Toronto-Dominion Bank Faces Challenges as Shares Drop 6.7% Due to AML Charges

Toronto-Dominion Bank's shares fell by 6.7% on the NYSE, primarily due to the suspension of its medium-term financial targets and disappointing results for the fourth quarter of fiscal year 2024, which concluded on October 31. This situation creates hurdles for the bank to achieve growth in the upcoming year.

The suspension of TD's financial targets came after the bank incurred $3.1 billion in charges related to investigations of its compliance with the U.S. Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations.

For the quarter, TD reported an adjusted net income of C$3.2 billion (approximately $2.34 billion), marking an 8% decline compared to the previous year.

The increases in provisions for credit losses and higher operational expenses significantly impacted the results. Conversely, an increase in net interest income and non-interest income, along with a growth in loan balances, helped support TD’s performance for the quarter.

Revenue Growth and Rising Expenses

Adjusted revenues rose to C$14.9 billion (around $10.91 billion), a 12% increase year-over-year.

Net interest income increased by 6% year-on-year, reaching C$8.03 billion (about $5.88 billion). The non-interest income saw a remarkable jump of 21%, arriving at C$6.86 billion (roughly $5.02 billion).

However, adjusted non-interest expenses climbed by 11% to C$7.73 billion (approximately $5.66 billion).

The adjusted efficiency ratio was 61.7% as of October 31, 2024, up from 58.7% in the same period last year.

During this quarter, TD recorded a provision for credit losses that soared 26% from the year-ago quarter, amounting to C$1.11 billion (about $0.81 billion).

Strong Balance Sheet for Toronto-Dominion

As of October 31, 2024, the bank's total assets were C$2.06 trillion (approximately $1.5 trillion), which is a 5% increase sequentially.

Net loans also increased slightly by 1% since the fiscal third quarter, reaching C$949.5 billion (around $682.1 billion), and deposits grew by 4% to C$1.27 trillion (about $0.9 trillion).

The common equity Tier I capital ratio as of October 31, 2024, was 13.1%, down from 14.4% the previous year. Additionally, the total capital ratio stood at 16.8%, compared to 18.1% from a year earlier.

Resolution of AML Investigation

Toronto-Dominion's challenges arose after the failure of a significant acquisition deal worth $13.4 billion to purchase First Horizon in 2022. Following this collapse, several inquiries emerged from U.S. regulatory bodies regarding TD's compliance with AML practices.

The central issue was TD Bank's inability to prevent incidents of money laundering at various branches in the U.S., where employees allegedly accepted bribes to facilitate money movement.

In preparation for the investigations' outcomes, TD set aside $450 million in the April quarter and an additional $2.6 billion in the fiscal third quarter. To cover the anticipated fine, the bank sold 40.5 million shares of Charles Schwab, reducing its stake from 12.3% to 10.1%.

On October 10, 2024, TD Bank resolved the investigation, agreeing to pay $3.1 billion in penalties to U.S. regulators. Following this agreement, total assets of its two U.S. banking subsidiaries must not exceed $434 billion, based on September 30, 2024 records. Furthermore, these subsidiaries will face a stricter approval process for new banking products.

As a result, TD suspended its medium-term financial targets, which included aims for 7-10% adjusted earnings growth, over 16% return on equity, and positive operating leverage. For fiscal 2025, the bank anticipates difficulty in achieving earnings growth as it manages a transition phase, invests in AML remediation, and continues to allocate resources toward its operational needs.

Outlook for Toronto-Dominion Bank

Toronto-Dominion has a solid geographical presence, and its endeavors to enhance revenue and market share are noteworthy. The favorable environment of ongoing high interest rates and steady loan demand could also benefit its financial performance.

However, the recent challenges and stricter regulatory requirements stemming from the AML settlement could impact its financial health. Additionally, fluctuations in asset quality due to the unpredictable macroeconomic landscape remain a concern.

As of now, TD Bank holds a Zacks Rank of #3 (Hold), indicating a cautious perspective on its future performance. You can explore more about stocks with a strong buying outlook to diversify your investment portfolio.

Toronto-Dominion, shares, earnings