TD’s US expansion plans have been questioned due to regulatory issues

TD Bank Group management is trying to answer questions from Wall Street about whether the company’s ambitious expansion plans in the United States will be thwarted by serious anti-money laundering problems.

On Thursday, during a call with analysts regarding quarterly results, TD executives announced changes to anti-money laundering protections at the bank’s American branch. However, they were unable to provide firm guidance on whether plans announced last year to expand the Canadian unit in the U.S. are now largely out of date.

“I know there are a lot of questions about what we can and can’t do,” Leo Salom, who heads U.S. retail bank TD, said on a earnings call about the company’s financial results. “The one thing I commit to this group is that as soon as we can provide more clarity on this, we will certainly do so.”

The comments highlighted the enormous regulatory uncertainty facing the Toronto-based bank, whose U.S. branch touts itself as America’s most convenient bank. The bank set aside $450 million to begin settling its legal obligations and spent $500 million to modernize systems that proved convenient for money launderers.

Management didn’t say anything Thursday how much the bank expects to spend due to regulatory problemsbut external estimates put it at up to $2 billion.

Investors are also concerned about “a stagnation in the U.S. franchise market” as TD recovers from regulatory issues, Bank of America analyst Ebrahim Poonawala said on an earnings call.

Poonawala noted that large and regional banks are expanding their presence in the growing southeastern United States. TD planned to expand in the region through the acquisition of Tennessee-based First Horizon Corp. However, last year the transaction fell through, apparently after retaliation from regulatory authorities regarding TD’s protection against money laundering.

After the failure of its First Horizon acquisition, TD unveiled a plan to open 150 new branches in the U.S. by 2027. Executives on Thursday wouldn’t say whether it was backing down from that plan.

Leo Salom, who heads TD’s U.S. retail division, said when asked about the company’s branch plans that he was “deliberately setting the pace” for its expansion and that TD would focus more on its “digital and mobile strategies.” He declined to provide more transparency when asked if this meant TD was unable to open more branches, which TD calls “stores.”

“I’m not saying we can’t expand stores,” Salom said. “But I also want to make it very clear that we are in discussions with regulators, and I don’t want to impose bias on any of those conversations at this point.”

Salom said the bank has a “strong franchise” in the United States, pointing to continued credit momentum, profitability and spending cuts.

Analysts appreciated TD for what they called its good financial results in the second quarter. “Not much else could have gone right for TD this quarter,” Jefferies analyst John Aiken wrote in a note to clients. However, “regulatory overhang is likely to persist for some time,” he added, making the bank’s quarterly earnings less relevant.

“While results for the quarter were strong, we continue to believe that TD’s prospects are subject to uncertainty surrounding the U.S. regulatory investigation, its financial implications and the impact on TD’s ability to grow in an important U.S. region,” Aiken wrote.

He added that investors “will remain frustrated that management will not be able to disclose additional information” until U.S. regulatory investigations are completed.

TD’s stock price fell more than 2% on Thursday.

During the company’s earnings call, CEO Bharat Masrani admitted that TD had admitted to serious failures to protect itself against criminals using the bank to launder money.

“It is unfortunate that we failed in this one case,” Masrani said. “We are in the process of fixing this and we will fix it.”

But he insisted the bank was focusing on reviewing the U.S. branch where the lapses occurred, questioning at least some parts News story Wednesday on new scrutiny from Canadian regulators.

In this article, the Global and Mail reported that Canadian banking regulators are requiring TD to make compliance amendments. A more extensive investigation in Canada would increase the risk of further penalties.

Masrani said the Globe and Mail report “contains inaccuracies” and that TD’s discussions with regulators in its home country are part of “our normal course of business.”

Ajai Bambawale, the bank’s chief risk officer, said the “major issue we’re facing” is shortcomings in the U.S. anti-money laundering program. The lessons TD learns there “will benefit the global program,” Bambawale said.

“The dialogue mentioned in the article, the dialogue with regulators, actually takes place every day,” Bambawale said.

The bank “owns the problem” and acknowledges that its U.S. branch “failed to address issues that should have been addressed,” Bambawale said.

“There were some procedural lapses in the US that resulted in bad actors taking advantage of us,” Bambawale said. “We were also disappointed that some of our colleagues did not adhere to our code of ethics.”

In a May 2 article in The Wall Street Journal. reported that criminals used its American branches laundering profits from the sale of fentanyl and that US prosecutors charged a former TD branch employee with facilitating money laundering and taking bribes. The bank said it took action against the employees responsible as part of an internal investigation, including dismissal where necessary.

“At the enterprise level, this is not a problem,” Bambawale said on Thursday.

The bank continues to cooperate with law enforcement agencies to pursue criminals using TD and shares all information “even if it showed our vulnerabilities,” Masrani said.

Masrani also said TD has invested about $500 million to improve its anti-money laundering systems to ensure it can adequately address “the growing risk from bad actors around the world.”