Toronto-Dominion Bank has now set aside a total of US$3 billion to cover a global settlement of criminal and civil investigations into shortcomings in anti-money laundering (AML) controls in the United States, which is likely to turn attention to a plan to replace chief executive Bharat Masrani.

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“Succession questions have become even more intense because of the bank’s U.S. regulatory issues,” National Bank Financial analyst Gabriel Dechaine said in a note on Wednesday, suggesting that, under normal circumstances, succession would already be in motion with Masrani, 67, having spent 10 years at the helm.

“Providing clarity (if not certainty) of the direct financial consequences ‘clears the deck’ for a potential successor,” he said.

TD on Wednesday said it is setting aside US$2.6 billion for expected fines from the AML probe, which is on top the US$450 million it set aside in April.

But replacing Masrani may not be an easy task, with top contenders having left the bank before and after the money laundering probes were revealed more than a year ago.

Michael Rhodes, who was presumed by some company watchers to be the CEO-in-waiting, left the bank last December, giving up his job as head of TD’s personal banking business to become chief executive at Discover Financial Services. Teri Currie, Rhodes’ predecessor, was also considered CEO material before her unexpected retirement in early 2022.

Others have left the bank as the AML probes played out, including Katy Boshart, who became Manulife Bank chief executive in April. Tim Hockey, at one time touted as a candidate to lead the bank, left TD Ameritrade, where he was chief executive, in February 2020.

One internal candidate who could replace Masrani is Riaz Ahmed, CEO of TD Securities and head of wholesale banking, who was previously the bank’s CFO. But he is 61, which makes his ascent to the top of the bank a less obvious choice at this point, according to some bank watchers. There are younger potential successors, including Leo Salom. But he is in a pivotal role as group head of U.S. retail and CEO of the U.S. banking franchise, a division where stability might be prioritized.

“The regulatory fine provision ‘clears the deck’ for CEO succession, which could include an external candidate,” Dechaine wrote in a follow-up note Thursday.

Despite the succession uncertainty, the analyst predicted Wednesday that investors could respond to news of a pending global settlement of the money-laundering issues with a “relief rally” because the investigations have been weighing on TD for more than a year and cost the Canadian bank a major U.S. acquisition.

Still, TD isn’t out of the woods, the analyst said. The sale of shares in Charles Schwab Corp. to shore up the bank’s capital will dent earnings and reduce TD’s ownership interest in Schwab to 10.1 per cent from 12.3 per cent. Moreover, he said, there is still the prospect of non-financial penalties, which could include an asset cap on U.S. operations.

“If growth here is restricted, TD could deliver sub-par earnings growth relative to peers over the next several years,” Dechaine said. “Aside from the impact on TD’s growth, we believe the bank’s valuation multiple would also suffer if an asset cap were imposed by regulators.”

Masrani said TD is continuing to address its shortcomings that have led to money laundering allegations in New York, New Jersey and Florida.

“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,” he said in a statement on Wednesday.

• Email: bshecter@postmedia.com

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