TD worst-case scenario more likely after drug money laundering allegations: analyst

A person makes their way past a Toronto-Dominion Bank in the Financial District of Toronto on August 14, 2023. THE CANADIAN PRESS/Spencer Colby

TORONTO — TD Bank Group could be hit with more severe penalties than previously expected, says a banking analyst, after a report that the investigation it faces in the U.S. is tied to laundering illicit fentanyl profits.

National Bank analyst Gabriel Dechaine said in a note that the worst-case scenario of the multiple U.S. investigations TD faces needs reassessing after the Wall Street Journal reported the link on Thursday.

The newspaper said the U.S. Justice Department investigation is focused on how Chinese drug traffickers allegedly used TD to launder at least US$653 million, and bribed TD employees to do so.

TD did not directly confirm the report, but said its anti-money laundering defences had been deficient.

"Criminals relentlessly target financial institutions to launder money and TD has a responsibility and an obligation to thwart their illegal activity," said chief executive Bharat Masrani in a late Friday statement.

"I regret that there were serious instances where the bank's AML program fell short and did not effectively monitor, detect, report or respond. This is unacceptable and not in line with our values."

The bank said a comprehensive overhaul of its program is well underway, with over $500 million already spent in program remediation and platform enhancements.

The severity of the allegations means TD could not only face fines well above the $500 million to $1 billion that many investors have anticipated, but also more severe regulator-imposed limitations on its business activities, said Dechaine.

"We believe investors need to put greater weight on worst-case scenarios for the stock," he said in a note.

The cumulative fines could easily hit $2 billion, while regulators could put in place restrictions, including limits on its balance sheet growth, that could affect bank operations for years, said Dechaine.

In a worst-case scenario, the issue could erode TD's future earnings potential by more than $1 billion, he said, and he has dropped his price target for the bank's TSX-listed shares by almost nine per cent to $84.

The link to drug trafficking comes the same week TD announced it had taken an initial provision of US$450 million in connection to the ongoing U.S. regulatory inquiry into its anti-money laundering compliance program.

The bank said on Tuesday its discussions with three U.S. regulators and the Department of Justice are ongoing, and it anticipates additional financial penalties.

Separately, Canada’s financial-crime watchdog Fintrac levied a $9.2-million penalty against the bank on Thursday for non-compliance with money laundering and terrorist financing measures.

TD Bank's stock price fell almost six per cent to $74.80 Friday on the Toronto Stock Exchange.

This report by The Canadian Press was first published May 3, 2024.