Opinion: TD Bank's 'LOL' culture is reversing two generations of southward expansion

The most striking thing about U.S. Attorney General Merrick Garland's takeover of Toronto-Dominion Bank TD-T on Thursday wasn't the criminal conviction, the massive $3.09 billion in penalties or the freeze on future U.S. growth. Market.

The shocking element of Mr. Garland's press conference criticism was the emails from TD employees that he read aloud. They spoke to a culture that will plague the bank as new CEO Raymond Chun and his team try to win back customers, boost profits and restore the luster of a bank that has historically boasted a premium stock market valuation.

Time and again, year after year, TD branch employees, managers and compliance officials joked about drug dealers laundering money. In three separate emails that Mr. Garland read at the news conference, TD employees responded to suspicious activity, such as customers dropping off $1 million in cash and withdrawing checks on the same day, by sending a note with the Ending “LOL – laugh out loud – to colleagues.

“In one case, a compliance officer asked a manager what 'the bad guys' thought about the bank. The manager replied, “Lol. “An easy target,” Mr. Garland said.

When bankers continually add “LOL” to emails and text messages about working with criminals, a serious problem arises.

On Thursday, after Mr. Garland finished his demolition work, TD executives were truly contrite. In an analyst call, CEO Bharat Masrani – who is retiring in April – along with Mr Chun and the team spent a lot of time talking about turnaround plans. In the future, 97,000 TD employees will understand that including LOL in an internal email is career-ending.

What Mr. Chun and his colleagues have struggled to put into words is how this former stock market darling will grow profits as predictably as in the past to win back investors.

TD has had a unique growth story marked by two generations of acquisitions. The bank built a network of 1,150 TD branches stretching from Maine to Florida – more branches than TD has in its home country. Quarter after quarter, a U.S. division billed as “America’s most convenient bank” generated reliable returns.

By freezing TD's $434 billion in U.S. retail assets as of the end of September, American regulators have shut down TD's growth engine.

To serve U.S. customers without increasing U.S. assets, TD must make difficult decisions. In the press conference, Leo Salom, the head of TD's U.S. retail business, said it was part of the bank's strategy to exit some business areas – he described it as a plan to “reduce non-scalable or niche portfolios with minimal franchise value.” “. .”

Banks cannot shy away from achieving premium stock market valuations.

Mr. Chun and Mr. Masrani stressed that the U.S. sanctions would not impact the bank's Canadian retail business. They noted, tellingly, that regulators had not imposed any restrictions on TD Securities, which has extensive investment banking and commercial lending operations in the United States.

TD has an extremely strong balance sheet, even after paying fines for money laundering. With a significant stake in the online brokerage firm Charles Schwab, the bank has a piggy bank that it can fall back on at any time.

If he takes the top job, Mr. Chun could use the capital he no longer needs to expand the U.S. retail business to expand TD's corporate loan portfolio. TD has the financial clout to compete with the largest U.S. lenders in areas such as leveraged loans or non-investment grade loans. (That's the polite term for junk bond issuers.)

TD could strengthen its asset management platform by acquiring asset managers. The bank could and probably will use even more of its excess capital to buy back its own shares.

Growth strategies based on more corporate loans or asset management acquisitions are far riskier than adding more stores and customers to TD's vast U.S. retail network. Until the bank earns the trust of U.S. regulators, which will take at least three years, Mr. Chun will have great difficulty achieving the top-notch rating that TD has received from investors for most of his career at the bank. At TD there is no reason to LOL.