National Post


U.S. senator alleges abusive client practices

- Barbara shecter

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.

 ?? ?? U.S. Sen. Elizabeth Warren
U.S. Sen. Elizabeth Warren

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