'Everything is on the table': TD seeks ways to steady the ship

Bloomberg News

UPDATE: This article includes information from TD Bank's earnings call and an analyst note.

TD Bank Group put its profitability expectations on hold and announced a sweeping strategic review in its first earnings update since pleading guilty to historic money-laundering-related crimes.

The Toronto-based bank fell short of analysts' expectations for its fourth-quarter earnings, and the rocky end to a dismal quarter put investors on edge. Shares in TD were down some 5.53% midday Thursday, trading at $53.30.

Chief Operating Officer Raymond Chun, who will take the helm as the bank's CEO in April, told analysts Thursday that TD isn't "where we want to be" on profitability, although he contended that its businesses have momentum.

"For fiscal 2025, it will be challenging to generate earnings growth as the bank navigates a transition year, continues to advance its [anti-money-laundering] remediation with investments in risk and control infrastructure and investments in its businesses," Chun said.

The bank suspended its growth targets for earnings per share, return on equity and operating leverage, as costly compliance investments and a balance sheet restructuring are combining to squeeze returns.

TD's earnings per share of 1.97 Canadian dollars ($1.40) for the three months ended Oct. 31 fell short of consensus analyst estimates of CA$2.52, according to S&P Capital IQ. 

Net income across the entire company increased 27% from the prior year to CA$3.6 billion.

In the troubled U.S. segment quarterly net income declined 34% from the prior year to $634 million, as expenses of $1.5 billion dragged on revenue.

TD's woes stem from massive risk-management failures that have been chipping at the bank's earnings since they were first disclosed in fall of 2023. In October, TD's American operation became the first U.S. bank to plead guilty to money-laundering conspiracy violations. The bank also admitted to charges that it blundered its anti-money-laundering controls, kick-starting its "transition year."

As part of the plea agreement, the bank agreed to halt its stateside asset growth until its compliance functions are under control, and to pay record fines of more than $3 billion to the Department of Justice, the Federal Reserve, the Office of the Comptroller of the Currency and the Treasury Department's Financial Crimes Enforcement Network. Attorney General Merrick Garland said in October that TD had "created an environment that allowed financial crime to flourish."

Chun, who previously led Canadian personal banking at TD, said Thursday that the bank last month launched a "broad and detailed review" of its strategies to reassess priorities and organic opportunities, efficiency and capital allocation alternatives.

When an analyst asked if TD would consider divestitures in the U.S., Chun replied, "Everything is on the table." Still, he said in his opening remarks that the bank is "committed to the U.S. market and confident in the strength" of its franchise. 

TD said in October that it would exit certain lines of business in the U.S. and restructure its balance sheet in response to the OCC-imposed asset cap. Chun added Thursday that the bank will focus on continuing to operate in U.S. client sectors "where we have scale, market share and competitive advantage."

TD had previously built up a cushion to cover the regulatory penalties, which led to the bank's earlier announcement that it lost 14 Canadian cents a share in the quarter that ended July 31. The bank said Thursday that expenses will increase 5% to 7% in 2025, driven by its remediation efforts.

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CEO Bharat Masrani said on the Thursday call that whipping compliance into shape in the U.S. is the bank's top priority. He noted that TD expects to have the majority of its remediation actions — including hiring new staff, rolling out additional training and updating technology — completed by the end of next year. 

Masrani added, though, that the buck won't stop with improving the bank's stateside anti-money-laundering controls. As the bank has examined its risk management systems, TD has found that it's "critical" to enhance compliance across markets, he said.

"We have learned from the U.S. experience and are applying those learnings globally," Masrani said. "Though we have not identified issues to the same extent or experienced the same severe AML-related events in markets outside the U.S., we do need to improve and strengthen our enterprise-wide program."

The CEO has repeatedly taken responsibility for the debacle, and he announced in September that he would step down come spring. Masrani is passing the baton to Chun, a veteran of the bank who didn't have exposure to American risk management.

John Aiken, an analyst at Jefferies, wrote in a note Thursday that TD's fourth-quarter earnings won't do much to assuage investors, as questions remain about the bank's medium-term and long-term performance. He maintained his "hold" rating on the bank, writing that "investors will need to be patient for a catalyst to release the pent-up value in TD."

The bank said it would provide more details about its compliance progress and its expectations for future financial performance at an investor day in the second half of 2025. But the bank's executives repeatedly expressed optimism about the company's underlying operations.

"Great to see that the fundamentals of our businesses, particularly the momentum we have in each of our segments, is terrific," Masrani said. "We do have headwinds as we discussed, but good to see that there is good momentum in each of our operating businesses."