One Canadian bank analyst says there could be $1 billion downside to Toronto Dominion Bank’s earning potential after a report that the investigation it faces in the U.S. is tied to laundering illicit fentanyl profits.
The U.S. Department of Justice launched an investigation after discovering evidence of a drug-money-laundering operation in New York and New Jersey, the Wall Street Journal reported on May 2, citing court documents and people familiar with the case.
The Journal said the U.S. Justice Department investigation is focused on how Chinese drug traffickers allegedly used TD to launder at least US$653 million, and bribed TD employees to do so.
Gabriel Dechaine, a Canadian banks analyst with National Bank Financial says the aftermath of the probe could lead to rippling implications for TD’s revenue growth.
Dechaine says a major element in the regulatory response to the scandal are non-monetary penalties and wider restrictions enforced on the bank.
“Those are some things that could still come into play,” he said during an interview with BNN Bloomberg on Monday. “That could be a persistent push to keep investing into compliance costs or compliance personnel and systems. So the next two years they’re going to spend around $500 million a year after tax. That could go on or the numbers could get bigger. Or it could last several more years beyond that.”
Regulators, he said, could essentially tell TD, “until your problems are fixed and we’re satisfied with your new system there’s a cap on your growth.”
According to Bloomberg News, TD has lost about $10 billion in market capitalization since the Wall Street Journal initially reported on the laundering case. On Friday of last week, TD’s share price fell 5.8 per cent, marking the worst drop since March 2020, Bloomberg says.
Dechaine says that a lower stock price shouldn’t be too enticing to investors.
“Valuation alone isn’t a reason to buy a stock,” he said. “You have to think, ‘What’s the cause for the valuation to be that low?’ In this case, it’s such a murky situation with a lot of uncertainty and with a lot of long term implications as well. That seemed a little too simplistic to focus on the valuation alone.”
“Wait and see. Don’t be early to the party.”
To watch the rest of Dechaine’s interview with BNN Bloomberg, watch the video above.
With files from Bloomberg.com and The Canadian Press