TD Bank sets aside $2.6 bln more for US anti-money laundering penalties, lowers Schwab stake

By Nivedita Balu and Manya Saini

TORONTO, - Canada's TD Bank Group said it would set aside $2.6 billion more for penalties related to U.S. regulatory probes into deficiencies in its anti-money laundering program and it would sell part of its stake in Charles Schwab to offset the financial impact.

In anticipation of a global resolution to the anti-money laundering probes by year-end, which will include monetary and non-monetary penalties, the lender has now set aside a total of over $3 billion, including a $450 million provision it took in April.

The U.S. regulatory probes relate to allegations that Chinese drug traffickers used the bank to launder at least $650 million from 2016 through 2021 and an employee took a bribe to facilitate laundering of drug money.

TD said it would sell 40.5 million Charles Schwab shares, cutting its ownership in the U.S. brokerage down to 10.1% from 12.3%. The shares had a market value of $2.6 billion based on the closing price on Wednesday.

"We recognize the seriousness of our U.S. AML program deficiencies and the work required to meet our obligations and responsibilities is of paramount importance," TD CEO Bharat Masrani said in a statement. "Our remediation program is well underway. TD has strengthened its U.S. AML program."

Masrani and other executives will take questions from analysts on Thursday after the lender reports third-quarter earnings.

"While the market now has certainty surrounding the amount of the charge, this is offset by the fact that it is larger than expectations and the impact this has on capital," Jefferies analyst John Aiken said.

The U.S. regulatory probes were announced shortly after TD terminated its planned $13.4 billion purchase of U.S. regional bank First Horizon.

The deal would have grown TD's retail presence in the U.S. southeast and added about 400 branches in the country, a key part of its growth strategy as it seeks opportunities beyond its home market.

Since disclosing the probes last year, the bank has spent $500 million to tighten its AML program and risk controls, hired several key executives and invested in staff training programs.

"TD Bank is not out of the woods yet," said Sean Parker, a senior adviser with consultancy firm AML Shop in Toronto. U.S. regulators including the Treasury Department's Financial Crimes Enforcement Network and the Department of Justice would "test" the bank to ensure there is a culture shift towards compliance, he said.

TD's capital ratio, a key measure of a bank's health, will take a 35 basis points hit in the fourth fiscal quarter due to operational risk and will get a 54 basis points advantage due to the Schwab share sale, it said.

The capital ratio, or CET1 ratio, stood at 12.8% as of July 31, 2024, well above the Canadian banking regulator's requirement.

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