Up to C$2 Billion on the Line: How Would AML Penalties Affect TD Bank?

Analysts have put forth a consensus estimate for the potential fines TD Bank may incur, with figures ranging from $600 million to $4 billion, according to Bloomberg. Bloomberg analyst Elliott Z Stein and Paul Gulberg suggest a fine within 2 billion could be seen as reasonable for TD Bank's alleged AML infractions, drawing on past substantial penalties levied against US Bancorp and HSBC as potential benchmarks:

· The 2018 penalties that US Bancorp incurred for AML infractions could be a comparison of what TD might expect. US Bancorp was fined a total of $613 million for deliberately neglecting to implement a robust AML program and for its failure to report suspicious activities tied to a $2 billion payday lending fraud. The breakdown of their fines included $453 million to the Justice Department, $75 million to the Office of the Comptroller of the Currency (OCC), $70 million to the Financial Crimes Enforcement Network (FinCEN), and $15 million to the Federal Reserve.

· The $1.9 billion settlement HSBC agreed to in 2012 provides a less direct comparison for TD's situation, given that the fines were not solely for AML breaches but also for transgressing sanctions related to Burma, Cuba, Iran, Libya, and Sudan. This broader scope of violations presents a more severe scenario compared to TD's case. Specifically for AML shortcomings, HSBC paid $500 million in fines to the OCC and $165 million to the Federal Reserve. Additionally, HSBC forfeited $1.26 billion, with an estimated one-third of that amount attributed to the sanctions violations.

The scrutiny from regulators might affect TD's standing in the US market, potentially impeding the expansion of its American segment. Yet, despite the possible adverse consequences of the ongoing money laundering probe on TD's operations in the US, Bloomberg analysts suggest that the bank's robust capital and profit-generating capabilities should enable it to absorb any immediate shocks.

Should fines fall within the CAD 615 million to CAD 2 billion range, it could result in a 4-15% dip in the bank's anticipated 2024 earnings and a decrease of 10-33 basis points in its CET1 ratio, yet it's expected to remain above the regulatory minimums. It is worth noting that TD Bank has provisioned $450 million for a potential fine related to the US anti-money laundering investigation as of April 30. Bloomberg analysts infer that TD may have already been aware of the March allegations against the former employee in Florida when it allocated these provisions.

The ongoing AML investigations have prompted S&P Global Ratings to adjust TD Bank's outlook to "negative." While analysts retain a cautiously positive stance on the bank’s profitability, they recognize the persistent effects of the regulatory inquiries. RBC Capital has increased its stock price target from C$87 to C$89, buoyed by strong second-quarter results, but still remains aware of the looming AML issues. "We intend to revisit its valuation multiple once there is more clarity on the outcome," stated RBC analyst Darko Mihelic.

Desjardins Securities calls for patience and slightly lowers its target price to $91. The firm observed that TD's F2Q adjusted pretax, pre-provision earnings were 6% higher than their predictions, with most of TD's divisions outperforming expectations, except for the corporate segment. However, the spotlight remained on the U.S. anti-money laundering concerns, as the bank had limited updates to provide on the matter.