What’s going on at TD Bank?

last week TD Bank reported its first quarterly loss in 21 years this comes after the bank has put aside billions of dollars in anticipation of paying fines over money laundering issues all of this has people wondering what's going on at TD Tim Katz is a financial reporter and columnist for the globe he's here to talk about a shift in TD's culture has changed things and what this means for the bank and its investors I'm manica ramman Wims and this is the decel from the globe in [Music] mail Tim great to have you back on the podcast happy to be here as always so TD Bank reported its quarterly earnings last week uh Tim what did we learn about how much money they've actually put aside for these fines so on one hand the bank is performing somewhat normally you know it's day-to-day operations had no major surprises on the other hand there was a huge $2.6 billion US charge or provision is the formal term related to its us anti-money laundering failures and this has been hanging over the bank for over a year now because we knew that there had been a probe um from the Department of Justice and from you know big banking Regulators in the US uh tied to money laundering and drug trafficking but no one kind of knew exactly where it would shake out and now Med has kind of disclosed this is how big it's going to be they had already predisclosure failings the trouble right now though is that we still don't know the full details um those are supposed to come out by calendar end but the sum of the money alone signal you know TD got in some deep deep trouble yeah can we just put that fine into context I mean that seems like a lot of money um how does that compare to other fines that other banks have faced it's up there the biggest fine that I can remember from a US regulator is when against Wells Fargo a number of years ago it wasn't tied to money laundering it was kind of bad business practices and that came in in about $8 billion us so TD is much lower than that but if my memory serves right they're now the largest just after TD would be jiy Morgan took a huge fine tied to the um Bernie madeof punzi scheme for those who remember that from the 08 financial crisis there's been a European bank that's taken a $2 billion charge HSBC has taken a$2 billion charge so TD now has set a bit of a a major case is maybe the best way to describe it and and just to be clear TD has set aside this amount of money for the potential fine they haven't actually been given a final number yet but this is kind of the amount that they're anticipating think they're going to need to cover it Tim do we have any sense of the kind of impact that this could actually have on TD maybe the best context would be that its us retail operation which is where these failings um took place usually makes around $4 billion Canadian a year so I think of it as about one year of earnings um but they're still going to make billions of dollars as an entire bank because the Canadian bank is very profitable it has other divisions like Capital markets Etc so Tim as you as you touched on there these fines that TD is facing stem from issues around money laundering uh in the US which we are going to touch on but I I think it's helpful Tim if we kind of back up a little bit and and look at how TD got here really um because I mean for a long time TD had a pretty positive reputation right absolutely you know I don't want to oversell it cuz you know no bank is a saint but they were always outfront on things like social issues which again might bother some people but they kind of touched on the Canadians Zeitgeist is the way that I would put it and so a big one is that they were big on the environment for more than 15 years and you know there's a story that had been told to me that we didn't get into the piece it was someone who was tied to kind of their environment program was fearful that you know we were so outfront on this issue that it might actually cause problems and at the time TD CEO Ed Clark basically took the stance it's okay I'll handle it and so they weren't scared to kind of push the limit at the same time they also ran a very profitable and good bank so yeah so it seems like as you said like zeitgeisty kind of issues paired with good management of a bank so this was a pretty positive reputation that this bank had totally and maybe the best metric for this to judge this in a sense is that other Banks were secretly very jealous of what TD had built even their arch rival which is RBC would quietly acknowledge like TD's really got something they figured it out and I think that has changed over time and what we really set out to tell was AML in a way and AML failings money laundering yes were a symptom of this culture change and culture stories are very hard to tell because culture is intangible but over time the degradation of culture can really impact how you function so when did you start hearing about I guess changes at TD Bank then honestly it was pre-pandemic but for a long time it was really hard to prove there had been so much kind of going on with the banks they all took major restructuring charges about a decade ago8 to n years ago so there was just a lot happening and you can never tell kind of what was attributed to what then the pandemic happened and that consumed all of us for so long but it was around I'd say 2021 that you started to hear these Whispers of you know TD has lost its fast ball which is a baseball analogy but you know TD was scared to stick its neck out might be the best way to describe it otherwise and then it kind of manifested into like the TDS become risk averse but it was really hard to prove because the numbers were actually still okay like their profits were still fine it's partly because we literally flooded the