Incoming TD CEO Ray Chun has an opportunity to boost the bank's performance and put his stamp on leadership by selling the bank's 10-per-cent stake in Charles Schwab Corp. and using the proceeds to buy back TD shares.
Incoming Toronto-Dominion Bank CEO Ray Chun has promised to unveil the bank’s path forward later this year after the lender suspended its financial guidance and announced a strategic review in December. Every CEO heading into retirement says the same thing when asked to look back on their careers: I wish I had moved faster. Incoming boss Ray Chun should keep that sentiment in mind as he prepares to take the reins in April.
He’s got an opportunity to boost performance and – more importantly – put his stamp on leadership by selling the bank’s 10-per-cent stake in Charles Schwab Corp. and use the US$13-billion-plus in proceeds to buy back TD shares. TD is adrift, strategically, in the wake of its US$3.09-billion settlement with U.S. regulators last October. Chief executive officer Bharat Masrani’s growth plan focused on bulking up in U.S. retail banking, an approach investors rewarded with a premium market valuation. The sanctions imposed last fall over violations of anti-money-laundering (AML) rules include a cap on TD’s U.S. banking assets. The penalty killed an expansion strategy that included a $13.4-billion acquisition of Memphis-based regional bank First Horizon Corp. In December, TD suspended its financial guidance and announced a strategic review. Mr. Chun has promised to unveil the bank’s path forward later this year. The long timeline is tough to understand. Mr. Chun could only have won the top job last fall by presenting TD’s board with a vision for a post AML-penalty future. “We understand why growth will be difficult to achieve in 2025, and why TD had to suspend its current medium-term financial targets,” analyst Meny Grauman at Bank of Nova Scotia said in a recent report. “We find it harder to understand why investors will need to wait until the second half of 2025 to get a clearer sense of what management believes is the earnings power of the company.” TD’s self-imposed time out, along with the AML sanctions, weigh heavily on its stock price. A bank that historically commanded the highest valuation in the sector now sports a price-to-earnings ratio 15 per cent below its domestic peers. There’s no reason Mr. Masrani and Mr. Chun need to finish the strategic review before selling the stake in Schwab, acquired in 2020 when the Dallas-based discount brokerage bought TD Ameritrade. On two occasions in the past four years, TD sold portions of its Schwab stake to raise capital, with Schwab helping out by buying back some of its shares. If the Schwab stake is a piggybank, it’s already been cracked open. The math behind a sale is compelling. TD could sell Schwab stock trading at 18 times its forecast 2025 earnings per share and buy back massive amounts of its own stock, which trades at 10 times earnings, analyst Paul Holden at CIBC Capital Markets pointed out in a report on Monday. There’s no better way to create wealth than selling high and buying low. The psychological impact of the sale could outweigh the financial benefits. Selling the entire Schwab holding would signal Mr. Chun is willing to take bold steps to get TD back on track. “The sale of Schwab stock is one of the items that does not require completion of a full strategic review,” Mr. Holden said. “There is potential for a re-rating of TD stock, as decisive and material value-surfacing action by the incoming CEO should be viewed as a more shareholder-friendly approach vs. prior management.” Using the cash from selling the entire Schwab stake to buy back TD shares would boost TD’s earnings per share by about 5 per cent, a significant lift at a bank with limited short-term growth potential. Mr. Holden said: “The potential re-rate on material and decisive management action could be more impactful than the 5 per cent estimated earnings per share accretion.” Selling Schwab would also boost TD’s already strong capital reserves at a time when Mr. Chun may want to consider profit-boosting acquisitions in sectors such as wealth management or investment banking, where the bank is free to expand. Mr. Chun spent a portion of his four-decade career at TD running the fund management division. He knows the advantages of scale that come with acquisitions such as TD’s 2018 purchase of alternative asset manager Greystone Capital Management Inc. for $792-million. TD faces a long road back from AML sanctions. The bank’s incoming CEO has the good fortune to be starting down that trail with significant capital reserves, including the bank’s stake in Schwab. Investors will have an early reason to believe in Mr. Chun’s leadership if TD moves quickly to cash in the holding.
TD Bank Charles Schwab Ray Chun CEO Stock Buyback Acquisitions AML Sanctions Strategic Review
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