By Nivedita Balu and Fergal Smith

TD Bank’s Leadership Transition Amid AML Concerns

TORONTO (Reuters) – Canada’s second-largest lender, TD Bank, is working to address gaps in its anti-money laundering (AML) controls by year-end, potentially paving the way for a new CEO, possibly from outside the organization.

Shareholders and analysts suggest a CEO change is imminent next year. Many advocate for an external candidate with knowledge of the U.S. market to lead after TD resolves its AML issues with U.S. regulators.

Last week, TD set aside $3 billion to cover fines from ongoing U.S. regulatory investigations into its AML controls, anticipating a global resolution by the year’s end. The penalties may become among the largest ever imposed on a Canadian bank.

CEO Bharat Masrani, who has led the bank since November 2014 during a period of rapid expansion, is navigating these challenges after the failure of a $13.4 billion deal to acquire U.S.-based regional lender First Horizon (NYSE:FHN).

Shareholders have expressed a preference for Masrani to see through the investigations before a leadership transition.

The uncertainty around CEO succession has grown, especially after the departure of candidate Michael Rhodes raised questions during recent analyst discussions.

Ben Jang, a portfolio manager at Nicola Wealth, believes a CEO change is likely next year, contingent upon resolving the current challenges. He stated, “Once we get past these rocky waters, and there is a little bit of light at the end of the tunnel, maybe that will help create more clarity for leadership change.”

In response, TD emphasized its strong succession planning process and executive bench.

A Need for Cultural Change

BofA Securities analyst Ebrahim Poonawala noted that investors’ push for a “cultural shake-up” would likely necessitate an external hire for the CEO position.

Unlike other Canadian banks which typically promote from within, TD’s approach may shift, particularly given the market dynamics. A suitable CEO is expected to have a solid understanding of Canadian banking, ideally with U.S. experience to help TD navigate growth in that market.

Potential internal candidates include Leo Salom, head of U.S. retail; Riaz Ahmed, head of capital markets; and Ray Chun, head of personal banking in Canada.

At 68, Masrani is older than his predecessor Ed Clark and is the oldest CEO among Canada’s top banks. TD’s stock has gained 44% under his leadership, compared to a 95% gain for its rival Royal Bank of Canada during the same timeframe.

TD plans to resolve its AML lapses, having recorded its first loss since 2003 with a $2.6 billion provision in the last fiscal quarter. The resolution may include non-monetary penalties.

If the penalties lead to severe restrictions, such as an asset cap, an external candidate may be preferable to align with the bank’s strategic focus on capital returns, according to Anthony Visano of Kingwest & Co.

“As much as I don’t like the idea of an external candidate, potentially someone handcuffed in terms of strategy, they should come from outside the bank,” he remarked, stressing the importance of capital deployment strategies in the U.S.