Dive Deposits: TD gives its AML woes long-haul messaging

Last year’s terminated acquisition of First Horizon is now arguably as much a part of TD’s fabric as the 2020 Revlon gaffe is to Citi, or the 2016 fake-accounts scandal is to Wells Fargo.

The proof is in how the bank answers analysts’ questions about shortcomings in anti-money laundering controls: As though the questions are anticipated.

“I know there are questions relating to the bank's investments in our risk and control infrastructure, including in our AML program," TD CEO Bharat Masrani said last week during the bank's first-quarter earnings call, according to The Globe and Mail and American Banker.

Translation: Let’s address this upfront.

"We will continue to mobilize the required resources to strengthen our capabilities,” Masrani said Thursday. “We are making comprehensive enhancements. This is a priority for the bank and we take our responsibility seriously to live up to our high standards.”

TD’s AML issues have been rumored to be at the root of the First Horizon deal’s downfall almost as long as the deal has been dead. The Capitol Forum reported in January that TD executives knew as early as November 2022 that multiple U.S. agencies, including the Justice Department, had found AML deficiencies serious enough to put the deal at risk of rejection.

TD acknowledged in August that it’s cooperating with a DOJ investigation of the bank’s compliance with AML measures.

That gives TD’s AML woes the feel of a known quantity. The irony is the bank isn’t sharing the extent of what’s known.

“We know what the AML issue is, and we’re making progress is fixing it every day,” Masrani said, according to The Globe and Mail, without offering further details.

Long-haul role models

Then again, the bank knows that interested observers are in it for the long haul, with or without precise answers.

It’s that way with Wells and Citi, too. Citi addresses risk management, internal controls and updates to transaction infrastructure at every quarterly call.

“We’re deep into the large body of work of automating manual controls and processes, consolidating fragmented tech platforms and upgrading our data architecture,” CEO Jane Fraser said in October. “Transformation remains our number-one priority.”

Likewise, every time Wells Fargo resolves an enforcement action — at last count, regulators have ended six consent orders against the bank since 2019 — the bank reminds observers why they care.

“I have repeatedly said that implementing a risk and control framework appropriate for a bank of our size and complexity is our top priority, and closing consent orders is an important sign of our progress,” CEO Charlie Scharf said last month. “We are a stronger, better Wells Fargo for our customers and communities, and we will not lose sight of the remaining work to do.”

TD has hired “hundreds” of employees over the past two quarters to support improvements to its risk and control operations, Masrani said. The bank launched a restructuring in late November that cut headcount by 3%. CFO Kelvin Tran said TD expects the move to save C$400 million this year and C$600 million in 2025. Most of the savings will be reinvested in risk and control initiatives, Tran said Thursday, according to American Banker.

Masrani, meanwhile, said he couldn't give an estimated time frame or cost for fixes to TD's AML issues, though he inferred it would be in the hundreds of millions of dollars, American Banker reported.

TD could pay between $500 million and $1 billion in penalties over the issue, The Globe and Mail reported, citing analysts’ estimates. 

For some observers, follow-on consequences are the overriding concern with TD.

“It is the potential actions against future growth that are the real concern as U.S. banking had been the [number] one growth priority,” CIBC analyst Paul Holden said, according to The Globe and Mail.

How long before a CEO switch?

Jefferies analysts, in a note about TD, flagged all of that — and “management focus.”

“I'm focused. Every day I wake up, I'm focused on strengthening the bank," Masrani said, according to Reuters and American Banker. "Serving our customers, of course, is a top priority, as is creating value for our shareholders. And hopefully, I'm doing that.”

However, Masrani’s age — 67 — and the departure of certain TD executives — notably, Michael Rhodes — may leave some investors uncertain about the Canadian bank’s long-term plans.

“We have a deep and highly experienced bench of senior leaders,” Masrani said, according to The Globe and Mail.

"As you would expect, we have very detailed and robust succession plans across the bank,” he added, according to Reuters.

In the eyes of some, Rhodes — who, until December, led TD’s Canadian personal banking operations — was the succession plan. He left TD to become CEO at Discover — just before Capital One said it would buy the struggling card network. On an investor call last month, Rhodes said he anticipates assuming an advisory role for a year after that deal closes. Capital One has said it estimates the deal to wrap at the end of this year or early next. Such a timeline would keep Rhodes from returning to TD if Masrani aims to leave in the short term.

Look at the Morgans

Not that age 67 should raise urgency. One need only look at the developing U.S. presidential race and assume 67 is the new 50.

On succession, TD may want to take a page not from Citi or Wells but from JPMorgan Chase. When analysts would ask that bank’s CEO, Jamie Dimon, for a timeline on his retirement, he’d ritually say “five years.” Dimon, who is set to turn 68 next week, only appeared to stop doing that around 2021, when JPMorgan’s board offered him a $52 million stock award he can only access if he stays with the company until 2026 (though he also seemed to launch a succession race in 2021).

Or perhaps Masrani’s role model should be the now-executive chair of the “other” Morgan: Morgan Stanley.

James Gorman, who stepped down as CEO at the transition of the year, set in motion a succession race around the same time as Dimon and, when an analyst asked him the following spring if he would retire soon, he said, “‘Soon’ is the operative word, and the answer to that is no. … But retire we all must do eventually, or die in our seats, which I have no intention of doing.”

Reuters noted that Masrani is the same age Ed Clark, his predecessor atop TD, was when he retired. Masrani did not give details on the bank’s “robust” bench, but among the candidates, observers must consider Leo Salom, TD’s U.S. chief — who holds the same role Masrani did when he was chosen to take the big chair in Toronto. Observers could probably also put Raymond Chun in the mix. Chun, a 32-year veteran of TD, succeeded Rhodes in leading TD’s Canadian personal banking segment.

KBW analyst Mike Rizvanovic told American Banker he expects Masrani to stay until the AML issue is resolved.

(Again, if he wanted to leave sooner rather than later, he could follow the Citi model, in which the 2020 Revlon error hastened CEO Michael Corbat’s already-planned retirement.)

TD shareholder Anthony Visano of Kingwest & Co. told Reuters he hopes the AML issue will wind up by the end of the year.

Brian Madden, chief investment officer at First Avenue Investment Counsel, told Reuters he would bet the next CEO of TD is already working there — and that that scenario would be better for continuity’s sake.

“It doesn't sound like [Masrani is] in a hurry to leave,” Madden said. “[But] I think the board will probably want to accelerate the process.”

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