TD’S FIRST HORIZON DEAL FACES NEW SCRUTINY
U.S. senator alleges abusive client practices
TORONTO • Toronto-dominion Bank’s proposed Us$13.4-billion acquisition of Memphis-based First Horizon Corp. is facing new political scrutiny in the United States, but at least one Bay Street analyst says losing the deal — something that does not yet appear likely — might not be the worst thing for the Canadian bank.
The political heat was turned up on Tuesday, when U.S. Senator and Senate banking committee member Elizabeth Warren sent a letter to authorities urging them to block the transaction, citing a media report alleging abusive consumer practices. TD has disputed that report, published in early May by the Washington-based investigative outlet Capitol Forum, and defended its practices, telling the Financial Post its business “is built on a foundation of ethics, integrity and trust.”
If U.S. authorities were to block the merger, it would be “a mixed bag for TD shareholders,” Gabriel Dechaine, a financial services analyst at National Bank, wrote in a note to clients after reviewing Warren’s letter to the Acting Comptroller of the Currency, which called on authorities to prevent any mergers “until TD Bank is held responsible.”
TD’S acquisition of First Horizon Corp., announced in February, was approved by the U.S. firm’s shareholders earlier this month and expected to close in November.
The analyst said it would bring several benefits to TD — including an enhanced physical presence in the U.S. Southeast, increased leverage to rising rates, and the potential for accretive earnings and return on equity.
“However, we must acknowledge that the deal has met with a lukewarm reaction from many investors,” Dechaine wrote. “For starters, most investors compared the deal to BMO (Bank of Montreal)’s proposed acquisition of Bank of the West. That comparison shows TD paid a higher valuation multiple.”
Additional comparisons were also unfavourable, the analyst wrote, noting that the TD combination would not generate full run-rate expense synergies until the third year versus the end of the first year for BMO’S. TD could also take a hit to its CET 1 capital cushion.
If a deal fell through, on the other hand, “TD would find itself back at the top of the pack in terms of CET 1 positioning, which isn’t a terrible place to be when facing a possible economic recession,” Dechaine wrote.
The market appeared to shrug off the U.S. Senator’s letter, which was largely based on the Capitol Forum report about a 2017 investigation by regulators into improper sales practices. TD bank said Thursday that the allegations in the report are “unfounded.”
In a statement, TD disputed the allegations, noting that its compensation practices “place a heavy emphasis on customer satisfaction” and “are carefully and actively managed.”
The statement added that the bank’s routine and ongoing monitoring “has not identified systemic sales practice issues at any time,” and that TD is continuing to work to secure approval for the acquisition of First Horizon.
Dechaine said in his note to clients that Warren’s letter could nevertheless have financial implications for Canada’s second-largest bank in the form of potential fines, remarking that focusing on the proposed First Horizon acquisition may be “missing the bigger picture.”
Warren and three other lawmakers who signed the letter urged the regulator to release results of the fiveyear-old investigation into TD’S sales practices mentioned in the report, and explain why there were no penalties levied.
Dechaine also noted the report raised the issue of rampant improper sales practices at Wells Fargo, which suffered significant fallout from a major scandal that began around 2016. Wells Fargo was found to have pressured employees to meet unrealistic sales goals, which led to the creation of phoney accounts for customers who were unaware of them.
“Any time a bank’s sales practices in the U.S. are being compared to Wells Fargo’s (which is what Senator Warren’s letter is doing) is not a good time,” Dechaine wrote, noting that approval of the First Horizon acquisition “could prove to be a secondary issue.”
He also noted that the allegations echoed issues for which Canadian bank had previously been fined in the U.S.
In 2020, TD paid US$97 million in restitution and a US$25 million penalty in a settlement with the Consumer Financial Protection Bureau, which alleged TD’S New Jersey-based U.S. operation with 1,250 locations in the eastern United States violated rules by “charging consumers overdraft fees for ATM and one-time debit card transactions without obtaining their affirmative consent.”
In 2017, Canada’s Financial Consumer Agency of Canada’s conducted a review of domestic retail sales practices of the six largest Canadian banks and, in a report the following year, said retail banking culture “is predominantly focused on selling products and services, increasing the risk that consumers’ interests are not always given the appropriate priority.”
The FCAC also found that “incentives, sales targets and scorecards… may increase the risk of mis-selling and breaching market conduct obligations.”
The Canadian regulator made six recommendations to enhance the banks’ management of sales practices risk. No penalties were imposed.