TD’s First Horizon deal facing new scrutiny in U.S.

Deal not yet in jeopardy, but losing it may not be the worst thing, analyst says

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The Toronto-Dominion Bank’s proposed acquisition of Memphis-based First Horizon Corp. for US$13.4 billion is under renewed political scrutiny in the US, but at least one analyst Bay Street says losing the deal – something that doesn’t yet seem likely – might not be the worst thing for the Canadian bank.

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The political heat rose on Tuesday, when U.S. Senator and Senate Banking Committee member Elizabeth Warren sent a letter to authorities urging them to block the deal, citing a news report alleging abusive consumer practices. TD disputed the report, published in early May by Washington-based investigative journal Capitol Forum, and defended its practices, telling the Financial Post that its business “is built on a foundation of ethics, integrity and trust”.

US Senator Elizabeth Warren.
US Senator Elizabeth Warren. Photo by Win McNamee/Getty Images

If U.S. authorities block the merger, it would be “a mixed bag for TD shareholders,” wrote Gabriel Dechaine, financial services analyst at National Bank, in a note to clients after reviewing Warren’s letter to the comptroller by the currency’s interim, which called on the authorities to prevent any merger “until TD Bank is held accountable”.

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The analyst said the acquisition of First Horizon Corp. by TD, announced in February, approved by the US company’s shareholders earlier this month and expected to close in November, would bring several benefits to TD, including an increased physical presence in the southeastern United States. States, increased leverage on rising rates, and the potential for accretive earnings and return on equity.

“However, we have to acknowledge that the deal received a lukewarm reaction from many investors,” Dechaine wrote. “To begin with, most investors compared the operation to the proposed acquisition of Bank of the West by BMO (Bank of Montreal). This comparison shows that TD paid a higher valuation multiple. »

Other comparisons were also unfavorable, the analyst wrote, noting that the TD combination would not generate full expense synergies until year three compared to the end of year one for BMO. TD could also deal a blow to its CET 1 capital cushion.

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If a deal fell through, on the other hand, “TD would find itself leading the pack in terms of CET 1 positioning, which is not a terrible place to face a possible economic downturn,” Dechaine wrote.

The market appeared to ignore the US senator’s letter, which was largely based on the Capitol Forum’s report on a 2017 investigation by regulators into improper sales practices. TD Bank said Thursday that the report’s claims were “baseless.”

The deal was met with a lukewarm reaction from many investors

Gabriel Dechaine, Analyst, National Bank

In a statement, TD disputed the allegations, noting that its compensation practices “place a strong emphasis on customer satisfaction” and “are carefully and actively managed.”

The statement adds that the bank’s routine and ongoing monitoring “has at no time identified any systemic sales practice issues” and that TD continues to work to obtain approval for the acquisition of First Horizon.

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Dechaine said in his note to clients that Warren’s letter could nonetheless have financial implications for Canada’s second-largest bank in the form of potential fines, noting that focusing on the proposed acquisition of First Horizon could ” miss the big picture”.

Signage at a branch of First Horizon Bank in Peachtree Corner, Georgia.
Signage at a branch of First Horizon Bank in Peachtree Corner, Georgia. Photo by Elijah Nouvelage/Bloomberg

Warren and three other lawmakers who signed the letter urged the regulator to release the results of the five-year investigation into TD’s sales practices mentioned in the report and explain why no penalties were imposed.

Dechaine also noted that the report raised the issue of inappropriate sales practices rampant at Wells Fargo, which suffered significant fallout from a major scandal that began around 2016. Wells Fargo was found to have pressured employees for them to achieve unrealistic sales goals, which led to the creation of fake accounts for customers who were unaware of them.

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“Anytime a bank’s sales practices in the United States are compared to those of Wells Fargo (which Senator Warren’s letter does) is not a good time,” Dechaine wrote, noting that approval of the acquisition of First Horizon “may turn out to be a side issue.

He also noted that the allegations echoed issues for which the Canadian bank had previously been fined in the United States.

In 2020, TD paid US$97 million in restitution and a US$25 million fine as part of a settlement with the Consumer Financial Protection Bureau, which alleged that TD’s New Jersey-based US operation with 1,250 locations in the eastern United States had violated the rules by “charging consumers overdraft fees for ATM and one-time debit card transactions without obtaining their affirmative consent.”

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In 2017, the Financial Consumer Agency of Canada conducted a review of the national retail practices of the six largest Canadian banks and, in a report released the following year, stated that the bank’s culture retail “is primarily focused on the sale of products and services, which increases the risk that consumer interests may not always be given the appropriate priority.

The FCAC also found that “incentives, sales targets and scorecards…can increase the risk of mis-selling and violation of market conduct obligations.”

The Canadian regulator has made six recommendations to improve banks’ management of sales practice risks. No sanctions were imposed.

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