TD Bank's stock drop on money-laundering probe overblown says KBW analyst, but Jefferies is not so sure

By Steve Gelsi

Jefferies cuts TD's price target on fears of a 'lost decade' while KBW reiterates outperform rating in more bullish stance.

A drop in TD Bank Group's stock following a Wall Street Journal report about allegedly laundering illegal money from Chinese drug traffickers and Mexican cartels may or may not be overblown, depending on which analyst is asked.

While analysts at KBW said Monday that investors have overreacted to the report, analysts at Jefferies were more critical of the situation.

KBW stuck to its outperform rating on TD Bank's stock, even as Jefferies reiterated a hold rating and cut its price target to C$74 ($54.17) from C$82 a share.

TD Bank's stock (TD) was up by 1.1% on Monday, after a nearly 6% slide in the previous trading session on the WSJ report, which said the U.S. Justice Department is investigating the bank's internal controls.

"As more information comes to light in TD's U.S. anti money-launching probe, it becomes more damning," Jefferies analyst John Aiken said.

Market expectations for the potential fines faced by TD Bank have risen to $2 billion from $1 billion, but could go higher, Aiken said.

TD Bank, which tried unsuccessfully to buy First Horizon Corp. (FHN) to boost its entry into the U.S. market, now faces a potential "lost decade" in its plans to grow South of the Canadian border, Aiken said.

"Growth in the U.S. will likely be constrained and the timeline for a fix is extended by several years" to as long as 5.5 years, rather than two-to-three years he said.

It's doubtful that the stock will bounce back soon because of even higher potential fines and its perceived status as being in the "penalty box" for the foreseeable future, Aiken said.

The bank may also reshuffle its leadership team and face a succession challenge.

"With departures around the table, TD's bench strength has weakened," he said.

KBW analyst Mike Rizvanovic said the latest TD Bank developments have "clearly spooked investors" with the bank's relative valuation at its lowest point in more than 21 years.

"While the optics around the new anti-money-laundering details are negative, we believe the market has overreacted," Rizvanovic said.

HSBC (HSBC) had similar issues more than a decade ago which were, in the words of KBW's Rizvanovic, "far worse in terms of magnitude and scope" that resulted in a fine of about $1.9 billion in 2021.

That fine, valued at $2.6 billion in today's dollars, was paid to avoid prosecution for allowing at least $881 million in proceeds from the sale of illegal drugs, according to contemporaneous reports.

TD Bank has already lost about C$7.8 billion ($5.7 billion) in market cap after the WSJ story came out, Rizvanovic said.

"While we believe TD's shares will trade at a discount in the near term, we see relative upside for patient investors," KBW's Rizvanovic said.

Law-enforcement efforts were triggered by the discovery of an operation in New York and New Jersey that laundered hundreds of millions of dollars from fentanyl sales and other drugs through TD Bank, with alleged bribes to bank employees, the report said.

Late Friday, TD Bank said it's already invested about $450 million in boosting its anti-money-launching efforts and that it continues to work to improve its internal practices to thwart criminals. In a statement, Chief Executive Bharat Masranis said the bank's anti-money laundering program "fell short and did not effectively monitor, detect, report or respond."

In 2023, TD Bank disclosed an investigation by the Justice Department into its anti-money-laundering program but the laundering of illegal drug money had not been reported prior to last week.

Prior to Monday's trades, TD Bank's stock was down by 15.4% in 2024, compared to a 7.5% gain by the S&P 500 SPX, prior to Monday's trading.

Philip Van Doorn contributed.

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-Steve Gelsi

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05-06-24 1243ET

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