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

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. Contributions from Canadian personal banking will likely moderate as revenue growth slows, with households limiting new borrowing, and as the federal government’s tightening of mortgage rules continues to weigh on residential mortgage activity. TD continues to see earnings growth from its U.S. Personal and Commercial Banking (P&C) unit in 2013, supported by strong organic loan growth in personal and business lending relative to the prior year period (excluding the acquisition of Target Corporation’s U.S. credit card portfolio).

TD has created a retail banking north-south corridor in the eastern United States as a result of acquisitions and organic growth across its expanding network, providing the Bank with scale advantages. However, the U.S. P&C unit will be challenged by regulatory headwinds, margin pressures and the still-recovering economy within the United States.

In April of 2013, TD announced that its long-standing CEO, Ed Clark, will be stepping down in late 2014 and that Bharat Masrani, who leads the Bank’s U.S. P&C group, will assume the role of CEO. The long transition period for Masrani provides ample time for a smooth transition; no change in strategy or culture is anticipated. Additionally, TD closed two transactions in the second quarter of 2013, Target Corporation’s U.S. credit card portfolio and Epoch Holding Corporation, and entered into an agreement to acquire HSBC Retail Services Limited’s private label credit card portfolio. All transactions are consistent with the Bank’s strategy to grow assets within the United States.

DBRS does not expect potential house price depreciation in Canada to result in material losses from the Bank’s real estate secured lending portfolio, notwithstanding the high indebtedness of the average Canadian consumer and significant increases in housing prices in certain sectors of the Canadian real estate market.

TD’s Deposits & Senior Debt rating of AA is composed of an intrinsic assessment of AA (low) and a 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 Issuer Rating and the Deposits & Senior Debt and Subordinated Debt ratings.

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.

Lead Analyst: Brenda Lum
Rating Committee Chair: Kent Wideman
Initial Rating Date: November 30, 1980
Most Recent Rating Update: September 18, 2012