U.S. Regulators May Impose an Asset Cap on Toronto-Dominion Bank -- and the Stock Is Tumbling

Shares of Toronto-Dominion Bank (NYSE: TD) fell by as much as 7% Thursday morning after a bombshell report from The Wall Street Journal said that U.S. regulators were preparing to fine the large Canadian lender about $3 billion and place an asset cap on its U.S. operations in a deal to settle charges that it had failed to properly follow anti-money-laundering laws. As of 11 a.m. ET, shares were trading down 4.7%.

A big punishment

The Wall Street Journal report, citing anonymous sources, said a settlement could be announced as early as Thursday between TD Bank, the Justice Department, the Federal Reserve, the Office of the Comptroller of the Currency, and the Financial Crimes Enforcement Network (FinCEN). TD Bank is expected to plead guilty to criminal charges from the Justice Department.

Regulators and authorities assert that TD failed to build the proper internal programs and controls to detect and prevent money laundering, and that drug cartels had taken advantage of that. The Wall Street Journal previously reported that the Justice Department was investigating TD after authorities learned that Chinese criminal organizations had laundered millions of dollars accrued from the sale of fentanyl through the bank's branches in New York and New Jersey, bribing bank employees in the process. The paper also reported that these issues led regulators last year to block TD's plan to acquire First Horizon and expand its U.S. operations in the South.

According to the WSJ report, the Justice Department and FinCEN will each assign independent monitors to the bank to ensure it addresses issues with its anti-money-laundering program and abides by its agreement with regulators. The FinCEN monitor could remain in place for four years, according to sources.

This is serious

While the fine is certainly large, the potential asset cap on the bank's U.S. business unit indicates the seriousness of the situation. Of TD's roughly $2 trillion in assets, about $370 billion are in the U.S. After Wells Fargo's phony accounts scandal came to light, the Fed in 2018 imposed an asset cap on that bank -- and it's still in place today. That cap has undoubtedly cost the bank billions in profits, and its reputation has yet to recover from the revelation of its misdeeds. Wells Fargo stock is down by 11% since that time.

Anti-money-laundering consent orders can last four or five years at a minimum, and given the serious nature of TD's internal issues, this one could last longer. While the institution may still be able to grow in Canada, it had been hoping to grow in the U.S. Until more is known, I would avoid the stock.

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