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A person walks past a TD Bank sign in the financial district in Toronto on Sept. 20, 2022.Alex Lupul/The Canadian Press

The whispers started percolating before the pandemic, but this year they’ve taken on a life of their own. On Bay Street everyone wants to know: What’s going on with Toronto-Dominion Bank TD-T?

A decade ago, the lender was in immaculate shape. Profit was soaring, investors loved the stock, and, in the aftermath of the 2008-09 global financial crisis, TD was the poster child for a well-run financial institution, with a focus on retail customers.

It all earned TD the kind of respect most companies would kill for. But instead of simply milking it, the bank’s executives, led by CEO Ed Clark, used this clout to move the needle on social issues. TD made the environment a priority long before ESG was a movement, and it championed LGBTQ rights at a time when the best – and often only – way for anyone in the community to get ahead on Bay Street was to stay quiet about their identity.

Ten years later, that narrative doesn’t quite fit any more. TD is still a strong lender with solid operations, there’s no questioning that. But bit by bit, TD is losing its lustre. Succession planning has gotten messy. The bank’s growth outlook is diminished. And on social issues, executives don’t stick their necks out the way they used to.

For years such talk could be brushed off as Bay Street gossip – perhaps even jealousy. But it became inescapable in May after TD’s US$13.4-billion attempted takeover of Memphis-based First Horizon Corp. FHN-N was blocked by U.S. authorities over unnamed regulatory issues. It wasn’t just that the deal was killed, which is rare enough; it also happened two months into the U.S. regional banking crisis.

At the time, regional lenders like First Horizon needed as many votes of confidence as possible, and a takeover would have sent a message to the entire sector. But not even that deterred the regulators.

TD has since disclosed a significant anti-money laundering problem that has attracted the attention of the U.S. Department of Justice. A financial penalty is expected, and analysts estimate it will be in the range of US$500-million to US$1-billion. This from the lender that was once held up as the gold standard for retail banking.

With uncertainty already swirling, Michael Rhodes, the head of TD’s Canadian banking business, stepped down this week. Mr. Rhodes, an American, had only been in the role for two years and was a top contender in the CEO succession process, which is widely expected to play out in the near future. (TD’s current chief executive, Bharat Masrani, is approaching the 10-year mark.) Instead, Mr. Rhodes is leaving to run Discover Financial Services, a troubled credit card company with a market value less than a quarter of TD’s.

So far TD has managed to navigate the whispers well enough. In fact, most banks – and most companies, for that matter – would still give anything for the respect TD gets from investors. In Canada’s banking sector, the multiple that each lender’s shares trade at relative to its earnings is a measure of confidence, and TD’s stock, trading at 10.8 times next year’s expected earnings, is second-best in the industry.

Yet the bank is starting to fall behind its long-time chief rival, Royal Bank of Canada RY-T, which trades at 11.5 times estimated earnings. RBC’s shares have also outperformed TD’s over the past five years, and now there are questions about TD’s future growth. RBC has a blockbuster deal to buy HSBC Canada, pending Ottawa’s approval. TD, meanwhile, was banking on expansion in the U.S., but future deals look like they’re on ice because of the regulatory woes.

At the moment, analysts are still content with TD, considering the bank has loads of excess capital after the failed takeover, and this cash can be used for share buybacks. That may be fine in the short term. But it won’t help much three or five years out.

Sussing out why TD just hasn’t been the same lately is a bit of a puzzle. Mr. Masrani, for instance, was one of TD’s top executives during the Ed Clark era, when the bank was adored, and, if anything, he’s helped the bank avoid what could have been costly disasters. As chief risk officer heading into the 2008-09 financial crisis, he helped stop TD from building a business around the toxic mortgage securities that burned so many U.S. financial institutions. He has also modernized the executive team by making it much more diverse – something RBC has yet to do.

But there have also been enough confusing strategies and decisions that it is fair to question whether they have the same root cause.

Before the pandemic, there were complaints about TD’s aggressive cross-selling of products in its retail bank, questions about its aborted takeover of wealth manager Richardson GMP and confusion about the bank’s willingness to pay $1-billion simply to remain the lead credit card provider for the struggling Aeroplan loyalty rewards program, to name a few.

For so long they were treated as isolated events that could be explained away. Yet the woes keep piling up.

TD’s Canadian personal banking division, its bread and butter, struggled during the pandemic while rival Big Six banks thrived. Succession planning turned messy in late 2021 when the bank abruptly parted ways with its Canadian and U.S. banking heads, right as Mr. Masrani was entering the third act of his tenure. And Norie Campbell, technically the bank’s general counsel, but more importantly a beloved figured internally who oversaw TD’s corporate citizenship, public affairs and environment, social and governance strategy, decided to leave in early 2022, and no one really understood why.

Now there’s the blocked takeover, uncertainty regarding the U.S. penalty and even more succession planning chaos.

When Mr. Masrani was named CEO, there were three – arguably four – executives who could have taken over, and investors, analysts and the media knew most of them well. The bank’s leadership was like a corporate family, and everyone could be trusted. With the current crop, everyone seems to be on a tight leash, and they rarely say anything of substance.

By no means is this a disaster scenario. Whoever takes the reins next – the top two contenders are capital markets head Riaz Ahmed and U.S. head Leo Salom – will inherit a bank with a solid footing. TD is the envy of so many rivals because it is flush with retail deposits, and retail clients rarely go hunting for higher interest rates. That means TD has a stable source of extremely cheap funding for its loans – a fundamental advantage for any bank.

Some strategies that were previously questioned are also starting to pay off. With the pandemic fading, Canadians have started spending with their credit cards again, and the Aeroplan program has been rejigged to be more appealing to clients. Mr. Masrani has also expanded in capital markets, as promised, with the acquisition of the investment bank Cowen Inc., and that has added a growth pillar.

But with so much uncertainty in the air, TD is at risk of losing the benefit of the doubt. For so long the bank took pains to be honest and have adult conversations, earning it something no financial model can ever quantify, but does wonders for relationships: trust.

That trust is starting to fade, and if the erosion continues, every new development will be scrutinized in ways TD doesn’t seem to comprehend.

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