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Enriching the lives of our customers,
communities and colleagues
2016 Annual Report
FSC Logo
® The TD logo and other trade-marks are the property of
The Toronto-Dominion Bank or a wholly-owned subsidiary,
in Canada and/or other countries.
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2016 Snapshot
Year at a Glance
Performance Indicators
TD Framework
Group President and CEO’s Message
Chairman of the Board’s Message
MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL RESULTS
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Ten-Year Statistical Review
Glossary
Shareholder and Investor Information
1
2
4
5
6
7
11
116
124
201
207
209
For more information, see the interactive
TD Annual Report online by visiting
td.com/annual-report/ar2016
For information on TD’s commitments
to the community see the TD Corporate
Responsibility Report online by visiting
td.com/corporate-responsibility
(2016 report available April 2017)
Shareholder and Investor Information
MARKET LISTINGS
The common shares of The Toronto-Dominion
Bank are listed for trading on the Toronto Stock
Exchange and the New York Stock Exchange
under the symbol “TD”. The Toronto-Dominion
Bank preferred shares are listed on the Toronto
Stock Exchange.
Further information regarding the Bank’s
listed securities, including ticker symbols and
CUSIP numbers, is available on our website at
www.td.com under Investor Relations/Share
Information or by calling TD Shareholder
Relations at 1-866-756-8936 or 416-944-6367
or by e-mailing tdshinfo@td.com.
AUDITORS FOR FISCAL 2016
Ernst & Young LLP
DIVIDENDS
Direct dividend depositing: Shareholders
may have their dividends deposited directly
to any bank account in Canada or the U.S.
For this service, please contact the Bank’s
transfer agent at the address below.
U.S. dollar dividends: Dividend payments
sent to U.S. addresses or made directly to
U.S. bank accounts will be made in U.S. funds
unless a shareholder otherwise instructs the
Bank’s transfer agent. Other shareholders can
request dividend payments in U.S. funds by
contacting the Bank’s transfer agent. Until
February 28, 2017, dividends will be exchanged
into U.S. funds at the Bank of Canada noon
rate on the fifth business day after the record
date, or as otherwise advised by the Bank.
Effective March 1, 2017, dividends will be
exchanged into U.S. funds at the Bank of Canada
daily average exchange rate published at 16:30
(Eastern) on the fifth business day after the
record date, or as otherwise advised by the Bank.
Dividend information is available at
www.td.com under Investor Relations/Share
Information. Dividends, including the amounts
and dates, are subject to declaration by the
Board of Directors of the Bank.
DIVIDEND REINVESTMENT PLAN
For information regarding the Bank’s dividend
reinvestment plan, please contact our transfer
agent or visit our website at www.td.com under
Investor Relations/Share Information/Dividends.
IF YOU
AND YOUR INQUIRY RELATES TO
PLEASE CONTACT
Are a registered shareholder (your name appears
on your TD share certificate)
Hold your TD shares through the Direct
Registration System in the United States
Missing dividends, lost share certificates, estate
questions, address changes to the share register,
dividend bank account changes, the dividend
reinvestment plan, eliminating duplicate mailings
of shareholder materials or stopping (and
resuming) receiving annual and quarterly reports
Missing dividends, lost share certificates, estate
questions, address changes to the share register,
eliminating duplicate mailings of shareholder
materials or stopping (and resuming) receiving
annual and quarterly reports
Transfer Agent:
CST Trust Company
P.O. Box 700, Station B
Montréal, Québec H3B 3K3
1-800-387-0825 (Canada and U.S. only)
or 416-682-3860
Facsimile: 1-888-249-6189
inquiries@canstockta.com or www.canstockta.com
Co-Transfer Agent and Registrar:
Computershare
P.O. Box 30170
College Station, TX 77842-3170 or
211 Quality Circle, Suite 210
College Station, TX 77845
1-866-233-4836
TDD for hearing impaired: 1-800-231-5469
Shareholders outside of U.S.: 201-680-6578
TDD shareholders outside of U.S.: 201-680-6610
www.computershare.com
Beneficially own TD shares that are held in the
name of an intermediary, such as a bank, a trust
company, a securities broker or other nominee
Your TD shares, including questions regarding
the dividend reinvestment plan and mailings
of shareholder materials
Your intermediary
TD SHAREHOLDER RELATIONS
For all other shareholder inquiries, please contact
TD Shareholder Relations at 416-944-6367 or
1-866-756-8936 or e-mail tdshinfo@td.com.
Please note that by leaving us an e-mail or
voicemail message you are providing your
consent for us to forward your inquiry to the
appropriate party for response.
Shareholders may communicate directly with the
independent directors through the Chairman
of the Board, by writing to:
Chairman of the Board
The Toronto-Dominion Bank
P.O. Box 1
Toronto-Dominion Centre
Toronto, Ontario M5K 1A2
or you may send an e-mail c/o TD Shareholder
Relations at tdshinfo@td.com. E-mails addressed
to the Chairman received from shareholders and
expressing an interest to communicate directly
with the independent directors via the Chairman
will be provided to Mr. Levitt.
HEAD OFFICE
The Toronto-Dominion Bank
P.O. Box 1
Toronto-Dominion Centre
King St. W. and Bay St.
Toronto, Ontario M5K 1A2
Product and service information 24 hours a day,
seven days a week:
In Canada contact TD Canada Trust
1-866-222-3456
In the U.S. contact TD Bank,
America’s Most Convenient Bank®
1-888-751-9000
French: 1-866-233-2323
Cantonese/Mandarin: 1-800-328-3698
Telephone device for the hearing impaired:
1-800-361-1180
General information:
Contact Corporate and Public Affairs
416-982-8578
Website: In Canada: www.td.com
In the U.S.: www.tdbank.com
E-mail: customer.service@td.com
(Canada only; U.S. customers can e-mail
customer service via www.tdbank.com)
ANNUAL MEETING
Thursday, March 30, 2017
9:30 a.m. (Eastern)
Design Exchange
Toronto, Ontario
SUBORDINATED NOTES SERVICES
Trustee for subordinated notes:
Computershare Trust Company of Canada
Attention: Manager,
Corporate Trust Services
100 University Avenue, 11th Floor
Toronto, Ontario M5J 2Y1
Vous pouvez vous procurer des exemplaires en
français du rapport annuel au service suivant :
Affaires internes et publiques
La Banque Toronto-Dominion
P.O. Box 1, Toronto-Dominion Centre
Toronto (Ontario) M5K 1A2
TD B ANK GRO UP ANNUAL REP ORT 2016 SHAREHOLDER AND I NVESTO R I NFORM ATIO N
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2016 Snapshot1
NET INCOME
available to common shareholders
(millions of Canadian dollars)
DILUTED EARNINGS
PER SHARE
(Canadian dollars)
RETURN ON
COMMON EQUITY
(percent)
Reported
Adjusted
Reported
Adjusted
Reported
Adjusted
TOTAL ASSETS
(billions of Canadian dollars)
$10,000
8,000
6,000
4,000
2,000
0
$5
4
3
2
1
0
18.0%
15.0
12.0
9.0
6.0
3.0
0
$1,200
1,000
800
600
400
200
0
12
13
14
15
16
12
13
14
15
16
12
13
14
15
16
12
13
14
15
16
TD’s 5-year CAGR
TD’s 5-year CAGR
8.5% Reported
8.0% Adjusted
7.8% Reported
7.3% Adjusted
TD’s 2016 Return
on Common Equity
13.3% Reported
13.9% Adjusted
$1,177 billion of total
assets as at
October 31, 2016
DIVIDENDS PER SHARE
(Canadian dollars)
TOTAL SHAREHOLDER
RETURN
(5-year CAGR)
TD’S PREMIUM RETAIL
EARNINGS MIX 2
$2.50
2.00
1.50
1.00
0.50
0
14.2%
TD’s premium earnings
mix reflects our North
American retail focus –
lower-risk businesses with
stable, consistent earnings
61%
30%
9%
12
13
14
15
16
10.6% TD’s 5-year CAGR
6.6% Canadian peers
5-year CAGR
12.6% Canadian peers
91% Retail
9% Wholesale
1 Refer to the footnotes on pages 2 and 3 for information on how
these results are calculated.
2 Reported basis excluding Corporate segment.
Canadian Retail
U.S. Retail
Wholesale
TD BANK GROUP ANNUAL REP O RT 20 1 6 2 016 SNAPSHOT
1
Year at a Glance1
Record Reported Earnings of
$8.9 billion in 2016
TD Shares Reach
an All-Time High
Returning Capital
to TD Shareholders
TD announced record reported earnings for the
seventh consecutive year driven by growth in our
U.S. Retail and Wholesale businesses.
TD common shares reached an all-time high of
$61.03 on October 31, 2016. TD also ranked
#1 or #2 over the one, three, five and ten year
time frames for Total Shareholder Return (TSR)
among the Big 5 banks2.
TD raised its quarterly dividend 8% from the
previous year and repurchased 9.5 million
shares to offset dilution from the Bank’s
dividend reinvestment plan and issuances
related to stock options.
Tuck-in Acquisitions to Further
Strengthen U.S. Businesses
TD Securities announced an agreement to
acquire Albert Fried & Company, a New York
based broker-dealer with a prime brokerage
technology platform. TD also announced
an agreement to acquire Scottrade Bank, in
conjunction with TD Ameritrade’s agreement to
acquire Scottrade’s discount brokerage business3.
TD Canada Trust Remains the Leader
in Service and Convenience
TD Canada Trust (TDCT) retained the #1 spot
in “Customer Service Excellence” among
the Big 5 Canadian Banks for the twelfth
consecutive year according to Ipsos. In
addition, TDCT continued to lead in credit
cards and total personal deposit market share
and maintained the #2 position for business
loan and deposit market share4,5.
Momentum in TD Securities
TD Securities (TDS) achieved net income
of $920 million and ROE of 16% in 2016.
TDS grew corporate loans by 28%; further
expanded its U.S. capabilities and client
offerings; maintained top three dealer status
in Canada in key product markets; and
attained the #1 ranking overall in Thomson
Reuters Analyst Awards for equity research6,7.
TD Bank, America’s Most
Convenient Bank® delivers
Record Earnings
TD’s U.S. Retail segment delivered
US$2.2 billion in earnings, up 11% from
the prior year, and TD Bank, America’s
Most Convenient Bank won the J.D. Power
U.S. Retail Banking Satisfaction Award for
the Florida Region8.
Record Year in Wealth Management
TD Wealth delivered double-digit growth and
over $1 billion in global earnings and surpassed
the $700 billion mark in total assets under
management and administration. TD Direct
Investing launched the new WebBroker
Platform and successfully migrated over
1.5 million clients. The Advice businesses
posted record assets and delivered earnings
growth of over 25%. TD Asset Management,
including Epoch, accumulated record assets
under management of over $300 billion.
TD Insurance Continues to Lead
in Direct to Consumer and Affinity
Personal Home and Auto Insurance
in Canada
TD Insurance (TDI) continues to enhance its
claims handling and industry leading digital
quoting and advice capabilities. In 2016, it
launched the first one-stop-shop auto claims
collision centre in Canada. TDI also raised
the bar on customer support during the Fort
McMurray wildfires, the costliest natural
disaster in Canadian history. TD is ranked
first in balance protection for credit cards and
second in credit protection insurance among
the Big 5 banks9,10,11.
TD Remains a Direct Channels
Leader in Canada
TD ranked first in Canadian mobile banking with
the highest number of mobile unique visitors
according to Comscore. TD was also recognized
for its leadership in customer service excellence
among the Big 5 Canadian Banks for automated
teller machines (ATM), online and mobile
banking according to Ipsos4,12.
TD Continues to Deliver Innovative
Solutions to Help Customers Live
their Lives
TD Provides Leadership
in the Transition to the
Low Carbon Economy
TD introduced TD My Spend, a money
management app that provides customers with
real time insight into their spending. TD also
introduced TD for Me. A companion to TD’s
Canadian banking app, it provides customers
with personalized experiences, offers and
reminders. Both are firsts for Canadian
financial institutions. In the U.S., TD launched
its Next Generation Digital platform, including
a redesigned app for iOS and Android devices
with more than 20 new features.
In 2016, TD became the first Canadian
company to join both the RE100, a global
initiative to help increase renewable energy
demand, and CDP’s program to reduce
carbon in the supply chain. Alongside a group
of Canadian industry leaders, TD joined the
Carbon Pricing Leadership Coalition to support
the Canadian government’s commitment to
reduce carbon emissions. In 2016, TD was the
highest scoring Canadian bank on the CDP
Climate Disclosure Leadership Index and the
only Canadian bank listed on the Dow Jones
Sustainability World Index.
1 The Toronto-Dominion Bank (the “Bank” or “TD”) prepares its Consolidated
Financial Statements in accordance with International Financial Reporting Standards
(IFRS), the current Generally Accepted Accounting Principles (GAAP), and refers
to results prepared in accordance with IFRS as the “reported” results. The Bank
also utilizes non-GAAP financial measures to arrive at “adjusted” results to assess
each of its businesses and to measure overall Bank performance. To arrive at
adjusted results, the Bank removes “items of note”, net of income taxes, from
reported results. Refer to the “Financial Results Overview” in the accompanying
2016 Management’s Discussion and Analysis (MD&A) for further explanation,
a list of the items of note, and a reconciliation of non-GAAP financial measures.
