DBRS Confirms TD at AA and R-1 (high), Trends Stable

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 focus on its lower-risk retail banking business and by its integration experience. Over the last several years, the more stable retail banking business has generated a higher proportion of total pre-tax income at TD relative to its four largest Canadian bank peers. TD’s position in Canadian personal banking, through service and convenience, coupled with a strong housing market, is one of the driving forces behind the strong overall financial performance of the Bank. In fiscal 2010, TD’s Canadian Personal and Commercial Banking franchise (Canadian P&CB) generated $3.1 billion of net income, a 25% year-over-year increase; in H1 2011, its net income increased 18% over the same period last year. Canadian P&CB represented 55% of adjusted net income (excluding intangible amortization and the Corporate segment) in H1 2011. The contribution will likely moderate as a result of an expected slowdown in mortgage origination volumes in Canada (as a result of a slowing market and increased price competition) and the origination of more assets in U.S. banking.

Despite having scale and scope in the United States, the greater challenge will be to accelerate revenue growth in a weak economy. In the near term, that means successfully executing on its asset generation through the Chrysler Financial acquisition. Longer term, the potential exists for TD’s U.S. retail banking business to be a bigger contributor to total profitability and the Bank’s franchise strength, which could eventually have positive implications for the ratings.

At the end of Q2 2011, the Bank’s tangible common equity-to-risk-weighted assets ratio, as determined by DBRS, was 8.9%, while the Basel II Tier 1 capital ratio was 12.7%. Although these ratios are at the lower end relative to its Canadian bank peers, it compares favourably with historical levels. As the Canadian banking regulator moves toward the application of Basel III capital rules, TD is in a good position given its capital levels. DBRS’s expectation is for ongoing strength in capital during the period prior to the implementation of Basel III.

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.

Based in Toronto, The Toronto-Dominion Bank has a full-service banking operation in retail and wholesale banking and wealth management in Canada; retail banking, auto finance and discount brokerage operations in the United States; and online banking and discount brokerage 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 (Canadian P&CB), U.S. Personal and Commercial Banking (U.S. P&CB), Wealth Management and Wholesale Banking, representing 55%, 20%, 12% and 13%, respectively, of adjusted net income (excluding intangible amortization and the Corporate segment) in H1 2011. Retail businesses (i.e., Canadian P&CB, U.S. P&CB and Wealth Management) generated approximately 87% of earnings in H1 2011. This percentage has been at this level since 2008, which is consistent with TD’s objective to minimize earnings volatility through its strategy of achieving a higher proportion of earnings through retail operations.

TD’s Canadian P&CB is one of the largest personal banking operations in Canada, with 11.5 million customers serviced through a distribution network of 1,131 branches and more than 2,700 automated bank machines (ABMs) at April 30, 2011. U.S. P&CB, operating under the brand name of “TD Bank, America’s Most Convenient Bank,” is based in Portland, Maine, and Cherry Hill, New Jersey. It has a sizable presence, with a network of 1,285 stores located in the U.S. Northeast, Florida and North Carolina and more than 1,800 ABMs at Q2 2011. 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 43.3% investment in TD Ameritrade. Wholesale Banking is primarily centred on Canadian corporate and investment banking.

The Toronto-Dominion Bank is the second largest Schedule 1 bank in Canada as measured by assets ($630 billion) at H1 2011.

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

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (January 14, 2010), Rating Bank Preferred Shares and Equivalent Hybrids (June 29, 2009) and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments (February 11, 2009), which can be found on our website under Methodologies.

The sources of information used for this rating include information provided by The Toronto-Dominion Bank, the Investment Funds Institute of Canada, the Bank for International Settlements and the Office of the Superintendent of Financial Institutions Canada. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

For additional information on this rating, please see Banks and Banking Organisations Linking Document by clicking the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

Lead Analyst: Brenda Lum
Rating Committee Chair: Brenda Lum
Initial Rating Date: November 30, 1980
Most Recent Rating Update: July 6, 2010