Potential fines and regulatory issues raise investor concerns
Toronto-Dominion Bank (TD Bank) is in the spotlight as Canadian bank earnings season kicks off this week, with its ongoing US money-laundering investigations overshadowing its financial performance.
Analysts at Bank of America Securities, led by Ebrahim Poonawala, predict investors will closely scrutinize TD's potential exposure to the investigations' financial impact. The bank currently faces money-laundering probes by the US Department of Justice and three regulatory agencies.
TD has already set aside a $450 million provision related to one of these probes while the Justice Department investigates its involvement in a $653 million drug money-laundering case. The bank has invested over C$500 million ($366 million) to enhance its anti-money laundering controls and hopes for a "global resolution" soon.
While analysts expect TD to report adjusted earnings per share of C$1.85 for the second quarter, down from C$1.91 a year ago, the focus remains on the potential fines and penalties from the investigations. Estimates suggest fines could reach $2 billion, and some analysts warn of potential restrictions on the bank's US growth.
Despite the uncertainty, Scotiabank analysts, led by Meny Grauman, believe that the market's negative sentiment towards TD's US retail business is unwarranted.
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"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 US earnings power has totally evaporated," they wrote.
Investors will also be monitoring loan losses at all major Canadian lenders amidst high interest rates and deteriorating credit conditions. TD's provisions for bad loans are expected to be around C$1 billion, similar to the first quarter.
The bank's capital ratio, a key measure of financial strength, could see a slight dip due to the regulatory provision, but analysts predict it will remain comfortably above the required minimum.
TD's stock has declined by about 9% this year, contrasting with the 5% gain of the S&P/TSX Composite Financials Sector index. The remaining major Canadian banks will report their earnings next week.
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