“Five-year CAGR” is the compound annual growth rate calculated from 2011
to 2016 on a reported and adjusted basis.
Reference to retail earnings includes the total reported earnings of the
Canadian Retail and U.S. Retail segments.
2 TSR is calculated based on share price movements and dividends reinvested
over the trailing one, three, five, and ten year periods ending October 31, 2016.
Source: Bloomberg. Canadian peers include Royal Bank of Canada, Scotiabank,
Bank of Montreal and Canadian Imperial Bank of Commerce.
3 Scottrade Bank is a federal savings bank wholly-owned by Scottrade Financial
Services Inc.
2
TD BANK GROU P AN NUAL REPO RT 20 16 YEAR A T A GLAN CE
4 TDCT achieved leadership in banking excellence in the following channels in the
2016 Ipsos Best Banking Awards: Automated Teller Machine, Online and Mobile.
Leadership is defined as either a statistically significant lead over the other Big 5
Canadian Banks (at a 95% confidence interval) or a statistically equal tie with one
or more of the Big 5 Canadian Banks. Ipsos 2016 Best Banking Awards are based
on ongoing quarterly Customer Service Index (CSI) survey results. Sample size for
the total 2016 CSI program year ended with the August 2016 survey wave was
47,305 completed surveys yielding 67,678 financial institution ratings nationally.
5 Market share ranking is based on the most current data available from public financial
disclosures for average credit card balances at June 2016, the Office of the
Superintendent of Financial Institutions Canada (OSFI) for personal deposits, and
the Canadian Bankers Association for business deposits and loans as of March 2016.
6 Ranked #1 in Equity Options Block Trading and #2 in Equity Block Trading (block
trades by value on all Canadian exchanges. Source: IRESS); #1 in Equity Underwriting
(Source: Bloomberg); #2 in Government and Corporate debt underwriting (excludes
self-led domestic bank deals and credit card deals. Bonus credit to lead. Source:
Bloomberg); #3 in Canadian Syndicated Loans (deal volume awarded proportionately
to the Lead Arrangers. Based on a rolling twelve-month basis. Source: Bloomberg).
All rankings are as of calendar year-to-date September 2016 unless otherwise noted.
Rankings reflect TD Securities’ position among Canadian peers.
7 The Thomson Reuters Analyst Awards are recognized as the gold standard in
objective measurement of sell-side analyst performance. The awards recognize
the world’s top individual sell-side analysts and sell-side firms. They measure
the performance of sell-side analysts based on the returns of their buy/sell
recommendations relative to industry benchmarks, and the accuracy of their
earnings estimates in 16 regions across the globe. TD Securities’ ranking is
based on receiving the highest number of equity research awards in 2016.
8 TD Bank, N.A. received the highest numerical score among Retail Banks in
Florida in the J.D. Power 2016 Retail Banking Satisfaction Study, based on
76,233 responses from 10 banks measuring opinions of consumers with their
primary banking provider, surveyed April 2015-February 2016. Your experiences
may vary. Visit www.jdpower.com.
9 Ranks based on data available from OSFI, Insurers, Insurance Bureau of Canada,
and Provincial Regulators, as at December 31, 2015. Peer group top 10: Intact,
Desjardins, Aviva, RSA, Wawanesa, The Co-Operators, Allstate, Economical,
and Travelers.
10 Balance protection insurance on credit cards per Canadian Bankers Association
(CBA), April 2016.
11 Credit protection insurance among Big 5 banks based on credit penetration
of Mortgage Life Insurance, using data from CBA, April 2016.
12 Comscore reporting current as of August 30, 2016. TD had the highest number
of mobile unique visitors accessing financial services over the past three months,
over the full year to-date, and over the third quarter of 2016.
Financial Highlights
(millions of Canadian dollars, except where noted)
Results of operations
Total revenues – reported
Total revenues – adjusted1
Provision for credit losses – reported
Provision for credit losses – adjusted1
Insurance claims and related expenses
Non-interest expenses – reported
Non-interest expenses – adjusted1
Net income – reported
Net income – adjusted1
Return on common equity – reported
Return on common equity – adjusted2
Financial positions (billions of Canadian dollars)
Total loans net of allowance for loan losses
Total assets
Total deposits
Total equity
Total Common Equity Tier 1 Capital risk-weighted assets3
Financial ratios
Efficiency ratio – reported
Efficiency ratio – adjusted1
Common Equity Tier 1 Capital ratio3
Tier 1 Capital ratio3
Total Capital ratio3
Leverage ratio
Provision for credit losses as a % of net average loans and acceptances5
Common share information – reported (dollars)
Per share earnings
Basic
Diluted
Dividends per share
Book value per share
Closing share price6
Shares outstanding (millions)
Average basic
Average diluted
End of period
Market capitalization (billions of Canadian dollars)
Dividend yield
Dividend payout ratio
Price-earnings ratio
Total shareholder return (1 year)7
Common share information – adjusted (dollars)1
Per share earnings
Basic
Diluted
Dividend payout ratio
Price-earnings ratio
2016
2015
2014
$ 34,315
34,308
2,330
2,330
2,462
18,877
18,496
8,936
9,292
$ 31,426
31,437
1,683
1,683
2,500
18,073
17,076
8,024
8,754
$ 29,961
29,681
1,557
1,582
2,833
16,496
15,863
7,883
8,127
13.3%
13.9
13.4%
14.7
15.4%
15.9
$ 585.7
1,177.0
773.7
74.2
405.8
$ 544.3
1,104.4
695.6
67.0
382.4
$ 478.9
960.5
600.7
56.2
328.4
55.0%
53.9
10.4
12.2
15.2
4.0
0.41
57.5%
54.3
9.9
11.3
14.0
3.7
0.34
55.1%
53.4
9.4
10.9
13.4
n/a4
0.34
$
4.68
4.67
2.16
36.71
60.86
1,853.4
1,856.8
1,857.2
$ 113.0
$
4.22
4.21
2.00
33.81
53.68
1,849.2
1,854.1
1,855.1
99.6
$
3.9%
46.1
13.0
17.9
4.88
4.87
44.3%
12.5
$
3.8%
47.4
12.8
0.4
4.62
4.61
43.3%
11.7
$
$
4.15
4.14
1.84
28.45
55.47
1,839.1
1,845.3
1,844.6
$ 102.3
3.5%
44.3
13.4
20.1
4.28
4.27
43.0%
13.0
$
1 Refer to footnote 1 on page 2.
2 Adjusted return on common equity is a non-GAAP financial measure. Refer to the
4 Not applicable.
5 Excludes acquired credit-impaired (ACI) loans and debt securities classified as loans.
“Return on Common Equity” section of this document for an explanation.
3 Effective the third quarter of 2014, each capital ratio has its own risk-weighted
assets (RWA) measure due to the OSFI prescribed scalar for inclusion of the Credit
Valuation Adjustment (CVA). For fiscal 2014, the scalars for inclusion of CVA
for Common Equity Tier 1 (CET1), Tier 1, and Total Capital RWA are 57%, 65%,
and 77% respectively. For fiscal 2015 and 2016, the scalars are 64%, 71%, and
77% respectively.
For additional information on ACI loans, refer to the “Credit Portfolio Quality”
section of the MD&A and Note 8 of the Consolidated Financial Statements. For
additional information on debt securities classified as loans, refer to the “Exposure
to Non-Agency Collateralized Mortgage Obligations” discussion and tables in the
“Credit Portfolio Quality” section of the MD&A.
6 Toronto Stock Exchange closing market price.
7 TSR is calculated based on share price movement and dividends reinvested over
a trailing one year period.
TD BANK GROUP ANNUAL REP O RT 20 1 6 Y EAR AT A GLANCE
3
Performance Indicators1
Performance indicators focus effort, communicate our priorities, and benchmark TD’s performance as we
strive to be the even Better Bank. The following table highlights our performance against these indicators.
2016 PERFORMANCE INDICATORS
RESULTS 1
FINANCIAL
• Deliver above-peer-average total shareholder return2
• Grow earnings per share (EPS) by 7 to 10%
• Deliver above-peer-average return on risk-weighted assets3
• 17.9% vs. Canadian peer average of 15.4%
• 6% EPS growth
• 2.31% vs. Canadian peer average of 2.15%3
BUSINESS OPERATIONS
• Grow revenue4 faster than expenses
CUSTOMER
•
Improve Legendary Experience Index (LEI)5 and Customer
Experience Index (CEI)6 scores
Invest in core businesses to enhance customer experience
•
EMPLOYEE
•
• Enhance the employee experience by:
Improve employee engagement score year over year
– Listening to our employees
– Building employment diversity
– Providing a healthy, safe, and flexible work environment
– Providing competitive pay, benefits, and performance-
based compensation
– Investing in training and development
• Total revenue growth of 10% vs. total expense growth of 8%
• Refer to “Business Segment Analysis” in the 2016 MD&A for details
• LEI/CEI composite score 45.3% (target 46.5%)
• Refer to “Business Segment Analysis” in the 2016 MD&A for details
• Employee engagement score7 was 4.18 in 2016 vs. 4.17 in 2015
• Refer to TD’s 2016 Corporate Responsibility Report available
April 2017
COMMUNITY
• Donate minimum of 1% of domestic pre-tax profits (five-year
• $102.8 million in donations and community sponsorships across
average) to charitable and not-for-profit organizations
North America and the U.K. vs. $92.5 million in 2015
• Make positive contributions by:
• 1.2% of domestic pre-tax profits in donations and community
– Supporting employees’ community involvement and
sponsorships in Canada vs.1.3% in 20158
fundraising efforts
• $245,000 in domestic employee volunteer grants to 406 different
– Supporting advancements in our areas of focus, which include
education and financial literacy, creating opportunities for
young people, creating opportunities for affordable housing,
and the environment
– Protecting and preserving the environment
1 Performance indicators that include an earnings component are based on TD’s
full-year adjusted results (except as noted) as explained in footnote 1 on page 2.
For peers, earnings have been adjusted on a comparable basis to exclude identified
non-underlying items.
2 TSR is calculated based on share price movement and dividends reinvested over
a trailing one year period.
3 Return on CET1 RWA measured year-to-date as at October 31, 2016, for comparison
purposes. Each capital ratio has its own RWA measure due to the OSFI prescribed
scalar for inclusion of the CVA. The scalars for inclusion of the CVA for CET1, Tier 1,
and Total Capital RWA are 64%, 71%, and 77%, respectively.
4 Revenue is net of insurance claims and related expenses.
organizations
• $38.8 million, or 56.9%, of our community giving was directed
to promote our areas of focus domestically
• $5.7 million distributed to 1,113 community environmental
projects through TD Friends of the Environment Foundation;
an additional $9.3 million from TD’s community giving budget
was used to support environmental projects
5 LEI is a new survey measurement program that tracks customers’ experience and
their overall relationship with TD. LEI was launched for TDCT and TD Bank retail
programs in fiscal 2015, replacing CEI.
6 CEI is a survey measurement program that tracks advocacy among TD Wealth
and TD Insurance customers. TD Wealth and TD Insurance CEI programs will be
transitioned to LEI programs in fiscal 2018.
7 Scale for employee engagement score is from one to five.
8 Calculated based on Canadian cash donations/five-year rolling average domestic
net income before tax.
4
TD BANK GROU P AN NUAL REPO RT 20 16 PERF ORM ANCE INDIC ATORS
TD Framework
The title of this year’s Annual Report, Enriching the lives of our customers, communities and colleagues,
speaks to the purpose that underpins what we do each and every day. It is part of the new TD Framework,
which guides our behaviour, shapes our culture and drives our performance.
Our Framework is described in a simple and straightforward way,
so everyone has a clear understanding of how we will grow
our business and people, be the brand of choice for customers
and clients, and make life better in the community. It is captured
in the graphic below, which expresses our mission, purpose and
set of shared commitments. The TD Tree represents growth and
development, strength and wisdom, and an organization with
deep roots. It also reflects our ongoing focus on our environment.
Simply, it’s about what we set out to achieve every day, and how we
will do it. The TD Framework is inspiring, yet easy to incorporate into
the work we do. Most important, it has no borders – the Framework
applies to everyone at TD, no matter their business, level or location.
The shared commitments are the behaviours that differentiate us and
help guide the way we run our business, develop as leaders, and
support our colleagues. We will use these commitments throughout
the Bank to help set objectives, evaluate performance, reward and
recognize our colleagues and build the skills and capabilities we need
to continue succeeding as an organization.
Execute
Own
Innovate
Think
Customer
Develop
Our vision
Be the better bank
TD Framework
Our shared commitments
Our purpose
To enrich the lives of our
customers, communities
and colleagues
Think like a
customer; provide
legendary
experiences and
trusted advice
Act like an owner;
lead with integrity
to drive business
results and contribute
to communities
Execute with speed
and impact; only
take risks we can
understand and
manage
Innovate with
purpose; simplify
the way we work
Develop our
colleagues;
embrace diversity
and respect one
another
TD BANK GROUP ANNUAL REP O RT 20 1 6 TD FRAMEWOR K
5
Group President and CEO’s Message
ENRICHING LIVES
TD strives to enrich the lives of its customers, communities and
colleagues every day. This core purpose enables us to compete, win
and grow in ways that create long-term shareholder value.
Indeed, we delivered record earnings of $8.9 billion in 2016.
