Toronto-Dominion Bank (TSX:TD) has been in the limelight this year, but not for the best reasons. The Canadian banking sector’s $137.2 billion market capitalization giant has underperformed its peers in the Big Six by significant margins. A major announcement from the bank recently led to a sharp decline in its share price, making it lag substantially behind the largest Canadian bank stocks.
Between October 9 and October 11, TD Bank stock share price dipped by around 10% following an announcement acknowledging its compliance issues in the US. The bank has agreed to pay a US$3 billion settlement for its shortcomings in the anti-money laundering (AML) program, outlining plans for remediation.
As with any major development, the announcement has sent its share price into volatile territory. In light of the ongoing situation, I will discuss whether TD Bank stock might be a buy, sell, or hold based on the possible impact.
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The massive settlement
TD Bank’s compliance issues with the US AML program have been a problem for a few years. October 10, 2024 saw the bank reach a resolution with regulators, which included a settlement the bank has to pay amounting to around US$3.1 billion.
The settlement agreement primarily focuses on fixing its past errors with the US AML program. As part of the remediation process, the bank must bolster its compliance and monitoring systems.
TD Bank also has restrictions on growing its assets across the border. The bank has a cap of US$434 billion, limiting its ability to expand its presence in the US until it fully aligns with the compliance conditions laid out. TD Bank stock has covered a substantial portion of the penalties, but the announcement has put the bank in the spotlight and applied significant pressure on the stock.
The impact on its financials
TD Bank stock is one of the Big Six Canadian banks and a fundamentally sound publicly traded company. The company’s earnings report from the third quarter of the fiscal year already showed signs of pressure from getting ready for such an outcome.
The July 2024-ending quarter saw the bank lay out a US$2.6 billion provision to cover penalties related to its compliance issues. The quarter saw the bank report a $181 million loss. Despite the reported loss, the bank’s core operations stayed solid after adjusting for the large provision it set aside.
Limitations on expanding its operations in the US until it meets compliance might be bad, but it can help the bank focus on optimizing its existing operations.
Foolish takeaway
TD Bank’s recent challenges do place the stock under pressure in the short term. However, the bank has a clear path to meeting regulatory requirements for the US AML program. There will likely be sustained weakness in its share prices for a while, but the bank has a runway for growth once it meets requirements.
As of this writing, TD Bank stock trades for $78.48 per share, down by 10.8% from its 52-week high. It boasts a 5.2% dividend yield that you can lock into your portfolio while you wait for the turnaround in its valuation to capture capital gains.
