DBRS Confirms Toronto-Dominion Bank at AA and R-1 (high)

DBRS has today confirmed the ratings of The Toronto-Dominion Bank (TD or the Bank) and its related entities, including TD’s Deposits & Senior Debt at AA and Short-Term Instruments at R-1 (high). All trends are Stable.

The ratings are supported by TD’s leadership position in Canadian personal banking, low business risk profile and strong capital levels. The Bank’s large retail operations contribute to a lower business risk profile than some of its peers. TD’s Canadian Personal and Commercial Banking franchise generated $2.5 billion of net income in 2009 and is expected to continue to provide earnings stability.

Its retail distribution network expansion, significantly longer hours of service relative to its peers and relentless drive to improve customer service index scores are critical to the Bank’s franchise strength and have led to its successful growth in Canadian retail market shares, including credit cards, property and casualty (P&C) insurance, small business and commercial banking. At the end of October 2009, TD had a solid number one market share ranking in personal deposits and number two in lending in Canada.

Following a period of integration of both TD Banknorth Inc. and Commerce Bancorp, Inc., the weak U.S. economy has presented TD with opportunities to accelerate its acquisition strategy in Florida. TD has been back on the acquisition trail with the purchase of The South Financial Group (TSFG) and a Federal Deposit Insurance Corporation (FDIC)-assisted acquisition of three Florida banks. These acquisitions are consistent with TD’s desire to bolster its presence in Florida and implement a Maine-to-Florida U.S. footprint because of TSFG’s strong market share in South Carolina and its more modest footprint in North Carolina. Neither of these recent acquisitions had an impact on TD’s ratings. For further details on the TSFG acquisition and on the FDIC-assisted acquisition of the three Florida banks, please see the DBRS press releases on May 17, 2010, and April 19, 2010, respectively. Going forward, DBRS expects the Bank to continue to execute on its business strategy of relentless commitment to customer service to drive revenue and earnings growth.

Longer term, DBRS believes successful execution of TD’s U.S. retail and commercial banking strategy will contribute positively to the Bank’s business franchise as it begins to generate acceptable returns on invested capital for the Bank and becomes a platform for further growth, albeit with a degree of risk. The execution, however, remains a challenge.

The slowdown in the global economy has negatively affected loan loss provisions in the U.S. and Canadian Personal and Commercial Banking segments, with real estate in the United States and unsecured personal lending in Canada being the primary drivers. Credit costs are expected to remain elevated in the near term but manageable relative to the TD’s earnings before loan losses and taxes.

TD and its Canadian bank peers have increased capital ratios, but potential changes to regulatory capital rules could negatively affect these ratios. Notwithstanding, the Bank has the ability to generate substantial levels of internal capital to offset some changes likely to be put into effect in fiscal 2013.

TD’s long-term Deposits & Senior Debt rating, at AA, is composed of its intrinsic assessment at AA (low) and its support assessment at SA2 (reflecting the expectation of systemic and timely external support by the government of Canada). The SA2 results in a one-notch benefit to the senior debt and deposits and subordinated debt ratings, which benefit from this implied support.

With its headquarters in Toronto, The Toronto-Dominion Bank has a full-service banking operation in retail and wholesale banking and wealth management in Canada, retail banking and discount brokerage operations in the United States and online banking in the United Kingdom.

TD has five segments: four operating lines of business and the Corporate segment. The operating businesses are Canadian Personal and Commercial Banking, U.S. Personal and Commercial Banking, Wealth Management and Wholesale Banking, representing 53%, 15%, 11% and 21% of net income (excluding intangible amortization and the Corporate segment) in H1 2010, respectively. In aggregate, the first three business lines generated approximately 79% of earnings in H1 2010, which is consistent with TD’s objective to minimize earnings volatility through its strategy of achieving a higher proportion of earnings through retail operations.

Canadian Personal and Commercial Banking is one of the largest personal banking operations in Canada, with 11 million customers serviced through a distribution network of 1,116 branches and 2,697 ABMs at the end of 2009. U.S. Personal and Commercial Banking, operating under the brand name of TD Bank, America’s Most Convenient Bank, is a U.S. northeastern regional bank with a sizable Florida presence, with its headquarters in Portland, Maine, and Cherry Hill, New Jersey. TD wealth management is composed of discount and full-service brokerage operations in Canada, the United States and the United Kingdom. U.S. discount brokerage is through TD’s approximately 45% investment in TD Ameritrade Holding Corporation (TD Ameritrade). Wholesale Banking is primarily a Canadian corporate and investment bank.

The Toronto-Dominion Bank is the second largest Schedule 1 bank in Canada as measured by assets ($574 billion) at H1 2010.

Notes:
All figures are in Canadian dollars unless otherwise noted.

DBRS ratings also apply to TD Mortgage Corp., TD Pacific Mortgage Corp. and The Canada Trust Company, which are unconditionally guaranteed by The Toronto-Dominion Bank.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations, Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessment, Rating Bank Subordinated Debt and Hybrid Capital Instruments with Contingent Risks, Rating Bank Subordinated Debt and Hybrid Capital Instruments with Discretionary Payments and Rating Bank Preferred Shares and Equivalent Hybrids, which can be found on the DBRS website under Methodologies.

This is a Corporate (Financial Institutions) rating.