Canadian Retail represented approximately two-thirds of our total
earnings, with contributions coming from across all of our businesses
including personal and commercial, wealth, and insurance. Our U.S.
business continued to grow at an impressive pace with results driven by
peer-leading loan and deposit volume growth. TD Securities delivered
strong results as well, and improved its market position in Canada in
key areas while continuing its growth momentum in the U.S.
Shareholders earned $2.16 per share in dividend payout. TD achieved
above average Total Shareholder Return among our Big 5 peers over
the short, medium and long term. Common Equity Tier 1 capital ratio
of 10.4% speaks to our enduring financial strength.
THE PROMISES WE MAKE
These results point to the strength of our diverse business mix, winning
growth strategy and the investments we continue to make in our business
to ensure we can compete, win and grow. But, more fundamentally, they
stem from our clarity of purpose and the promises we make.
Customers
To our customers, we know they don’t live to bank, they bank to live.
In 2016, we continued to simplify processes and empower our people
to make it easier for our customers to do business with us.
We also introduced a number of innovations to elevate their
experiences. For instance, TD can now serve its customers through
Facebook Messenger, a preferred channel by many – TD was, in fact,
the first bank in the world to do so. What’s more, this past June,
we launched TD MySpend, which enables customers to easily track
their spending habits in real time. Already, we have more than
700,000 registered users and this is just one example of our approach
to meeting our customers’ evolving needs. All this helps explain why
we are ranked among the world’s leading online financial services
firms, with approximately 11 million active digital customers.
Communities
Helping communities thrive is a business imperative for TD. We know
that we can only be successful if the communities in which we operate
are vibrant places to live and work. This includes investing our time
and money in various environmental and educational initiatives. In
2016, we continued to create more green spaces and helped hundreds
of thousands of people gain the knowledge, skills and confidence to
manage their finances responsibly.
TD’s community efforts took on special meaning in Fort McMurray,
Alberta, where many people were left in extreme and, in some cases,
desperate situations. I was very proud of how TD colleagues all across
the Bank came together to support this community in their time of
greatest need.
Colleagues
Whether serving our customers or communities, we know that our
people are the ones who make a difference. We work hard to create
an environment where our colleagues can be their best and do their
best. To this end, we foster an inclusive culture, and provide our
colleagues with meaningful work and growth opportunities. We
entrust them to think like a customer and act like an owner to enhance
our brand and business. I was pleased that these efforts continued to
earn awards and accolades in both the U.S. and Canada in 2016.
ENDURING PURPOSE
Looking forward, economic headwinds will likely persist. The competitive
landscape will continue to intensify, as both traditional and new entrants
deploy innovative technologies. Regulatory changes will require business
models to evolve. And financial institutions need to contend with new
and emerging threats including cyber-security.
None of this, however, will distract us from the promises we’ve
made to our customers, communities and colleagues or the values we
hold dear. Ultimately, our purpose – to enrich lives – will continue to
guide TD and, in turn, will enable us to deliver superior results for our
shareholders. I am confident that we have the right strategies and are
making the right investments to enable us to compete, win and grow
in the future.
Thank you for the confidence you have placed in TD. We work hard
every day to earn your trust and look forward to continuing to do so.
Bharat Masrani
Group President and Chief Executive Officer
6
TD BANK GROU P AN NUAL REPO RT 20 16 GROU P PR ESID ENT AND CE O’S M ESSA GE
Chairman of the Board’s Message
In 2016 TD Bank Group delivered increased reported earnings for the
seventh consecutive year. We delivered increased dividends for the
sixth consecutive year. We operated within our risk appetite and ended
the year with strong capital and liquidity positions. For the sixth year in
a row, Global Finance named TD one of the world’s safest banks and
the safest bank in Canada.
On behalf of the Board I would like to thank our Group President
and CEO, Bharat Masrani, and his leadership team, as well as every
one of our employees, for their hard work, wise stewardship and
balanced approach to making TD the Better Bank. I also want to thank
our shareholders for their ongoing support and our customers for the
opportunity to serve them every day.
While delivering excellent short term results, TD maintained focus
on the medium to long term through substantial investment in
technology and training, so as to enable TD to continue to deliver on
its differentiated convenience and service promise to retail customers
and to support the growth of our commercial and corporate clients.
TD’s success is underpinned by its values and culture. As the pace and
intensity of the competition has increased, we have maintained a focus
on metrics of employee and customer satisfaction, in order to be sure
that our core values continue to be well understood and widely reflected
throughout the Bank, particularly in our interactions with customers.
Brian M. Levitt
Chairman of the Board
THE BOARD OF DIRECTORS
AND ITS COMMITTEES
The Board of Directors as at November 30,
2016, its committees and key committees’
responsibilities are listed below. Our Proxy
Circular for the 2017 Annual Meeting will
set out the director candidates proposed
for election at the meeting and additional
information about each candidate including
education, other public Board memberships
held in the past five years, areas of expertise/
experience, TD Committee membership, stock
ownership and attendance at Board and
Committee meetings.
William E. Bennett
Corporate Director and
former President and
Chief Executive Officer,
Draper & Kramer, Inc.,
Chicago, Illinois
Amy W. Brinkley
Consultant,
AWB Consulting, LLC,
Charlotte,
North Carolina
Brian C. Ferguson
President & Chief
Executive Officer,
Cenovus Energy Inc.,
Calgary, Alberta
Colleen A. Goggins
Corporate Director
and retired
Worldwide Chairman,
Consumer Group,
Johnson & Johnson,
Princeton, New Jersey
Mary Jo Haddad
Corporate Director and
retired President and
Chief Executive Officer,
The Hospital for
Sick Children,
Oakville, Ontario
Jean-René Halde
Corporate Director and
retired President and
Chief Executive Officer,
Business Development
Bank of Canada,
Montréal, Québec
David E. Kepler
Corporate Director
and retired Executive
Vice President,
The Dow Chemical
Company,
Sanford, Michigan
Brian M. Levitt
Chairman of the Board,
The Toronto-Dominion
Bank,
Toronto, Ontario
Alan N. MacGibbon
Non-executive
Vice Chair,
Osler, Hoskin &
Harcourt LLP,
Toronto, Ontario
Karen E. Maidment
Corporate Director
and former Chief
Financial and
Administrative Officer,
BMO Financial Group,
Cambridge, Ontario
Bharat B. Masrani
Group President and
Chief Executive Officer,
The Toronto-Dominion
Bank,
Toronto, Ontario
Irene R. Miller
Chief Executive Officer,
Akim, Inc.,
New York, New York
Nadir H. Mohamed
Corporate Director and
former President and
Chief Executive Officer,
Rogers
Communications Inc.,
Toronto, Ontario
Claude Mongeau
Corporate Director and
former President and
Chief Executive Officer,
Canadian National
Railway Company,
Montréal, Québec
TD BANK GROUP ANNUAL REP O RT 20 1 6 C H AIR MA N OF TH E BO ARD’S MESS AG E
7
COMMITTEE
MEMBERS 1
KEY RESPONSIBILITIES 1
Corporate
Governance
Committee
Brian M. Levitt
(Chair)
William E. Bennett
Karen E. Maidment
Alan N. MacGibbon
Responsibility for corporate governance of TD:
• Set the criteria for selecting new directors and the Board’s approach to director independence;
•
Identify individuals qualified to become Board members and recommend to the Board the director
nominees for the next annual meeting of shareholders and recommend candidates
to fill vacancies on the Board that occur between meetings of the shareholders;
• Develop and recommend to the Board a set of corporate governance principles, including a code
of conduct and ethics, aimed at fostering a healthy governance culture at TD;
• Review and recommend the compensation of the non-management directors of TD;
• Satisfy itself that TD communicates effectively with its shareholders, other interested parties and
the public through a responsive communication policy;
• Facilitate the evaluation of the Board and Committees;
• Oversee an orientation program for new directors and continuing education for directors; and
• Monitoring the functions of the Ombudsman, including by reviewing with the Ombudsman periodic
reports on the activities of the Office of the Ombudsman.
Human
Resources
Committee
Karen E. Maidment
(Chair)
Amy W. Brinkley
Mary Jo Haddad
Brian M. Levitt
Nadir H. Mohamed
Responsibility for management’s performance evaluation, compensation and succession planning:
• Discharge, and assist the Board in discharging, the responsibility of the Board relating to leadership,
human resource planning and compensation, as set out in this Committee’s charter;
• Set performance objectives for the Chief Executive Officer (CEO), which encourage TD’s long-term
financial success and regularly measure the CEO’s performance against these objectives;
• Recommend compensation for the CEO to the Board for approval, and determine compensation
for certain senior officers;
• Oversee a robust talent planning and development process, including review and approval of the
succession plans for the senior officer positions and heads of control functions;
• Review and recommend the CEO succession plan to the Board of Directors for approval; and
• Produce a report on compensation which is published in TD’s annual proxy circular, and review,
as appropriate, any other related major public disclosures concerning compensation.
Supervising the management of risk of TD:
• Approve the Enterprise Risk Framework (ERF) and related risk category frameworks and policies that establish
the appropriate approval levels for decisions and other measures to manage risk to which TD is exposed;
• Review and recommend TD’s Risk Appetite Statement and related metrics for approval by the Board
and monitor TD’s major risks as set out in the ERF;
• Review TD’s risk profile against Risk Appetite metrics; and
• Provide a forum for “big-picture” analysis of an enterprise view of risk, including considering trends
and emerging risks.
Supervising the quality and integrity of TD’s financial reporting:
• Oversee reliable, accurate and clear financial reporting to shareholders;
• Oversee the effectiveness of internal controls including controls over financial reporting;
• Be directly responsible for the selection, compensation, retention and oversight of the work
of the shareholders’ auditor – the shareholders’ auditor reports directly to this Committee;
• Receive reports from the shareholders’ auditor, Chief Financial Officer, Chief Auditor,
Chief Compliance Officer and Global Anti-Money Laundering Officer, and evaluate the effectiveness
and independence of each;
• Oversee the establishment and maintenance of processes that ensure TD is in compliance with the
laws and regulations that apply to it, as well as its own policies;
• Act as the Audit Committee and Conduct Review Committee for certain subsidiaries of TD that are
federally-regulated financial institutions and insurance companies; and
• Receive reports on and approve, if appropriate, certain transactions with related parties.
Additional information relating to the responsibilities of the Audit Committee in respect of the appointment
and oversight of the shareholder’s independent external auditor is included in the Bank’s 2016 Annual
Information Form.
Risk Committee
Audit Committee
William E. Bennett
(Chair)
Amy W. Brinkley
Colleen A. Goggins
David E. Kepler
Alan N. MacGibbon
Karen E. Maidment
Alan N. MacGibbon2
(Chair)
William E. Bennett2
Brian C. Ferguson2
Jean-René Halde
Irene R. Miller2
Claude Mongeau2
1 As at November 30, 2016
2 Designated Audit Committee Financial Expert
8
TD BANK GROU P AN NUAL REPO RT 20 16 CHAIR MA N OF THE BOA RD ’S M ESS AGE
ENHANCED DISCLOSURE TASK FORCE
The Enhanced Disclosure Task Force (EDTF) was established by the
Financial Stability Board in May 2012 to identify fundamental disclosure
principles, recommendations and leading practices to enhance risk
disclosures of banks. On October 29, 2012, the EDTF published its
report, “Enhancing the Risk Disclosures of Banks”, which sets forth
7 fundamental disclosure principles and 32 recommendations around
improving risk disclosures.
Below is an index that includes the recommendations (as published
by the EDTF) and lists the location of the related EDTF disclosures
presented in the 2016 Annual Report or the 2016 fourth quarter
Supplemental Financial Information (SFI). Information on TD’s website
or any SFI is not and should not be considered incorporated herein by
reference into the 2016 Annual Report, Management’s Discussion and
Analysis, or the Consolidated Financial Statements.
Type of Risk
Topic EDTF Disclosure
Present all related risk information together in any
particular report.
The bank's risk terminology and risk measures and present key
parameter values used.
72-77, 82,
88-91, 102-103
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
General
Risk Governance and
Risk Management
and Business Model
Capital Adequacy and
Risk Weighted Assets
Liquidity
Describe and discuss top and emerging risks.
Outline plans to meet each new key regulatory ratio once
applicable rules are finalized.
Summarize the bank's risk management organization, processes,
and key functions.
Description of the bank's risk culture and procedures applied
to support the culture.
Description of key risks that arise from the bank's business
models and activities.
Description of stress testing within the bank's risk governance
and capital frameworks.
Pillar 1 capital requirements and the impact for global
systemically important banks.
Composition of capital and reconciliation of accounting balance
sheet to the regulatory balance sheet.
Flow statement of the movements in regulatory capital.
Discussion of capital planning within a more general discussion
of management's strategic planning.
Analysis of how RWA relate to business activities and
related risks.
Page
Annual Report
SFI
Refer to below for location
of disclosures
68-71
63-64, 70,
95-96, 98
73-76
72-73
62, 72, 77-104
60, 76, 84, 102
58-59
79-80, 83
58
79-81
59-60, 102
60, 62
82
5-8
78
53-73
Analysis of capital requirements for each methods used for
calculating RWA.
78-84, 196-197
Tabulate credit risk in the banking book for Basel asset classes
and major portfolios.
Flow statement reconciling the movements of RWA by risk type.
61
Discussion of Basel III back-testing requirements.
