Anyone living on the eastern seaboard of the U.S. 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 U.S. and is currently the 10th largest bank in the country, with US$366 billion in assets. TD even muscled its way to becoming the third-largest retail bank in New York.
A subsidiary of the Toronto-Dominion Bank, TD’s incursion into the U.S. began more than 20 years ago when it decided to spend US$20 billion on buying up regional American banks.
But was it actually a good investment and a good idea?
In a recent article in Mergers & Acquisitions magazine, analysts with Toronto-based Veritas Investment Research, an independent equity research firm, said that U.S. banking is a very low-return, high-risk business relative to Canadian banking. (Learn: Gold Jumped 22% this year, Record Highs)
“Over the long term, banks that generate the highest risk-adjusted return on equity (ROE) tend to outperform. In other words, banks that focus on Canadian banking supplemented with wealth and capital markets (i.e. tortoises) outperform banks that chase international banking growth (i.e. hares),” Veritas said in a recent report.
Today, TD is facing a crippling crisis in the U.S. Three years ago, the U.S. Department of Justice laid charges against a Chinese drug trafficking ring that had 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 the money over five years due to the bank’s poor anti-money laundering controls. (Learn: Lower rates not great for Canadian banks)
This October, TD learned of the steep price it would have to pay for this scandal. The bank would have to plead guilty to criminal charges, pay out US$3 billion in fines, accept an asset cap barring the bank from growing above a certain level in the U.S., and allow independent monitors to watch TD to ensure it complies with certain regulatory pacts.
Last year, TD also paid a US$225 million termination fee after it walked away from buying a regional bank in Tennessee. Not shockingly, its third-quarter earnings this summer saw a loss of C$181 million and a loss from its U.S. retail business of C$2.28 billion.
In a note to clients, John Aiken, an investment bank analyst from Jeffries, said this money laundering fiasco may result in a “lost decade” for TD. “Growth in the U.S. will likely be constrained and the timeline for a fix is extended by several years.”
For more than 30 years, Canada’s six big banks saw investing in the U.S. and other parts of the world as a way to expand their footprints. TD and Scotiabank made the biggest investments abroad, with TD and Bank of Montreal (BMO) often buying up regional banks in the U.S.
Yet research conducted by Veritas shows that Canadian banks that sought fortunes outside of Canada have seen a relatively low return on this investment—and many headaches. In contrast, Canadian banks that focused more on business at home saw better returns.
Veritas has produced three data-heavy reports making his case. The research concluded that the banks with the best risk-adjusted returns over the past decade focused on Canada as a market rather than those that pursued foreign markets.
Why? One reason is that Canada has one of the most stable banking systems in the world, having 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 heavily regulated. “Canadian banking generates a higher ROE than international banking due to less capital intensity, lower competitive pressures, and higher profitability,” Veritas said in one report.
In contrast, the U.S. has experienced 12 major banking crises since 1840, driven by a fragmented, competitive, and localized banking system. The most recent was the credit crisis of 2007–2008, which led to the collapse of storied investment houses like Bear Stearns and Lehman Brothers.
The far more competitive environment in the U.S. makes earning high returns more difficult. Profit margins aren’t as strong in the U.S. as in Canada, and fees are lower in the U.S. with more competition, Veritas said.
Indeed, Canadian banks like TD, which focused on building retail networks in the States, ran smack into this reality. On the other hand, Veritas found that Canadian banks that instead focused on wealth management in the U.S. and elsewhere did far better.
Canadian banks also invariably take wayward 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 and ended up helping the energy company hide debt. CIBC had to pay US$80 million in fines and US$2.4 billion to settle a class action lawsuit (although it did not admit any wrongdoing in the Enron case).
In 2005, the bank also had to pay out US$125 million to settle an SEC investigation into its role in an improper mutual fund market timing and late trading scam (again, not admitting they had been at fault). And in 2007, the bank found itself exposed to US$9.8 billion worth of problematic U.S. subprime mortgage debt it had agreed to backstop.
The Royal Bank of Canada (RBC) has faced similar issues. In 2008, three of its employees went to prison for their role in the Enron scandal. Earlier this year, the U.S. Office of the Comptroller of the Currency (OCC) imposed a US$65 million fine on City National Bank, an American subsidiary of RBC, for “systemic deficiencies in the bank’s risk management and internal controls.” City also had to pay more than US$31 million for refusing to extend mortgages in predominantly Black and Latino communities in Los Angeles.
Canadian banks have also sucked up significant losses from its acquisitions. In the late 1990s and early 2000s, RBC bought a North Carolina bank called Centura Banks Inc. and tried valiantly to turn it into a meaningful foothold in the southeastern states, only to retreat after absorbing losses for 10 straight quarters in the aftermath of the credit crisis. (Learn: “Strong cultural fit” – Scotiabank to invest in U.S.-based KeyCorp as it refocuses direction)
More recently, in 2023, BMO acquired San Francisco’s Bank of the West for US$16.3 billion. In the first quarter after its acquisition, Bank of the West added US$538 million in provisions for credit losses to BMO’s balance sheet—more than double the provisions on the parent company’s existing portfolio.
In the meantime, TD Bank faces a long recovery from its 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 Money Penalties, asset reductions, and enforcement actions if the bank fails to successfully remediate its anti-money laundering (AML) compliance program. Enforcement actions by the OCC are not the end of TD’s AML issues but instead mark the beginning of a multiyear remediation process,” Veritas 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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