Morningstar DBRS Downgrades The Toronto-Dominion Bank's Long-Term Issuer Rating to AA From AA (high); Changes Trend to Stable

DBRS Limited (Morningstar DBRS) downgraded its long-term credit ratings on The Toronto-Dominion Bank (TD or the Bank) and its related entities, including TD's Long-Term Issuer Rating to AA from AA (high). At the same time, Morningstar DBRS downgraded the Short-Term Issuer Rating on TD Bank, N.A. and TD Bank US Holding Company to R-1 (middle) from R-1 (high) while confirming TD's short-term credit ratings. All trends are now Stable. TD's Long-Term Issuer Rating is composed of an Intrinsic Assessment (IA) of AA (low) and a Support Assessment (SA) of SA2, which reflects the expectation of timely systemic support from the Government of Canada (rated AAA with a Stable trend). As a result of the SA2 designation, the Bank's Long-Term Issuer Rating benefits from a one-notch uplift to the Bank's IA.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings downgrade primarily reflects the repositioning of the Bank's credit ratings within its peer group, given the significant failures related to governance and controls in its U.S. anti-money laundering (AML) program, as well as the unexpected weakening in the operating environment that will likely pressure earnings more than Morningstar DBRS originally anticipated. Morningstar DBRS views the Bank as having a prolonged level of heightened reputational and operational risk as it continues its multiyear AML remediation efforts, including the potential for additional missteps. Further, F2025 will be a transition year for the Bank as it undertakes a U.S. balance sheet restructuring and concludes its strategic review following the USD 434 billion asset cap imposed on TD's two U.S. banking subsidiaries (TD Bank USA, N.A. and TD Bank, N.A.). Profitability will be challenged in F2025 and potentially beyond as the Bank looks to pivot its strategy and refocus growth on the Canadian market where competition for market share between the large Canadian banks will likely intensify. Further, the asset cap and higher expenses related to governance and control investments pose potential earnings headwinds. Morningstar DBRS is also concerned about heightened economic and geopolitical uncertainty, particularly as it relates to U.S. trade policy, which may lead to a recession and could exacerbate the negative impact on the Bank's profitability and asset quality.

The credit ratings and Stable trends continue to reflect TD's strong banking franchise and diversified business mix and earnings, including its top-tier Canadian retail franchise and comprehensive wealth offering. TD's large U.S. banking franchise operates primarily along the Eastern Seaboard, contributing to earnings diversity. Additionally, the Wholesale Banking segment includes a top-tier investment bank in Canada and an expanded U.S. Wholesale business following the integration of TD Cowen that, while subject to more volatility, comprised a reasonable 9% of F2024 adjusted net income (excluding the Corporate segment). Although credit quality metrics are deteriorating, credit and market risks are well managed, and the Bank maintains strong levels of liquidity and capital.

TD's Intrinsic Assessment of AA (low) has been assigned at the low point of the Intrinsic Assessment Range, given the challenges the Bank still faces while reflecting Morningstar DBRS' view that future earnings may be adversely affected by the AML remediation efforts, as well as the deteriorating operating environment created by the tariff uncertainty.

CREDIT RATING DRIVERS
A credit ratings upgrade would occur if TD made substantial progress in restoring the integrity of its AML program and demonstrated a sustainable level of improved profitability commensurate with the higher credit rating category, without a material deterioration in asset-quality metrics.

A credit ratings downgrade would occur if the Bank experienced any additional missteps or failures, including in its AML remediation efforts, leading to heightened operational risk. Additionally, a sustained deterioration in earnings or asset quality would also lead to a downgrade of the credit ratings.

CREDIT RATING RATIONALE
Franchise Combined Building Block Assessment: Very Strong/Strong
As measured by total assets, TD currently ranks as the second-largest bank in Canada, the sixth-largest in North America, and a top 10 U.S. bank (including being the largest foreign-owned bank). TD maintains a top-tier retail banking platform in Canada where it is ranked first or second across most retail products, including total deposits where it ranks second in Canada and sixth in North America. In the U.S., TD's existing footprint along the U.S. East Coast from Maine to Florida includes retail, small business, and commercial banking operations in four of the top 10 metropolitan statistical areas and six of the 10 wealthiest states. The Bank benefits from its full product suite and wide distribution channels, which continue to provide organic growth opportunities, along with an expanded Wholesale Banking segment following the integration of TD Cowen.

Earnings Combined Building Block Assessment: Strong/Good
TD typically generates solid underlying earnings through its well-diversified and generally predictable retail revenue streams, contributing to the Bank's ability to absorb credit losses. In F2024, adjusted net income (as reported) decreased 4.8% year-over-year (YOY) to $14.3 billion, as higher noninterest income and a modest uptick in net interest income was more than offset by higher provisions for credit losses (PCL) and noninterest expenses. Reported net interest margin (NIM) decreased by 2 bps YOY to 1.72% in F2024, primarily due to the impact of maintaining elevated liquidity levels. TD had Q1 2025 adjusted net income (as reported) of $3.6 billion, a quarter-over-quarter (QOQ) increase of 13% as higher revenues were only partly offset by higher PCLs and noninterest expenses. Reported NIM in Canada was broadly stable QOQ at 2.81% in Q1 2025, while reported NIM in the U.S. increased 9 basis points (bps) QOQ to 2.86%, as a result of the U.S. balance sheet restructuring activities and normalization of liquidity levels. Morningstar DBRS notes that F2025 will be a challenging year for the Bank from an earnings standpoint, as it completes its U.S. balance sheet restructuring and absorbs elevated governance and control expenses related to its AML remediation efforts.

