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 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 lower-risk retail banking and solid North American scale and presence.

TD generated 9% earnings growth over the nine months ended Q3 2012 relative to the prior-year period, in line with management’s targeted growth level of between 7% and 10%. Given revenue headwinds posed by the low interest rate environment and global uncertainty, TD, like its Canadian banking peers, has looked to expense management as a core focus of earnings growth. TD’s solid position in Canadian personal banking, established through service and convenience, coupled with a strong housing market that has fuelled high levels of asset growth, are driving forces behind the Bank’s recent strong financial performance. Contributions from Canadian personal banking will likely moderate as revenue growth slows, with households limiting new borrowing and as the recent tightening of mortgage rules begins to affect the market.

TD continues to see earnings growth from its U.S. Personal and Commercial Banking unit (5% year-to-date ended Q3 2012, if the litigation reserve expense is excluded), supported by very strong volume growth with a 36% rise in U.S. residential mortgages and a 9% rise in business lending relative to the prior-year period. As the Bank’s existing branches have become more seasoned, following more than two years of acquisition-oriented activity, volume growth has followed accordingly. TD remains focused on further strengthening its presence within the United States, with the Bank on pace for the addition of 35 new stores in 2012, while continuing to favour an organic growth-oriented strategy. As the Bank continues to gain scale and scope within the United States, its challenge will be to generate volume and revenue growth in a relatively weak economic environment.

TD’s long-term Deposits & Senior Debt rating of AA is composed of its intrinsic assessment of AA (low) and its support assessment of SA2 (reflecting the expectation of systemic and timely external support by the Government of Canada). The SA2 ranking results in a one-notch benefit to the Deposits & Senior Debt and Subordinated Debt ratings.

Based in Toronto, The Toronto-Dominion Bank has a full-service banking operation in retail and wholesale banking, auto finance and wealth management in Canada; retail banking, auto finance 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 & Insurance and Wholesale Banking, representing 50%, 16%, 22% and 12%, respectively, of net income (excluding the Corporate segment) in the first nine months of 2012.

Retail businesses – the combination of the first three lines of business – generated approximately 88% of earnings in the first nine months of 2012 (excluding the Corporate segment). The retail business segment has consistently been the dominant earnings contributor for TD, consistent with the Bank’s objective to minimize earnings volatility through sourcing a large proportion of earnings from retail operations. TD’s Canadian Personal and Commercial Banking segment is one of the largest personal banking operations in Canada, with approximately 12 million personal and small business customers serviced through a distribution network of 1,160 branches and over 2,800 ABMs as at July 31, 2012, providing customers with a high level of convenience and customer service.

U.S. Personal and Commercial Banking, operating under the brand name of “TD Bank, America’s Most Convenient Bank,” is headquartered in Portland, Maine, and Cherry Hill, New Jersey. TD has a sizeable presence in the United States, with the Bank’s network reaching 1,300 stores in 2012, and locations spread along the east coast from Maine to Florida. TD Wealth Management is composed of discount and full-service brokerage operations in Canada, the United States and the United Kingdom. The U.S. discount brokerage is through TD’s 45.28% investment in TD Ameritrade as at July 31, 2012. Wholesale Banking is primarily centred around the Canadian corporate and investment bank.

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (June 2012), DBRS Criteria: Rating Bank Preferred Shares and Equivalent Hybrids (June 2009) and DBRS Criteria: Intrinsic and Support Assessments (February 2009), which can be found on our website.

The sources of information used for this rating include information provided by the Toronto-Dominion Bank, Investment Funds Institute of Canada, Bank for International Settlements and 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

Lead Analyst: Brenda Lum
Rating Committee Chair: Kent Wideman
Initial Rating Date: November 30, 1980
Most Recent Rating Update: July 18, 2011