TD CEO says bank’s size helps explain risk management failures

TD Bank Group is still in the thick of it a thorough overhaul of the anti-money laundering programme, but Chief Executive Bharat Masrani said on Wednesday he saw “light at the end” of the tunnel.

The bank’s massive size — C$2 trillion in assets — has acted as a bottleneck in risk management, Masrani said during a fireside chat at the Scotiabank Financials Summit. He said TD is improving intercompany communication systems as part of an effort to turn around its AML program.

TD already has over $500 million invested to the program and expects to allocate another hundreds of millions for this purpose.

“We had a situation here where some bad actors were able to exploit the bank,” Masrani said. “In a bank our size, it’s easy sometimes not to look at the accounts as clearly as we should. … There’s a lot of information available. It’s important to coordinate and make sure the right information is available to the right people in the right areas of the bank in real time.”

The Toronto-based bank said last month it expected U.S. regulators to impose fines a total of over 3 billion dollarswhich would constitute one of the most expensive AML violations in the country.

Masrani said TD cannot share details of its mistakes until it closes the case with the Justice Department and other federal agencies, though he expects a “global resolution” by the end of the year. The Wall Street Journal reports TD is being tested for use by Chinese criminal groups to launder drug money.

One of the “key lessons” from the risk management failure is that TD needs to “deepen accountability” across all of its front lines and control functions, Masrani said, ensuring employees can recognize risks and “act with urgency.”

TD is not the first major bank to point to the dangers of isolated corporate structures following regulatory issues.

Among series of scandals at Wells FargoA 2017 internal company report pointed to “significant problems” with the bank’s decentralized structure, as different business units housed their own risk-management operations. Wells eventually centralized many of its functions in the wake of the scandals.

TD did not disclose the total cost of its efforts to fix its AML issues, but has repeatedly said it is investing in technology upgrades, staff development and training.

Last month, TD said its risk and control infrastructure spending this year would be higher than previously forecast, raising its spending growth forecast from mid-single digits to high single digits. Masrani said Wednesday that the bank’s 2024 spending includes a range of one-time costs that range from C$200 million to C$250 million. Those expenses include litigation costs and compensation related to some performing businesses.

TD also fired some employees after an internal investigation determined they had violated the bank’s code of conduct. Other employees faced disciplinary action, including impacts to their pay. A TD spokesman declined to provide additional details on how many employees were affected.

Masrani himself took a C$1 million pay cut last year amid TD’s regulatory woes and failed acquisition of Memphis, Tenn.-based First Horizon, a $13.4 billion deal that collapsed months before TD disclosed a Justice Department investigation into his business.

“At the end of the day, I’m the CEO of the bank. I’m responsible,” Masrani said Wednesday. “I’m the owner. And the good thing is we know what the problems were and we’re fixing them. And we want to make sure that continues in the bank and that this is behind us.”

As TD’s mistakes mounted, some investors began to ask questions about who will replace Masraniand when. On Wednesday, the CEO, who is nearly 70 and has been at the helm of the company for the past decade, reiterated that succession planning is important to TD, while also hinting that he plans to see the regulatory troubles through to the end.

“I’m busy,” Masrani said. “Not just fixing our programs in the U.S., but (also) ‘How do we serve our customers well and make sure the bank continues to operate in the way all of our stakeholders would expect it to operate?’”

TD, self-described as “America’s Most Convenient Bank,” did not disclose how much development plans in the United States could be hampered by U.S. regulators, although the company recently warned of possible non-monetary penalties.

Wall Street analysts are wondering whether the bank’s plans to open 150 U.S. branches by 2027 are mostly off. TD announced its expansion plan last year after losing additional access to the southeastern U.S. market that it could have gained by acquiring First Horizon.

Masrani acknowledged Wednesday that U.S. expansion has slowed “pretty dramatically” as the bank invests in risk management. But he maintained that TD’s U.S. operations demonstrate “a strong franchise in very important markets.”

Despite the stalled growth of TD’s U.S. presence, analysts say the bank has enough of a buffer to absorb potential regulatory fines that are eating into capital. TD’s latest Tier 1 equity ratio of 12.8% represented a quarterly decline as the bank bought back some stock and set aside $2.6 billion for anticipated penalties. Since then, TD has sold 40.5 million shares of Charles Schwab stock to rebuild capital.

Masrani said Wednesday that TD maintains an excess buffer “in case something goes wrong” but generally aims for a CET1 ratio of between 12% and 12.5%. A year ago, the ratio was 15.2%.

Bank of America analyst Ebrahim Poonawala wrote in a note after TD’s third-quarter earnings report that the company’s capital management strategy — which includes both share buybacks and the sale of Schwab shares — was “somewhat of a mystery.” He said the capital moves, combined with higher-than-expected spending, “left the door open for additional hits to earnings/capital.”

Masrani said Wednesday that TD has historically acted conservatively when it comes to capital preservation.

“It was a fundamental part of our DNA, and that hasn’t changed,” he said. “I think there’s a lot of uncertainty there.”