world with money during the pandemic and so it was like almost impossible to not make good money you know we had a huge housing boom here in Canada right that we all know about now well the banks made huge amounts of money off of that but around 20202 it reached this kind of like point where the bank couldn't hide from it anymore and so what it did is it went out and it was like all right you want us to be more uh aggressive we're going to go buy a big US Bank so it it went out and offered to pay 13 billion US for a company called First Horizon which is based in Memphis Tennessee and this was kind of meant to you know the bank has never said this but it was like a listen we got it we're going to grow don't worry and it made a lot of sense you know TD in the US over the last 20 years has really expanded more in the Northeast and the Mid-Atlantic so think about like Philadelphia area up up through Massachusetts and then has this kind of portion in Florida which is also pretty big so this would have connected the bank all along the Eastern Seaboard they they love to say that so it made sense and it was like okay here we go well it turns out this one deal is what in a way exposed all of T's problems to the public at least because what ended up happening was about a year later the deal got killed we later found out because Regulators were worried about money laundering right so this I think this was May 2023 right when we found out that the deal with fris Horizon was not going through it was kind of mysterious at first but then yeah eventually it came down to this this moneya laundering stuff exactly and so there was a few leaks that came out that it was tied to moneya laundering but again no one really knew and then it was exactly one year ago last August during the quarterly reporting season when TD disclosed there was a doj probe we're likely to face Financial penalties and all of a sudden it was like oh my God like this is actually happening it's real uh doj of course Department of Justice probe so big deal big deal exactly so let's dig into that because you you started Tim kind of talking around the culture of the bank and how things may be changed there so what do we know about the the changes that happened kind of within the institution I would boil it down to to one thing to start which is that under the previous regime and I don't want to pin this on like one specific person because Ed Clark who was a previous CEO he handpicked the current CEO Barrett misran uh as his successor and Barrett was a top official he was used to run the US division under Ed so bear was very much part of this it wasn't like there was this huge shift right like not some Outsider who came in and imposed some brand new thing but one of the core differences was that Ed believed in the kind of Frank talk is how I would describe it when it came to just you know investor Communications Communications with the media TV under Ed Clark they would answer your questions same thing with investors it was kind of like treat people with respect treat people like adults and it builds Goodwill so that when something goes wrong people know you're not lying to them they may be mad at you and say you have to fix this but they trust you that you're going to fix it under the current regime it's basically been say nothing Barrett M has been CEO since 2014 2014 yes so it's been 10 years now so we must have a pretty good sense of his management style how he's running the place like what do you know about that Tim it's this idea of we don't have to say much because we are TD and TD performs TD delivers coupled with bureaucracy and so another anecdote somebody said to me was that you know within TD now to get some sort of business initiative approved you need 30 people to say yes because there's so many layers of like Risk in compliance and and lawyers who have to sign off on things about like you know will this hurt the bank's reputation will this affect our brand you know like where are we at risk on financial performance Etc and I remember I ran that anecdote by someone else tied to the bank and they said oh it's not 30 it's 50 people who need to say yes wow and all it takes is one person to say no and the whole thing can die and so another person described it to me as like a drift setson bringing this back to AML though you know there's a lot that we still don't know and I want to make that very clear because you know to TD's credit they haven't been able to say much because us Regulators are still you know probing the bank even though we now know how much money has to be paid there could be a lot more that comes out in terms of of limiting TD's growth and you know actual details of of what went on but one example that was given to me around you know how decisions get made is with some money laundering problems that that actually got raised internally inside the bank they got sent kind of up the chain and then they disappeared into what I'll call TD's ether and there's less accountability there's less direct understanding of like I can just go to this person and get an answer and so over time people just you know you probe a little bit and and you don't get answers you learn okay stop probing and again multipli that over years and people kind of throw their hands up we'll be back in a minute so Tim some of the cultural changes you mentioned things like issues getting sent up the chain and they're not being dealt with over time is this maybe how some of the problems like moneya laundering got so bad totally and the the Third Leg of this is this idea of accountability which people in the bank talk about as as this big problem of people leave the bank and you never know like have they been fired have they left on their own have we seen a lot of people leave