TD Takes $2.6 Billion Loss in U.S. Probe, Sells Schwab Shares

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

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Including a $450 million provision announced in April, the lender now estimates it will pay $3 billion in connection with its non-compliance with U.S. standards.

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

Canada’s second-largest bank said its ownership stake in Schwab will fall to 10.1% from 12.3% after selling 40.5 million shares of the discounted brokerage firm. Toronto-Dominion acquired that stake in 2020 as part of a deal to sell its stake in online brokerage TD Ameritrade Holding Corp. to Schwab.

Under the terms of the deal seen by Bloomberg News, the shares were priced between $61.35 and $62.65 a share. That range represents a potential discount of up to 5% to Wednesday’s closing price of $64.57, Bloomberg calculations show.

Analysts and investors have expected Toronto-Dominion to 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 anti-money laundering program in the United States,” CEO Bharat Masrani said in the statement. “The work required to meet our obligations and responsibilities is of utmost importance to me, our senior leadership, and our boards of directors.”

bribery charges

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

The main allegations are that the bank failed to detect money laundering and other financial crimes at several U.S. branches, where employees who dealt with customers took bribes to help move money. So far, federal prosecutors in New Jersey have filed at least four lawsuits alleging serious misconduct by branch employees in New York, New Jersey and Florida. The bank said it has fired about a dozen front-line employees for code violations.

The story continues

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

In addition to the fines, analysts noted that the bank could also face years of restrictions on organic growth or acquisitions in the United States, where it has built a large business. It has more than 10 million customers in the country and a network of nearly 1,200 branches along the U.S. East Coast.

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

Toronto-Dominion said the move, which will be reflected in its third-quarter financial report on Thursday, would lower its common equity tier 1 capital ratio to 12%. That’s still above the minimum 11% capital-to-risk-assets ratio required by the Banking Regulatory Authority of Canada.

TD said the item would increase the decline in common equity ratio 1 by about 35 basis points in the fourth quarter of the fiscal year, but the Schwab sale would increase the ratio by about 54 basis points during the period.

“The big question remains: What non-monetary sanctions might be imposed? It’s hard to say at this point. We highly doubt the administration will comment on this now,” Doug Young, an analyst at Desjardins Capital Markets, said in a report.

—With assistance from Bree Bradham.

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