Financial accounting business sheet calculator

Concerns about the impact of weak anti–money laundering (AML) controls are overshadowing strong earnings at Toronto-Dominion Bank, says Moody’s Investors Service in a new report.

Last week, TD Bank reported its second-quarter results, which saw earnings decline by 22% year over year amid provisions related to the bank’s AML controls along with higher provisions for credit losses, higher non-interest expenses and restructuring charges, which were partially offset by higher revenues, the rating agency noted.

Adjusted net income was up 2% from a year ago “because of higher earnings in wholesale banking and Canadian personal [and] commercial banking, partly offset by lower earnings in U.S. retail,” the report said.

Those adjustments include AML provisions, restructuring charges, a litigation provision and integration charges, among other one-time factors.

Specifically, the bank took a $615-million provision related to regulatory and law enforcement investigations of its AML program.

It also took a $165-million restructuring charge, primarily for employee severance and other personnel-related costs, and non-interest expenses rose 5% quarter over quarter (up 24% year over year), Moody’s said.

“Adjusted revenue was up 10%, driven by higher trading-related revenue, underwriting fees and lending fees in wholesale banking as well as higher volumes and margins in Canadian [personal and commercial] banking,” Moody’s said.

Earnings increased sequentially in both wholesale banking, and wealth management and insurance, it said.

Notably, the wealth management segment saw net income increase 12% from the previous quarter, and 19% year over year, to $621 million.

“The sequential increase reflected higher fee-based and transaction revenue in the wealth management business, partly offset by lower revenue in the insurance business,” Moody’s noted.

The core Canadian banking business saw earnings decline 3% sequentially to $1.74 billion, “driven by lower revenue and higher [loan loss provisions], partially offset by lower non-interest expenses,” it said.

But earnings in the U.S. retail bank were down 35% sequentially, “driven by provisions for investigations related to the bank’s AML program and the [Federal Deposit Insurance Corp.] special assessment,” it said.

Credit loss provisions increased, which, Moody’s said, reflects the “continued normalization of credit performance and credit migration in the commercial lending portfolios, as well as volume growth.”

The bank’s overall asset quality remains sound, the report said, and, while its common equity tier one capital ratio declined by 51 basis points in the quarter, the ratio remains well above its regulatory minimum and is at the high end among TD’s peers.

“We expect TD to maintain a comfortable buffer above regulatory minimums in light of the weakened macroeconomic environment,” Moody’s said. Total loss-absorbing capacity and leverage ratios are well above regulatory minimums too, it said.