TD Bank is selling $15 billion of Schwab shares high, buying its own TD shares low, but killing the old (TD) Waterhouse goose that laid gold eggs

"TD Schwabitrade" is no more.

TD Bank is dumping its massive minority stake in Charles Schwab Corp, after shrewdly holding it from a tiny 1996 investment in Waterhouse Securities – and rolling it over in 2020 when TD Ameritrade sold out to the discount broker.

The good news for TD Bank is that it is selling when Schwab shares are touching a three-year high at $82. It is also buying US$6 billion (C$8 billion) of its shares near a five-year low of about $60. 

The secondary offering by TD Bank of 165,443,530 shares, or $13.1 billion, of the Company’s common stock is priced at $79.25 per share. It is expected to close tomorrow, Feb. 12, subject to customary closing conditions.

Following the completion of the secondary offering and the previously announced $1.5 billion share repurchase by the company from TD, the Canadian bank will have disposed of all of its shares. 

Charles Schwab will not receive any of the proceeds from stock sales, the company said in a release.

Ready to arbitrage

Exactly five years ago, TD's shares traded at $57 – a massive half-decade of sideways slippage, despite its Schwab stake nearly doubling in value. In contrast, the Dow Jones U.S. Banks Index had a five-year annualized return of 7.24%. 

TD Bank is ready to arbitrage from Schwab to its shares, says Raymond Chun, Group President and Chief Executive Officer, TD Bank Group in a release.

"We are confident in TD's growth opportunities and long-term potential, and we plan to use C$8 billion of the proceeds to repurchase our stock. We will invest the balance of the proceeds in our businesses to further support our customers and clients, drive performance, and accelerate organic growth."

TD will host a conference call tomorrow.

Diminished prospects

In October, TD Bank's own serious troubles went public, and it paid $3 billion for failing to detect money laundering. See: TD Bank’s $3 Billion Fine Reveals the Shortcomings of the Banking Sector’s Anti-Money-Laundering Safeguards 

In addition to the fine, TD Bank – the largest non-US bank operating in the United States – has a cap on how much it can grow its US banking presence – until it proves it has a grip on anti-money-laundering safeguards.

The bank's troubles compelled CFRA analyst Alexander Yokum to put a “sell” rating on the company.

“An asset cap by The Office of the Comptroller of the Currency (OCC) on TD’s two U.S. banking subsidiaries greatly diminishes the bank’s growth prospects, in our view,” he wrote. 

"We expect TD to underperform from an expense perspective as the bank is forced to make risk and control framework investments. 

"Also, the reputational damage could result in a loss of both talent and customers, in our view. Furthermore, after outperforming for much of 2024, credit quality has begun to deteriorate."

Golden return

The Toronto, Canada, banking and brokerage conglomerate may also be selling the goose that lays the golden eggs. Schwab has agreed to repurchase $1.5 billion of its shares from TD conditional on the offering's completion.

TD Bank originally paid $525 million to create TD Waterhouse, an entity acquired by Ameritrade in 2016, then Schwab in 2020. Worth about $7 billion in 2020, the 184.7 million shares of Schwab's common stock represent 10.1% economic ownership worth about $15 billion today.

That's a golden 30X difference from initial pay-in 29 years ago to final cash-out.

By rolling over its TDA shares into Schwab, TD Bank also got two board seats, held by its then-CEO Bharat Masrani and then-chairman, Brian Levitt. Both men are still listed as directors at Schwab. 

For now, TD will continue to “have a business relationship with Schwab through the Insured Deposit Account (IDA) Agreement,” today's release states.

Quiet arrangement

In fact, Schwab last summer signaled its TD Bank relationship might be mightily expanded after Schwab Bank sought to move risk off of its balance sheet. See: Wall Street hammers Charles Schwab Corp. shares after Tuesday's surprise unveiling of budding mega-outsource deal with its biggest shareholder, TD Bank

"We envision the potential to increase our usage of third-party banks like TD Bank and others to achieve the following goals: deliver extended FDIC insurance for clients, lower our capital intensity, and improve liquidity, subject, of course, to obtaining economics from third-party banks that make sense for us," then-Schwab CEO Walt Bettinger said in mid-July.

Both companies have stayed relatively quiet about that arrangement ever since, and as Schwab's balance sheet has improved, its potential reliance on TD Bank may diminish.