(Toronto) TD Bank Group posted a rare loss in its latest quarter, due to a $2.6 billion charge related to ongoing U.S. investigations into its anti-money laundering program.
The charge resulted in a quarterly loss of $181 million, but it also shed light on the total costs expected to result from the investigations after some speculation about their scale.
“The $2.6 billion provision we just announced, combined with the $450 million provision we announced last quarter, represents our current estimate of the total penalties payable related to these issues,” Chairman and CEO Bharat Masrani told financial analysts on a conference call Thursday to discuss the company’s latest results.
TD also added that it expects a comprehensive resolution of these issues to be finalized by the end of the year.
“Although we have not yet gone through the tunnel, we can see the light at the end,” Masrani said.
The money laundering probe has long been a major concern for TD. The investigation helped derail its $13.4 billion acquisition of U.S. bank First Horizon in May, while the bank said in August it expected U.S. regulators to impose sanctions over deficiencies in the program.
Earlier this year, the bank admitted serious flaws in its program after media reports that criminals had laundered at least $653 million in illicit drug proceeds through the bank.
“As I said before, the failures were serious,” Masrani said Thursday. “We are responsible for them, we know what the problems are and we are fixing them.”
Non-pecuniary sanctions
The bank said the expected resolution would include both the monetary penalties it described, as well as non-monetary sanctions, but Mr. Masrani declined to detail what those sanctions might be.
“You know, there may be compliance requirements, there may be various other requirements, it’s hard to speculate. We’re in the middle of all of that, negotiations, investigations, so we just want to make sure that we provide you with full disclosure when it’s appropriate,” he said.
In addition to announcing the provision, the bank said it sold 40.5 million shares of Charles Schwab stock, worth about $2.6 billion.
Analysts have questioned the need for the sale, but Mr Masrani said it was about maintaining high capital levels.
“It is prudent to have capital. There is still a lot of volatility and economic conditions are not as predictable as we would like,” said the president and CEO.
The capital requirement comes amid a loss in the latest quarter that contrasted sharply with a profit of $2.88 billion a year ago. The loss was 14 cents per diluted share for the quarter ended July 31, compared with a profit of $1.53 per diluted share a year ago.
Revenue for the quarter totaled $14.18 billion, up from $12.91 billion a year earlier.
On the credit front, which will be a focus for other banks, TD said provisions for credit losses were $1.07 billion, up from $766 million in the same quarter last year but essentially flat from the previous quarter.
On an adjusted basis, TD said it earned $2.05 per diluted share in its latest quarter, compared with adjusted earnings of $1.95 per diluted share in the same quarter last year.
Adjusted earnings were slightly below the $2.07 analysts had expected on average, according to LSEG Data & Analytics.
Extreme weather events
One of the main reasons for the shortfall was a significant decline in profits at TD’s insurance division due to extreme weather events.
Insurance profits fell sharply to $15 million from $145 million in the previous quarter after the bank recorded $186 million in claims in the quarter from flooding in the Toronto area and wildfires in Alberta. The bank also saw an increase in claims related to hailstorms in Calgary and flooding in Montreal this month.
Analysts, however, focused more on the anti-money laundering aspect than the small revenue shortfall, noting that the clarity is welcome.
“This does not answer all of the outstanding questions, but it provides important clarity on the ultimate timeline for a full resolution of the bank’s U.S. anti-money laundering issues, as well as a clearer picture of the full monetary penalty,” Scotiabank analyst Meny Grauman said in a note.
He said the real issue, in his view, is non-monetary sanctions, about which there was no new information Thursday. However, he said he was less worried than the markets appear to be.
“We continue to believe that the markets are pricing in a worst-case scenario that has no real precedent,” he said.
Investors will have to wait a few more months to know exactly what the consequences will be, but Mr Masrani said he was eager to present the full picture.