Fitch Ratings has revised the outlook on Toronto-Dominion Bank’s (TSE: TD) credit rating from “stable” to “negative” amidst ongoing regulatory investigations into the bank’s anti-money laundering (AML) practices in the United States.
The revision comes as TD faces potential monetary and non-monetary penalties that could significantly impact its earnings, franchise strength, and ability to engage in further mergers and acquisitions.
TD has already set aside $450 million to cover potential fines related to one of the three regulatory investigations, with more monetary penalties anticipated. The bank has acknowledged that its AML program was insufficient in effectively monitoring, detecting, reporting, and responding to suspicious activity.
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As a result, TD has invested approximately $500 million in program remediation and platform enhancements to address these shortcomings.
Fitch believes that the regulatory findings regarding TD’s AML practices will continue to garner significant attention from regulators, politicians, and potential legal entities in both Canada and the United States. The uncertainty surrounding the ultimate impact of these investigations on TD’s franchise, earnings, and risk profiles has led to the negative outlook revision.
Despite the challenges posed by the AML investigations, Fitch has affirmed TD’s Long-Term Issuer Default Rating at ‘AA-‘ and Short-Term IDR at ‘F1+’, citing the bank’s resilient financial profile, prudent underwriting, benign asset quality, diversified business mix, strong capitalization, and robust liquidity.
However, the ratings agency warns that a downgrade could occur if the regulatory issues result in a material loss of franchise strength or if the bank incurs fines that significantly lower its profitability and pressure its capital levels.
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