80, 84, 89-90
75-76
The bank’s management of liquidity needs and liquidity reserves.
91-93
TD BANK GROUP ANNUAL REP O RT 20 1 6 EN H A NCE D D ISC LOS UR E TASK FOR CE
9
Type of Risk
Topic EDTF Disclosure
Page
Annual Report
SFI
Funding
Market Risk
Credit Risk
Other Risks
19
20
21
22
23
24
25
26
27
28
29
30
31
Encumbered and unencumbered assets in a table by balance
sheet category.
Tabulate consolidated total assets, liabilities and off-balance
sheet commitments by remaining contractual maturity at the
balance sheet date.
Discussion of the bank's funding sources and the bank's
funding strategy.
Linkage of market risk measures for trading and non-trading
portfolio and balance sheet.
Breakdown of significant trading and non-trading market
risk factors.
Significant market risk measurement model limitations and
validation procedures.
Primary risk management techniques beyond reported risk
measures and parameters.
Provide information that facilitates users’ understanding of
the bank’s credit risk profile, including any significant credit
risk concentrations.
Description of the bank's policies for identifying impaired
or non-performing loans.
Reconciliation of the opening and closing balances of
non-performing or impaired loans in the period and the
allowance for loan losses.
94, 188
99-101
97-98
82
82, 84-85, 87
83-85, 87,
89-90
83-87
42-57, 77-82,
152-155,
164-166,
194-197
50-51,
126-127, 152
47, 153-154
Analysis of the bank's counterparty credit risks that arises from
derivative transactions.
80, 137, 160-161,
164-166
Discussion of credit risk mitigation, including collateral held for
all sources of credit risk.
80-81,
130-131, 137
Description of 'other risk' types based on management's
classifications and discuss how each one is identified, governed,
measured and managed.
88-90,
102-104
32
Discuss publicly known risk events related to other risks.
89
21-39,
43-76
25, 29
43-46
10
TD BANK GROU P AN NUAL REPO RT 20 16 ENH ANCE D DIS CLOS URE TASK F ORC E
Management’s Discussion and Analysis
This Management’s Discussion and Analysis (MD&A) is presented to enable readers to assess material
changes in the financial condition and operating results of TD Bank Group (“TD” or the “Bank”) for the
year ended October 31, 2016, compared with the corresponding period in the prior years. This MD&A
should be read in conjunction with the audited Consolidated Financial Statements and related Notes for
the year ended October 31, 2016. This MD&A is dated November 30, 2016. Unless otherwise indicated,
all amounts are expressed in Canadian dollars and have been primarily derived from the Bank’s annual
Consolidated Financial Statements prepared in accordance with International Financial Reporting Standards
(IFRS) as issued by the International Accounting Standards Board (IASB). Note that certain comparative
amounts have been restated/reclassified to conform with the presentation adopted in the current year.
FINANCIAL RESULTS OVERVIEW
Net Income
Revenue
Provision for Credit Losses
Expenses
Taxes
Quarterly Financial Information
BUSINESS SEGMENT ANALYSIS
Business Focus
Canadian Retail
U.S. Retail
Wholesale Banking
Corporate
2015 FINANCIAL RESULTS OVERVIEW
Summary of 2015 Performance
2015 Financial Performance by Business Line
12
15
16
19
20
21
22
24
27
31
35
37
38
40
GROUP FINANCIAL CONDITION
Balance Sheet Review
Credit Portfolio Quality
Capital Position
Securitization and Off-Balance Sheet Arrangements
Related-Party Transactions
Financial Instruments
RISK FACTORS AND MANAGEMENT
Risk Factors That May Affect Future Results
Managing Risk
ACCOUNTING STANDARDS AND POLICIES
Critical Accounting Estimates
Current and Future Changes in Accounting Policies
Controls and Procedures
ADDITIONAL FINANCIAL INFORMATION
41
42
58
64
67
67
68
72
104
107
109
110
Additional information relating to the Bank, including the Bank’s Annual Information Form, is available on the Bank’s website at http://www.td.com, on SEDAR
at http://www.sedar.com, and on the U.S. Securities and Exchange Commission’s website at http://www.sec.gov (EDGAR filers section).
Caution Regarding Forward-Looking Statements
From time to time, the Bank (as defined in this document) makes written and/or oral forward-looking statements, including in this document, in other filings with
Canadian regulators or the United States (U.S.) Securities and Exchange Commission (SEC), and in other communications. In addition, representatives of the Bank
may make forward-looking statements orally to analysts, investors, the media and others. All such statements are made pursuant to the “safe harbour” provisions of,
and are intended to be forward-looking statements under, applicable Canadian and U.S. securities legislation, including the U.S. Private Securities Litigation Reform
Act of 1995. Forward-looking statements include, but are not limited to, statements made in this document, including in the Management’s Discussion and Analysis
(“2016 MD&A”) under the heading “Economic Summary and Outlook”, for each business segment under headings “Business Outlook and Focus for 2017”, and in
other statements regarding the Bank’s objectives and priorities for 2017 and beyond and strategies to achieve them, the regulatory environment in which the Bank
operates, and the Bank’s anticipated financial performance. Forward-looking statements are typically identified by words such as “will”, “should”, “believe”, “expect”,
“anticipate”, “intend”, “estimate”, “plan”, “may”, and “could”.
By their very nature, these forward-looking statements require the Bank to make assumptions and are subject to inherent risks and uncertainties, general and specific.
Especially in light of the uncertainty related to the physical, financial, economic, political, and regulatory environments, such risks and uncertainties – many of which
are beyond the Bank’s control and the effects of which can be difficult to predict – may cause actual results to differ materially from the expectations expressed in
the forward-looking statements. Risk factors that could cause, individually or in the aggregate, such differences include: credit, market (including equity, commodity,
foreign exchange, and interest rate), liquidity, operational (including technology and infrastructure), reputational, insurance, strategic, regulatory, legal, environmental,
capital adequacy, and other risks. Examples of such risk factors include the general business and economic conditions in the regions in which the Bank operates; the
ability of the Bank to execute on key priorities, including the successful completion of acquisitions and dispositions, business retention plans, and strategic plans and
to attract, develop and retain key executives; disruptions in or attacks (including cyber-attacks) on the Bank’s information technology, internet, network access or other
voice or data communications systems or services; the evolution of various types of fraud or other criminal behaviour to which the Bank is exposed; the failure of third
parties to comply with their obligations to the Bank or its affiliates, including relating to the care and control of information; the impact of new and changes to, or
application of, current laws and regulations, including without limitation tax laws, risk-based capital guidelines and liquidity regulatory guidance; the overall difficult
litigation environment, including in the U.S.; increased competition, including through internet and mobile banking and non-traditional competitors; changes to the
Bank’s credit ratings; changes in currency and interest rates (including the possibility of negative interest rates); increased funding costs and market volatility due to
market illiquidity and competition for funding; critical accounting estimates and changes to accounting standards, policies, and methods used by the Bank; existing
and potential international debt crises; and the occurrence of natural and unnatural catastrophic events and claims resulting from such events. The Bank cautions that
the preceding list is not exhaustive of all possible risk factors and other factors could also adversely affect the Bank’s results. For more detailed information, please
refer to the “Risk Factors and Management” section of the 2016 MD&A, as may be updated in subsequently filed quarterly reports to shareholders and news releases
(as applicable) related to any transactions or events discussed under the heading “Significant Events” in the relevant MD&A, which applicable releases may be found
on www.td.com. All such factors should be considered carefully, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking
statements, when making decisions with respect to the Bank and the Bank cautions readers not to place undue reliance on the Bank’s forward-looking statements.
Material economic assumptions underlying the forward-looking statements contained in this document are set out in the 2016 MD&A under the
headings “Economic Summary and Outlook”, and for each business segment, “Business Outlook and Focus for 2017”, each as may be updated in subsequently
filed quarterly reports to shareholders.
Any forward-looking statements contained in this document represent the views of management only as of the date hereof and are presented for the purpose of
assisting the Bank’s shareholders and analysts in understanding the Bank’s financial position, objectives and priorities and anticipated financial performance as at and
for the periods ended on the dates presented, and may not be appropriate for other purposes. The Bank does not undertake to update any forward-looking statements,
whether written or oral, that may be made from time to time by or on its behalf, except as required under applicable securities legislation.
11
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCIAL RESULTS OVERVIEW
CORPORATE OVERVIEW
The Toronto-Dominion Bank and its subsidiaries are collectively known
as TD Bank Group (“TD” or the “Bank”). TD is the sixth largest bank
in North America by branches and serves 25 million customers in three
key businesses operating in a number of locations in financial centres
around the globe: Canadian Retail, including TD Canada Trust,
TD Auto Finance Canada, TD Wealth (Canada), TD Direct Investing,
and TD Insurance; U.S. Retail, including TD Bank, America’s Most
Convenient Bank,® TD Auto Finance U.S., TD Wealth (U.S.), and an
investment in TD Ameritrade; and Wholesale Banking, including
TD Securities. TD also ranks among the world’s leading online financial
services firms, with approximately 11 million active online and mobile
customers. TD had $1.2 trillion in assets as at October 31, 2016. The
Toronto-Dominion Bank trades under the symbol “TD” on the Toronto
and New York Stock Exchanges.
HOW THE BANK REPORTS
The Bank prepares its Consolidated Financial Statements in accordance
with IFRS, the current generally accepted accounting principles (GAAP),
and refers to results prepared in accordance with IFRS as “reported”
results. The Bank also utilizes non-GAAP financial measures referred to
as “adjusted” results to assess each of its businesses and to measure
the Bank’s overall performance. To arrive at adjusted results, the Bank
removes “items of note”, net of income taxes, from reported results.
The items of note relate to items which management does not believe
are indicative of underlying business performance. The Bank believes
that adjusted results provide the reader with a better understanding
of how management views the Bank’s performance. The items of note
are disclosed in Table 2. As explained, adjusted results differ from
reported results determined in accordance with IFRS. Adjusted results,
items of note, and related terms used in this document are not defined
terms under IFRS and, therefore, may not be comparable to similar
terms used by other issuers.
The following table provides the operating results on a reported basis
for the Bank.
T A B L E 1
OPERATING RESULTS – Reported
(millions of Canadian dollars)
Net interest income
Non-interest income
Total revenue
Provision for credit losses
Insurance claims and related expenses
Non-interest expenses
Income before income taxes and equity in net income of an investment in TD Ameritrade
Provision for income taxes
Equity in net income of an investment in TD Ameritrade
Net income – reported
Preferred dividends
Net income available to common shareholders and non-controlling interests in subsidiaries
Attributable to:
Common shareholders
Non-controlling interests
2016
$ 19,923
14,392
34,315
2,330
2,462
18,877
10,646
2,143
433
8,936
141
$ 8,795
2015
$ 18,724
12,702
31,426
1,683
2,500
18,073
9,170
1,523
377
8,024
99
$ 7,925
2014
$ 17,584
12,377
29,961
1,557
2,833
16,496
9,075
1,512
320
7,883
143
$ 7,740
$ 8,680
115
$ 7,813
112
$ 7,633
107
12
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 2
NON-GAAP FINANCIAL MEASURES – Reconciliation of Adjusted to Reported Net Income
(millions of Canadian dollars)
2016
2015
2014
Operating results – adjusted
Net interest income
Non-interest income1
Total revenue
Provision for credit losses2
Insurance claims and related expenses
Non-interest expenses3
Income before income taxes and equity in net income of an investment in TD Ameritrade
Provision for income taxes4
Equity in net income of an investment in TD Ameritrade5
Net income – adjusted
Preferred dividends
Net income available to common shareholders and non-controlling
interests in subsidiaries – adjusted
Attributable to:
Non-controlling interests in subsidiaries, net of income taxes
Net income available to common shareholders – adjusted
Adjustments for items of note, net of income taxes
Amortization of intangibles6
Fair value of derivatives hedging the reclassified available-for-sale securities portfolio7
Impairment of goodwill, non-financial assets, and other charges8
Restructuring charges9
Charge related to the acquisition in U.S. strategic cards portfolio and related integration costs10
Litigation and litigation-related charge(s)/reserve(s)11
Integration charges and direct transaction costs relating to the acquisition of the
credit card portfolio of MBNA Canada12
Set-up, conversion and other one-time costs related to affinity relationship with
Aimia and acquisition of Aeroplan Visa credit card accounts13
Impact of Alberta flood on the loan portfolio14
Gain on sale of TD Waterhouse Institutional Services15
Total adjustments for items of note
Net income available to common shareholders – reported
$ 19,923
14,385
34,308
2,330
2,462
18,496
11,020
2,226
498
9,292
141
$ 18,724
12,713
31,437
1,683
2,500
17,076
10,178
1,862
438
8,754
99
9,151
8,655
115
9,036
(246)
6
(116)
–
–
–
–
112
8,543
(255)
55
–
(471)
(51)
(8)
–
$ 17,584
12,097
29,681
1,582
2,833
15,863
9,403
1,649
373
8,127
143
7,984
107
7,877
(246)
43
–
–
–
–
(125)
–
–
–
(356)
$ 8,680
–
–
–
(730)
$ 7,813
(131)
19
196
(244)
$ 7,633
1 Adjusted non-interest income excludes the following items of note: $7 million gain
due to change in fair value of derivatives hedging the reclassified available-for-sale
securities portfolio, as explained in footnote 7; 2015 – $62 million gain due to
change in fair value of derivatives hedging the reclassified available-for-sale
securities portfolio; $73 million difference of the transaction price over the fair
value of the Nordstrom assets acquired, as explained in footnote 10; 2014 –
$49 million gain due to change in fair value of derivatives hedging the reclassified
available-for-sale securities portfolio; $231 million gain due to the sale of
TD Waterhouse Institutional Services, as explained in footnote 15.
