DBRS Confirms The Toronto-Dominion Bank at AA; Trend Remains Negative

DBRS, Inc. (DBRS) has today confirmed the ratings of The Toronto-Dominion Bank (TD or the Bank) and its related entities, including its Issuer Rating and Deposits & Senior Debt rating at AA and its Short-Term Instruments rating at R-1 (high). The trends on the senior long-term debt, 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 (IA) continue to have a Stable trend. Confirmation of the ratings follows a detailed review of the Bank’s operating results, financial fundamentals and future prospects.

TD ranks as the second-largest bank in Canada and the sixth largest in North America by assets ($1.12 trillion as of Q2 2016). The Bank offers a largely complete set of banking products and services, with top-tier market positions in most domestic retail products. In addition, TD’s U.S. bank holding company ranks in the top ten nationally by deposits, with a branch network larger than its Canadian operations and locations throughout the east coast, from Maine to Florida. Further, its U.S. Retail segment represents a material 34% of the group’s total H1 2016 earnings and contributes to the geographic diversity of the organization. Overall, and consistent with the Bank’s well-articulated strategy, TD continues to be a leader in customer service and convenience, which supports its retail earnings focus. Indeed, more than 80% of TD’s adjusted net income is generated from its Canadian and U.S retail operations, providing considerable stability to earnings, a key underpinning to its ratings. DBRS considers TD to be one of the top banks in Canada as well as globally, reflecting the Bank’s strong and growing franchise.

TD’s long-term Deposits & Senior Debt rating of AA is composed of an IA of AA (low) and a support assessment of SA2, reflecting the expectation of timely, systemic support by the Government of Canada (rated AAA, Stable trend, by DBRS). The SA2 designation results in a one-notch benefit to the senior debt and deposits ratings. The maintenance of the Negative trend reflects DBRS’s view that ongoing changes in Canadian legislation and regulation still indicate that the potential for timely support for systemically important institutions is declining, leading to a likely change in DBRS’s support assessment to SA3 from SA2. The legislation enacting the bank recapitalization, or bail-in, regime is moving forward, but DBRS does not yet have sufficient clarity on the details of the implementation to remove the benefit of systemic support from the affected ratings.

TD continues to benefit from its diversified earnings base, consistently generating strong profitability metrics, including a return on equity of 13.2% in H1 2016, despite the challenging operating environment. Specifically, adjusted net income increased 6% in H1 2016 relative to the comparable period in the prior year, even with a substantial increase in the provision for credit losses, driven by strong performances from U.S. and Canadian retail banking, partially offset by a decline in wholesale banking and a larger loss in corporate banking.

TD’s risk profile remains strong, as evidenced by its still quite favourable credit quality indicators, though DBRS views current levels as likely unsustainable, given how low they are compared with historical norms. Similar to peers, the Bank’s oil & gas portfolio was pressured in recent periods but remains highly manageable, representing less than 1% of total loans. Moreover, DBRS anticipates seeing some signs of deterioration in other parts of the loan portfolio in the near to intermediate term, given the above-average debt levels of Canadian consumers, rapidly rising housing prices and expected credit quality trend reversion. Importantly, DBRS remains comforted by TD’s track record and disciplined approach to risk management.

The Bank’s balance sheet fundamentals remain robust, providing further support to the ratings. TD’s funding and liquidity position is underpinned by a sizable deposit base, including the highest level of personal deposits among the big six Canadian banks, which is generally considered a more stable source of deposits, and a substantial amount of high quality liquid assets, with a Liquidity Coverage Ratio of 128% for the quarter ended April 30, 2016. Additionally, capital metrics remain sound with a Basel III Common Equity Tier 1 Ratio of 10.1% and a Basel III Leverage Ratio of 3.8% as of April 30, 2016.

RATING DRIVERS
If support is removed, TD’s long-term ratings may be downgraded. DBRS views the Bank’s current IA as strengthening. On an intrinsic basis, the Bank’s preserving its commanding position in Canada with continued strengthening of its U.S. franchise while maintaining sound balance sheet fundamentals could lead to positive rating actions. Conversely, a material increase in risk appetite or significant asset quality deterioration could lead to negative rating actions.

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 on the issuer page at www.dbrs.com.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (December 2015), Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016) and DBRS Criteria: Guarantees and Other Forms of Support (February 2016), which can be found on our website under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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

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

For more information on this credit or on this industry, visit www.dbrs.com.

Lead Analyst: John Mackerey
Rating Committee Chair: Roger Lister
Initial Rating Date: November 30, 1980
Most Recent Rating Update: July 16, 2015