TD exits Schwab as it looks to boost its balance sheet amidst U.S. sanctions

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Toronto-Dominion Bank is selling its entire ownership stake in Charles Schwab Corp. as it takes a major step towards reallocating its capital after being sanctioned by United States regulators last year for failing to prevent money laundering at its branches.

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The bank on Monday said it intends to sell about 184.7 million shares of the Texas-based financial company’s common stock, or about 10.1 per cent of economic ownership. Analysts expect the move to free up at least $20 billion for TD, of which $8 billion will be used to repurchase up to 100 million shares, TD said.

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“As part of our strategic review, we have been evaluating capital allocation and have made the decision to exit our Schwab investment,” TD chief executive Raymond Chun said in a statement. “We are very pleased with the strong return we are generating on the Schwab shares we acquired in 2020.”

The bank also will use the money to “further support” its “customers and clients, drive performance and accelerate organic growth,” he said.

In December, TD suspended its medium-term financial targets and said it would conduct a review of its strategies after it was fined $3.1 billion and ordered to cap the expansion of its U.S. retail banking business by U.S. regulators. It hopes to provide new financial targets in the second half of 2025 after its strategic review is completed.

TD had already lowered its ownership in Schwab to 10.1 per cent in August 2024 from 13.5 per cent in August 2022 as it anticipated getting hit with fines due to the anti-money laundering charges. As such, its decision to sell the remainder didn’t surprise analysts following the bank.

“Overall, we view this transaction favourably,” Canaccord Genuity Corp. analyst Matthew Lee said in a note on Monday. “It represents the first step in TD’s strategic review to reallocate capital.”

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While TD won’t own any shares in Schwab once the sale is completed, it will continue to have a business relationship with the U.S. financial player through its Insured Deposit Account agreement, which he said will benefit TD.

The agreement allows clients’ cash balances held in Schwab brokerage accounts “to be swept into deposit accounts at TD Bank,” providing them with Federal Deposit Insurance Corp.’s insurance, which, “enhances both safety and liquidity,” Lee said.

“For TD, these deposits serve as a stable funding source and generate net interest income. The agreement will remain in place after TD’s sale of its Schwab stake and is set to expire in 2034. It includes a deposit range with a floor of US$60 billion. As of now, we estimate total deposits to be over US$80 billion.”

Jefferies Inc. analyst John Aiken said TD’s decisions could have a net neutral impact on earnings.

“We believe that this will simplify TD’s U.S. operations,” he said in a note. “Whether this sets TD up for a different strategy in U.S. wealth management will be seen when its strategic review is complete and revealed to the street.”

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Prior to TD’s announcements, National Bank of Canada analyst Gabriel Dechaine said it seemed like a “no brainer” to sell its Schwab shares, but there may be some other “important considerations.”

For one thing, he said TD will be selling an investment that has created tremendous value over the years and generates returns materially above TD’s consolidated figure.

“Second, the Schwab stake is expected to grow as an earnings contributor, an important consideration for a bank in TD’s position,” he said in a note on Sunday. “TD’s share price improvement in anticipation of this scenario has diluted the ‘financial engineering’ aspect of the trade.”

TD said it plans to purchase and cancel up to 100 million of its common shares, representing about 5.7 per cent of its issued and outstanding common shares and its public float as of Oct. 31, 2024, subject to the completion of the sale of its Schwab investment and the approval of the Office of the Superintendent of Financial Institutions and Toronto Stock Exchange.

• Email: nkarim@postmedia.com

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