TD Bank posts first loss in decades after hit from U.S. laundering probe

Toronto-Dominion Bank reported its first quarterly loss in decades, largely due to a US$2.6 billion provision set aside for potential fines related to U.S. money-laundering investigations, as well as the impact of extreme weather and wildfires.

The bank, which is Canada’s second-largest lender, posted a $181 million loss, driven by the anticipated costs from a prolonged investigation into its compliance shortcomings. Even without this charge, earnings fell short of expectations, with the bank’s insurance division experiencing a surge in claims. This marks Toronto-Dominion’s first quarterly net loss since 2003.

The results were disclosed a day after the bank announced it expects to pay more than US$3 billion in total penalties related to U.S. compliance issues. The bank aims to reach a “global resolution” by the end of the year and has sold part of its stake in Charles Schwab Corp. to cover the recent provision. National Bank of Canada analyst Gabriel Dechaine suggested that Wednesday’s announcement might pave the way for CEO Bharat Masrani’s potential succession.

Toronto-Dominion is facing allegations of failing to detect money laundering and other financial crimes at several U.S. branches, with at least four cases filed by prosecutors in New York, New Jersey, and Florida. The bank is under investigation by the Department of Justice, financial regulators, and the Treasury Department. This latest provision follows an earlier US$450 million charge announced in April.

While the latest update offers some clarity on the timeline for resolution and the potential fines, the nature and duration of any non-monetary restrictions on Toronto-Dominion’s U.S. operations remain uncertain. Limits on the growth of its U.S. business pose a significant risk.

"While we are not through the tunnel yet, we can see the light at the end of the journey,” Masrani said during a conference call on Thursday.

Masrani's position at the helm of Toronto-Dominion remains in question. Dechaine noted that by clarifying the financial consequences, the bank has potentially set the stage for a new CEO.

In May 2023, Toronto-Dominion’s US$13.4 billion acquisition deal for First Horizon Corp., a regional bank in the southeastern U.S., collapsed after the Canadian lender expressed doubts that regulators would approve the deal. Shortly thereafter, the bank acknowledged ongoing inquiries from regulators and law enforcement.

Despite these challenges, Masrani reiterated on Thursday that the U.S. division remains a crucial part of Toronto-Dominion’s future.

In the fiscal third quarter, Toronto-Dominion earned $2.05 per share on an adjusted basis, slightly below the $2.07 average estimate from analysts surveyed by Bloomberg.

The bank also incurred $110 million in restructuring charges during the three months ending in July, as it cut jobs and reduced real estate expenses to offset rising compliance costs. The restructuring program is now complete.

In its wealth-management and insurance division, insurance claims costs surged by 20% from the previous year due to wildfires in Alberta and severe weather in the greater Toronto area, where heavy rains have caused recent flooding. Net income for the division was $430 million, nearly unchanged from a year earlier but down from $621 million in the second quarter.

Meanwhile, Toronto-Dominion reported record revenue in its Canadian personal and commercial banking unit, with profit rising 13% from a year earlier to $1.9 billion. The wealth-management business also saw record revenue, although profits were impacted by higher insurance claims.