Canadian lender TD Bank Group has announced plans to allocate an additional $2.6 billion to cover potential penalties related to ongoing U.S. regulatory investigations into deficiencies in its anti-money laundering (AML) programme.

The bank also revealed its intention to sell a portion of its stake in the U.S. brokerage firm Charles Schwab to mitigate the financial impact of these penalties.

TD Bank Allocates Further Funds for AML Penalties

In a move that signals the gravity of the situation, TD Bank Group has now set aside a total of over $3 billion in anticipation of a global resolution to the AML probes by the end of the year, including a $450 million provision made in April. The investigations, spearheaded by U.S. regulators, focus on allegations that Chinese drug traffickers used the bank to launder at least $650 million between 2016 and 2021. Additionally, there are claims that a TD employee accepted a bribe to facilitate the laundering of drug money.

The global resolution is expected to include both monetary and non-monetary penalties, further emphasising the seriousness of the allegations against the bank. TD Bank’s CEO, Bharat Masrani, acknowledged the deficiencies in the bank’s U.S. AML programme and stressed the importance of addressing these issues. “We recognise the seriousness of our U.S. AML program deficiencies, and the work required to meet our obligations and responsibilities is of paramount importance,” Masrani said in a statement. “Our remediation program is well underway. TD has strengthened its U.S. AML program.”

Sale of Charles Schwab Shares to Offset Financial Impact

To offset the financial burden of the impending penalties, TD Bank Group announced its decision to sell 40.5 million shares of Charles Schwab, reducing its ownership in the U.S. brokerage firm from 12.3% to 10.1%. The shares had a market value of $2.6 billion based on the closing price as recently as Wednesday last week. This strategic move aims to bolster the bank’s capital position in light of the expected penalties.

The sale of Charles Schwab shares is seen as a necessary step to maintain financial stability amidst the uncertainty surrounding the AML investigations. Despite this, some analysts have expressed concerns about the impact of these actions on the bank’s capital. “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,” commented Jefferies analyst John Aiken.

Impact on TD Bank’s Growth Strategy and Capital Ratio

The announcement of the regulatory probes came shortly after TD Bank terminated its planned $13.4 billion acquisition of U.S. regional bank First Horizon. The deal, which would have expanded TD’s retail presence in the U.S. southeast by adding approximately 400 branches, was a key component of the bank’s growth strategy as it sought to explore opportunities beyond its home market in Canada.

Since disclosing the AML investigations last year, TD Bank has undertaken significant measures to enhance its AML programme and risk controls. The bank has reportedly spent $500 million on tightening its AML procedures, hired several key executives, and invested in comprehensive staff training programmes to ensure compliance with regulatory standards.

Despite these efforts, experts warn that TD Bank is still under scrutiny from U.S. regulators. Sean Parker, a senior adviser with consultancy firm AML Shop in Toronto, noted that U.S. authorities, including the Treasury Department’s Financial Crimes Enforcement Network and the Department of Justice, will likely “test” the bank to ensure that it has truly shifted its culture towards compliance.

As a result of these developments, TD Bank’s capital ratio, a critical indicator of a bank’s financial health, is expected to face some fluctuations. The bank anticipates a 35 basis points reduction in its capital ratio in the fourth fiscal quarter due to operational risk. However, this will be somewhat offset by a 54 basis points boost resulting from the Schwab shares of 31 July 2024, TD Bank’s capital ratio stood at 12.8%, well above the Canadian banking regulator’s requirement.

Conclusion

The unfolding situation surrounding TD Bank’s AML deficiencies highlights the challenges that financial institutions face in maintaining regulatory compliance, particularly in the context of global operations. While the bank has taken significant steps to address these issues, the financial and reputational impact of the U.S. regulatory probes is likely to be felt for some time. The sale of Charles Schwab shares provides a temporary buffer, but the long-term implications of these investigations will require ongoing attention and vigilance from TD Bank’s leadership.