Is a change at the top imminent?
Toronto-Dominion Bank’s (TD) expansion into the US market was supposed to help with its growth, but it's become a burden – dampening profitability and delivering a hit to the banking giant’s reputation.
The bank's failed $13.4 billion acquisition of First Horizon Corp. has investors turning sour on the bank. Despite recent positive momentum, TD's stock has underperformed compared to other major Canadian banks.
Once highly valued, TD's US assets now contribute about 23% of net income and 25% of revenue, Bloomberg said in a recent analysis. Despite this, some investors feel these operations are falling short of expectations. The challenges of operating in the US, including lower profitability, higher competition, and tougher regulatory relationships, have become apparent.
Brian Madden, Chief Investment Officer at First Avenue Investment Counsel, told Bloomberg that while the US was once seen as a growth opportunity for TD, it has now become a source of shareholder dissatisfaction.
“Once again, TD heads into reporting season in a unique position as anti-money laundering issues at the bank overshadow quarterly results,” Scotiabank analyst Meny Grauman wrote in a report to clients this week.
TD executives, however, maintain confidence in the US business, with CEO Bharat Masrani emphasizing the substantial growth potential. Over the past two decades, TD has invested more than $25 billion in US acquisitions, becoming the 10th largest bank in the country by assets.
However, the failed First Horizon deal in 2023 has damaged Masrani's credibility. Currently, the bank is under investigation by the US Department of Justice and other agencies, with allegations of failing to prevent money laundering at several branches.
In the fallout, TD has replaced about 10 senior leaders in compliance and legal roles — and fired about a dozen customer-facing employees — and has already spent C$500 million ($367 million) to bulk up its anti-money-laundering defenses. Despite the efforts, some investors remain concerned about TD's ability to generate positive returns in the US market.
According to Nigel D’Souza, Senior Investment Analyst at Veritas Investment Research, TD’s US retail bank had a return on equity of just 8.5% in 2023, compared to 36.8% in its Canadian operations. This discrepancy has led some to question whether TD’s business south of the border is truly delivering value.
The market's sentiments reflect these concerns, as TD's shares are down 3.6% over the past year, while its main Canadian competitors have seen an average gain of 17%.
