Shares of Toronto-Dominion Bank TD declined 6.7% on the NYSE on suspension of its medium-term financial targets and disappointing fourth-quarter fiscal 2024 (ended Oct. 31) results, which would make it challenging to generate growth next year.
The reason behind the suspension of financial targets is the $3.1 billion charges incurred in resolving previously disclosed investigations related to its U.S. Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) compliance programs.
The company’s quarterly adjusted net income of $3.2 billion ($2.34 billion) fell 8% year over year.
Huge increases in provisions for credit losses and higher expenses acted as undermining factors. On the other hand, growth in net interest income and non-interest income and higher loan balance offered much-needed support to TD’s quarterly performance.
TD’s Revenues Rise, Expenses Up
Adjusted revenues were C$14.9 billion ($10.91 billion), increasing 12% year over year.
Net interest income (NII) grew 6% year over year to C$8.03 billion ($5.88 billion). Non-interest income of C$6.86 billion ($5.02 billion) jumped 21%.
Adjusted non-interest expenses rose 11% to C$7.73 billion ($5.66 billion).
The adjusted efficiency ratio was 61.7% as of Oct. 31, 2024, up from the 58.7% recorded in the prior-year period.
In the reported quarter, Toronto-Dominion recorded a provision for credit losses of C$1.11 billion ($0.81 billion), which surged 26% from the year-ago quarter.
Toronto-Dominion’s Balance Sheet Robust
Total assets were C$2.06 trillion ($1.5 trillion) as of Oct. 31, 2024, up 5% sequentially.
Net loans rose 1% from the fiscal third quarter to C$949.5 billion ($682.1 billion), and deposits grew 4% to C$1.27 trillion ($0.9 trillion).
As of Oct. 31, 2024, the common equity Tier I capital ratio was 13.1%, down from 14.4% as of Oct. 31, 2023. The total capital ratio was 16.8% compared with the prior-year quarter's 18.1%.
TD’s Resolution of Probe Related to AML Practices
Last year, after Toronto-Dominion’s landmark $13.4 billion deal to acquire First Horizon FHN collapsed, the Canada-based lender started receiving inquiries from the U.S. Department of Justice, financial regulators and the Treasury Department regarding its AML practices. The deal to acquire FHN was announced in February 2022.
The core allegations have been that TD Bank failed to prevent money laundering and other financial crimes at several branches in the United States, where customer-facing employees took bribes to help move money.
In anticipation of the resolution of the investigations, TD set aside $450 million in the April quarter and another $2.6 billion during the fiscal third quarter. To fund this expected fine, the company sold 40.5 million shares of Charles Schwab SCHW, reducing its ownership interest in SCHW from 12.3% to 10.1%.
On Oct. 10, 2024, TD Bank resolved the investigation and agreed to pay a $3.1 billion penalty to the U.S. regulators. As part of this agreement, the total assets of its two U.S. banking subsidiaries – TD Bank, NA and TD Bank USA, NA – cannot exceed $434 billion (total assets as of Sept. 30, 2024). Also, these two subsidiaries would be subject to a more stringent approval process for new bank product launches.
Because of this, TD Bank has suspended its medium-term financial targets of 7-10% adjusted earnings growth, more than 16% return on equity and positive operating leverage. Further, the company noted that for fiscal 2025, “it will be challenging for the Bank to generate earnings growth as it navigates a transition year, advances AML remediation with investments in its risk and control infrastructure, and continues to invest in its businesses.”
Our Viewpoint on Toronto-Dominion
Supported by a diverse geographical presence, Toronto-Dominion’s efforts toward improving revenues and market share seem impressive. Relatively high interest rates and decent loan demand will also likely aid its financials.
However, concerns related to tough regulatory requirements following the settlement of the AML probe are expected to weigh on its financials. Further, weakening asset quality due to an uncertain macroeconomic backdrop is a headwind.
Toronto Dominion Bank (The) Price, Consensus and EPS Surprise
Toronto Dominion Bank (The) price-consensus-eps-surprise-chart | Toronto Dominion Bank (The) Quote
TD currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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