By Nivedita Balu and Arasu Kannagi Basil

TORONTO (Reuters) – TD Bank missed quarterly earnings estimates on Thursday and reported a rare loss after it set aside a further $2.6 billion to prepare for fines from U.S. regulators following investigations into the Canadian lender’s anti-money laundering (AML) measures.

The bank’s U.S. business, which accounts for about a quarter of TD’s profit, reported a 5.6% fall in net income hurt by lower deposit volumes and loan margins.

The U.S. has been a key growth market for the bank where it has invested billions over the past two decades to acquire smaller regional banks on the east coast, building a network of 1,100 branches, more than it has across Canada.

The regulatory probe was disclosed last year shortly after TD terminated its $13.4 billion First Horizon acquisition that would have added about 400 branches to its network in the southeast U.S.

TD said a provision of $3 billion it has taken so far reflects its estimate of the total fines it would have to pay, but it could also face non-monetary penalties from U.S. regulators.

“These may include an asset cap that would restrict loan growth… If growth here is restricted, TD could deliver sub-par earnings growth relative to peers over the next several years,” National Bank analyst Gabriel Dechaine wrote.

The $2.6 billion provision announced on Wednesday comes on top of $450 million it set aside in April.

The probes have been a major overhang on TD’s stock over the last year, with investors concerned about the resolution timeline and potential cost. The clarification of the direct financial impact of the bank’s AML issues could result in a short-term “relief rally,” Dechaine said.

The stock has fallen 5% so far this year, underperforming the TSX banking index’s 8.6% growth.

In Canada, personal and commercial banking recorded a 13% rise in net income driven by new account openings and volume growth. TD’s wealth management and insurance earnings were flat, reflecting impact from severe weather events.

The net loss was C$181 million, or 14 Canadian cents per share, in the three months ended July 31, compared with a profit of C$2.88 billion, or C$1.53 per share, a year earlier.

On an adjusted basis, TD earned C$2.05 ($1.51) per share, 2 Canadian cents short of analysts’ estimates, according to LSEG data.

Provision for credit losses rose to C$1.07 billion, compared with C$766 million a year ago.

TD kicks off the earnings season for Canadian banks with others slated to report their results next week.

($1 = 1.3577 Canadian dollars)

(Reporting by Arasu Kannagi Basil in Bengaluru and Nivedita Balu in Toronto; Editing by Vijay Kishore, Elaine Hardcastle)

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