Morningstar DBRS Comments on TD's Large, Additional $2.6 Billion Provision Related to AML Program Deficiencies That Indicates Total Potential Fines Likely at High End of Expectations

Morningstar DBRS notes that on August 21, 2024, The Toronto-Dominion Bank (TD or the Bank; rated AA (high) with a Stable trend) announced it has recorded an additional $2.6 billion provision in Q3 2024. The provision, combined with the initial $450 million provision taken in Q2 2024, represents the Bank's current estimate of total fines related to anti-money laundering (AML) matters being investigated by U.S. prudential regulators, the Financial Crimes Enforcement Network, and the U.S. Department of Justice. The total of $3.05 billion in potential fines falls at the high end of analyst estimates and would represent one of the largest regulatory penalties imposed for these types of issues.

Although the Bank has the capacity to absorb these fines, TD mitigated some of the financial impact by selling 40.5 million common shares in the Charles Schwab Corporation (Schwab), reducing its ownership interest to 10.1% from 12.3% and, thereby, reducing future earnings. Incorporating the $2.6 billion provision, TD's CET1 ratio at Q3 2024 was 12.8% and remained comfortably higher than the 11.5% minimum regulatory requirement. In Q4 2024, a 54 basis points (bps) increase to the CET1 ratio from the aforementioned sale of Schwab shares will more than offset the 35 bps reduction from the resulting increase in operational risk.

TD is in the midst of an extensive overhaul of its AML program and controls (see June 13, 2024, Morningstar DBRS commentary, "TD's Anti-Money Laundering Deficiencies Pose Increasing Concerns" at https://dbrs.morningstar.com/research/434467). Improvement efforts thus far include the hiring of established AML leaders and staff, including former regulatory, law enforcement, and government professionals. Additionally, the Bank has been investing in technology, process redesign, and training.

TD anticipates a global resolution of the investigations into the Bank's U.S. Bank Secrecy Act and AML program, including monetary and nonmonetary penalties, to be completed by the end of calendar 2024. Morningstar DBRS will be closely monitoring the final outcomes of these regulatory and law enforcement investigations. Prolonged and adverse impacts to TD's franchise or earnings power¿resulting from reputational risk issues and/or any restrictions imposed on the Bank's U.S. retail operations that materially limit the Bank's U.S. growth strategy (i.e., organic or inorganic) and affect its U.S. retail fundamentals¿are likely to have negative credit implications.

Notes:
All figures are in U.S. dollars unless otherwise noted.

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