Toronto-Dominion Bank’s acquisition of U.S. investment dealer Cowen Inc. fits with the bank’s growth strategy but represents a negative for its credit quality, says Moody’s Investors Service in a new report.
Last week, TD announced a US$1.3-billion deal for Cowen that is expected to close in the first quarter of 2023, subject to shareholder and regulatory approval.
According to Moody’s, while the deal will enable TD to accelerate its U.S. growth plans, it also increases the bank’s exposure to capital markets, which are generally riskier than TD’s other business activities.
“On a pro forma basis, we estimate that TD’s overall revenue contribution from wholesale banking will increase to 15% from 11% at year-end 2021,” the rating agency said.
The deal will boost TD’s standing in the competitive U.S. market, where management has expressed aspirations of becoming a top dealer, the report said.
But it noted that the bank doesn’t have the same franchise strength in the U.S. that it does in Canada, and capital markets activities “are prone to inherent volatility as their performance depends on market conditions, investor appetite and pose risk-control challenges.”
The report also noted the “challenging macroeconomic outlook reflecting high inflation, rising interest rates and continued fallout from the Russia-Ukraine conflict, which could negatively impact capital markets related activities.”
Integration risk is also intensified by the deal, given that TD now expects to close two U.S. acquisitions in the first quarter of 2023, Moody’s said. Earlier this year it announced a US$13.4-billion deal for Memphis-based First Horizon Corp.
“Even though these integrations will impact two separate business segments and TD has demonstrated a strong integration track record, TD’s growing appetite for inorganic growth outside Canada is notable and will necessitate careful monitoring,” the report said.
In the Cowen deal, TD expects total integration and retention costs of US$450 million over three years.
“Risks related to employee retention are especially critical given the potential cultural differences between the firms that may arise following the acquisition,” Moody’s said.