DBRS Confirms TD Bank US Holding Company at AA (low); Trend Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of TD Bank US Holding Company (TD Bank US or the Company) and its’ lead banking subsidiary, TD Bank, N.A. Confirmed ratings include the Company’s Issuer & Senior Debt rating of AA (low). The trend for all ratings remains Stable. The rating confirmation follows a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

The ratings of the Company, a wholly-owned U.S. subsidiary of The Toronto-Dominion Bank (TD – rated AA and confirmed on July 9, 2013 with a Stable trend), reflect its significant and important role in TD’s North American strategy. TD Bank US also represents a substantial portion of TD’s net income. Indeed, for the first nine months of TD’s 2013 fiscal year ended July 31, 2013, the U.S. Personal & Commercial Banking segments; which represents largely TD Bank US, adjusted earnings (excluding litigation costs) accounted for 21.2% of Group adjusted earnings.

Given TD Bank US’s position in TD’s overall franchise, DBRS expects that TD would support TD Bank US, if needed. As a result, DBRS has assigned a SA1 designation to the Company, which implies strong and predictable support from the parent. As a supported rating with a SA1 designation, TD Bank US’s ratings are likely to move in tandem with TD’s long-term debt ratings.

The Company’s ratings also consider TD Bank US’s robust deposit franchise in attractive markets along the East Coast from Maine to Florida. The Company’s retail banking model, which is focused on customer service and convenience, is a key differentiator and its core deposit base serves as the cornerstone of the Company’s strong funding and liquidity profile. Benefiting from portfolio and business line acquisitions as well as success in its efforts to increase mortgage lending, TD Bank US has continued to strongly grow both loans and deposits. For 1H13, TD Bank US reported 10% growth in deposits and 21% growth in loans since YE2012. With a low loans-to-deposits ratio of 55%, deposits readily fund the loan portfolio, even with strong loan growth, and liquidity remains robust.

Also factored into DBRS’s ratings is TD Bank US’s moderate risk profile. TD Bank US’s asset quality metrics have improved and compare favorably to those of other large banks. Based on regulatory data, NPAs fell to 1.61% of total loans and OREO at June 30, 2013, down from 1.74% at YE12 and 2.07% at YE11. Likewise, annualized NCOs as percent of average loans declined to 51 bps for 1H13 from 85 bps for 2012. The recent acquisition of the Target Corporation credit card portfolio, which typically operates with higher charge-off rates, is likely to cause this ratio to increase over the long-term.

DBRS expects that ongoing efforts to increase lending activity from its depositors, including mortgage production and credit cards, as well as completed acquisitions on the asset side, should improve the Company’s earnings capacity. All these activities enhance TD Bank US’s capacity to generate assets with attractive yields (relative to securities) allowing the Company to more profitably deploy its substantial core deposits.

These positive trends are somewhat offset by the challenges the Company faces in what remains a challenging interest rate environment, a slow growth US economy, steady competition, and increased regulatory and compliance costs. The Company is more reliant on spread income than peers and although, with its substantial low cost deposit base, DBRS views the Company as well-positioned as interest rates rise.

On the capital front, TD Bank US has relatively weak capitalization at the holding company while the banks remain well capitalized. However, the Company’s capital levels have steadily improved in recent years and it expects to continue to build capital toward compliance with Dodd-Frank requirements.

DBRS notes that Bharat Masrani, former group head of U.S. personal and commercial banking for TD Bank Group and president and CEO of TD Bank US has been tapped to succeed W. Edmund Clark as Toronto-Dominion Bank’s group president and CEO effective on November 1, 2014. As part of this change, effective July 1 2013, Mike Pedersen, formerly group head of wealth management, insurance and corporate shared services became group head of U.S. banking and CEO of TD Bank. DBRS anticipates a continuation of the current operating strategy in the U.S. following this management change.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other applicable methodologies include the DBRS Criteria: Intrinsic and Support Assessments, DBRS Criteria: Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments and DBRS Criteria: Rating Bank Preferred Shares & Equivalent Hybrids. These can be found at: http://www.dbrs.com/about/methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

[Amended on August 27, 2014, to reflect actual methodologies used.]

Lead Analyst: John Mackerey
Rating Committee Chair: William Schwartz
Initial Rating Date: February 21, 2006
Most Recent Rating Update: April 4, 2012

For additional information on this rating, please refer to the linking document under Related Research