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$7-billion wiped out in one day: Why TD stock took its sharpest drop since the financial crisis

Toronto-Dominion Bank (TD) logos are seen outside of a branch in Ottawa, in this file photo.

© Chris Wattie / Reuters

Toronto-Dominion Bank shares took their sharpest dip in eight years on Friday, erasing more than $7-billion in shareholder value after a news report alleged that some bank employees may have broken rules to reach aggressive sales goals.

TD shares fell to $66, down $3.88, or 5.6 per cent, their steepest one-day decline since the depths of the financial crisis in early 2009.

The suggestion of unsavoury sales tactics adds another challenge for Canada's banking sector, which already faces a slow domestic economy and high consumer-debt loads. In their most recent batch of quarterly results, major lenders all managed to top analysts' expectations for profit growth.

But TD is particularly sensitive to criticism of its sales practices given its heavy focus on retail banking.

"These allegations are more serious for TD than for other banks," said Ian Lee, former MBA director at Carleton University's Sprott School of Business.

"TD has carved out a position that they are the more progressive and socially sensitive bank," Mr. Lee said.

If you're going to do that, he added, "you really have to make sure you are."

CBC reported Monday that three unnamed TD employees had complained they felt pressure to "squeeze profits" from customers. On Friday, CBC followed up with another story claiming that "hundreds of current and former" employees – also unnamed – contacted CBC about a work environment that, according to one employee, has "zero focus on ethics."

Some complained about aggressive sales tactics such as managers pushing tellers to sell more, according to the CBC report.

But others suggested employees have breached ethical lines by making account changes without customer authorization. For example, one unnamed TD employee cited in the report said she had increased overdraft-protection amounts and credit-card limits without customers' knowledge.

"We have a long history of providing great customer service and we do that by listening and responding to our colleagues and our customers. We'll continue to do so," said Bharat Masrani, TD's chief executive officer, in a statement. "We are in the trust business. Everything we do is about earning and sustaining the trust of those we serve.  It's an incredible honour and obligation – and a huge source of pride for all of us – to know that millions of people have chosen TD to help them achieve their financial goals."

In a separate statement, TD said: "We investigate and act on concerns that are raised."

It added: "The environment described in the media report is very much at odds with how we run our business, and we don't recognize it from our own perspective, experience or assessments.

"While we believe that having metrics and goals helps us to manage our business, we also believe that we will only achieve our goals by doing the right thing for our customers."

John Aiken, an analyst at Barclays Capital Canada Inc., noted that investors may be concerned that the fallout could escalate, echoing a scandal at Wells Fargo & Co. The U.S. lender paid large fines, fired thousands of employees and acknowledged that its aggressive sales culture led to the opening of unauthorized accounts. Its shares, though, have recovered from the scandal and recently hit a record high.

Regarding TD, Mr. Aiken said: "While we find it unlikely that there will be material repercussions … there is very little that TD itself can do in the near term to disprove the allegations, and the full overhang is not likely to dissipate until a full investigation is concluded, which could take months."

Credit-rating agency DBRS Ltd. said it will monitor any damage to the bank's reputation.

"Given its relatively high rating level and the importance of the Canadian retail-banking sector to TD, DBRS has limited tolerance for any adverse impact to TD's franchise strength and/or earnings power, both of which are key underpinnings of the bank's credit profile and overall credit ratings," the agency said in a statement.

A spokesperson for the Financial Consumer Agency of Canada (FCAC), which oversees how financial institutions offer products and services, said the watchdog is generally "aware of allegations about financial institutions signing consumers up for products or services without providing all the required information," especially about fees, costs and penalties.

Without naming names, the FCAC said that, in the past two years, it has received 142 complaints against regulated financial institutions over fee disclosure and another 51 complaints about getting consumers' express consent to make changes.

Canadian lenders have focused considerable attention on the performance of their domestic personal and commercial (P&C) operations, which generate the bulk of their profits. Low interest rates and slowing loan growth have weighed on results. Many banks, including TD, have responded with layoffs and large restructuring charges in recent years.

In its first-quarter results, reported last week, TD trailed its peers with Canadian P&C profit growth of 2.3 per cent to $1.2-billion, according to Robert Sedran, an analyst at CIBC World Markets Inc.

"Better performance in Canada is required to improve our outlook for the shares," Mr. Sedran said in a note last week. "It is, quite simply, too important to the bank."

TD has also struggled to keep its lead on consumer satisfaction. After winning the J.D. Power survey for 10 consecutive years, the lender fell to second place in 2016, behind Royal Bank of Canada.

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About the Authors
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

Banking Reporter

James Bradshaw is banking reporter for the Report on Business. He covered media from 2014 to 2016, and higher education from 2010 to 2014. Prior to that, he worked as a cultural reporter for Globe Arts, and has written for both the Toronto section and the editorial page. More

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