the bank that has been a really interesting development and to be honest is what really triggered looking into the culture side of things we knew that there were problems with AML because of the deal that got killed but in 2021 or so you started to see some senior people that I would call TD blood who started leaving so there was someone who everyone thought was going to be the next CFO mangit Singh uh left for sunlife a year later someone named Nori Campbell left and these people were kind of like flag bearers inside the organization it really picked up though last year in the fall effectively the three leading people in Canadian banking which is Big Money Maker all left the most important being Michael rhods who was the head of the division he was also going to be a CEO succession candidate or he wasn't going to be he was a candidate and he left in the middle of like a Department of Justice probe it just it was like the worst thing that could have happened and all of a sudden that's when everyone said what is going on inside TD so what what does all that signal to you Tim like all of these departures and done in this way what do you get from that it felt a lot like frustration on the inside it's like any crisis you know you have a few mini problems that that crop up over time people leave and management tries to kind of just forge ahead you know like we'll keep a lid on it the problem is this spring the lid kind of like popped off um it's like a dam broke a real frustration started Brewing inside the bank because more people were leaving and yet the same lines are being delivered internally which are the same lines that we hear externally which is TD's been around for 150 years TD Will Survive the next 150 years TD is the bank that you can trust and people were saying to me like have you seen our stock price like we we can't deny it anymore it sounds crazy but people actually want an acknowledgment of the problems because there's a feeling that the only way to fix it is to you know first have acceptance that something has gone wrong so this frustration that you're talking about how is the current leadership like I guess especially the CEO Miss Rani how is how has he responded to all of that it's been very nothing to see here is how I would describe it and it's the same thing from the board of directors people around the bank I always say kind of the TD family broadly speaking have said like you know one thing that they themselves can't figure out is one of T's major AML problems cropped up in New York in Queens New York the lead person in this criminal ring pled guilty in early 2022 we we actually had a whole other episode where we talked about the details of this lot going on it was a lot exactly um and the bank's Global head of anti-money laundering wasn't replaced until late last year so almost two years later call it I think it's like 20 months later so the the person kind of the you know the go-to person who would have been responsible was was kind of sticking around for quite a while after this all came to light yes and I think part of it and and understandably so to be frank and be fair is that every Bank faces money laundering problems um these criminal rings have become so sophisticated so I think I think there was a sense internally of like listen we are TD this was a major major failing major lapse but we will fix it but then more and more problems kept cropping up there were examples at other branches from other criminal rings that have been had been breached basically and on top of that TD until very very recently kept giving these kind of very Bland public lines about how like this is not the TD way and we will address problems and you know I've been at the globe for 15 years now I've seen like a fair share of crises and like over time you realize that there is a way to they call it issues management you manage the crisis you number one fire somebody you acknowledge the problem and you set a path forward you know it's like that's that's the secret to PR to be honest and TD wasn't doing any of it is how I would describe it and so there were all these questions around like who heads on a pla like like who who's taking ownership for this which again ties back to the idea that you know from what we could see from the outside nobody had kind of been replaced in the department that has all now changed you know we have a new Global head they recently replaced their Chief compliance officer which is tied to AML but also risk in general in an interview I did with Barrett for our big story you know the CEO the CEO he very much said I own this we own this we will fix this so the tone has very much changed but it hasn't changed when it comes to culture if anything there's been pushed back it's more like I don't see what you're talking about I think you're getting bad information is is effectively effectively the message you know companies like TD the board of directors is a significant player here too so what role has the board played in all of this that's been one of the big Mysteries through it all because TD also historically had a strong board it's felt like the board has basically been said we have this one issue in the US that we're going to pick and we're going to move forward and when we move forward we'll be fantastic and the problem is that so much time has passed now that people have just gotten extremely frustrated again that there's been no acknowledgement but two it's dovetailed with all these cultural issues and there's this saying that was part of a big report like 30 years ago here in Canada and the title of the report was where were the directors and you're hearing that now about TD like where were the directors and Canada's banking regulator has also talked about the board Canada's banking