‘All eyes on TD’ and U.S. probes as Canadian bank earnings begin (2024)

Toronto-Dominion Bank and its U.S. money-laundering woes are set to dominate the start of Canadian bank earnings season this week.

It’s “all eyes on TD,” Bank of America Securities analysts led by Ebrahim Poonawala said in a note, adding that investors may be more willing to buy up the bank’s much cheaper stock if they can get clarity on the potential impact of Toronto-Dominion’s troubles in the United States.

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The bank faces an investigation by the U.S. Department of Justice as well as three U.S. regulatory agencies. It’s already taken a US$450-million provision tied to one of those regulatory probes, while the Justice Department is investigating the bank over its ties to a US$653-million drug money-laundering case, allegedly including the proceeds of fentanyl sales.

Toronto-Dominion has said that it’s already invested more than $500 million to upgrade its anti-money laundering controls and that it hopes to soon reach a “global resolution” of the probes. Analysts have forecast that total fines could be in the range of US$2 billion and some have warned that the bank could also face restrictions on its U.S. growth.

It’s expected to post adjusted earnings per share of $1.85 when it reports second-quarter financial results on Thursday, according to average estimates in a Bloomberg survey. That’s down from $1.91 in the same period last year.

With interest rates still stubbornly high and credit conditions worsening, investors will again be keeping a wary eye on loan losses at all of Canada’s big lenders. Toronto-Dominion’s provisions for potentially bad loans are likely to be in the range of $1 billion, analysts forecast, about the same as what the bank reported in the first quarter.

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And it could see a small decline in the ratio of capital it holds against risk-weighted assets owing to the regulatory provision it took. Analysts predict it will report a common equity tier 1 capital ratio of about 13.5 per cent on average, which is still comfortably above the regulatory minimum of 11.5 per cent.

But it’s the U.S. probes that are expected to command most of the attention, with stakeholders looking for details on fines and other penalties the bank could face.

They may be in for disappointment. The bank is unlikely to provide any specific updates on the situation, National Bank of Canada analysts led by Gabriel Dechaine said in a note. Still, they’ll be “watching for any changes in the bank’s strategic messaging, such as potential indications of a higher/longer cost burden from investing in its AML programs,” they said.

Toronto-Dominion’s shares are down about nine per cent this year, compared with the financials sector index’s five per cent advance over the same period.

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After a sharp selloff earlier this month, the market appeared to ascribe negative value to the bank’s U.S. retail business, according to Bank of Nova Scotia analysts led by Meny Grauman, who noted that the division produced $4.8 billion in adjusted net income last year.

“This business may very well be growth constrained for some time, but based on what we know, there is simply no basis to believe that TD’s U.S. earnings power has totally evaporated,” the Scotiabank analysts said.

The rest of Canada’s big five banks report next week.

“Organic revenue growth has likely slowed,” at Canada’s biggest lenders, Bloomberg Intelligence analysts Paul Gulberg and Samuel Radowitz said in a note. “Fees may drive revenue, even with slower loan growth, as wealth and capital markets hold well,” they added, but noted that even with tighter cost controls at some of the banks, “it could be challenging for the group to generate positive operating leverage.”

Bloomberg.com

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