Morningstar DBRS is downgrading TD Bank’s credit ratings, citing the prospect of a looming economic slowdown and the bank’s well-known governance issues.
The rating agency cut its long-term issuer rating on TD to AA from AA (high).
“The credit ratings downgrade primarily reflects the repositioning of the bank’s credit ratings within its peer group, given the significant failures related to governance and controls in its U.S. anti-money laundering program, as well as the unexpected weakening in the operating environment that will likely pressure earnings more than… originally anticipated,” it said.
Fiscal 2025 was already set to be a “transition year” for TD, as it grapples with the impact of sanctions imposed on a couple of its U.S. subsidiaries due to anti-money laundering failings, including a cap on U.S. retail banking assets.
The bank is facing elevated reputational risk and operational risk, “as it continues its multi-year AML remediation efforts, including the potential for additional missteps,” DBRS said.
Against this backdrop, “Profitability will be challenged in [fiscal] 2025 and potentially beyond as the bank looks to pivot its strategy and refocus growth on the Canadian market where competition for market share between the large Canadian banks will likely intensify,” it noted — adding that the costs of beefing up its governance and internal controls will also pressure earnings.
DBRS said that it’s also concerned about elevated economic and geopolitical uncertainty, particularly U.S. trade policy, “which may lead to a recession and could exacerbate the negative impact on the bank’s profitability and asset quality,” it said.
The rating could face a further downgrade if the bank “experienced any additional missteps or failures, including in its AML remediation efforts, leading to heightened operational risk,” it said — and a “sustained deterioration in earnings or asset quality would also lead to a downgrade of the credit ratings.”
Conversely, the rating could be upgraded, “if TD made substantial progress in restoring the integrity of its AML program and demonstrated a sustainable level of improved profitability commensurate with the higher credit rating category, without a material deterioration in asset-quality metrics,” it said.