Toronto-Dominion Shares Plummet 6.7% Due to AML Charges and Q4 Earnings Impact

Shares of Toronto-Dominion Bank (TD - Free Report) fell by 6.7% on the NYSE following the suspension of its medium-term financial goals and disappointing fourth-quarter results for fiscal 2024, which ended on October 31. These developments suggest it may be difficult for the bank to achieve growth in the upcoming year.

The suspension of financial targets was primarily triggered by significant charges of $3.1 billion related to ongoing investigations into its compliance with the U.S. Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations.

For the quarter, the bank reported an adjusted net income of C$3.2 billion (approximately $2.34 billion), marking an 8% decrease compared to the previous year.

Factors such as increased provisions for credit losses and rising expenses have negatively impacted TD's earnings. Conversely, growth in net interest income and non-interest income, as well as a rise in loan balances, provided some support to the bank's quarterly performance.

TD Sees Revenue Growth, but Expenses Increase

TD Bank's adjusted revenues reached C$14.9 billion (about $10.91 billion), reflecting a 12% increase year over year.

Net interest income rose by 6% year over year to C$8.03 billion (around $5.88 billion), while non-interest income surged by 21% to C$6.86 billion (approximately $5.02 billion).

However, adjusted non-interest expenses climbed by 11% to C$7.73 billion (around $5.66 billion).

The adjusted efficiency ratio was reported at 61.7% as of October 31, 2024, a rise from 58.7% during the same period last year.

In the reported quarter, TD Bank allocated a provision for credit losses totaling C$1.11 billion (approximately $0.81 billion), which represented a 26% increase from the previous year's quarter.

Strong Balance Sheet for Toronto-Dominion

As of October 31, 2024, Toronto-Dominion's total assets amounted to C$2.06 trillion (around $1.5 trillion), reflecting a sequential increase of 5%.

Net loans increased by 1% from the fiscal third quarter, reaching C$949.5 billion (about $682.1 billion), while deposits grew by 4% to C$1.27 trillion (around $0.9 trillion).

By the end of October 2024, the common equity Tier I capital ratio stood at 13.1%, down from 14.4% a year earlier. The total capital ratio was 16.8%, compared to 18.1% from the prior year's quarter.

Resolution of AML Investigations by TD Bank

After the collapse of its $13.4 billion deal to acquire First Horizon (FHN - Free Report) last year, Toronto-Dominion began receiving inquiries from various U.S. authorities, including the Department of Justice and financial regulators, regarding its AML practices. This acquisition was initially announced in February 2022.

The main accusations against TD Bank involve its alleged failure to prevent money laundering and related financial crimes at several branches in the U.S., where employees were reportedly bribed to facilitate financial transactions.

To prepare for the costs associated with these investigations, TD set aside $450 million in the April quarter and an additional $2.6 billion during the fiscal third quarter. The bank funded these reserves by selling 40.5 million shares of Charles Schwab (SCHW - Free Report), which reduced its stake from 12.3% to 10.1%.

On October 10, 2024, TD Bank announced its agreement to settle the investigation by paying a penalty of $3.1 billion to U.S. regulators. The agreement also imposed a cap on the total assets of its two U.S. banking subsidiaries, totaling $434 billion as of September 30, 2024. Furthermore, these subsidiaries will face a stricter approval process for launching new banking products.

As a result, TD has suspended its medium-term financial targets, which included 7-10% growth in adjusted earnings, over 16% return on equity, and positive operating leverage. The bank acknowledged that for fiscal 2025, generating earnings growth will be challenging as it manages through a transition period, addresses AML compliance issues, and invests in its core businesses.

Conclusion on Toronto-Dominion Bank

Toronto-Dominion Bank continues to work towards enhancing its revenues and market share, aided by a strong geographical presence. The current high interest rates and solid loan demand are expected to positively impact its financial standings.

However, challenges posed by increased regulatory requirements following the AML settlement may impact its financial health. Additionally, a decline in asset quality due to an unpredictable economic environment could also serve as a hindrance.

Currently, TD holds a Zacks Rank of #3 (Hold). You can view the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Toronto-Dominion, Shares, Earnings