Skip to main content

Right now, running Toronto-Dominion Bank TD-T is the job from hell.

Chief executive officer Bharat Masrani wakes up every morning to multiple regulatory investigations into money laundering in the bank’s U.S. branch network. Colonoscopies are more pleasant. Until these problems are resolved, TD’s work force is demoralized, its U.S. growth strategy is in question, and the stock price is weighed down by the prospect of multibillion-dollar fines.

Mr. Masrani’s pain is his successors’ gain. At some point in the not-too-distant future, the 67-year-old will finish up a decade-long run as CEO. Mr. Masrani, as honourable an individual as you are going to meet, has made it clear he will wear responsibility for TD’s regulatory failings.

It may not look like it today, but being TD’s next boss is the best job in banking.

For all the well-deserved attention investors are giving to anti-money-laundering shortfalls at TD, this is a one-time problem at the bank, rather than a structural issue. Any CEO would take a problem that can be solved by spending money – which describes TD’s woes – to a strategic challenge like being a regional player in a sector dominated by larger, better-capitalized rivals (looking at you, Laurentian Bank).

TD Bank faces stiff penalty from FinTRAC for faulty controls to prevent money laundering

TD is in the penalty box. Once regulators are satisfied with the bank’s beefed-up compliance team (many of the people and systems are already in place), guidelines are set for its U.S. retail operations and fines are paid, the bank will be back to full strength.

That’s not to say TD is out of the woods. The stock price, already down 10 per cent this year, could fall further if sanctions against the bank are worse than what’s expected. However, analysts have cranked out worst-case scenarios for the bank and there’s nothing TD’s balance sheet can’t handle.

Investors are assigning little or no value to TD’s vast U.S. network of “stores,” as the bank calls its branches. Analysts see that as overly pessimistic.

“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,” analyst Meny Grauman at Bank of Nova Scotia said in a report.

Based on past penalties imposed by U.S. regulators, analyst Darko Mihelic at RBC Capital Markets projected TD’s darkest possible future consists of a US$3-billion fine – the largest levied in history. In addition, Mr. Mihelic said in a report the bank could face an “asset cap” on its U.S. branch network that lasts for up to five years. The cap would prevent TD from expanding a division that accounted for $4.9-billion of the bank’s $15.1-billion profit last year.

U.S. probe of TD Bank tied to US$653-million money-laundering and drug-trafficking case

The odds of TD facing this worst-case scenario are roughly one in four – the market is assigning a 27-per-cent probability of the bank facing penalties of this magnitude, according to Mr. Mihelic.

“A high fine is manageable for TD,” said Mr. Mihelic in a report, noting the bank could sell all or part of its $22-billion stake in Charles Schwab Corp. SCHW-N to refill its coffers. He added: “Our principal concern is centred on non-monetary penalties and what it might mean for its U.S. business.”

Here’s the opportunity for TD’s next CEO. Even under the worst-case scenario, TD still has strong Canadian and U.S. franchises that will continue to earn significant profits. The “odd impact” of an asset cap, as Mr. Mihelic put it, would be TD generating even more capital, as barriers to U.S. growth would mean the bank needs to set aside less in reserves.

Both the Scotia and RBC analysts have “outperform” ratings on TD stock. Their logic is Mr. Masrani and his successor will dedicate more money to building Canadian operations, the bank’s most profitable business. The next CEO could, and likely would, aggressively buy back shares, a proven crowd pleaser with investors.

In the U.S. market, TD can continue to expand its capital markets operations. The anti-money-laundering issues didn’t stop regulators from approving the bank’s US$1.3-billion acquisition of New York-based investment dealer Cowan Inc. last year.

The next head of TD will take the wheel of a bank traditionally valued at a premium to peers in a rare period when its stock trades at a discount. As that leader starts what’s likely to be a decade-long turn at the helm, with compensation heavily weighed to owning equity, the timing couldn’t be better.

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe