TD cannot discuss issues that derailed First Horizon deal, CEO says

Open this photo in gallery:

Toronto-Dominion Bank TD-T chief executive Bharat Masrani said he is not able to provide investors with more information about the regulatory issues that derailed its planned U.S. acquisition of First Horizon Corp., FHN-N telling shareholders Thursday that the bank has plenty of capital to grow in other ways.

During an investor presentation in Toronto, Mr. Masrani said there are rules that prevent the lender from answering questions about the issues that sunk the US$13.4-billion deal.

“The issue we are dealing with has nothing to do with our good-faith dealings with customers,” Mr. Masrani said. “We are working with our [U.S.] regulators to put this matter behind us and I’m confident that in time, we will.”

TD and regulators have not disclosed the factors that drove the deal’s failure, leaving some investors and analysts concerned that the regulatory issues could hinder TD’s ability to do other deals, and that the loss could delay TD’s growth outlook.

In early May, TD walked away from its acquisition after difficulties securing regulatory approvals delayed the deal’s closing timeline indefinitely. Speaking to analysts on its May second-quarter earnings, Mr. Masrani sidestepped questions on the matter, saying that TD can spend on other priorities that build its capabilities.

Media reports citing unnamed sources said the regulators’ concerns stemmed from issues with TD’s anti-money-laundering practices, but the bank has declined to comment on the issue.

During his presentation Thursday, Mr. Masrani highlighted TD’s peer-leading capital cushion that provides Canada’s second-largest bank with a significant platform to expand its dominance over rivals.

The bank has the highest capital buffer among the Big Six banks. Its common equity tier (CET1) ratio – a measure of a bank’s ability to sustain sour loans – towers at 15.3 per cent, well above the 11-per-cent regulatory minimum. That means TD has billions of dollars more than its competitors to spend on organic growth, acquisitions, share buybacks and dividend increases.

Mr. Masrani said that even if economic conditions continue to worsen, TD’s capital position allows it to pursue “organic or inorganic opportunities that may arise and which TD may be uniquely positioned to pursue.”

The shareholder event focused on TD’s Canadian market, with the bank planning to hold a separate presentation on its U.S. business at a later date.

In the past five years, TD has grown its revenue, earnings per share and dividends faster than the peer average while investing in technology and sales platforms to help maintain and grow its significant deposit base, according to Mr. Masrani. As high interest rates put pressure on deposits – a key source of funding for banks – competition in Canada’s banking sector is escalating as TD’s rivals also fight for customers’ cash.

The banking sector is facing rising costs and slower growth as the economic outlook darkens. With few opportunities for growth in Canada’s market – where customers are less likely to switch banks – TD is one of many lenders targeting the wave of newcomers as the government ramps up its immigration targets. TD has set a medium-term growth target of 50 per cent in newcomer customer acquisitions.

TD already holds the largest share of the Canadian market in deposits. In the past five years, it grew its client base by two million net new customers, amassing 27 million customers, Mr. Masrani said.

Personal and commercial banking deposits account for nearly three-quarters of its funding base, which are a cheaper source of funding than other options. This could bolster TD’s earnings as higher interest rates squeeze net interest margins – the difference between the amount banks charge on loans and pay on deposits.

Mr. Masrani pitched TD as a bank that adapts in a quickly evolving industry. He cited acquisitions in technology, including its 2019 purchase of predictive-artificial intelligence (AI) company Layer 6. By using the company’s AI model, the bank has cut down the decision processing time on mortgage preapprovals from two hours to as little as ten seconds.

The focus on tech has allowed the bank to move customer transactions to digital platforms, while streamlining branch interactions to financial advice and sales. TD plans to renovate more than 200 branches in the next three years, swapping out teller desks for sales offices.