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Anyone living on the East Coast of the US would be hard-pressed not to notice the ubiquitous TD Bank branches, with their aqua green signs and matching decor.
All told, TD Bank has 1,100 bank branches in the US and is currently the 10th largest bank in the country, with $366 billion in assets. In fact, TD has clawed its way to becoming the third-largest retail bank in New York.
A subsidiary of Toronto-Dominion Bank, TD’s foray into the U.S. began more than two decades ago when it decided to spend $20 billion buying up regional U.S. banks.
But was it actually a good investment and a good idea?
In a recent article in Mergers & Acquisitions magazine, Toronto analysts say Veritas Investment Research, an independent equity research firm, said the U.S. banking industry is a very low-return, high-risk activities compared to the Canadian banking industry. (Learn: Gold rose 22% this year, record highs)
“Over the long term, banks that generate the highest risk-adjusted return on equity (ROE) tend to perform better. In other words, banks that focus on Canadian banking, supplemented by asset and capital markets (i.e. turtles), outperform banks that pursue international banking. growth (i.e. hares),” Veritas said in a recent report.
Today, TD faces a crippling crisis in the US. Three years ago, the US Department of Justice filed charges against a Chinese drug gang that laundered US$653 million in profits through various financial institutions, primarily through TD branches in New York. The criminals even bribed some TD employees and managed to wash off the money for five years due to the bank’s poor money laundering controls. (Learn: Lower rates aren’t great for Canadian banks)
In October, TD learned of the high price it would have to pay for this scandal. The bank would have to plead guilty to criminal charges, pay $3 billion in fines, accept an asset limit that prevents the bank from growing above a certain level in the US, and allow independent regulators to keep an eye on TD to ensure that it complies with certain regulations. pacts.
Last year TD also paid one $225 million termination fee after walking away from the purchase of a regional bank in Tennessee. It is not shocking that this summer’s third quarter results showed an increase loss of C$181 million and a US retail loss of C$2.28 billion.
In a note to clients, Jeffries-based investment banking analyst John Aiken said this money laundering fiasco could result in a “lost decade” for TD. “Growth in the US is likely to be limited and the timeline for resolution is extended by several years.”
For more than three decades, Canada’s six major banks saw investing in the U.S. and other parts of the world as a way to expand their footprint. TD and Scotiabank made the largest investments abroad, with TD and Bank of Montreal (BMO) often buying regional banks in the US
Yet research from Veritas shows that Canadian banks that sought their fortunes outside of Canada have seen relatively low returns on this investment – and plenty of headaches. In contrast, Canadian banks that focused more on business domestically posted better returns.
Veritas has produced three data-rich reports making its case. The research concluded that the banks with the best risk-adjusted returns over the past decade focused on Canada as a market and not those pursuing foreign markets.
Why? One reason is that Canada has one of the most stable banking systems in the world: it has never had a banking crisis since 1840 and only two bank failures since 1923. Canada also has a handful of large, diversified banks with less competition, all of which are heavily regulated. “Canadian banking generates a higher ROE than international banking due to less capital intensity, lower competitive pressure and higher profitability,” Veritas said in a report.
In contrast, the US has experienced twelve major banking crises since 1840, caused by a fragmented, competitive and localized banking system. The most recent was the credit crisis of 2007-2008, which led to the collapse of legendary investment houses such as Bear Stearns and Lehman Brothers.
The much more competitive environment in the US makes achieving high returns more difficult. Profit margins in the U.S. are not as strong as in Canada, and fees are lower in the more competitive U.S., Veritas said.
Canadian banks like TD, which focused on building retail networks in the United States, faced this reality. On the other hand, Veritas found that Canadian banks that instead focused on wealth management in the U.S. and elsewhere fared much better.
Canadian banks also consistently take idiosyncratic risks when they venture south of the border, leading to costly scandals. In the 1990s, the Canadian Imperial Bank of Commerce (CIBC) became one of Enron’s bankers, eventually helping the energy company hide debts. CIBC had to pay $80 million fines and $2.4 billion arrange a class action lawsuit (although no wrongdoing was admitted in the Enron case).
In 2005, the bank also had to pay out $125 million to settle SEC investigation in his role in an improper mutual fund market timing and late trading scam (again without admitting guilt). And in 2007 the bank found himself exposed to $9.8 billion of problematic U.S. subprime mortgage debt that the Accord had agreed to backstop.
The Royal Bank of Canada (RBC) has faced similar problems. In 2008, three of her employees left prison for their role in the Enron scandal. Earlier this year, the US Office of the Comptroller of the Monet (OCC) imposed a $65 million fine on City National Bank, a U.S. subsidiary of RBC, for “systemic deficiencies in the bank’s risk management and internal controls.” City also had to pay more than $31 million for refusing to renew mortgages in predominantly black and Latino communities in Los Angeles.
Canadian banks have also suffered significant losses from the acquisitions. In the late 1990s and early 2000s, RBC purchased a North Carolina bank, Centura Banks Inc. and tried valiantly to gain a meaningful foothold in the southeastern states, only to retreat after ten consecutive quarters of losses in the wake of the credit crisis. crisis. (Learn: “Strong cultural match” – Scotiabank will invest in American KeyCorp as it reorients its course)
More recently, in 2023, BMO acquired San Francisco’s Bank of the West for $16.3 billion. In the first quarter after the acquisition, Bank of the West added $538 million in provisions credit losses on BMO’s balance sheet – more than double the provisions on the parent company’s existing portfolio.
In the meantime, TD Bank faces a lengthy recovery from the money laundering scandal.
“While enforcement actions by the U.S. Office of the Comptroller of the currency (OCC) provide clarity on monetary and non-monetary penalties, TD Bank may still be subject to additional civil penalties, asset reductions and enforcement actions if the bank fails to comply successfully reinstate its anti-money laundering (AML) compliance program. Enforcement actions by the OCC are not the end of TD’s AML problems, but instead mark the beginning of a multi-year remediation process,” Veritas said. said in its most recent report on TD.
This article originally appeared on veritascorp.com and was syndicated by MediaFeed.org.
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