By Nivedita Balu and Arasu Kannagi Basil
TORONTO (Reuters) -TD Bank on Thursday reported a rare loss after setting aside an extra $2.6 billion to cover expected fines from U.S. regulators which has been probing weaknesses in the Canadian lender's anti-money laundering (AML) controls.
TD said late Wednesday that it would sell part of its 12.3% stake in U.S. brokerage Charles Schwab to help offset the impact from the fine, for which it had already provisioned $450 million in the prior quarter. The bank said it expects to resolve the matter by year end and flagged that regulators could also impose non-monetary restrictions.
Analysts said the disclosures should help provide more clarity for investors over the ultimate cost, timing and impact of the probe, which has been a major overhang for TD's stock. At nearly $3 billion, the probe would be one of the biggest ever for a Canadian bank.
"The real issue in our view has always been and remains the non-monetary penalties that are sure to be part of a final settlement with the U.S. authorities," Scotiabank analyst Meny Grauman said.
TD CEO Bharat Masrani declined to provided details on what those could be when quizzed by analysts on Thursday's earnings call.
TD's shares have fallen 5% so far this year, underperforming the TSX banking index's 8.6% growth. They were down about 3.5% in Toronto on Thursday morning.
The bank first disclosed the probe last year shortly after its $13.4 billion bid to acquire U.S. lender First Horizon fell apart.
The United States has been a key growth market for TD where it has invested billions over the past two decades to acquire smaller regional banks on the east coast, building a network of 1,100 branches, more than it has across Canada.
Potential U.S. regulatory restrictions could dampen that growth, analysts said.
"These may include an asset cap that would restrict loan growth ... If growth here is restricted, TD could deliver sub-par earnings growth relative to peers over the next several years," National Bank analyst Gabriel Dechaine wrote.
The probe centers on allegations that Chinese drug traffickers used a TD branch to launder at least $650 million from 2016 through 2021 and that an employee at one New Jersey branch took a bribe to facilitate laundering of drug money, according to sources.
The bank said in May it had spent $500 million to tighten its AML program and risk controls, hired several key executives and invested in staff training programs.
"But there's still much work ahead ... this is a priority. The U.S. business is an important part of the bank and of our future," Masrani told analysts.
"The failures were serious. We own it. We know what the issues are, and we are fixing them," he said.
In Canada, TD's personal and commercial banking recorded a 13% rise in net income driven by new account openings and volume growth. TD's wealth management and insurance earnings were flat, reflecting impact from severe weather events.
The net loss was C$181 million, or 14 Canadian cents per share, in the three months ended July 31, compared with a profit of C$2.88 billion, or C$1.53 per share, a year earlier.
On an adjusted basis, TD earned C$2.05 ($1.51) per share, 2 Canadian cents short of analysts' estimates, according to LSEG data.
Provision for credit losses rose to C$1.07 billion, compared with C$766 million a year ago.
The bank's U.S. business, which accounts for about a quarter of TD's profit, reported a 5.6% fall in net income hurt by lower deposit volumes and loan margins.
($1 = 1.3577 Canadian dollars)
(Reporting by Arasu Kannagi Basil in Bengaluru and Nivedita Balu in Toronto; Editing by Vijay Kishore, Michelle Price, Elaine Hardcastle and David Evans)
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