Toronto-Dominion Bank beat analysts’ estimates on strong performance in its capital-markets division and the company said that a “comprehensive overhaul” of its U.S. anti-money-laundering program is “well underway.”

Canada’s second-largest lender earned $2.04 a share on an adjusted basis in the fiscal second quarter, it said in a statement Thursday, topping the $1.85 average estimate of analysts in a Bloomberg survey. Toronto-Dominion closed its acquisition of U.S. investment bank Cowen Inc. in last year’s second quarter, and the combined capital-markets unit reported that net income more than doubled to $441 million on an adjusted basis.

“We had strong contributions from trading, investment banking — and that would include advisory underwriting as well — and then lending revenues too,” Chief Financial Officer Kelvin Tran said in an interview. “So, fairly broad-based. We’re very pleased with that.”

While the bank’s overall revenue grew from a year earlier, its provisions for credit losses totaled $1.07 billion in the three months through April, more than the roughly $1 billion analysts had forecast.

North American consumers are increasingly struggling to make credit-card payments, and the bank’s Canadian homeowners are struggling with rising mortgage costs as interest rates remain elevated. Business bankruptcies are also increasing in Toronto-Dominion’s home market. 

Overshadowing its financial results, Toronto-Dominion faces multiple U.S. law enforcement and regulatory investigations into laundering of funds tied to illegal drug sales. The bank said last month it has set aside US$450 million in relation to one of three regulatory probes on the issue, and it’s been investing heavily to improve its internal controls, driving up expenses.

On a conference call with analysts Thursday, Chief Executive Officer Bharat Masrani called the issue “unacceptable” and said he hoped the bank would reach a resolution of the probes “as soon as possible,” but otherwise offered little new commentary.

The money-laundering failures weren’t a problem at the “enterprise level,” said Ajai Bambawale, the bank’s chief risk officer.

“If I go right to the root cause of what happened, there were some procedural weaknesses in the U.S. that caused bad actors to exploit us,” he said. “And we were also disappointed that some of our colleagues didn’t follow our code of ethics.”

Analysts questioned Toronto-Dominion executives on whether the bank is constrained in expanding its retail footprint in the U.S., where it has about 1,200 branches, primarily on the East Coast. Leo Salom, who leads the American division, said that while the lender is making big investments to improve its money-laundering controls, it’s “deliberately pacing” a previously planned addition of locations.

Numerous questions

“I’m not making the claim that we cannot grow stores, but I also want to be clear that we are in the midst of discussion with regulators and I don’t want to prejudice any of those conversations at this point,” Salom said. “I know that there’s lots of questions about what we can and cannot do.”

The lender’s net income totaled $2.56 billion, slightly less than the average estimate of $2.58 billion, as a result of loan-loss provisions and higher expenses, including costs tied to the anti-money-laundering probes. 

It also said it incurred a charge of $103 million for a special assessment by the U.S. Federal Deposit Insurance Corp. related to bank failures plus $165 million for severance payments and other ongoing cost-cutting. The bank said it will wrap up its restructuring program — which it said will lead to annual savings of $725 million on a pretax basis — after spending a final $50 million in the third quarter. 

The bank scrapped its proposed US$13.4 billion acquisition of Memphis-based First Horizon Corp. a year ago after it became clear that the companies could not win timely regulatory approval of the deal owing to the inquiries into Toronto-Dominion’s anti-money-laundering controls. 

That left the Canadian bank with a surplus of capital and it has been regularly buying back shares in recent quarters. Its ratio of Common Equity Tier 1 capital to risk-weighted assets declined to 13.4 per cent at the end of April, in part owing to the regulatory provision booked in the quarter.

The bank’s results reflect broad-based strength across all of its operating segments, several analysts said Thursday. But the focus will remain on U.S. anti-money-laundering issues, which is “the elephant in the room,” Bank of Nova Scotia analyst Meny Grauman said in a note to clients. 

“We continue to view TD’s U.S. anti-money-laundering investigations as the biggest event impacting the company and consider this well-priced into its stock,” Royal Bank of Canada analyst Darko Mihelic said in his own note.

The bank’s shares have slumped almost 11 per cent since the start of the year. They were little changed at $76.52 at 10:26 a.m. in Toronto.