DBRS Confirms TD Bank US Holding Company at AA (low); Trend Remains Negative For Most Ratings

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., including the Company’s Issuer & Senior Debt rating of AA (low). Concurrently, DBRS maintained the Negative trend on most ratings, and the Stable trend on the short-term ratings of TD Bank US and TD Bank, N.A. The rating confirmation follows a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

Overall, TD Bank US’s ratings reflect its significant and important role in its parent company’s, The Toronto-Dominion Bank’s (TD), North American strategy. Indeed, TD’s U.S. footprint offers higher growth opportunities than its legacy Canadian footprint. Reflective of its importance to its parent, the Company’s net income represents a substantial portion of TD’s total net income. Specifically, for the first three quarters of TD’s fiscal 2015, net income of the U.S. Retail segment (which represents largely TD Bank US), totaled $1.3 billion and accounted for approximately 22% of TD’s net income.

The maintenance of the Negative trend on most of the ratings considers DBRS’s assignment on May 20, 2015 of a Negative trend on TD’s Issuer Rating reflecting DBRS’s view that anticipated changes in Canadian legislation and regulation mean that the potential for timely support for systemically important institutions is declining and is likely to eventually result in a change in DBRS’s support assessment from SA2 to SA3 for TD. Currently, most TD ratings benefits from an uplift of one notch above the entities intrinsic assessment (IA) due to the SA2 support assessment. DBRS currently assigns TD Bank US a SA1 support assessment based on DBRS’s view of strong and predictable support from TD. As a supported rating with a SA1 designation, the ratings for TD Bank US will move in tandem with TD’s rating. TD is rated AA and was last confirmed on July 16, 2015.

The Company’s ratings also consider its robust deposit franchise in attractive markets along the East Coast from Maine to Florida. DBRS notes that TD Bank US’ retail banking model, which is focused on customer service and convenience, is a key differentiator amongst its peers, and its core deposit base serves as the cornerstone of the Company’s strong funding and liquidity profile.

Despite relatively moderate earnings generation, TD Bank US’s earnings power remains satisfactory, driven by its growing loan book and strong deposit franchise. Indeed, for the first three quarters of fiscal year 2015, ending July 31, 2015, the Company’s average loans grew by 9.3%, while average deposits increased by 4.9%. DBRS notes that TD Bank US’s strong deposit franchise, easily funds the loan portfolio and its average loan-to-average deposit ratio of 60% as of July 31, 2015 reflects a high level of funding capacity for future loan growth. DBRS expects that ongoing efforts to increase lending activity from a variety of sources will benefit future earnings as lending products typically have more attractive yields relative to securities. This should enable the Company to deploy its substantial core deposits more profitably. Furthermore, given its large retail customer base, TD Bank US has solid opportunities for fee income growth. Finally, expenses remain well managed.

Also factored into DBRS’s ratings is TD Bank US’s sound risk profile, which compares favorably to other large banks. Specifically, the Company’s non-performing assets represented a manageable 1.39% of total loans and other real estate owned as of June 30, 2015, relatively stable as compared to 1.37% as of December 31, 2014, and down from 1.61% as of December 31, 2013. Likewise, annualized net charge-offs (NCOs) were a low 39 basis points of average loans for the three months ended June 30, 2015, down from 46 basis points for 2014.

On the capital front, TD Bank US has historically operated with moderate capitalization at the holding company level while its banking subsidiaries 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 although remaining somewhat lower than many U.S. regional bank peers.

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 2015). Other applicable methodologies include the DBRS Criteria – Support
Assessments for Banks and Banking Organisations (March 2015), DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February2015), and DBRS Criteria - Guarantees and Other Forms of Explicit Support (February 2015). 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: May 20, 2015

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