regulator has said that it's starting to look at non-financial risks like actually the the board members themselves the character of the board members that seems like I don't know is that is that normal Tim or what do we what do we know about that it's a really new development and I would argue it's really relevant it's like the banking regulator has said without using these exact words that they want to start monitoring what they call non-financial risks because non-financial risks can become Financial risks so an egregious example might be you know a bank brings in somebody who's a big risk taker and wants to go out and win business and you know they're kind of your typical not to be too gender normative or whatever but your typical alpha male who pounds his chest you know and hires people around him that are the same mentality and they're the kind of people that you know don't take criticism well and they're just always kind of out saying like my way is the the only way and it can work for a while cuz maybe they deliver great results but 5 years in you know there's a recession there is um economic downturn there's a pandemic something right and all of a sudden their business blows up because all those risky things really had major risk in bad times you know and so the The Regulators basically said we need to monitor more things to make sure that we don't have these scenarios pop up because particularly in Canada the banks are vital through our economy they have a huge element of economic stability is the best way to describe it and so if you have a bank that kind of blows up in a way it's a hit to kind of the Canadian image and an important note to this is that you know during the 2008 2009 financial crisis Candace Banks were like heralded globally as these champions of you know the right way to do business and it became the source of like National pride and I think a lot of that Halo has now faded and the regulator feels like you know we can't expect or think that the banks will just always be good corporate citizens and so we need to kind of be able to keep a check on them in a different way we've talked a little bit about how this is playing out in Canada how Canadians perceive TD but I I wonder how is this playing out in the US because TD has a big presence there now too yeah TD now depending on how you rank it in what banks you include they're definitely top 10 in the US and they were going to get even bigger with this first horizon deal they were going to Vault into sixth place which is directly under kind of the four major Global Banks like JB Morgan so I'd say a lot of the pain and cultural hit or reputation hit has been felt more in Canada what is really important though for people to understand is though even even though they've settled this um Financial penalty and it's huge but they can kind of absorb it we don't know yet if they're going to constraints put on its its growth in the US and that's a big element of TD's future because about 20 years ago under Ed Clark they said that we're going to go and we're going to build out a franchise in the US Canada is just too constrained for growth in the long term and so they bet heavily on the US and they've done a decent job of building that franchise but they're at a point where they kind of to really make it work they need a bigger one hm so if TD wants to keep competing at the level that they have been Tim how do they come out of this again it comes down for me to this idea of of acknowledgement which may not be the best word because it sounds a little bit boring but just saying like we're not where we want to be and we've we've made mistakes you know I think everybody understands that on some level you know with AML for instance these criminal rings are really sophisticated and on top of that there's been a huge influx of fenel into the US and opioids like we have it here in Canada too this was tied because Drug Money essentially was tied to the AML issue so yeah it's all related exactly um you know even talking to Regulators or like you know speaking through the media or speaking through investor calls to Regulators because that's kind of how it works acknowledge that this was a major problem that then that you know like you're embarrassed by it because TD has had issues in the past with AML a lot of banks have and this is something that came up in our our reporting but they showed embarrassment you know they showed that they were going to fix this and they they took a very direct plan to do so this time around it's just felt so much different I think they need to also explain to investors explain to the broader public why they're worth the TD premium the way that I would describe it for kind of the average person is that this Goodwill that they had built up for more than a decade it had real Financial consequences in a good way at the end of the day the TD premium came down to trust it was investors trusted you that even if you messed up you were going to fix it it's a measure of confidence in leadership they have chewed through so much of that Goodwill for various reasons and and over time so it's not like it was just something this this one AML issue is what's caused it I would argue that the current management team still views themselves as having that Goodwill that trust from people and the street investors are saying to them you don't so prove it and they're going to need to Tim thank you so much for your reporting and and for taking the time to be here today I always happy to that's it for today I'm manica ramman Wilms our producers are meline white Rachel Ley McLaughlin and Mall Stein David Crosby edits the show Adrien Chun is our senior producer and Matt frer is our managing editor thanks much for listening and I'll talk to you tomorrow