TD faces anxious investors

Concerns over U.S. probe and CEO succession fuel shareholder frustration

Toronto-Dominion Bank is confronting shareholders at a moment when investors and executives alike are clamouring for clarity on potential penalties in a U.S. probe and the future of the firm’s leadership.

The bank’s annual shareholders meeting on Thursday comes as the firm contends with an investigation into its anti-money-laundering controls that has derailed the lender’s growth strategy, hurt its stock and hastened questions about who might eventually rise to succeed chief executive officer Bharat Masrani, 67, once he retires.

Senior executives have grown unhappy with the lack of an heir apparent, according to people with knowledge of the situation. The uncertainty has exacerbated managers’ frustrations over the business setbacks and their ability to plot their futures, the people said, asking not to be named discussing private conversations.

Much of the tension stems from the bank’s attempt to buy Memphis-based First Horizon Corp., which was called off almost a year ago amid the U.S. regulatory probe into how the Toronto-based lender handled suspicious customer transactions. The move left Toronto-Dominion with ample capital to deploy and limited options, with its U.S. growth strategy in limbo. The stock has tumbled in recent months, falling almost nine per cent this year, compared with a 2.5 per cent decline for the S&P/TSX Commercial Banks Index.

Masrani, who’s been CEO for almost a decade, voluntarily took a $1-million pay cut for the last fiscal year over the scuttled acquisition of First Horizon and regulatory probe. Now, with no clear successor lined up, a new board chair is under pressure to come up with a way forward to satisfy investors and employees.

“The uncertainty is the biggest source of consternation,” said Dan Rohinton, portfolio manager at iA Global Asset Management. The firm’s retail mutual funds have about 4 million Toronto-Dominion shares.

Investors in Canada’s secondlargest bank want more detail on the fines it’s likely to pay, Rohinton said, as well as whether it could be restricted from mergers and acquisitions — or, in a worst-case scenario, face a cap on growing U.S. assets organically.

Analysts have estimated the fine could top $1 billion, and the bank is already spending hundreds of millions of dollars on upgrades to its risk and control systems in the U.S.

“Regretfully, our AML program was not where it needed to be, and we are addressing it.” Masrani said at Thursday’s meeting. “We know what we need to do, and we are working diligently to strengthen our program. We have on boarded globally recognized talent and leadership, and invested in technology, process design, training and other activities. I understand that you want to know more. However, given the confidential nature of regulatory discussions, I cannot provide additional detail or speculate on timing or announcements.”

With the broader regulatory penalties still up in the air, investors don’t yet seem convinced.

“That uncertainty is weighing on the stock,” said Nigel D’Souza, an analyst with Veritas Investment Research Corp., said before the meeting. “And then you have questions about succession planning as well.”

“Bharat is focused on strengthening the bank, serving our customers and creating value for shareholders,” TorontoDominion spokesperson Lisa Hodgins said in an email. “He leads a deep and highly experienced bench of leaders with proven track records driving growth across large complex businesses. As you would expect, we have a very detailed and robust succession plan, overseen by the board, which continues to serve us well.”