TD's Global Resolution of Its Anti-Money Laundering Investigations Includes Asset Cap on Two U.S. Banking Subsidiaries

On October 10, 2024, certain U.S. subsidiaries of The Toronto-Dominion Bank (TD or the Bank; rated AA (high) with a Stable trend) pleaded guilty to multiple criminal charges, including conspiracy to commit money laundering, as part of a global resolution to its anti-money laundering (AML) investigations. We consider this to have been a significant corporate governance failure for the Bank. Nevertheless, the global AML resolution should allow TD to move forward, easing the cloud of uncertainty that has been hovering over the Bank during a tumultuous period. Despite these negative developments, we view the impact to be manageable, although we will continue to monitor the AML resolution's impact on TD's reputation and earnings power. We note that our credit ratings have very little tolerance for any additional or new missteps or failures in remediation, or if overall profitability remains negatively impacted for a prolonged period.

Key highlights

-- Resolution of TD AML investigations resulted in total fines of $3.09 billion and an approximate $434 billion asset cap on the Bank's two U.S. subsidiaries.

-- Elevated liquidity and solid capital levels provide some flexibility as TD restructures its U.S. balance sheet. We estimate that the Bank is operating with a roughly $40 billion to $50 billion surplus in U.S. assets that can be redeployed to support existing or new U.S. customer relationships.

-- TD expects F2025 to be a transition year which results in a slight drag on earnings. TD's scale and diverse business model should allow the Bank to shift its growth focus toward Canada and TD Securities, mitigating some of the medium- to long-term negative impact on earnings.

"With the Bank restructuring its U.S. balance sheet to comply with the asset cap and create capacity to support existing U.S. customer needs while continuing its AML remediation work, we expect F2025 earnings to be pressured," said Carl De Souza, Senior Vice President and Sector Lead, North American Financial Institution Ratings. "In our view, however, TD has some flexibility and levers at its disposal to mitigate any prolonged and adverse impacts to earnings."