Despite reporting its first quarterly loss in 21 years due to U.S. anti-money laundering (AML) issues, TD Bank saw strong mortgage lending volumes in Q3.

The loss was driven by a US$2.6 billion provision set aside for anticipated regulatory fines related to these AML failures, highlighting the bank’s ongoing challenges in addressing compliance concerns.

Despite these challenges, TD Bank reported a 6% year-over-year increase in its real estate secured lending (RESL) portfolio in the third quarter, even against the backdrop of a slow real estate market.

“RESL continues to be strength for us. It’s our 14th consecutive month of market share gain. We’re up 6% there,” said Raymond Chun, Group Head, Canadian Personal Banking.

This growth was fuelled in part by its new “Mortgage Direct” channel, which offers customers a streamlined process for obtaining a mortgage. The channel is designed to make the mortgage application and approval process more efficient by leveraging online tools and direct communication with mortgage specialists.

“We’re seeing conversion rates of our leads [in the Mortgage Direct program] that are three times higher than our traditional leads,” Chun said. “And so, overall from a Canadian Personal Banking, I couldn’t be more pleased with the momentum that we have, whether it’s on the deposit side or the lending side. And I think our momentum will continue as we move forward into 2025.”

Similarly the bank saw its commercial loan volumes up 7% year-over-year, though that has moderated from recent quarters “reflecting the macro environment,” noted Barbara Hooper, Group Head, Canadian Business Banking.

Challenging quarter due to AML-related penalties

TD is facing a potential fine exceeding $4 billion related to serious deficiencies in its U.S. anti-money laundering (AML) programs, which have been under multiple regulatory and criminal probes.

These deficiencies allowed financial crimes to go undetected through its branches, leading to what could be the largest penalty ever paid by a Canadian bank in the U.S. and the second-largest globally for similar issues.

The bank has already spent $500 million on legal costs and sold part of its stake in Charles Schwab to bolster its financial position. These challenges contributed to a drop in TD’s capital levels, with its CET1 ratio falling to 12.8% from 15.2% a year ago.

“We recognize the seriousness of our U.S. AML program deficiencies, and the work required to meet our obligations and responsibilities is of paramount importance to me, our senior leaders, and our boards,” CEO Bharat Masrani said in a statement.

Over 80% of TD’s mortgages to renew in the next three years

TD’s second-quarter filings also showed that $309 billion worth of the bank’s mortgage portfolio will be renewing in the next three years, or roughly 82% of the bank’s total amortizing balances.

That includes roughly $224 billion worth of fixed-rate mortgages and $86 billion of variable-rate mortgages.

Across all federally regulated financial institutions, 76% of outstanding mortgages are expected to come up for renewal by the end of 2026.

Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), has warned that the upcoming wave of renewals across all mortgage lenders poses a “significant” risk to Canada’s financial system.

While this risk remains, the impact of payment shock may be mitigated as interest rates are expected to ease over the coming year, the potential for payment shock among Canadian borrowers may not be as severe as initially feared.

TD is one of Canada’s big banks that offers fixed-payment variable-rate mortgages, which keep monthly payments consistent despite interest rate changes.

In a recent earnings call, Chief Risk Officer Ajai Bambawale noted that many borrowers have taken proactive steps when approaching their trigger rates. Clients are responding positively by making lump-sum payments, switching to fixed-rate mortgages, or increasing their principal and interest payments.

Consequently, TD has seen its mortgage amortization periods normalize, with 15.4% of the portfolio having an amortization of 35 years or more, down from 27.4% in Q1 2023.

Remaining amortizations for TD residential mortgages

TD earnings highlights

Q3 net income (adjusted): $3.6 billion (0% Y/Y)
Earnings per share: $2.05

Conference Call

• Real-estate secured lending volumes were up 6% year-over-year.
• Net interest margin was 2.81%, down three basis points quarter-over-quarter “as expected,” said Chief Financial Officer Kelvin Tran. He noted that this reflects the migration from Bankers’ Acceptances (short-term debt instruments issued by companies that are guaranteed by a bank) to CORRA-based loans (Canadian Overnight Repo Rate Average). This shift is affecting the bank’s net interest margin, contributing to downward pressure on margins. “As we look forward to Q4, while many factors can impact margins, we expect downward pressure due to BA CORRA migration and the impact of Bank of Canada rate cuts,” he said.
• Insurance service expenses rose 20% year-over-year due to higher claim severity, unfavourable prior claims, and severe weather events. This quarter, $186 million in claims costs were driven by weather events in the Greater Toronto area and Alberta wildfires. Additionally, the Calgary hailstorms and Montreal floods in August are expected to add over $300 million in claims for Q4.
• Expenses were up 13% year-over-year, more than half of this increase related to provisions for ongoing litigation matters.

Source: TD Conference Call

Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.

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Last modified: August 23, 2024