DBRS Confirms Ratings on The Toronto-Dominion Bank, Negative Trend

DBRS Limited (DBRS) has today confirmed the ratings on The Toronto-Dominion Bank (TD or the Bank) and related entities, including the Deposits & Senior Debt at AA and Short-Term Instruments at R-1 (high). Trends on senior long-term debt ratings, short-term instruments and older-style subordinated debt remain Negative, while other capital instruments whose ratings are notched down from the Bank’s intrinsic assessment continue to have Stable trends. The ratings are supported by TD’s focus on lower-risk retail banking and solid North American scale and presence, although returns on the U.S. investments have lagged expectations and industry returns in the United States.

TD’s long-term deposits and Senior Debt rating, at AA, is composed of an intrinsic assessment of AA (low) and 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 ratings. The Negative trend reflects DBRS’s view that anticipated changes in Canadian legislation and regulation mean that the potential for timely support for these systemically important institutions is declining and is likely to eventually result in a change in DBRS’s support assessment to SA3 from SA2 for this institution. At the same time, DBRS notes that an additional layer of protection for non-bail-in-able debt and deposits may eventually be provided by bail-in-able senior debt under the anticipated bail-in debt regime. DBRS will assess the impact of the “Taxpayer Protection and Bank Recapitalization Regime” rules as more details are made available by the authorities.

TD is a well-diversified bank with top-tier market positions in Canada with wide distribution channels which support the Bank’s well-articulated and consistent strategy. TD has demonstrated significant experience in integrating financial institutions and loan portfolios both in Canada and the United States, providing the Bank with a significant intellectual capital advantage versus peers.

TD continues to deliver excellent returns, with return on common equity generally in the mid-teens. The Bank benefits from its diversified earnings base which contributes to earnings stability and the Bank's ability to withstand stresses. DBRS views TD as having a lower business risk profile than many of its peers as a result of its large diversified retail operations relative to its wholesale business.

As with other Canadian banks, TD has a notable exposure to the Canadian residential mortgage market. Any slowdown in this market may slow earnings generation, while a downturn in the residential mortgage market could hurt asset-quality indicators and ultimately have an impact on provisioning levels. Direct exposure to the oil and gas (O&G) sector is manageable within a well-diversified portfolio. Asset quality within the Canadian market will be determined by the extent to which any deteriorating consumer credit quality trends materialize in the Canadian market, including potentially as an indirect result of volatility in O&G. At this point, there are no material observable problems.

Risk Management culture appears to be strong at TD with very strong asset-quality measures, although provisions and impaired loans are admittedly at unsustainably low levels and will eventually increase. Management describes having an appropriate reporting and control structure for both the credit and capital markets’ type risks.

The Bank’s financial risk profile remains robust as a result of solid internal capital generation, reasonable quality of capital and strong capital ratios. The Bank has a good funding profile and handily meets the new liquidity regulations.

TD’s rating could be positively influenced if the Bank were to improve returns in its U.S. banking operations without substantively increasing the risk profile of its lending portfolio. In addition to the support and other considerations noted earlier with respect to the Negative trend, other factors with negative rating implications include an increase in risk appetite or notable weakening of asset quality or franchise. A significant out-of-footprint acquisition may also have negative rating implications.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (June 2015), Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015) and DBRS Criteria: Support Assessment for Banks and Banking Organisations (March 2015), which can be found on DBRS’s website at www.dbrs.com.

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.