Fitch expects Canadian banks to undergo increased scrutiny

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Canadian banks are expected to come under increased scrutiny from regulators in 2025 due to the historic sanctions against Toronto-Dominion Bank for its failure to tackle money laundering activities in the United States, says a new report by Fitch Ratings Inc.

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Fitch expects the Office of the Superintendent of Financial Institutions, Canada’s primary banking regulator, to conduct reviews and audits of the larger banks with an emphasis on their anti-money laundering programs. It also expects “heightened regulatory scrutiny” from U.S. regulators.

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“We expect Canadian banks to be focused on operational risk management and regulatory reporting in 2025, which could imply higher spending on those initiatives,” Fitch said in its report on Wednesday.

TD was fined about US$3.1 billion and ordered to cap the expansion of its retail banking business in October by the U.S. Department of Justice and other regulators for failing to monitor money laundering activities at its branches. The fine was expected — TD had kept aside the money beforehand — but the cap took some by surprise.

Last week, TD suspended its medium-term financial targets as it decided to conduct a review of its strategies, which would make it “challenging” to generate earnings growth, the bank said. It suspended its targets of seven per cent to 10 per cent earnings per share growth and 16 per cent return on equity. It will provide new targets in the second half of 2025.

“We are looking at our business mix, including profitability and risk-adjusted return on capital, and where we need to invest and divest to improve. Everything is on the table,” Raymond Chun, TD’s chief operating officer who is set to succeed current chief executive Bharat Masrani next year, said on a conference call with analysts.

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The bank said its main focus will be on boosting its anti-money laundering program next year.

Fitch’s senior director Maria-Gabriella Khoury last week said the other Canadian banks, “not just TD,” will also be looking at their anti-money laundering programs, along with all other operational risks.

Overall, Fitch expects Canadian bank financial profiles to remain broadly “neutral” in 2025 as they “enter a slowing economic period with solid financial profiles, relatively healthy asset quality metrics, stable funding and good capitalization.”

All Canadian banks rated by Fitch have stable outlooks except for TD, which remains negative.

“TD’s negative outlook reflects the uncertainty over the ultimate impact of various investigations by regulators on the deficiencies of the bank’s anti-money laundering practices in the U.S. on its franchise, earnings and risk profiles,” Fitch said.

It also expects higher mortgage payments upon renewal next year since a majority were signed when the Bank of Canada’s rate was at or below one per cent. Despite the central bank’s recent cuts, including a 50-basis-point cut to 3.25 per cent on Wednesday, most borrowers will, on average, renew at a rate 200 basis points higher, Fitch said.

“Higher mortgage payments could translate to lower household savings, as well as have a knock-on effect of higher delinquencies in other categories such as credit cards or auto loans as borrowers prioritize their mortgage payments,” Fitch said.

• Email: nkarim@postmedia.com

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