DBRS Comment: TD Ratings Unchanged Following Acquisition of MBNA Canada Credit Card Business

DBRS anticipates the acquisition of the credit card portfolio and certain assets and liabilities of MBNA Canada (MBNA) will not have a material impact on the earnings and credit risk of The Toronto-Dominion Bank (TD or the Bank) and modest impact on the capital profile of TD. The risk profile for TD remains solid, notwithstanding the credit risk associated with the acquired credit card portfolio, execution risk associated with growing the business and integration risk from the systems conversion. As such, there are no rating implications for TD at this time.

DBRS believes this transaction is consistent with TD’s desire to grow in underrepresented businesses in Canada. Following the close of the acquisition, TD will be positioned to have one of the largest credit card books in Canada, with close to 20% market share, and will be a dual issuer of Visa and MasterCard.

This transaction is expected to have some risk concerns given the higher level of losses associated with the MBNA credit card portfolio and systems conversion of accounts. With the implementation of TD’s tighter underwriting standards, new originations are expected to slow in the near term, but credit quality should improve on the margin.

In conjunction with the transaction, TD announced that the Bank will be issuing up to eight million common shares. On a pro forma basis, including the common share issuance, the Tier 1 capital ratio is expected to decline by approximately 20 basis points (12.7% at Q2 2011) and the tangible common equity, as determined by DBRS, is expected to decrease by ten basis points (8.9% at Q2 2011).

The total cash consideration is $7.5 billion, including approximately $6.2 billion to fund the credit cards. TD will acquire an $8.5 billion credit card portfolio and net liabilities of approximately $1.1 billion at close. Management has indicated the acquisition is expected to be accretive by $0.05 to earnings per share (EPS) in 2012 and $0.10 in 2013. The transaction is expected to close during Q1 2012, subject to regulatory approvals.

Based in Toronto, The Toronto-Dominion Bank has a full-service banking operation in retail and wholesale banking and wealth management in Canada and retail banking, auto finance and discount brokerage operations in the United States and online banking in the United Kingdom. In Canada, TD has one of the largest personal banking operations, with ten million customers.

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

The applicable methodology is Global Methodology for Rating Banks and Banking Organisations (January 14, 2010), which can be found on our website under Methodologies