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Regulator response to TD drug money laundering allegations could lead to a cap on growth




Following revelations of potential ties to money laundering, Toronto Dominion Bank (TD) faces significant regulatory scrutiny that could impede its growth trajectory, according to experts.


The investigation by the U.S. Department of Justice, triggered by findings of an illicit fentanyl money-laundering scheme in New York and New Jersey, has cast a shadow over TD's operations. Allegedly, Chinese drug traffickers funneled over US$653 million through TD, reportedly involving bribery of bank employees.


Gabriel Dechaine, a Canadian banking analyst at National Bank Financial, suggests that the aftermath of the probe might have far-reaching consequences for TD's revenue growth. He anticipates non-monetary penalties and broader regulatory constraints being imposed on the bank.


Dechaine highlights the possibility of regulators imposing limitations on TD's growth until they are satisfied with the bank's remedial actions and compliance systems. Such restrictions could entail substantial investments in compliance measures, potentially totaling around $500 million annually for the next couple of years or more.


The market has already responded unfavorably to the news, with TD experiencing a market capitalization loss of approximately $10 billion since the laundering allegations surfaced. Last week, TD's share price plummeted by 5.8%, marking its steepest decline since March 2020.


Despite the diminished stock value, Dechaine advises caution to investors, emphasizing that valuation alone should not dictate investment decisions. Given the uncertainty surrounding TD's situation and its long-term implications, he urges a "wait and see" approach rather than premature action.


The unfolding scenario underscores the need for TD to address regulatory concerns swiftly and transparently to restore investor confidence and mitigate the potential fallout on its growth prospects.


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