TD Bank Group will sell its large Charles Schwab investment as the bank overhauls its capital strategy following historic compliance failures that shackled U.S. business plans.
The Toronto-based company announced Monday that it plans to exit the entirety of its 10.1% ownership in Schwab through a secondary offering and share repurchases by the brokerage firm. The move didn’t come as a surprise following newly instated TD President and CEO Raymond Chun’s comments last month that the bank was reviewing its stake in the Westlake, Texas-based company.
Chun, who took the helm of the company Feb. 1
The bank
TD said Monday that, subject to the completion of its Schwab sale, it will launch a normal course issuer bid to purchase for cancellation up to 100 million of its common shares, or about 5.7% of its outstanding stock, as of Oct. 31, 2024.
The bank will use 8 billion Canadian dollars from the Schwab sale — roughly $5.6 billion — to buy back its own stock, and will invest the rest in businesses to “further support our customers and clients, drive performance and accelerate organic growth.” Schwab plans to repurchase $1.5 billion of its own shares.
John Aiken, an analyst at Jefferies, said in a Monday note that the exit will simplify TD’s U.S. operations. Although he had modeled for the Schwab stake to contribute just under $900 million over the next four quarters, TD’s share buybacks would negate almost the entire earnings-per-share impact, he said.
“Consequently, the earnings impact should be viewed as neutral, but the incremental capital will likely be viewed positively,” Aiken wrote. “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.”
TD’s stock price was up 3.24% Monday, trading at $59.84. Meanwhile, Schwab’s was down 3.17, at $80.54 per share.
But TD’s exit from its ownership stake won’t close the lid on the Canadian bank’s business with Schwab. TD’s insured deposit account agreement with Schwab, which currently runs through 2034, will stay intact.
TD acquired its Schwab shares in 2020 — which then amounted to roughly a 13.5% interest in the brokerage firm— when Schwab agreed to buy TD Ameritrade, the bank’s brokerage arm, in an all-stock transaction valued at about $26 billion.
TD’s 184.7 million Schwab shares were worth about $14.9 billion at the pre-market price Monday, though Truist Securities analyst Brian Foran said they would presumably be sold at a discount. TD Securities and Goldman Sachs will be acting as joint bookrunning managers on the offering.
TD said it will “continue to manage its capital prudently and strengthen its infrastructure.”
When the asset cap and penalties were announced last October, the bank said it would cut U.S. assets by 10% to “create capacity” for making more loans to clients looking to grow. TD said it would pull back from financing auto dealers’ operations and other “non-scalable and niche” businesses.
The bank also said it would sell some of its “jumbo” residential mortgages. Bank of America
TD put profitability guidance on hold in its last earnings report, as Chun noted the bank wasn’t “where we want to be,” but also said its businesses had momentum.
“For fiscal 2025, it will be challenging to generate earnings growth as the bank navigates a transition year, continues to advance its [anti-money-laundering] remediation with investments in risk and control infrastructure and investments in its businesses,” Chun said in December.