Toronto Dominion Bank, better knows as TD is Canada’s largest retail bank. Last week allegations arouse that bank tellers sold products and added fees to customer accounts that were against the law because they were under pressure from ever aggressive sales targets. Aptly coined as TD’s Wells Fargo moment by John Aiken of Barclays, this post will serve as a comparison between the two scandals and for possible opportunities for those who live for the excitement of catching falling knives.
It’s important to consider the damage to sentiment WFC’s scandal did to the banking space as seen by the swift move lower of TD’s stock. As seen by the initial 5.5% decline of TD’s stock, the more serious 2nd CBC article was priced in much more aggressively than the first. Unlike the 1st article, which only had 3 bank employees come forward, we saw “Hundreds of current and former TD Bank Group employees wrote” write to CBC detailing the sales intense sales pressure put on bank employees, featured in the 2nd article, likely prompting selling pressure as bids evaporated. But while there is still the overhang of further news risk, a move like the one seen Friday provides an aggressive trading opportunity. I would recommend buying TD shortly after the open and selling by around 10:30/11am or holding until 2pm if the rally persists.
Below are some of the quotes from the CBC story, and while they may sound damning, it is almost a guarantee that the other Big 5 Canadian Banks have the same practices.
"You don't know what it's like to go to bed at night, knowing your job is now to set people up for financial failure,"
"Customers are prey to me," says the teller. "I will do anything I can to make my [sales] goal."
Some employees admitted they broke the law, claiming they were desperate to earn points towards sales goals they have to reach every three months or risk being fired.
'I have invested clients' savings into funds which were not suitable, because of the ... pressure.'
"I was always asked by my managers to attach unnecessary products or services to the original sale just to increase the sales points — and not care if the customer can afford it or not."
By comparison, WFC had similar scandals, but they also had other serious issues that impacted their share price, which TD will be unlikely to experience:
- 5300 Employees fired – Very Unlikely – Some firings of front-line employees may have, but very sparcely.
- $185M fine by various regulators – Unlikely – But consumer protection regulation may be passed which may increase the regulatory burden.
- Credit Outlook cut by Fitch and S&P – Unlikely – At this time, DBRS does not anticipate any rating changes for TD (AA Issuer Rating/Negative Trend) emanating from these allegations.
- Firing of Mid-Level Executives – Likely – TD would like to have the appearance that the problem has been “resolved”.
- Changes to Employee Incentive Structure – Very Likely – Allegations against TD are very serious and TD will need to take action swiftly to change
Some questions which are important to consider going forward:
How many people actually read the CBC article/heard news and will act on it?
- Likely not many
How will TD change their practices and how may that affect their product sales revenue?
- TD will likely review policy and this will most certaintly reduce sales
- Customers will be more cautious in terms of new fees and products
How could bank profitability change as a result of the shift in regulatory environment ?
- Possible changes, but likely not too significantly on Net Earnings