TD Bank's AML issues set the stage for more regulatory pressure across the sector
Canadian banks are bracing for heightened regulatory oversight in 2025 in the wake of historic sanctions imposed on Toronto-Dominion Bank (TD) by US regulators for failures in its anti-money laundering (AML) programs, according to a new report from Fitch Ratings Inc.
The sanctions, which include a $3.1 billion fine and restrictions on TD’s American retail banking expansion, have triggered widespread reviews across the banking sector.
Fitch anticipates that Canada’s primary banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), will intensify audits and reviews of larger banks, with a particular focus on AML programs. US regulators are also expected to increase their scrutiny of Canadian banks operating in the United States.
“We expect Canadian banks to be focused on operational risk management and regulatory reporting in 2025, which could imply higher spending on those initiatives,” Fitch said in its report.
In October, TD was fined approximately $3.1 billion by the US Department of Justice and other regulators for failing to address money laundering activities effectively at its branches. While the fine was anticipated – TD had set aside the funds – the imposed cap on its retail banking business expansion surprised industry observers.
The fallout prompted TD to suspend its medium-term financial targets, citing the need to reevaluate its strategies. The bank noted that this review could hinder its ability to achieve earnings growth in the near term.
“We are looking at our business mix, including profitability and risk-adjusted return on capital, and where we need to invest and divest to improve. Everything is on the table,” Raymond Chun, TD’s chief operating officer and incoming CEO, said during a recent analyst call.
TD said it plans to prioritize enhancing its AML program in 2025, aiming to rebuild confidence among regulators and stakeholders.
Fitch’s senior director, Maria-Gabriella Khoury, emphasized that TD’s challenges are prompting other Canadian banks to reassess their AML frameworks and overall risk management practices.
Despite these pressures, Fitch expects Canadian banks to maintain “neutral” financial profiles in 2025. The sector is entering a period of economic slowdown with solid asset quality, stable funding, and strong capitalization. All Canadian banks rated by Fitch have stable outlooks, with the exception of TD, which remains on a negative outlook due to the lingering uncertainty surrounding regulatory investigations and their impact on the bank’s earnings and risk profiles.
“TD’s negative outlook reflects the uncertainty over the ultimate impact of various investigations by regulators on the deficiencies of the bank’s anti-money laundering practices in the US on its franchise, earnings and risk profiles,” Fitch said.
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Fitch also flagged potential financial strain for Canadian households, particularly as many mortgages come up for renewal in 2025. These mortgages were signed when the Bank of Canada’s policy rate was at or below 1%, meaning borrowers could face renewal rates around 200 basis points higher.
While the central bank recently lowered its policy rate to 3.25%, many households will still grapple with higher mortgage payments. Fitch warns this could erode household savings and lead to higher delinquency rates in other debt categories, such as credit cards and auto loans, as borrowers prioritize mortgage payments.
“Higher mortgage payments could translate to lower household savings, as well as have a knock-on effect of higher delinquencies in other categories such as credit cards or auto loans as borrowers prioritize their mortgage payments,” the ratings agency said.
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