TD Bank’s AML Challenges May Pave Way for New CEO in 2025

TD Bank, Canada’s second-largest lender, is striving to resolve significant gaps in its anti-money laundering (AML) controls by the end of the year, a move that could clear the way for the appointment of a new CEO, potentially an external candidate. However, the bank faces an uphill battle, with multiple U.S. federal agencies currently investigating TD, and possible penalties looming if a settlement is reached.

Despite TD’s commitment to addressing its AML shortcomings, many observers fear further revelations may emerge regarding the bank's lack of controls both domestically and internationally. Should these issues be resolved or overcome, the bank could be positioned to appoint a new chief executive in 2025.

In discussions with ten shareholders and two analysts, the consensus was that a CEO change is likely imminent next year. The majority of the 12 sources suggested that TD might opt for an external candidate with extensive knowledge of the U.S. market, someone who can start with a clean slate after the bank resolves its AML issues with U.S. regulators.

Last week, TD revealed it had set aside $3 billion to cover fines from U.S. regulators probing weaknesses in its money laundering controls. The bank is hopeful for a global resolution of the civil and criminal investigations by the end of the calendar year. The penalties could result in one of the largest fines ever paid by a Canadian bank abroad.

Bharat Masrani, who has served as TD’s CEO since November 2014, took the helm during a period of rapid expansion focused on the U.S. market, where TD now operates about 1,150 branches on the east coast—more than it has across Canada. However, a probe by U.S. regulators, including the Department of Justice, following the termination of TD’s $13.4 billion deal to acquire U.S.-based regional lender First Horizon, has extended Masrani’s tenure.

After acknowledging the AML issues, shareholders expressed a preference for Masrani to see the investigations through before passing the leadership baton. The departure of CEO contender Michael Rhodes has further fueled speculation around the bank’s succession plan, a topic that has been raised during recent analyst calls and other events.

Ben Jang, a portfolio manager at Nicola Wealth and a TD shareholder, anticipates a CEO change next year, potentially involving an outsider. “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,” Jang said.

In response to inquiries, TD stated it has a robust succession planning process and emphasized that “our senior executive bench is strong.”

BofA Securities analyst Ebrahim Poonawala suggested that investors’ desire for a “cultural shake-up” might necessitate an external hire for the CEO role. Traditionally, Canadian banks have promoted from within, with the notable exception of the Bank of Nova Scotia, which last year named board member Scott Thomson, former CEO of Caterpillar dealer Finning, as its chief.

While TD’s list of potential candidates remains unclear, shareholders indicated that a candidate with a deep understanding of Canadian banks, possibly from the U.S., who could help steer TD’s growth strategy south of the border, would be ideal. Internal candidates reportedly include Leo Salom, who heads TD’s U.S. retail business, Riaz Ahmed, the head of its capital markets division, and Ray Chun, head of Canada personal banking.

At 68, Masrani is older than his predecessor, Ed Clark, at the time of retirement and is currently the oldest CEO among Canada’s big six banks. TD, once competing with Royal Bank of Canada (RBC) for the title of the most valued Canadian company in the 2000s, has seen its stock rise by 44% since Masrani assumed leadership, compared to a 95% gain for RBC during the same period.

Last week, TD announced its intention to seek a global resolution related to its AML lapses, noting that the $2.6 billion provision in the fiscal third quarter led to the bank's first loss since 2003. TD indicated that the resolution would also include non-monetary penalties.

Anthony Visano, managing director at Kingwest & Co and a TD shareholder, noted that if the penalties are as severe as an asset cap, the bank might be better off with an external candidate. “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 as the focus ought to be on capital returns, as capital deployment wouldn’t be an option in the U.S.,” he said.

By fLEXI tEAM