2 In 2014, adjusted provision for credit losses (PCL) excludes the following items of
note: $25 million release of the provision for the impact of the Alberta flood on the
loan portfolio, as explained in footnote 14.
3 Adjusted non-interest expenses exclude the following items of note: $270 million
amortization of intangibles, as explained in footnote 6; 2015 – $289 million
amortization of intangibles; $686 million due to the initiatives to reduce costs,
as explained in footnote 9; $9 million due to integration costs related to the
Nordstrom transaction, as explained in footnote 10; $52 million of litigation
charges; $39 million recovery of litigation losses, as explained in footnote 11;
2014 – $286 million amortization of intangibles; $169 million of integration
charges relating to the acquisition of the credit card portfolio of MBNA Canada,
as explained in footnote 12; $178 million of costs in relation to the affinity
relationship with Aimia and acquisition of Aeroplan Visa credit card accounts,
as explained in footnote 13.
4 For a reconciliation between reported and adjusted provision for income taxes, refer
to the “Non-GAAP Financial Measures – Reconciliation of Reported to Adjusted
Provision for Income Taxes” table in the “Income Taxes” section of the MD&A.
5 Adjusted equity in net income of an investment in TD Ameritrade excludes the
following items of note: $65 million amortization of intangibles (2015 – $61 million;
2014 – $53 million), as explained in footnote 6. These amounts were reported in
the Corporate segment.
6 Amortization of intangibles relate to intangibles acquired as a result of asset
acquisitions and business combinations. Although the amortization of software
and asset servicing rights are recorded in amortization of intangibles, they are
not included for purposes of the items of note.
7 The Bank changed its trading strategy with respect to certain trading debt securities
and reclassified these securities from trading to the available-for-sale category
effective August 1, 2008. These debt securities are economically hedged, primarily
with credit default swap and interest rate swap contracts which are recorded on
a fair value basis with changes in fair value recorded in the period’s earnings.
Management believes that this asymmetry in the accounting treatment between
derivatives and the reclassified debt securities results in volatility in earnings from
period to period that is not indicative of the economics of the underlying business
performance in Wholesale Banking. The Bank may from time to time replace
securities within the portfolio to best utilize the initial, matched fixed term funding.
As a result, the derivatives are accounted for on an accrual basis in Wholesale
Banking and the gains and losses related to the derivatives in excess of the accrued
amounts are reported in the Corporate segment. Adjusted results of the Bank
exclude the gains and losses of the derivatives in excess of the accrued amount.
8 In the second quarter of 2016, the Bank recorded impairment losses on
goodwill, certain intangibles, other non-financial assets and deferred tax
assets, as well as other charges relating to the Direct Investing business in
Europe that has been experiencing continued losses. These amounts are
reported in the Corporate segment.
9 In fiscal 2015, the Bank recorded restructuring charges of $686 million
($471 million after tax) on a net basis. During 2015, the Bank commenced its
restructuring review and in the second quarter of 2015 recorded $337 million
($228 million after tax) of restructuring charges and recorded an additional
restructuring charge of $349 million ($243 million after tax) on a net basis
in the fourth quarter of 2015. The restructuring initiatives were intended to
reduce costs and manage expenses in a sustainable manner and to achieve
greater operational efficiencies. These measures included process redesign
and business restructuring, retail branch and real estate optimization, and
organizational review. The restructuring charges have been recorded as an
adjustment to net income within the Corporate segment.
10 On October 1, 2015, the Bank acquired substantially all of Nordstrom’s existing
U.S. Visa and private label consumer credit card portfolio and became the primary
issuer of Nordstrom credit cards in the U.S. The transaction was treated as an
asset acquisition and the difference on the date of acquisition of the transaction
price over the fair value of assets acquired has been recorded in non-interest
income. In addition, the Bank incurred set-up, conversion and other one-time
costs related to integration of the acquired cards and related program agreement.
These amounts are included as an item of note in the U.S. Retail segment.
11 As a result of an adverse judgment and evaluation of certain other developments
and exposures in the U.S. in 2015, the Bank took prudent steps to reassess
its litigation provision. Having considered these factors, including related or
analogous cases, the Bank determined, in accordance with applicable accounting
standards, that an increase of $52 million ($32 million after tax) to the Bank’s
litigation provision was required in the second quarter of 2015. During the
third quarter of 2015, distributions of $39 million ($24 million after tax)
were received by the Bank as a result of previous settlements reached on
certain matters in the U.S., whereby the Bank was assigned the right to these
distributions, if and when made available. The amount for fiscal 2015 reflects
this recovery of previous settlements.
12 As a result of the acquisition of the credit card portfolio of MBNA Canada, as
well as certain other assets and liabilities, the Bank incurred integration charges.
Integration charges consist of costs related to information technology, employee
retention, external professional consulting charges, marketing (including customer
communication and rebranding), integration-related travel, employee severance
costs, consulting, and training. The Bank’s integration charges related to the
MBNA acquisition were higher than what were anticipated when the transaction
was first announced. The elevated spending was primarily due to additional costs
incurred (other than the amounts capitalized) to build out technology platforms
for the business. Integration charges related to this acquisition were incurred by
the Canadian Retail segment. The fourth quarter of 2014 was the last quarter
Canadian Retail included any further MBNA-related integration charges as an
item of note.
13
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
13 On December 27, 2013, the Bank acquired approximately 50% of the existing
Aeroplan credit card portfolio from the Canadian Imperial Bank of Commerce
(CIBC) and on January 1, 2014, the Bank became the primary issuer of Aeroplan
Visa credit cards. The Bank incurred program set-up, conversion, and other
one-time costs related to the acquisition of the portfolio and related affinity
agreement, consisting of information technology, external professional
consulting, marketing, training, and program management, as well as a
commercial subsidy payment of $127 million ($94 million after tax) payable
to CIBC. These costs were included as an item of note in the Canadian Retail
segment. The third quarter of 2014 was the last quarter Canadian Retail
included any set-up, conversion, or other one-time costs related to the acquired
Aeroplan credit card portfolio as an item of note.
14 In the third quarter of 2014, the Bank released the remaining provision of
$25 million ($19 million after tax) for residential loan losses from Alberta flooding
that was initially recognized in 2013. The release of the remaining provision
reflects low levels of delinquency and impairments to date, as well as a low
likelihood of future material losses within the portfolio. These amounts were
included as an item of note in the Corporate segment.
15 On November 12, 2013, TD Waterhouse Canada Inc., a subsidiary of the Bank,
completed the sale of the Bank’s institutional services business, known as
TD Waterhouse Institutional Services, to a subsidiary of National Bank of Canada.
The transaction price was $250 million in cash, subject to certain price adjustment
mechanisms which were settled in the third and fourth quarters of 2014. On the
transaction date, a gain of $196 million after tax was recorded in the Corporate
segment in other income. The gain is not considered to be in the normal course
of business for the Bank.
T A B L E 3
RECONCILIATION OF REPORTED TO ADJUSTED EARNINGS PER SHARE (EPS)1
(Canadian dollars)
Basic earnings per share – reported
Adjustments for items of note2
Basic earnings per share – adjusted
Diluted earnings per share – reported
Adjustments for items of note2
Diluted earnings per share – adjusted
2016
$ 4.68
0.20
$ 4.88
$ 4.67
0.20
$ 4.87
2015
$ 4.22
0.40
$ 4.62
$ 4.21
0.40
$ 4.61
2014
$ 4.15
0.13
$ 4.28
$ 4.14
0.13
$ 4.27
1 EPS is computed by dividing net income available to common shareholders by the
2 For explanations of items of note, refer to the “Non-GAAP Financial Measures –
weighted-average number of shares outstanding during the period.
Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results
Overview” section of this document.
T A B L E 4
AMORTIZATION OF INTANGIBLES, NET OF INCOME TAXES1
(millions of Canadian dollars)
TD Bank, National Association (TD Bank, N.A.)
TD Ameritrade Holding Corporation (TD Ameritrade)2
MBNA Canada
Aeroplan
Other
Software and asset servicing rights
Amortization of intangibles, net of income taxes
1 Amortization of intangibles, with the exception of software and asset servicing
rights, are included as items of note. For explanations of items of note, refer to
the “Non-GAAP Financial Measures – Reconciliation of Adjusted to Reported Net
Income” table in the “Financial Results Overview” section of this document.
RETURN ON COMMON EQUITY
The Bank’s methodology for allocating capital to its business segments
is aligned with the common equity capital requirements under Basel III.
The capital allocated to the business segments is based on 9%
Common Equity Tier 1 (CET1) Capital.
Adjusted return on common equity (ROE) is adjusted net income avail-
able to common shareholders as a percentage of average common equity.
T A B L E 5
RETURN ON COMMON EQUITY
(millions of Canadian dollars, except as noted)
Average common equity
Net income available to common shareholders – reported
Items of note, net of income taxes1
Net income available to common shareholders – adjusted
Return on common equity – reported
Return on common equity – adjusted
1 For explanations of items of note, refer to the “Non-GAAP Financial Measures –
Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results
Overview” section of this document.
2016
$ 108
65
36
17
20
246
340
$ 586
2015
$ 116
61
37
17
24
255
289
$ 544
2014
$ 115
53
37
14
27
246
236
$ 482
2 Included in equity in net income of an investment in TD Ameritrade.
Adjusted ROE is a non-GAAP financial measure as it is not a defined
term under IFRS. Readers are cautioned that earnings and other
measures adjusted to a basis other than IFRS do not have standardized
meanings under IFRS and, therefore, may not be comparable to similar
terms used by other issuers.
2016
$ 65,121
8,680
356
9,036
2015
$ 58,178
7,813
730
8,543
2014
$ 49,495
7,633
244
7,877
13.3%
13.9
13.4%
14.7
15.4%
15.9
14
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
SIGNIFICANT EVENTS IN 2016
Announced Acquisition of Scottrade Bank
On October 24, 2016, the Bank announced an agreement to acquire
Scottrade Bank, a federal savings bank wholly-owned by Scottrade
Financial Services, Inc. (Scottrade), for cash consideration equal
to the tangible book value of Scottrade Bank at closing, subject to
certain adjustments. As of September 30, 2016, Scottrade Bank’s
tangible book value was approximately US$1.3 billion. TD Ameritrade
also announced an agreement to acquire Scottrade for cash and
TD Ameritrade shares. Subject to completion of the acquisitions, TD
and TD Ameritrade have agreed that TD will accept sweep deposits
from Scottrade clients. Pursuant to its preemptive rights and subject
to any required regulatory approval, the Bank intends to concurrently
purchase US$400 million in new common equity from TD Ameritrade
in connection with the proposed transaction. As a result, the Bank’s
anticipated pro forma common stock ownership in TD Ameritrade is
expected to be approximately 41.4%.
The transaction is subject to the concurrent closing of the
TD Ameritrade/Scottrade transaction as well as receipt of regulatory
approvals and other customary closing conditions, and is expected
to close in the second half of fiscal 2017. The results of the acquired
business will be consolidated from the date of close and will be
included in the U.S. Retail segment.
FINANCIAL RESULTS OVERVIEW
Net Income
Reported net income for the year was $8,936 million, an increase of
$912 million, or 11%, compared with last year. The increase in net
income was due to higher earnings in the U.S. Retail, Canadian Retail,
and Wholesale Banking segments and a lower loss in the Corporate
segment. U.S. Retail net income increased primarily due to higher
loan and deposit volumes, positive operating leverage, the positive
impact from an acquisition in the strategic cards portfolio, higher
deposit margins, higher contributions from the Bank’s investment
in TD Ameritrade, and the favourable impact of foreign currency
translation, partially offset by higher PCL. Canadian Retail net income
increase reflected revenue growth and lower insurance claims, partially
offset by the impact of a higher effective tax rate, higher non-interest
expenses, and higher PCL. Wholesale Banking net income increased
due to higher revenue and a lower effective tax rate, partially offset
by higher PCL and non-interest expenses. Corporate segment net loss
reflected higher provisions for incurred but not identified credit losses,
higher net corporate expenses and, an impairment of goodwill, non-
financial assets and other charges, and a lower gain due to changes in
the fair value of derivatives hedging the reclassified available-for-sale
securities portfolio, both of which were reported as items of note,
partially offset by restructuring charges in the prior year which were
reported as an item of note, higher revenue from treasury and balance
sheet management activities, and positive tax items in the current year.
Adjusted net income for the year was $9,292 million, an increase of
$538 million, or 6%, compared with $8,754 million last year.
NET INCOME – REPORTED BY BUSINESS SEGMENT
(as a percentage of total net income)
1
70%
60
50
40
30
20
10
0
14
15
16
14
15
16
14
15
16
NET INCOME – ADJUSTED BY BUSINESS SEGMENT
(as a percentage of total net income)
1
Reported diluted earnings per share (EPS) for the year were $4.67, an
70%
increase of 11%, compared with $4.21 last year. Adjusted diluted EPS
for the year were $4.87, a 6% increase, compared with $4.61 last year.
