TD Investors Meet as Probe and CEO Succession Fuel Frustration

Toronto-Dominion Bank is poised to confront shareholders at a moment when investors and executives alike are clamoring for clarity on potential penalties in a US probe and the future of the firm’s leadership.

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Bloomberg News

Christine Dobby and Hannah Levitt

Published Apr 18, 2024 • 4 minute read

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(Bloomberg) — Toronto-Dominion Bank is poised to confront shareholders at a moment when investors and executives alike are clamoring for clarity on potential penalties in a US probe and the future of the firm’s leadership.

The bank’s annual shareholders meeting on Thursday comes as the firm contends with an investigation into its anti-money-laundering controls that has derailed the lender’s growth strategy, hurt its stock and hastened questions about who might eventually rise to succeed Chief Executive Officer Bharat Masrani, 67, once he ultimately retires.

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Senior executives have grown unhappy with the lack of an heir apparent, according to people with knowledge of the situation. The uncertainty has exacerbated managers’ frustrations over the business setbacks and their ability to plot their futures, the people said, asking not to be named discussing private conversations.

Much of the tension stems from the bank’s attempt to buy Memphis-based First Horizon Corp., which was called off almost a year ago amid the US regulatory probe into how the Toronto-based lender handled suspicious customer transactions. The move left Toronto-Dominion with ample capital to deploy and limited options, with its US growth strategy in limbo. The stock has tumbled in recent months, falling almost 9% this year, compared with a 2.5% decline for the S&P/TSX Commercial Banks Index.

Masrani, who’s been CEO for almost a decade, voluntarily took a C$1 million ($725,000) pay cut for the last fiscal year over the scuttled acquisition of First Horizon and regulatory probe. Now, with no clear successor lined up, a new board chair is under pressure to come up with a way forward to satisfy investors and employees.

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“The uncertainty is the biggest source of consternation,” said Dan Rohinton, portfolio manager at iA Global Asset Management. The firm’s retail mutual funds have about 4 million Toronto-Dominion shares.

Investors in Canada’s second-largest bank want more detail on the fines it’s likely to pay, Rohinton said, as well as whether it could be restricted from mergers and acquisitions — or, in a worst-case scenario, face a cap on growing US assets organically.

Analysts have estimated the fine could top $1 billion, and the bank is already spending hundreds of millions of dollars on upgrades to its risk and control systems in the US.

“We know what the AML problem is,” Masrani said on a conference call in February to discuss the bank’s fiscal first-quarter results, adding that the bank is working to fix it.

But, with the broader regulatory penalties still up in the air, investors don’t yet seem convinced.

“That uncertainty is weighing on the stock,” said Nigel D’Souza, an analyst with Veritas Investment Research Corp. “And then you have questions about succession planning as well.”

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“Bharat is focused on strengthening the bank, serving our customers and creating value for shareholders,” Toronto-Dominion spokesperson Lisa Hodgins said in an email. “He leads a deep and highly experienced bench of leaders with proven track records driving growth across large complex businesses. As you would expect, we have a very detailed and robust succession plan, overseen by the board, which continues to serve us well.”

Still, to outsiders, questions about his replacement have grown murkier this year. Michael Rhodes, who was leading the company’s Canadian retail bank, departed in December to become CEO of Discover Financial Services, a role he has since left. His exit from Toronto-Dominion came as a shock to many executives, one of the people with knowledge of the conversations said.

Read More: Discover CEO Michael Rhodes Resigns to Become Ally’s Head

Leo Salom, who heads up Toronto-Dominion’s US operations, has long been seen as a potential CEO candidate, but it’s unclear how the anti-money-laundering mess in the country might impact his path to the top.

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The firm has a “strong and growing franchise in the US,” Hodgins noted in the emailed statement, pointing to more than 10 million customers in “major markets and communities from Maine to Florida.”

Another contender has been Riaz Ahmed, the former chief financial officer who was tapped to lead the capital-markets unit in 2021. Some within the company have speculated he could be named CEO but take on the role for a shorter-than-normal period — five years or less. Still, Ahmed’s age — he’s in his early 60s — could be a knock against him. Also, he’s been with the bank since the 1990s and on its senior executive team since 2009, a lengthy tenure when a more-dramatic change may be preferred.

One new name in the mix is Ray Chun, the former head of wealth management who was named to run the Canadian personal-banking business after Rhodes departed. The new post is an important role, often viewed as part of the CEO pipeline.

The succession question — intertwined as it is with the US issues — will be top of mind for the board’s new chair, Alan MacGibbon. The long-time director took over from Brian Levitt on Feb. 1 and is expected to lead the bank’s annual shareholder meeting in Toronto.

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Despite the lingering questions, at least one influential market watcher sees upside in Toronto-Dominion’s shares. Meny Grauman, a managing director in Bank of Nova Scotia’s Global Equity Research unit, upgraded the stock to outperform on Wednesday.

“We believe that fear has overtaken rationality on this name,” Grauman said in a report to clients co-written by associate Felix Fang.

The stock is trading at about 10 times earnings, compared with about 12 times earnings for rival Royal Bank of Canada and about 13 times earnings at Bank of Montreal, according to data compiled by Bloomberg.

“Concerns about the bank’s US regulatory problems and worries about succession at the bank are all valid,” Grauman and Fang wrote. “But we now believe that the downside risk from both of those issues is more than fully priced into the shares right now.”

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