Canadian banks have been a beacon of strength over the last many decades. This has given them the well-deserved reputation of being rock-solid pillars of the Canadian economy. Toronto-Dominion Bank (TSX:TD) is the prime example of this strength. But today, Toronto-Dominion stock is reeling from the fallout of its involvement in a historic money-laundering case.
TD Bank stock is down almost 10% since the ruling on the case was reached. Is it a good buy today?
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Toronto-Dominion money laundering case is settled
Back on October 10th, U.S. regulators ordered TD Bank to pay a total of $3.1 billion in fines after the bank pled guilty in the money-laundering case that was brought against it. As you can see in TD Bank’s price graph below, the stock has been hit hard as a result of this.
In addition to the fine, TD will have an asset cap of US$434 billion on its two U.S. banking subsidiaries, as well as a more stringent approval process for new bank products, services, markets, and stores. This includes remediation requirements, such as enhanced compliance and oversight.
Taking action
Of course, after such a big misstep, TD Bank is now on a mission to make things better. As a result, the bank is overhauling its anti-money-laundering (AML) program. New leaders, specialists from consulting firms, and regulatory agencies will form a new and improved AML team at TD.
The focus now is on restructuring the balance sheet and absorbing up to US$1.5 billion in one-time costs related to this.
TD Bank results were already showing weakness
TD’s latest quarter showed us a glimpse of the ramifications of this development, with the bank swinging to a net loss of $181 million. On top of this, provisions for credit losses came in at $1.1 billion, up from $766 million in the same quarter last year. This reminds us that the credit situation is still precarious, as the bank prepares for increasing credit losses.
Outlook
Looking ahead, TD Bank’s future growth plans have been somewhat thwarted. Restrictions and limitations on the US business will certainly put a wrench in the job of growing and expanding in the US market. All of this will undoubtedly negatively impact TD Bank’s future financial results and shareholder returns.
Along with this, we have the added negative impact of this scandal on customer and shareholder perception. This will undoubtedly hit the bank in the form of fewer new customer wins. Additionally, from a shareholder perspective, this scandal might very well negatively impact the valuation of TD Bank’s stock for quite some time.
The bottom line
TD Bank remains a top North American bank, with C$2 trillion in assets. TD’s strong franchise is reflected in its scale and resilience over time. In the long run, TD can re-establish its high standard of excellence, as its balance sheet adjustments and remediation efforts take hold. But the risks remain as the bank works through this major setback.
TD Bank stock continues to be plagued by the AML scandal. Growth in the US will be impacted by this, as will returns and by extension, shareholder value creation. The stock continues to trade above its peer group on an earnings and cash flow basis. I don’t think this is appropriate at this time. Therefore, I continue to believe that this is not a good time to add to Toronto-Dominion stock. I would wait for the stock to be trading lower than current levels before I would be interested in buying it.
