Is Warren Buffett Paying Interest to TD Bank?

“I’ve always wondered what you think about the Canadian economy,” asked a shareholder that traveled from Newmarket down to Omaha last weekend for the Berkshire Hathaway meeting with Warren Buffett.

Buffett responded that while many of Canada’s companies aren’t large relative to those in the United States, “we’re actually looking at one thing now.” 

Is it possible that Warren Buffett is looking at the troubled TD Bank?

TD once commanded a premium valuation compared to all other North American banks. Today, its valuation based on earnings is the absolute cheapest relative to its peers. 

And it’s cheap for a reason. 

Last year, TD ran into regulatory hurdles while attempting to acquire First Horizon. Unsure if it would be approved, the deal was called off. The hurdles surrounded deficiencies in TD’s anti-money laundering practices. 

More recently, the Wall Street Journal reported that Chinese drug traffickers used TD to launder over US$650 million and successfully bribed an employee. The fines TD could face might top US$2 billion. For context, TD has a public market valuation of US$97 billion. Severe regulator-imposed limitations on its business activities is also a possibility.

You never want to see the name of a company you own and the Department of Justice mentioned in the same article.

Unsurprisingly, TD’s stock price is down almost 10% so far this year and just about 50% from its all time high in 2022.

Buffett likes buying financial institutions, particularly during times of distress. In September 2008, Buffett invested US$5 billion in the beleaguered Goldman Sachs just days after Lehman Brothers filed for bankruptcy during the financial crisis. In August 2011, Buffett invested another US$5 billion in the Bank of America’s preferred stock amid fears over its troubled loan portfolio. Don’t forget about Canada’s Home Capital Group, a mortgage lender that faced a run-on-the-bank in 2018 by deposit holders. Home Capital was days away from insolvency had it not been for Berkshire Hathaway’s CAD$400 million vote of confidence and CAD$2 billion line of credit.

For decades, Wells Fargo was one of Buffett’s largest investments. In fact, Buffett liked the bank so much that Wells Fargo represented almost 25% of his stock portfolio in 2015 (about US$25 billion at its peak value). Then, that same year, a failed incentive practice was uncovered. Employees had created millions of fake accounts for years in order to hit their targets. Consequently, the CEO lost his job and Wells Fargo’s reputation came under intense scrutiny.

In a 2016 CNN interview, Buffett defended the bank and said, “it’s a great bank that made a terrible mistake. … Wells Fargo designed a system that produced bad behaviour. When you find out about that, you’ve got to do something. And they didn’t do anything about it.” Buffett went on to say he still had faith in the institution and hadn’t sold a single share. 

At the 2018 Berkshire Hathaway annual general meeting, Buffett said, “We’ve made some of our greatest investments when people have made similar errors, [such as American Express and Geico]. But they cleaned it up. … All the big banks have had troubles of one sort or another … And I see no reason why Wells Fargo as a company, from both an investor standpoint and a moral standpoint going forward, is in any way inferior to the other big banks with which it competes. … I like it as an investment.”

For reasons known only to Buffett, he sold his entire position in Wells Fargo throughout the pandemic. He owned the stock since 1989 and it was liquidated for about $35/share. Today, the stock trades at $60/share, suggesting that Buffett left about US$12 billion on the table. 

I don’t believe Buffett sold Wells Fargo because of the fake accounts scandal. He probably got tired of the public criticizing him for his loyalty to the bank. Otherwise, Buffett would have followed his own advice by acting fast and selling the stock in 2015 (not 2020). For that reason, I believe TD isn’t yet disqualified.

If Buffett carries any “seller’s remorse”, TD’s stagnant stock price will catch his attention. At $75/share, TD’s share price is about the same as it was when Buffett began selling Wells Fargo. TD and Wells Fargo have very similar business lines. Almost half of TD’s profit is now earned from the United States where it has 1200 branches (compared to 1100 in Canada). The two banks also target the consumer more heavily than commercial businesses. Notwithstanding these examples of bad behaviour discussed above, both institutions have historically avoided risky bets, which is why neither bank needed a government bailout in 2008.

However, the 93-year-old Warren Buffett is deservedly slowing down. Gone are the days when an op-ed would show up in the New York Times. Appearances on CNBC are a thing of the past. Buffett even remarked on Saturday that his phone seldom rings anymore.

It’s possible that the Canadian investment opportunity that caught Buffett’s eye is TD Bank. But at 93, Buffett is perhaps less probable to make the same investment decisions in distressed financial institutions that he would have done as his younger self with a much longer time horizon. 

Because TD’s regulatory difficulties will undoubtedly take years to resolve, we prefer owning Scotiabank, Canadian Western Bank, Charles Schwab, and Manulife Financial in our clients’ portfolios.