Toronto-Dominion Bank (TSX:TD) is one of Canada’s top two big banks. Its strengths include its diversified, well-capitalized business, its scale, and its history of strong risk management. Yet, the bank has landed in hot water recently. Is TD Bank’s stock price reflecting too much negativity? Is it time to buy?
Money laundering
Whenever we have to talk about money-laundering in relation to a bank, it’s not a good thing. But this is where we’re at with TD Bank right now.
You see, TD Bank is facing inquiries from regulators and law enforcement regarding its compliance with anti-money laundering rules. This is a blow to TD, as well as to our confidence in the bank. With the bank facing up to an estimated $2 billion in fines and potential limits on its business in the future, TD is facing a big hurdle.
While TD Bank has admitted that its anti money-laundering program was deficient, criminals have clearly known this for some time, as they have been penetrating the bank in recent times.
Drug money infiltrates TD Bank
The Wall Street Journal recently reported that TD is under investigation for laundering illicit fentanyl profits. Chinese drug traffickers allegedly bribed TD employers to launder over $600 million for them. This investigation tying TD to drug money obviously does not sit well with investors or regulators and will likely have long-term consequences, including TD having to increase its investment in its anti money-laundering (AML) program.
In response to these investigations, TD Bank has terminated the responsible employees. Also, the bank is undertaking a major overhaul of its US AML program, with $500 million already spent on remediation and platform enhancements.
TD Bank stock gets hit
Since the beginning of this year, TD Bank’s stock price has declined 10%. These investigations, along with the uncertain macro-economic environment, are taking their toll. But are these issues just what comes with being a bank? Are they part of what the banking business has always and will always be up against?
The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is Canada’s financial intelligence unit. It is the anti-money laundering and anti-terrorist financing supervisor. In fact, FINTRAC has also recently fined both CIBC and RBC for non-compliance to their rules. In their long history, banks have always had to protect themselves from criminals. It might be getting increasingly difficult, but the banking system will adjust, and increase their investment into safeguarding themselves and combatting this.
The business remains strong
Overall, TD Bank’s revenue increased 11% to $13.8 billion and was higher than expectations. Similarly, adjusted EPS came in at $2.04 versus $1.94, and higher than expectations calling for EPS of $1.85. Fundamentals remain strong and operating leverage was positive. Looking ahead, with interest rates expected to remain higher for longer, TD will benefit from higher net interest income.
TD Bank stock is trading at less than 10 times earnings and 1.3 times book value, and is yielding 5.3%. While I would not go all in with TD stock at this time, I’m definitely thinking that it’s looking more interesting these days. I think it would be a good idea to continue to monitor it as events unfold, and to buy it on weakness.
