TD Bank fails to meet expectations as U.S. sanctions sting

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Toronto-Dominion Bank has suspended its medium-term financial targets as it looks to undergo a “broad and detailed” review of its strategies, weeks after being sanctioned in the United States for failing to monitor money laundering activities.

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As a result of the strategic review, TD on Thursday said it would be “challenging” to generate earnings growth, so it suspended its targets of seven per cent to 10 per cent earnings per share growth and 16 per cent return on equity. It will update the targets in the second half of 2025.

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“We are looking at our business mix, including profitability and risk-adjusted return on capital, and where we need to invest and divest to improve. Everything is on the table,” Raymond Chun, TD’s chief operating officer who is set to succeed current chief executive Bharat Masrani next year, said on a conference call with analysts to discuss the bank’s fourth-quarter results.

He said he is “optimistic” about “rebuilding confidence in the bank,” although there’s “significant work ahead.”

TD was fined about US$3.1 billion and ordered to cap the expansion of its retail banking business in October by the U.S. Department of Justice and other regulators for failing to monitor money laundering activities at its branches. The fine was expected — TD had kept aside the money beforehand — but the cap was a bit of a surprise.

After the charges were announced, TD unveiled several steps to mitigate the impact of the curbs, but described 2025 as a “transition” year. It said it would sell about 10 per cent of its U.S. assets to create liquidity and support the financial needs of its customers, as well as introduce measures to improve return-on-equity metrics in the near term.

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Analysts expected TD’s growth to be impacted due to the planned transition, but some were disappointed with the bank’s commitment to delay providing new growth guidance until the second half of 2025.

“We would have hoped that TD would have been able to provide a little more concrete guidance to investors here right now,” Meny Grauman, an analyst at the Bank of Nova Scotia, said in a note on Thursday. “Waiting another half a year or more … leaves the stock without a proper anchor, and makes the investment thesis here more challenging.”

Chun said TD’s strategic review started last month and that it would take about four to five months to finish.

Fixing TD’s anti-money laundering program will be the main focus, Masrani said on the call. He said that the lessons from the U.S. would be applied globally.

“Though we have not identified issues to the same extent … in markets outside the U.S., we do need to improve and strengthen our enterprise-wide program,” he said.

TD reported a fourth-quarter profit, but didn’t meet analyst expectations.

Net income for the three-month period ending Oct. 31 was $3.6 billion compared to $2.9 billion during the same period last year and a loss of $181 million in the previous quarter. This resulted in net earnings per share of $1.97.

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Adjusted for certain conditions, the bank earned $3.2 billion on an adjusted basis, which is lower than the $3.5 billion earned a year ago, resulting in adjusted earnings per share of $1.72. Analysts had expected TD to earn $1.81 per share.

The miss was primarily due to a decline in TD’s retail business in the U.S., which had net income of $863 million compared to $1.27 billion a year ago.

TD reported adjusted total revenue of $14.9 billion, up from $13.2 billion during the same period last year.

TD’s total provisions for credit losses (PCL) — the amount of money banks keep aside to tackle potentially bad loans — increased to $1.1 billion from $878 million a year ago.

The bank also announced a quarterly dividend of $1.05 for the upcoming quarter.

“Despite a challenging quarter, we are pleased with the bank’s underlying fundamentals, which were reflected in our revenue growth,” Masrani said in a statement.

John Aiken, an analyst at Jefferies Inc., said TD’s fourth-quarter results were “irrelevant” to its outlook.

“With management stating that ‘for fiscal 2025, it will be challenging for the bank to generate earnings growth,’ we do not believe that the fourth quarter will provide any valuation relief and investors will need to be patient for a catalyst to release the pent-up value in TD,” he said in a note on Thursday.

• Email: nkarim@postmedia.com

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