percent from 12.3 percent after selling 40.5 million shares of the discount broker. Toronto-Dominion acquired the stake in 2020 as part of a deal to sell its interest in online brokerage TD Ameritrade Holding Corp. to Schwab.

Shares were trading between $61.35 and $62.65 each, according to terms of the deal seen by Bloomberg News. The range represents a potential discount of up to 5 percent from Wednesday’s closing price of $64.57 apiece, Bloomberg calculations show.

Analysts and investors have speculated that Toronto-Dominion may sell some or all of its stake in Schwab to help cover financial penalties it faces in criminal and regulatory money-laundering matters.

“We recognize the seriousness of the deficiencies in our US AML program,” Chief Executive Bharat Masrani said in the statement, adding: “The work required to meet our obligations and responsibilities is of the utmost importance to me, our senior leaders and our boards of directors. “

Allegations of bribery

Last year, Toronto-Dominion’s landmark $13.4 billion deal to acquire First Horizon Corp. collapsed, with the Canadian lender saying it was unclear regulators would ever approve the deal. Soon after, TD acknowledged it was receiving inquiries from the US Department of Justice, in addition to financial regulators and the Treasury Department.

The main allegations are that it failed to catch money laundering and other financial crimes at several US branches where customer-facing employees took bribes to help move money. So far, federal prosecutors in New Jersey have filed at least four cases alleging serious misconduct by employees at branches in New York, New Jersey and Florida. The bank said it had fired about a dozen front-line workers for code of conduct violations.

TD also replaced about 10 senior leaders in compliance and legal roles following the money laundering allegations. But Masrani, who has been CEO for nearly a decade, remains in his post despite swirling speculation that the board may be looking to replace him.

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In addition to the fines, analysts suggested the bank could also face years of restrictions on either organic growth or acquisitions in the US, where it has built a significant retail business. It has more than 10 million customers in the country and a network of nearly 1,200 branches along the US East Coast.

“While the market now has certainty about the amount of the tax, this is offset by the fact that it is larger than expected and the impact it has on capital,” said Jefferies Financial Group Inc. analyst John Aiken. in a note to clients. “The valuation impact will depend on tomorrow’s earnings, but it’s already behind the eight ball.”

Toronto-Dominion said the provision, which will be reflected in its third-quarter fiscal report on Thursday, will reduce its Tier 1 equity ratio to 12.%. This is still above the minimum 11% ratio of capital to risk-weighted assets required by Canadian banking regulators.

TD said the provision would further reduce its CET1 ratio by 35 basis points in the fiscal fourth quarter, but that the Schwab sale would increase the ratio by 54 basis points in the period.

“The big question remains: What might the non-monetary sanctions be? Hard to say at this point,” Desjardins Capital Markets analyst Doug Young said in a report. “And we highly doubt management will comment on that right now.”

–With help from Bre Bradham.

(Updates with compliance costs in the second paragraph, analyst commentary in the third to last.)

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