60
50
40
30
20
10
0
14
15
16
14
15
16
14
15
16
Canadian Retail
U.S. Retail
Wholesale Banking
1 Amounts exclude Corporate Segment.
15
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS Impact of Foreign Exchange Rate on U.S. Retail Segment
Translated Earnings
U.S. Retail segment earnings, including the contribution from the
Bank’s investment in TD Ameritrade, reflect fluctuations in the
U.S. dollar to Canadian dollar exchange rate compared with last year.
Depreciation of the Canadian dollar had a favourable impact on
U.S. Retail segment earnings for the year ended October 31, 2016,
compared with last year, as shown in the following table.
T A B L E 6
IMPACT OF FOREIGN EXCHANGE RATE ON
U.S. RETAIL SEGMENT TRANSLATED EARNINGS1
(millions of Canadian dollars, except as noted)
2016
vs. 2015
2015
vs. 2014
U.S. Retail Bank
Increased total revenue – reported
Increased total revenue – adjusted
Increased non-interest expenses – reported
Increased non-interest expenses – adjusted
Increased net income – reported, after tax
Increased net income – adjusted, after tax
Increased equity in net income of
an investment in TD Ameritrade
U.S. Retail segment increased net income –
reported, after tax
U.S. Retail segment increased net income –
adjusted, after tax
Earnings per share (dollars)
Increase in basic – reported
Increase in basic – adjusted
Increase in diluted – reported
Increase in diluted – adjusted
$ 581
581
344
344
157
157
33
190
190
$ 0.10
0.10
0.10
0.10
$ 997
1,002
628
626
252
260
45
297
304
$ 0.16
0.16
0.16
0.16
1 Certain comparative amounts have been restated to conform with the presentation
adopted in the current period.
On a trailing twelve month basis, a one cent appreciation/depreciation
in the U.S. dollar to Canadian dollar average exchange rate will increase/
decrease U.S. Retail segment net income by approximately $40 million.
NET INTEREST INCOME
(millions of Canadian dollars)
$21,000
18,000
15,000
12,000
9,000
6,000
3,000
0
14
15
16
Reported
Adjusted
FINANCIAL RESULTS OVERVIEW
Revenue
Reported revenue was $34,315 million, an increase of $2,889 million,
or 9%, compared with last year. Adjusted revenue was $34,308 million,
an increase of $2,871 million, or 9%, compared with last year.
NET INTEREST INCOME
Net interest income for the year was $19,923 million, an increase of
$1,199 million, or 6%, compared with last year. Net interest income
increased in the U.S. Retail, Corporate, and Canadian Retail segments,
partially offset by a decline in the Wholesale Banking segment.
U.S. Retail net interest income increased primarily due to higher loan
and deposit volumes, the benefit of the December 2015 Fed rate
increase (the “rate increase”), higher deposit margins, the benefit
of an acquisition in the strategic cards portfolio, and the favourable
impact of foreign currency translation, partially offset by lower loan
margins. Corporate segment net interest income increased primarily
due to the contribution from an acquisition in the strategic cards
portfolio. Canadian Retail net interest income increased reflecting
loan and deposit volume growth, partially offset by lower margins.
Wholesale Banking net interest income decreased due to higher
funding costs and lower dividend income.
NET INTEREST MARGIN
Net interest margin declined by 4 basis points (bps) during the year
to 2.01%, compared with 2.05% last year, primarily due to lower
margins in the Canadian Retail segment. U.S. Retail segment margins
were flat compared with last year.
16
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 7
NET INTEREST INCOME ON AVERAGE EARNING BALANCES1,2
(millions of Canadian dollars, except as noted)
2016
Average
balance
Interest3
Average
rate
Average
balance
Interest3
2015
Average
rate
Average
balance
Interest3
2014
Average
rate
Interest-earning assets
Interest-bearing deposits with Banks
Canada
U.S.
Securities
Trading
Canada
U.S.
Non-trading
Canada
U.S.
Securities purchased under reverse
repurchase agreements
Canada
U.S.
Loans
Residential mortgages4
Canada
U.S.
Consumer instalment and other personal
Canada
U.S.
Credit card
Canada
U.S.
Business and government4
Canada
U.S.
International
Total interest-earning assets
Interest-bearing liabilities
Deposits
Personal
Canada
U.S.
Banks5
Canada
U.S.
Business and government5,6
Canada
U.S.
Subordinated notes and debentures
Obligations related to securities sold short
and under repurchase agreements
Canada
U.S.
Securitization liabilities7
Other liabilities
Canada
U.S.
International5
Total interest-bearing liabilities
Total net interest income
on average earning assets
2.47
1.81
1.63
1.80
0.85
0.17
2.93
3.78
4.97
3.61
$
6,716 $
38,658
16
187
0.24% $
0.48
4,738 $
40,684
15
107
0.32% $ 3,692 $
0.26
27,179
17
72
0.46%
0.26
45,102
22,605
41,531
112,147
1,187
401
614
1,802
2.63
1.77
1.48
1.61
50,234
23,790
31,639
90,552
1,297
454
479
1,525
2.58
1.91
1.51
1.68
55,383
18,424
1,367
333
23,169
76,245
377
1,370
42,981
31,824
254
189
0.59
0.59
39,384
36,074
249
78
0.63
0.22
33,691
35,512
288
62
197,925
27,331
97,881
40,471
18,414
12,598
4,726
1,029
4,604
1,285
2.39
3.76
4.70
3.18
2,223
1,999
12.07
15.87
188,048
26,336
93,943
35,609
18,096
8,778
4,924
984
4,600
1,144
2.62
3.74
4.90
3.21
178,128
22,677
5,212
858
90,512
29,272
4,499
1,058
2,235
1,450
12.35
16.52
17,984
7,200
2,245
1,287
12.48
17.88
71,869
105,929
77,001
1,929
3,348
767
$ 990,983 $ 26,560
1,759
62,879
2.68
2,730
85,553
3.16
1.00
800
77,467
2.68% $ 913,804 $ 24,830
1,808
55,048
2.80
2,308
64,343
3.19
1.03
767
69,494
2.72% $ 807,953 $ 23,928
3.28
3.59
1.10
2.96%
$ 193,643 $
206,813
974
218
0.50% $ 181,101 $ 1,158
218
0.11
178,287
0.64% $ 172,897 $ 1,394
197
147,025
0.12
0.81%
0.13
11,601
6,514
213,965
148,621
8,769
55
47
2,100
1,185
395
45,098
47,654
32,027
412
346
452
0.47
0.72
0.98
0.80
4.50
0.91
0.73
1.41
8,907
11,764
34
32
180,596
154,578
7,953
1,796
909
390
46,340
47,835
34,968
450
186
593
0.38
0.27
0.99
0.59
4.90
0.97
0.39
1.70
5,898
7,682
18
16
145,233
125,375
7,964
1,540
1,065
412
47,360
42,962
41,745
535
122
777
0.31
0.21
1.06
0.85
5.17
1.13
0.28
1.86
4,225
35
45,579
82
4
367
$ 964,544 $ 6,637
79
4,889
1.94
4
33
11.43
0.81
257
35,693
0.69% $ 892,944 $ 6,106
88
5,652
1.62
1
29
12.06
0.72
179
32,673
0.68% $ 782,495 $ 6,344
1.56
3.45
0.55
0.81%
$ 990,983 $ 19,923
2.01% $ 913,804 $ 18,724
2.05% $ 807,953 $ 17,584
2.18%
1 Net interest income includes dividends on securities.
2 Geographic classification of assets and liabilities is based on the domicile of the
5 Includes average trading deposits with a fair value of $77 billion (2015 –
$71 billion, 2014 – $58 billion).
booking point of assets and liabilities.
3 Interest income includes loan fees earned by the Bank, which are recognized in net
interest income over the life of the loan through the effective interest rate method.
4 Includes average trading loans of $11 billion (2015 – $10 billion, 2014 – $10 billion).
6 Includes marketing fees incurred on the TD Ameritrade Insured Deposit Accounts
(IDA) of $1,235 million (2015 – $1,051 million, 2014 – $895 million).
7 Includes average securitization liabilities at fair value of $12 billion (2015 –
$11 billion, 2014 – $16 billion) and average securitization liabilities at amortized
cost of $20 billion (2015 – $24 billion, 2014 – $26 billion).
17
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table presents an analysis of the change in net interest
income of volume and interest rate changes. In this analysis, changes
due to volume/ interest rate variance have been allocated to average
interest rate.
T A B L E 8
ANALYSIS OF CHANGE IN NET INTEREST INCOME1,2
(millions of Canadian dollars)
2016 vs. 2015
2015 vs. 2014
Increase (decrease) due to changes in
Increase (decrease) due to changes in
Average volume
Average rate
Net change Average volume
Average rate
Net change
Interest-earning assets
Interest-bearing deposits with banks
Canada
U.S.
Securities
Trading
Canada
U.S.
Non-trading
Canada
U.S.
Securities purchased under reverse
repurchase agreements
Canada
U.S.
Loans
Residential mortgages
Canada
U.S.
Consumer instalment and other personal
Canada
U.S.
Credit card
Canada
U.S.
Business and government
Canada
U.S.
International
Total interest income
Interest-bearing liabilities
Deposits
Personal
Canada
U.S.
Banks
Canada
U.S.
Business and government
Canada
U.S.
Subordinated notes and debentures
Obligations related to securities sold short
and under repurchase agreements
Canada
U.S.
Securitization liabilities
Other liabilities
Canada
U.S.
International
Total interest expense
Net interest income
$
7
(5)
$
(6)
85
$
1
80
$
5
36
$
(132)
(23)
150
364
22
(30)
(15)
(87)
22
(10)
(17)
121
259
37
193
156
39
631
(457)
8
(189)
(15)
(51)
(82)
(110)
(53)
135
277
5
111
(198)
45
4
141
(12)
549
(127)
96
138
257
49
1
290
139
171
229
14
282
(7)
(1)
57
25
(36)
(102)
(88)
15
(578)
(13)
(70)
(143)
(24)
(119)
$
(2)
35
(70)
121
102
155
(39)
16
(288)
126
101
86
(10)
163
251
651
25
$ 2,615
(81)
(33)
(58)
$ (885)
170
618
(33)
$ 1,730
257
761
75
$ 2,673
(306)
(339)
(42)
$ (1,771)
(49)
422
33
$ 902
$
80
35
$ (264)
(35)
$
(184)
–
$
10
(14)
332
(35)
40
(12)
(1)
(50)
(11)
–
52
$ 426
$ 2,189
11
29
(28)
311
(35)
(26)
161
(91)
14
–
58
$ 105
$ (990)
21
15
304
276
5
(38)
160
(141)
3
–
110
$ 531
$ 1,199
66
42
9
8
375
248
–
(11)
14
(126)
(12)
–
25
$ 638
$ 2,035
$
(302)
(21)
$
(236)
21
7
8
(119)
(404)
(22)
(74)
50
(58)
3
3
53
(876)
(895)
$
$
16
16
256
(156)
(22)
(85)
64
(184)
(9)
3
78
(238)
$
$ 1,140
1 Geographic classification of assets and liabilities is based on the domicile of the
booking point of assets and liabilities.
2 Interest income includes loan fees earned by the Bank, which are recognized in net
interest income over the life of the loan through the effective interest rate method.
18
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
NON-INTEREST INCOME
Reported non-interest income for the year was $14,392 million,
an increase of $1,690 million, or 13%, compared with last year.
All segments experienced increases in reported non-interest income.
Wholesale Banking non-interest income increased due to higher
trading revenue and fees. Corporate segment non-interest income
increased primarily due to the contribution from an acquisition in
the strategic cards portfolio and higher revenue from treasury and
balance sheet management activities, partially offset by a lower gain
due to change in the fair value of derivatives hedging the reclassified
available-for-sale securities portfolio, which was reported as an item
of note. The increase in Canadian Retail non-interest income reflected
wealth asset growth and higher personal and business banking
fee-based revenue. U.S. Retail non-interest income increased primarily
due to fee income growth in personal banking, the positive impact from
an acquisition in the strategic cards portfolio, and the favourable impact
of foreign currency translation, partially offset by a change in time order
posting of customer transactions and an unfavourable hedging impact.
Adjusted non-interest income for the year was $14,385 million, an
increase of $1,672 million, or 13%, compared with last year.
T A B L E 9
NON-INTEREST INCOME
(millions of Canadian dollars, except as noted)
Investment and securities services
Broker dealer fees and commissions
Full-service brokerage and other securities services
Underwriting and advisory
Investment management fees
Mutual fund management
Trust fees
Total investment and securities services
Credit fees
Net securities gains (losses)
Trading income (losses)
Service charges
Card services
Insurance revenue
Other income (loss)
Total
TRADING-RELATED INCOME
Trading-related income is the total of net interest income on trading
positions, trading income (loss), and income from financial instruments
designated at fair value through profit or loss that are managed within a
trading portfolio. Trading-related income for the year was $1,335 million,
an increase of $183 million, or 16%, compared with last year. For
additional details, refer to Note 22 of the 2016 Consolidated Financial
Statements. The increase in trading-related income over last year
reflected higher fixed income, and foreign exchange trading, partially
offset by lower equity trading.