Risk Combined Building Block Assessment: Strong
Morningstar DBRS views TD's credit risk profile as conservative and well managed, exhibited by its solid asset quality with a manageable, albeit deteriorating, level of PCLs and impaired loans amid a challenging operating environment. In Q1 2025, the total PCL ratio increased 3 bps QOQ to 50 bps. Meanwhile, the allowance coverage increased by 4 bps QOQ to 99 bps, attributable to overlays in the business and government lending portfolios related to policy and trade uncertainty and credit migration, and is 25 bps higher compared with pre-pandemic levels. TD's Canadian real estate secured lending (RESL) portfolio represents approximately 41% of total gross loans and acceptances (GL&A) and, like that of all large Canadian banks, appears to be conservatively underwritten with an uninsured average credit bureau score of 792 and an uninsured current loan-to-value ratio of 53% providing a substantial buffer. Meanwhile, the CRE office sector exposure represents a manageable 10% of total CRE loans and 1% of GL&A and is well diversified across geographies and sub-segments. Morningstar DBRS views the Bank as having a heightened level of operational and reputational risk as it continues its multiyear AML remediation efforts, including the potential for additional missteps.

Funding and Liquidity Combined Building Block Assessment: Strong
Morningstar DBRS views TD as having one of the strongest funding profiles of all the large Canadian banks, underpinned by a strong deposit franchise in both Canada and the U.S. that is diversified and broad-based, reflecting the Bank's expansive network of deposit-gathering branches. Augmenting its ample deposit funding, TD also enjoys ready access to diversified wholesale funding sources. TD's liquidity profile remains strong, with a liquidity coverage ratio (LCR) of 141% and a net stable funding ratio (NSFR) of 116% as at January 31, 2025, both at elevated levels and comfortably exceeding regulatory minimum thresholds. Morningstar DBRS expects TD to normalize liquidity buffers more in line with historical levels once operational and macroeconomic uncertainty dissipates.

Capitalization Combined Building Block Assessment: Strong
Morningstar DBRS views the Bank's capitalization as strong, supported by typically solid internal capital generation. TD's CET1 ratio of 13.1% at Q1 2025 was the second lowest among large Canadian bank peers (albeit within a tight range between 12.9% and 13.6%). Morningstar DBRS expects the Bank to have the highest CET1 ratio in Q2 2025 following the expected 238 bps positive impact to CET1 from the sale of the Bank's remaining 10.1% equity investment in Schwab. However, $8 billion of the approximate $20 billion in sale proceeds from the Schwab sale has been earmarked for share buybacks. Additionally, TD will subsequently deploy a portion of excess capital in F2026 to invest in organic growth in its businesses, following the completion of the Bank's strategic review. As at Q1 2025, the Bank's risk-based total loss-absorbing capacity ratio was 29.5%, and its leverage ratio was 4.2%, in line with its Canadian bank peers.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/453411

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Governance (G) Factors
The following Governance factor had a significant effect on the credit analysis: Morningstar DBRS finds the corporate/transaction governance ESG factor is significant to the credit ratings and could affect the credit ratings assigned to the Bank, reflecting the details of the global resolution to TD's AML investigations. On October 10, 2024, certain U.S. subsidiaries of TD pleaded guilty to multiple criminal charges, including conspiracy to commit money laundering. The settlement included total fines of USD 3.09 billion, along with a USD 434 billion asset cap on TD's two U.S. subsidiaries (TD Bank USA, N.A. and TD Bank, N.A.). Given the elevated operational risk and macroeconomic uncertainty, any additional missteps and/or setbacks in AML remediation efforts to address these significant corporate governance failures at the Bank could result in reputational risk, customer attrition, loss of market share, and prolonged underperformance with respect to earnings. This factor is incorporated into TD's Franchise Strength, Earnings Power, and Risk Profile grid grades.

There were no Environmental or Social factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 4, 2024) https://dbrs.morningstar.com/research/433881. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

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 dbrs.morningstar.com.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

The last credit rating action on this issuer took place on October 16, 2024, when Morningstar DBRS changed the trends on all long-term credit ratings of the Bank, and its related entities, to Negative from Stable and confirmed all credit ratings. At the same time, Morningstar DBRS confirmed all short-term credit ratings with Stable trends, with the exception of TD Bank, N.A. and TD Bank US Holding Company, whose short-term credit rating trends were changed to Negative from Stable.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's trends and credit ratings are monitored.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see: https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Carl De Souza, Senior Vice President, Sector Lead, North American Financial Institution Ratings
Rating Committee Chair: Timothy O'Brien, Managing Director, North American Financial Institution Ratings
Initial Rating Date: November 30, 1980

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.

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