02:12 PM EDT, 05/01/2024 (MT Newswires) -- TD has taken an "initial provision" of US$450 million in relation to regulator investigations into its U.S. Bank Secrecy Act (BSA) & anti-money laundering (AML) program. This penalty addresses some, but not all, of the regulatory overhang weighing on the stock, writes National Bank's Gabriel Dechaine.

The initial penalty is being paid to one of the three regulators investigating the issues at TD. The Department of Justice (DoJ) is also investigating. Dechaine points out that when HSBC was assessed penalties for similar issues nearly a decade ago, the DoJ imposed the largest penalty, at US$1.3 billion (vs. US$500 million by the OCC and US$165 million by the Fed).

National Bank believes investors expect TD to settle its BSA/AML issues for somewhere in the $500 million - $1 billion range. However, "[g]iven the size of the initial penalty we could easily see the final cost hit the upper end of that range, if not exceed it. Importantly, the larger the fine gets, the larger the impact on TD's CET 1 ratio from both the impact on retained earnings and from the multiplier impact on Operational Risk RWAs."

In addition to fines, a regulator (or several of them) can issue consent orders on a bank. These orders can result in limits on asset growth and could also add to a bank's cost burden for several years.

TD is rated Sector Perform, with a $92 target.

Price: 81.10, Change: -0.57, Percent Change: -0.70