TD Bank faces US penalties and leadership questions

As TD Bank grapples with a US probe and leadership uncertainties, stakeholders demand clear answers

TD Bank faces US penalties and leadership questions

Toronto-Dominion Bank is currently navigating challenges, with investors and executives eagerly seeking clarity regarding potential US penalties and the future leadership of the company, as reported by BNN Bloomberg.

The bank’s annual shareholders meeting, scheduled for Thursday, is set against the backdrop of an investigation into its anti-money-laundering controls.

This scrutiny has significantly disrupted the bank's growth strategy, adversely affected its stock, and accelerated discussions about potential successors to chief executive officer Bharat Masrani, who is 67.

The lack of a clear successor has notably displeased senior executives, as per sources familiar with the matter. This leadership uncertainty has further intensified the frustrations among managers regarding the bank’s setbacks and their future career trajectories.

These individuals have requested anonymity due to the sensitivity of their information.

The tension is partly due to a failed attempt to acquire Memphis-based First Horizon Corp., which was abandoned nearly a year ago amidst a US regulatory probe into the bank's handling of suspicious customer transactions.

This aborted acquisition has left Toronto-Dominion with substantial capital but limited options for its US expansion strategy.

As a result, the bank’s stock has experienced a significant decline, dropping over 8 percent this year, which contrasts with a 2.6 percent decrease in the S&P/TSX Commercial Banks Index.

CEO Masrani, who has led the bank for nearly a decade, has voluntarily taken a $1m reduction in his last fiscal year’s salary due to the failed First Horizon acquisition and the ongoing regulatory investigation.

With no obvious successor in place, the new board chair faces significant pressure to devise a plan that will satisfy both investors and employees. 

At the shareholders' meeting, Masrani acknowledged the deficiencies in the bank’s Anti-Money Laundering (AML) program and outlined the steps being taken to enhance it, including hiring globally recognized talent and investing in technology.

However, he also noted the limitations on disclosing more details due to the confidential nature of regulatory discussions.

Investors are particularly interested in understanding the potential financial penalties the bank might face, which analysts have speculated could exceed $1bn. The bank is also spending heavily on upgrading its risk and control systems in the US to address these issues.

Questions about the bank’s succession plans have become more pressing, especially since Michael Rhodes, a potential successor, left his role to join Discover Financial Services and subsequently departed from there as well.

The uncertainty regarding who might lead next, especially with the ongoing US regulatory issues, has put additional scrutiny on candidates like Leo Salom, who manages the bank’s US operations, and Riaz Ahmed, who leads the capital markets unit.

Despite these challenges, some analysts see potential upside in Toronto-Dominion’s stock, noting that the current fears may be overstating the risks.

The stock’s valuation, at about 10 times earnings, is lower than its peers, indicating that concerns about regulatory issues and succession might be excessively reflected in its current price.