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 7, 2014, 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 six months of TD’s 2014 fiscal year ended April 30, 2014, the net income of the U.S. Retail segment; which represents largely TD Bank US, accounted for 25% of TD’s net income.

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 maintains an SA1 designation on the Company, which implies strong and predictable support from the parent. As a supported rating with an 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. As of March 31, 2014, TD Bank US reported 8% growth in deposits and 7% growth in loans year-over-year. 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, non-performing assets fell to 1.58% of total loans and other real estate owned at March 31, 2014, down from 1.61% at YE13 and 1.74% at YE12. Likewise, annualized net charge-offs as a percent of average loans declined to 39 bps for 1Q14 from 47 bps for 2013 and 85 bps for 2012. The 2013 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 generation side, should improve the Company’s earnings capacity. Indeed, these assets typically have more attractive yields relative to securities and should allow the Company to deploy its substantial core deposits more profitably.

These positive trends are somewhat offset by the challenges the Company faces given the difficult interest rate environment, slow growth US economy, steady competition, and increased regulatory and compliance costs. Moreover, the Company is more reliant on spread income than peers.

On the capital front, TD Bank US has historically operated with relatively weak capitalization at the holding company while the banks remained well-capitalized. However, largely through earnings retention as well as capital contributions from its parent, the Company’s capital levels have steadily improved in recent years as it builds capital toward compliance with Dodd-Frank requirements.

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 (June 2014). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities - Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found at: http://www.dbrs.com/about/methodologies.

The primary 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.

Lead Analyst: John Mackerey
Rating Committee Chair: Roger Lister
Initial Rating Date: February 21, 2006
Most Recent Rating Update: December 9, 2013

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