FINANCIAL RESULTS OVERVIEW
Provision for Credit Losses
PCL for the year was $2,330 million, an increase of $647 million,
or 38%, compared with last year. All segments experienced increases
in PCL. Corporate segment PCL increased primarily due to higher
provisions for incurred but not identified credit losses. U.S. Retail
PCL increased primarily due to commercial loan volume growth,
an allowance increase reflecting the current economic environment
in business banking, and higher provisions for auto loans and credit
cards, partially offset by the release of the South Carolina flooding
reserve, improvements on residential mortgages and home equity
loans, and the unfavourable impact of foreign currency translation.
Canadian Retail PCL reflected higher provisions in the auto lending
portfolio. Wholesale Banking PCL increased due to higher specific
provisions in the oil and gas sector.
2016
2015
2014
2016 vs. 2015
% change
$
463
853
546
505
1,623
153
4,143
1,048
54
395
2,571
2,313
3,796
72
$ 14,392
$
430
760
443
481
1,569
150
3,833
925
79
(223)
2,376
1,766
3,758
188
$ 12,702
$
412
684
482
413
1,355
150
3,496
845
173
(349)
2,152
1,552
3,883
625
$ 12,377
8%
12
23
5
3
2
8
13
(32)
277
8
31
1
(62)
13%
The mix of trading-related income between net interest income and
trading income is largely dependent upon the level of interest rates,
which impacts the funding costs of the Bank’s trading portfolios.
Management believes that the total trading-related income is the
appropriate measure of trading performance.
PROVISION FOR
CREDIT LOSSES
(millions of Canadian dollars)
$2,500
2,000
1,500
1,000
500
0
14
15
16
Reported
Adjusted
19
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL RESULTS OVERVIEW
Expenses
NON-INTEREST EXPENSES
Reported non-interest expenses for the year were $18,877 million, an
increase of $804 million, or 4%, compared with last year. All segments
experienced increases in reported non-interest expenses. U.S. Retail
non-interest expenses increased primarily due to business initiatives,
volume growth, investments in front line employees, and the
unfavourable impact of foreign exchange translation, partially offset
by productivity savings. The increase in Canadian Retail non-interest
expenses reflected business growth, higher employee-related expenses
including revenue-based variable expenses in the wealth business,
and higher investment in technology, partially offset by productivity
savings. Corporate expenses increased due to the contribution from an
acquisition in the strategic cards portfolio, an impairment of goodwill,
non-financial assets and other charges this year, which was reported
as an item of note, and higher net corporate expenses due to ongoing
investments in enterprise and regulatory projects, partially offset by
restructuring charges in the prior year which were reported as an item
of note. Wholesale Banking non-interest expenses increased primarily
due to higher variable compensation and the unfavourable impact of
foreign exchange translation, partially offset by productivity savings.
Adjusted non-interest expenses were $18,496 million, an increase of
$1,420 million, or 8%, compared with last year.
INSURANCE CLAIMS AND RELATED EXPENSES
Insurance claims and related expenses were $2,462 million, a decrease
of $38 million, or 2%, compared with last year, reflecting more
favourable prior years’ claims development, partially offset by more
severe weather conditions and a change in mix of reinsurance contracts.
T A B L E 1 0
NON-INTEREST EXPENSES AND EFFICIENCY RATIO1
(millions of Canadian dollars, except as noted)
Salaries and employee benefits
Salaries
Incentive compensation
Pension and other employee benefits
Total salaries and employee benefits
Occupancy
Rent
Depreciation and impairment losses
Other
Total occupancy
Equipment
Rent
Depreciation and impairment losses
Other
Total equipment
Amortization of other intangibles
Marketing and business development
Restructuring charges
Brokerage-related fees
Professional and advisory services
Other expenses
Capital and business taxes
Postage
Travel and relocation
Other
Total other expenses
Total expenses
Efficiency ratio – reported
Efficiency ratio – adjusted
1 Certain comparative amounts have been reclassified to conform with the
presentation adopted in the current period.
20
EFFICIENCY RATIO
The efficiency ratio measures operating efficiency and is calculated
by taking the non-interest expenses as a percentage of total revenue.
A lower ratio indicates a more efficient business operation.
The reported efficiency ratio was 55.0%, compared with 57.5%
last year.
NON-INTEREST EXPENSES
(millions of Canadian dollars)
EFFICIENCY RATIO
(percent)
$20,000
16,000
12,000
8,000
4,000
0
60%
50
40
30
20
10
0
14
15
16
14
15
16
Reported
Adjusted
Reported
Adjusted
2016
2015
2014
% change
2016 vs. 2015
$ 5,576
2,170
1,552
9,298
$ 5,452
2,057
1,534
9,043
$ 5,171
1,927
1,353
8,451
915
427
483
1,825
182
202
560
944
708
743
(18)
316
1,232
887
376
456
1,719
172
212
508
892
662
728
686
324
1,032
800
324
425
1,549
147
209
454
810
598
756
29
321
991
176
225
191
3,237
3,829
$ 18,877
139
222
175
2,451
2,987
$ 18,073
160
212
185
2,434
2,991
$ 16,496
2
5
1
3
3
14
6
6
6
(5)
10
6
7
2
(103)
(2)
19
27
1
9
32
28
4
55.0%
53.9
57.5%
54.3
55.1%
53.4
(250)bps
(40)
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL RESULTS OVERVIEW
Taxes
Reported total income and other taxes increased $881 million, or 32%,
compared with last year, reflecting an increase in income tax expense
of $620 million, or 41%, compared with last year, and an increase in
other taxes of $261 million, or 21%, compared with last year. Adjusted
total income and other taxes were up $625 million from last year,
reflecting an increase in income tax expense of $364 million, or 20%,
from last year.
The Bank’s reported effective tax rate was 20.1% for 2016,
compared with 16.6% last year. The year-over-year increase was
largely due to an increase in taxes associated with the Bank’s insurance
business, lower tax-exempt dividend income, changes in business mix,
and the tax impact associated with the restructuring charges last year.
For a reconciliation of the Bank’s effective income tax rate with the
Canadian statutory income tax rate, refer to Note 26 of the 2016
Consolidated Financial Statements.
The Bank’s adjusted effective income tax rate for 2016 was
20.2%, compared with 18.3% last year. The year-over-year increase
was largely due to an increase in taxes associated with the Bank’s
insurance business, lower tax-exempt dividend income, and changes
in business mix.
The Bank reports its investment in TD Ameritrade using the equity
method of accounting. TD Ameritrade’s tax expense of $214 million
in 2016, compared with $221 million last year, was not part of the
Bank’s effective tax rate.
T A B L E 1 1
NON-GAAP FINANCIAL MEASURES – Reconciliation of Reported to Adjusted Provision for Income Taxes
(millions of Canadian dollars, except as noted)
Provision for income taxes – reported
Adjustments for items of note: Recovery of (provision for) incomes taxes1,2
Amortization of intangibles
Fair value of derivatives hedging the reclassified available-for-sale securities portfolio
Impairment of goodwill, non-financial assets, and other charges
Restructuring charges
Charge related to the acquisition in U.S. strategic cards portfolio and related integration costs
Litigation and litigation-related charge(s)/reserve(s)
Integration charges and direct transaction costs relating to the acquisition
of the credit card portfolio of MBNA Canada
Set-up, conversion and other one-time costs related to affinity relationship
with Aimia and acquisition of Aeroplan Visa credit card accounts
Impact of Alberta flood on the loan portfolio
Gain on sale of TD Waterhouse Institutional Services
Total adjustments for items of note
Provision for income taxes – adjusted
Other taxes
Payroll
Capital and premium
GST, HST, and provincial sales3
Municipal and business
Total other taxes
Total taxes – adjusted
Effective income tax rate – adjusted4
1 For explanations of items of note, refer to the “Non-GAAP Financial Measures –
Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results
Overview” section of this document.
2 The tax effect for each item of note is calculated using the statutory income tax
rate of the applicable legal entity.
2016
$ 2,143
2015
$ 1,523
2014
$ 1,512
89
(1)
(5)
–
–
–
–
–
–
–
83
2,226
502
169
616
203
1,490
$ 3,716
95
(7)
–
215
31
5
–
–
–
–
339
1,862
485
135
428
181
1,229
$ 3,091
93
(6)
–
–
–
–
44
47
(6)
(35)
137
1,649
435
157
426
172
1,190
$ 2,839
20.2%
18.3%
17.5%
3 Goods and services tax (GST) and Harmonized sales tax (HST).
4 Adjusted effective income tax rate is the adjusted provision for income taxes
before other taxes as a percentage of adjusted net income before taxes.
21
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
Reported non-interest expenses for the quarter were $4,848 million,
a decrease of $63 million, or 1%, compared with the fourth quarter
last year. The decrease was primarily due to lower expenses in the
Corporate segment, partially offset by increases in the Canadian Retail,
U.S. Retail, and Wholesale Banking segments. Corporate non-interest
expenses decreased due to restructuring charges in the prior year which
were reported as an item of note, partially offset by the contribution
from an acquisition in the strategic cards portfolio and ongoing
investments in enterprise and regulatory projects. Canadian Retail
non-interest expenses reflect business growth, higher investment
in technology and higher employee-related expenses including
revenue-based variable expenses in the wealth business, partially offset
by productivity savings. U.S. Retail non-interest expenses increased
primarily due to business initiatives including store optimization, volume
growth, investments in front line employees, additional charges by the
Federal Deposit Insurance Corporation (FDIC), and the unfavourable
impact of foreign currency translation, partially offset by productivity
savings. Wholesale Banking non-interest expenses increase reflected
higher variable compensation and operating expenses. Adjusted
non-interest expenses for the quarter were $4,784 million, an increase
of $304 million, or 7%, compared with the fourth quarter last year.
The Bank’s reported effective tax rate was 20.1% for the quarter,
compared with 13.0% in the same quarter last year. The increase
was largely due to an increase in taxes associated with the Bank’s
insurance business, lower tax-exempt dividend income, and the tax
impact associated with the restructuring charges in the same quarter
last year. The Bank’s adjusted effective tax rate was 20.4% for the
quarter, compared with 16.9% in the same quarter last year. The
increase was largely due to an increase in taxes associated with the
Bank’s insurance business and lower tax-exempt dividend income.
QUARTERLY TREND ANALYSIS
The Bank has had steadily increasing underlying earnings over the past
eight quarters reflecting a consistent strategy, organic growth, expense
discipline and investments to support future growth. Canadian Retail
earnings reflect loan and deposit growth, higher fee based revenue
in personal and business banking, wealth asset growth, and lower
claims, with moderate expense growth. U.S. Retail earnings reflect
loan and deposit growth, higher operating leverage and good credit
quality. Wholesale Banking earnings reflect growth in trading revenue,
underwriting, and corporate lending volumes. The Bank’s quarterly
earnings are impacted by seasonality, the number of days in a quarter,
the economic environment in Canada and the U.S., and foreign
currency translation.
FINANCIAL RESULTS OVERVIEW
Quarterly Financial Information
FOURTH QUARTER 2016 PERFORMANCE SUMMARY
Reported net income for the quarter was $2,303 million, an increase
of $464 million, or 25%, compared with the fourth quarter last year
which included a restructuring charge of $243 million after tax and
costs related to an acquisition in the strategic cards portfolio, which
were reported as items of note. Adjusted net income for the quarter
was $2,347 million, an increase of $170 million, or 8%, compared
with the fourth quarter last year. Reported diluted EPS for the quarter
was $1.20, compared with $0.96 in the fourth quarter last year.
Adjusted diluted EPS for the quarter was $1.22, compared with
$1.14 in the fourth quarter last year.
Reported revenue for the quarter was $8,745 million, an increase
of $698 million, or 9%, compared with the fourth quarter last year.
All segments experienced increases in reported revenues. Corporate
segment revenue increased due to the benefit of an acquisition in the
strategic cards portfolio and higher revenue from treasury and balance
sheet management activities. U.S. Retail revenue increased primarily
due to higher loan and deposit volumes, the positive impact from an
acquisition in the strategic cards portfolio, higher deposit margins, the
benefit of the December 2015 Fed rate increase, customer account
growth, and the favourable impact of foreign currency translation,
partially offset by unfavourable hedging impact and lower loan
margins. Canadian Retail revenue increased due to loan and deposit
volume growth, wealth asset growth, higher fee-based revenue in
personal and commercial banking, and changes in the fair value of
investments supporting claims liabilities, partially offset by lower
margins and lower insurance premiums. Wholesale Banking revenue
increased primarily due to higher origination activity in debt and equity
capital markets and higher fixed income trading revenues, partially
offset by lower equity trading and advisory fees. Adjusted revenue for
the quarter was $8,726 million, an increase of $630 million, or 8%,
compared with the fourth quarter last year.
PCL for the quarter was $548 million, an increase of $39 million,
or 8%, compared with the fourth quarter last year. The increase was
primarily due to increases in the Canadian Retail and U.S. Retail
segments, partially offset by decreases in the Wholesale Banking and
Corporate segments. Canadian Retail PCL reflected higher commercial
recoveries in the prior year and higher provisions in the auto lending
portfolio. U.S. Retail PCL increased primarily due to the unfavourable
impact of foreign currency translation, partially offset by lower
personal banking PCL primarily related to the release of the South
Carolina flooding reserve. Wholesale Banking PCL decreased primarily
due to specific provisions in the oil and gas sector in the prior year.
