TD Bank Stock Falls 6% on Money-Laundering Investigation: Deal or Danger?

TD Bank (TSX:TD) stock looks like a great bargain after its latest plunge over the ongoing U.S. probe.

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TD Bank (TSX:TD) stock suffered one of its worst days since the pandemic era as shares nosedived around 6% in a day in response to some pretty troubling news relating to the ongoing money-laundering investigation. Undoubtedly, the major money-laundering probe is nothing new. We’ve known about this for quite some time.

That said, the severity of the financial impact and longer-lasting repercussions (could TD Bank’s growth in the U.S. market be limited due to this crisis?) have really set in on investors. Undoubtedly, the bank has set aside quite a bit (approximately US$450 million) to prepare for the financial penalties to be put forth by American regulators.

For now, it’s unclear just how big the penalty could be. Some of the bears out there think the penalties could hit or even exceed US$2 billion. That’s a pretty harsh penalty. And with investments now being put into anti-money laundering (AML) efforts, it’s clear that TD Bank is doing its best to learn and grow from this debacle. Indeed, I expect calls for massive change to the upper layers of management to grow louder. The only big issue lies in who will be next in line to take the chief executive officer (CEO) role from long-time top boss Bharat Masrani.

TD Bank: Uncertainties galore amid probe

Though there may be some major question markets surrounding succession over at TD Bank, I view such massive change as necessary. The sooner such shifts are made, the better, and perhaps the less harsh regulators will be regarding any potential long-lasting regulatory hurdles that could impede the Canadian bank’s growth profile. Indeed, there’s no “perfect” man or woman for the job as CEO of TD Bank right now. Indeed, it’s hard to hand the reins over at a time of great uncertainty.

With shares close to multi-year depths (TD stock did bounce back more than 1% after last week’s rough slide), there is no shortage of uncertainty regarding TD, the future of its management, the real magnitude of the penalties to come, and what’s in the cards for the stock.

Personally, I think an outsider would be a preferred choice for the new CEO of TD Bank. In the meantime, I do believe TD stock is quite undervalued, especially in light of recent plans to find some sort of “global resolution” to its money-laundering woes.

Changes to upper management to come?

The bank has put in $500 million to beef up its AML program. With some technologies added in (something Mr. Masrani noted), I view TD’s AML capabilities as not only in a better spot but perhaps among the best in the industry.

Of course, there’s no telling how much further AML investment is needed to convince regulators to let TD Bank out of the penalty box after it’s paid its dues, perhaps sooner rather than later.

The bottom line

For investors, I think TD Bank will live to see better days. However, it will take time and plenty of money to repair its reputation with consumers and regulators.

If you’re a patient investor, however, TD stock looks like a bargain while its yield is just shy of 5.5%. It’s been quite a while since TD Bank stock was this out of favour versus its peers. Over the next 10 years, I think TD stock could have the most room to run as it powers out of this dark time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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