Toronto-Dominion Bank TD-T +0.83%increase is selling its stake in U.S.-based investment dealer Charles Schwab Corp. SCHW-N for about US$14-billion as the lender remediates its anti-money-laundering failings and rejigs its balance sheet to comply with restrictions set by U.S. regulators and the Department of Justice.
The sale is a major step in an extensive overhaul of TD’s U.S. business aimed at navigating an asset cap imposed by authorities last fall – a significant hurdle to the bank’s ambitions in its largest growth market. Newly minted TD chief executive officer Raymond Chun has been conducting a strategic review to turn around the bank as it invests in extensive remediation requirements to fix gaps in its compliance and risk procedures.
“As part of our strategic review, we have been evaluating capital allocation and have made the decision to exit our Schwab investment. We are very pleased with the strong return we are generating on the Schwab shares we acquired in 2020,” Mr. Chun said in a statement Monday. “We are confident in TD’s growth opportunities and long-term potential.”
In October, TD pleaded guilty to conspiracy to commit money laundering after a lengthy investigation by U.S. authorities. Officials imposed several rare penalties, including a US$434-billion asset cap on the bank’s U.S. retail arm, limiting TD’s ability to grow that business. TD has been paring back its U.S. balance sheet to ensure it does not exceed the cap.
Mr. Chun previously told investors at a conference in January that the bank was considering several options, including selling its stake in Schwab. The Canadian bank already sold 40.5 million shares in Schwab last August to raise funds to cover fines connected to the U.S. anti-money-laundering investigation, lowering its previous 12.3-per-cent stake in the firm.
The CEO has said that “everything is on the table,” including selling portions of its jumbo mortgage and auto loan portfolios in the U.S. to shore up cash. Earlier this month, U.S.-based Bank of America Corp. agreed to buy a US$9-billion portfolio of residential mortgage loans from TD, according to a report by Bloomberg that cited confidential sources familiar with the matter.
TD is liquidating its entire equity investment in Schwab by selling 184.7 million shares of the company’s common stock, TD’s entire remaining 10.1-per-cent stake.
The sale is a step toward “rebuilding shareholder confidence,” according to CIBC analyst Paul Holden.
“Our conversations with investors made it clear that a sale of (Schwab) stock was a desirable outcome.” Mr. Holden said in a note to clients. “The fact that Raymond Chun is executing on the (Schwab) sale shortly after becoming CEO is a positive signal, in our view, that TD will be more shareholder-friendly than it was under the prior CEO.”
TD plans to use $8-billion of the proceeds to buy back its own stock and invest the remainder in its businesses to “drive performance and accelerate organic growth,” the bank said in a news release.
The lender intends to repurchase 100 million of its common shares, or about 5.7 per cent of its issued and outstanding common shares.
“In just under five years, this investment has generated a very strong return, and we believe this is the right time to reallocate the capital. We expect to generate considerable proceeds for TD – roughly US$14-billion or C$20-billion,” Mr. Chun said in an internal memo seen by The Globe and Mail.
“The actions and investments we announced today, along with our ongoing efforts to strengthen infrastructure and prioritize AML program enhancements, reflect our confidence in TD’s long-term potential.”
TD and Schwab will continue their previous deposit agreement, which allows the Canadian bank to manage cash and collect fees on some deposits.
Schwab has agreed to repurchase US$1.5-billion of its shares. TD Securities and Goldman Sachs are acting as joint book-running managers on the offering.
In a note to investors Sunday before TD announced its sale of its Schwab stake, National Bank analyst Gabriel Dechaine said while the move seems like a “no-brainer,” the deal would mean “disposing of an investment that has created tremendous value over the years” – and one that is expected to continue to grow its earnings contributions.
