By Nivedita Balu and Jaiveer Shekhawat

(Reuters) -TD Bank on Thursday reported better-than-expected quarterly earnings helped by strength in Canada and its wealth management unit, even as its U.S segment struggled amid probes related to its anti-money laundering program.

South of the border, the lender is facing a U.S. Department of Justice investigation over its ties to a $653 million drug money-laundering case in New York and New Jersey related to illegal drug sales and an employee taking a bribe to facilitate the laundering of drug money, but the bank is betting the region will continue to be a growth market.

“The US continues to be an important part for TD… we still believe in expanding stores and our footprint,” CFO Kelvin Tran said in an interview, adding that it has invested over $500 million in program remediation and platform enhancements.

The bank said there were “some procedural weaknesses” in the U.S. and was disappointed that some employees did not follow its code of ethics. TD has taken action against responsible employees, including termination, CEO Bharat Masrani said.

Earnings fell 17% in the U.S. on an adjusted basis as it set aside $450 million to cover potential fines for one of three regulatory probes on the issue and is anticipating more monetary penalties.

The region typically brings in about a quarter to a third of TD’s profit after its rapid expansion over the past decade, acquiring smaller regional banks on the east coast and southeast U.S. and building a network of 1,100 branches.

But after pulling its proposed $13.4 billion acquisition of First Horizon last year, TD said it would continue to focus on the U.S. market, expanding brick by brick by opening about 150 branches.

“The way we look at it is that it (AML probe) is situation dependent. We may pace the store opening differently given these priorities but we have a very strong franchise,” Tran said.

National Bank analyst Gabriel Dechaine said the costs related to rectifying the problems will inflate beyond TD’s forecast of 12 basis points in the third quarter and weaken its ability to support the stock via buybacks.

“It could get tougher before it gets better,” he said, adding that with the AML-related fine estimates to be around $2 billion, there could be another 45-50 basis-point hit to its capital ratio.

TD said net income at home rose 7%, helped by loan growth and newcomers opening accounts as it increased its focus on the segment through a partnership with India’s HDFC bank to attract customers, such as students moving to the country.

The Wealth Management and Insurance unit’s net income rose 19%. Adjusted net income rose to C$3.79 billion ($2.77 billion), or C$2.04 per share, from C$3.71 billion, or C$1.91 per share, a year earlier.

Analysts were expecting C$1.85, according to LSEG data.

($1 = 1.3664 Canadian dollars)

(Reporting by Jaiveer Singh Shekhawat in Bengaluru and Nivedita Balu in Toronto; Editing by Tasim Zahid, Chizu Nomiyama and Sharon Singleton)

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