Corporate PCL decreased primarily due to provisions for incurred but
not identified credit losses in the prior year.
Insurance claims and related expenses for the quarter were
$585 million, a decrease of $52 million, or 8%, compared with the
fourth quarter last year, reflecting more favourable prior years’ claims
development, less severe weather conditions and a change in mix
of reinsurance contracts, partially offset by unfavourable current year
claims experience and changes in the fair value of investments
supporting claims liabilities.
22
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 1 2
QUARTERLY RESULTS
(millions of Canadian dollars, except as noted)
Net interest income
Non-interest income
Total revenue
Provision for credit losses
Insurance claims and related expenses
Non-interest expenses
Provision for (recovery of) income taxes
Equity in net income of an investment in TD Ameritrade
Net income – reported
Adjustments for items of note, net of income taxes1
Amortization of intangibles
Fair value of derivatives hedging the reclassified
available-for-sale securities portfolio
Impairment of goodwill, non-financial assets, and other charges
Restructuring charges
Charge related to the acquisition in U.S. strategic cards portfolio
and related integration costs
Litigation and litigation-related charge(s)/reserve(s)
Total adjustments for items of note
Net income – adjusted
Preferred dividends
Net income available to common shareholders and
non-controlling interests in subsidiaries – adjusted
Attributable to:
Common shareholders – adjusted
Non-controlling interests – adjusted
(Canadian dollars, except as noted)
Basic earnings per share
Reported
Adjusted
Diluted earnings per share
Reported
Adjusted
Return on common equity – reported
Return on common equity – adjusted
(billions of Canadian dollars, except as noted)
2016
For the three months ended
2015
Oct. 31
Jul. 31
Apr. 30
Jan. 31
Oct. 31
Jul. 31
Apr. 30
Jan. 31
$ 5,072
3,673
8,745
548
585
4,848
555
94
2,303
$ 4,924
3,777
8,701
556
692
4,640
576
121
2,358
$ 4,880
3,379
8,259
584
530
4,736
466
109
2,052
$ 5,047
3,563
8,610
642
655
4,653
546
109
2,223
$ 4,887
3,160
8,047
509
637
4,911
259
108
1,839
$ 4,697
3,309
8,006
437
600
4,292
502
91
2,266
$ 4,580
3,179
7,759
375
564
4,705
344
88
1,859
$ 4,560
3,054
7,614
362
699
4,165
418
90
2,060
60
(16)
–
–
58
–
–
–
63
51
116
–
65
(41)
–
–
65
(21)
–
243
62
(19)
–
–
65
(15)
–
228
63
–
–
–
–
–
44
2,347
43
–
–
58
2,416
36
–
–
230
2,282
37
–
–
24
2,247
25
51
–
338
2,177
26
–
(24)
19
2,285
25
–
32
310
2,169
24
–
–
63
2,123
24
2,304
2,380
2,245
2,222
2,151
2,260
2,145
2,099
2,275
$
29
2,351
$
29
2,217
$
28
2,193
$
29
2,122
29
$
2,232
28
$
2,117
28
$
2,072
27
$
$ 1.20
1.23
$ 1.24
1.27
$ 1.07
1.20
$ 1.17
1.18
$ 0.96
1.15
$ 1.20
1.21
$ 0.98
1.15
$ 1.09
1.12
1.20
1.22
13.3%
13.6
1.24
1.27
14.1%
14.5
1.07
1.20
12.5%
14.0
1.17
1.18
13.3%
13.5
0.96
1.14
11.4%
13.5
1.19
1.20
14.9%
15.0
0.97
1.14
12.8%
15.0
1.09
1.12
14.6%
15.1
Average earning assets
Net interest margin as a percentage of average earning assets
$ 1,031
$ 989
$ 969
$ 975
$ 958
$ 925
$ 906
$ 862
1.96%
1.98%
2.05%
2.06%
2.02%
2.01%
2.07%
2.10%
1 For explanations of items of note, refer to the “Non-GAAP Financial Measures –
Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results
Overview” section of this document.
23
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS SEGMENT ANALYSIS
Business Focus
For management reporting purposes, the Bank’s operations and activities are organized around the
following three key business segments: Canadian Retail, U.S. Retail, and Wholesale Banking. The Bank’s
other activities are grouped into the Corporate segment.
Canadian Retail provides a full range of financial products and
services to customers in the Canadian personal and commercial
banking, wealth, and insurance businesses. Under the TD Canada Trust
brand, personal and small business banking provides a full range of
financial products and services to nearly 15 million customers through
its network of 1,156 branches, 3,169 automated banking machines,
telephone, internet and mobile banking. Commercial Banking serves
the needs of medium and large Canadian businesses by offering a broad
range of customized products and services to help business owners
meet their financing, investment, cash management, international
trade and day-to-day banking needs. Auto Finance provides flexible
financing options to customers at point of sale for automotive and
recreational vehicle purchases through our auto dealer network.
The credit card business provides an attractive line-up of credit cards
including proprietary, co-branded and affinity credit card programs.
The wealth business offers a wide range of wealth products and
services to a large and diverse set of retail and institutional clients
through the direct investing, advice-based and asset management
businesses. The insurance business offers property and casualty
insurance, as well as life and health insurance products in Canada.
U.S. Retail comprises the Bank’s retail and commercial banking
operations operating under the brand TD Bank, America’s Most
Convenient Bank,® auto financing services, and wealth management
services in the U.S. The retail banking operations provide a full
range of financial products and services to nearly 9 million customers
through multiple delivery channels, including a network of
1,278 stores located along the east coast from Maine to Florida,
mobile and internet banking, automated teller machines (ATM), and
telephone. The commercial banking operations serves the needs of
businesses, through a diversified range of products and services to
meet their financing, investment, cash management, international
trade, and day-to-day banking needs. Auto finance provides financing
options to customers at point of sale for automotive vehicle purchases.
Wealth management offers a range of wealth products and services to
retail and institutional clients. U.S. Retail works with TD Ameritrade to
refer mass affluent clients to TD Ameritrade for their direct investing
needs. The results of the Bank’s equity investment in TD Ameritrade
are included in U.S. Retail and reported as equity in net income of an
investment in TD Ameritrade, net of income taxes.
Wholesale Banking provides a wide range of capital markets,
investment banking, and corporate banking products and services,
including underwriting and distribution of new debt and equity
issues, providing advice on strategic acquisitions and divestitures,
and meeting the daily trading, funding, and investment needs of our
clients. Operating under the TD Securities brand, our clients include
highly-rated companies, governments, and institutions in key financial
markets around the world. Wholesale Banking is an integrated part
of TD’s strategy, providing market access to TD’s wealth and retail
operations, and providing wholesale banking solutions to our partners
and their customers.
The Bank’s other business activities are not considered reportable
segments and are, therefore, grouped in the Corporate segment.
Corporate segment comprises of a number of service and control
functional groups such as technology solutions, direct channels,
marketing, human resources, finance, risk management, compliance,
legal, anti-money laundering and others. Certain costs relating to these
functions are allocated to operating business segments. The basis of
allocation and methodologies are reviewed periodically to align with
management’s evaluation of the Bank’s business segments.
Ensuring that the Bank stays abreast of emerging trends and
developments is vital to maintaining stakeholder confidence in the
Bank and addressing the dynamic complexities and challenges from
changing demands and expectations of our customers, shareholders,
employees, governments, regulators, and the community at large.
Effective fiscal 2016, the presentation of the U.S. strategic cards
portfolio revenues, PCL, and expenses in the U.S. Retail segment
includes only the Bank’s agreed portion of the U.S. strategic cards
portfolio, while the Corporate segment includes the retailer program
partners’ share. Certain comparative amounts have been recast to
conform with this revised presentation. There was no impact on the
net income of the segments or on the presentation of gross and net
results in the Bank’s Consolidated Statement of Income.
Results of each business segment reflect revenue, expenses, assets,
and liabilities generated by the businesses in that segment. Where
applicable, the Bank measures and evaluates the performance of each
segment based on adjusted results and ROE, and for those segments
the Bank indicates that the measure is adjusted. Net income for the
operating business segments is presented before any items of note not
attributed to the operating segments. For further details, refer to the
“How the Bank Reports” section of this document and Note 30 of the
2016 Consolidated Financial Statements. For information concerning
the Bank’s measure of ROE, which is a non-GAAP financial measure,
refer to the “Return on Common Equity” section.
Net interest income within the Wholesale Banking segment is
calculated on a taxable equivalent basis (TEB), which means that the
value of non-taxable or tax-exempt income including dividends is
adjusted to its equivalent before-tax value. Using TEB allows the Bank
to measure income from all securities and loans consistently and makes
for a more meaningful comparison of net interest income with similar
institutions. The TEB increase to net interest income and provision for
income taxes reflected in the Wholesale Banking segment results is
reversed in the Corporate segment. The TEB adjustment for the year
was $312 million, compared with $417 million last year.
As noted in Note 9 of the 2016 Consolidated Financial Statements, the
Bank continues to securitize loans and receivables, however under IFRS,
the majority of these loans and receivables remain on balance sheet.
The “Business Outlook and Focus for 2017” section for each
segment, provided on the following pages, is based on the Bank’s
views and the assumptions set out in the “Economic Summary and
Outlook” section and the actual outcome may be materially different.
For more information, refer to the “Caution Regarding Forward-
Looking Statements” section and the “Risk Factors That May Affect
Future Results” section.
24
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 1 3
RESULTS BY SEGMENT1
(millions of Canadian dollars)
Net interest income (loss)
Non-interest income (loss)
Total revenue
Provision for (recovery of) credit losses
Insurance claims and related expenses
Non-interest expenses
Income (loss) before provision
for income taxes
Provision for (recovery of) income taxes
Equity in net income of an investment
in TD Ameritrade
Net income (loss) – reported
Adjustments for items of note,
net of income taxes2
Amortization of intangibles
Fair value of derivatives hedging the reclassified
available-for-sale securities portfolio
Impairment of goodwill, non-financial assets,
and other charges
Restructuring charges
Charge related to the acquisition
in U.S. strategic cards portfolio
and related integration costs
Litigation and litigation-related
charge(s)/reserve(s)
Total adjustments for items of note
Net income (loss) – adjusted
Average common equity
CET1 Capital risk-weighted assets3
Canadian
Retail
U.S. Retail
Wholesale
Banking
Corporate
2016
2015
2016
2015
2016
2015
2016
2015
2016
Total
2015
$ 9,979 $ 9,781 $
10,230
9,904
20,209 19,685
887
2,500
8,407
1,011
2,462
8,557
7,093 $
2,366
9,459
744
–
5,693
6,131 $ 1,685 $ 2,295 $ 1,166 $
2,098
8,229
535
–
5,188
1,345
3,030
74
–
1,739
631
2,926
18
–
1,701
451
1,617
501
–
2,888
517 $ 19,923 $ 18,724
12,702
14,392
31,426
34,315
1,683
2,330
2,500
2,462
18,073
18,877
69
586
243
–
2,777
8,179
2,191
7,891
1,953
3,022
498
–
5,988
–
5,938
435
2,959
2,506
394
376
2,488
1,217
297
1,207
334
(1,772)
(843)
(2,434)
(1,158)
10,646
2,143
–
920
–
873
(2)
(931)
1
(1,275)
433
8,936
9,170
1,523
377
8,024
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$ 5,988 $ 5,938 $
2,959 $
–
–
–
–
51
–
–
–
–
–
–
–
–
–
–
246
255
246
255
(6)
(55)
(6)
(55)
116
–
–
471
116
–
–
471
–
–
–
51
8
59
2,547 $
–
–
920 $
–
–
873 $
–
356
(575) $
–
671
(604) $
–
356
9,292 $
8
730
8,754
$ 14,291 $ 13,880 $ 33,687 $ 31,066 $ 5,952 $ 5,755 $ 11,191 $ 7,477 $ 65,121 $ 58,178
10,951 405,844 382,360
99,025 106,392 222,995 200,067
67,416
64,950
16,408
1 Certain comparative amounts have been recast to conform with the revised
presentation for the U.S. strategic cards portfolio adopted in the first quarter of
2016. For further details, refer to the “Business Focus” section of this document.
2 For explanations of items of note, refer to the “Non-GAAP Financial Measures −
3 Each capital ratio has its own risk weighted assets (RWA) measure due to the Office
of the Superintendent of Financial Institutions Canada’s (OSFI)-prescribed scalar for
inclusion of the Credit Valuation Adjustment (CVA). The scalar for inclusion of CVA
for CET1, Tier 1 and Total Capital RWA are 64%, 71%, and 77%, respectively.
Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results
Overview” section of this document.
ECONOMIC SUMMARY AND OUTLOOK
Wildfires in the Fort McMurray, Alberta area and weak international
trade figures resulted in a 1.6% contraction of Canadian economic
output (quarter-on-quarter, at annual rates) in the second calendar
quarter of 2016. The resumption of activity in the oil and gas sector
post-wildfire, alongside a modest improvement in the international trade
balance is expected to have resulted in a healthy rebound of economic
growth to around 3% in the third quarter. Nevertheless, Canada’s overall
growth rate for 2016 as a whole is forecast to be a sub-par 1.1%.
Beneath the national figures lie diverging regional performances, with
healthy growth of close to 3% expected in British Columbia and Ontario.
Conversely, although the worst of the downturn appears likely to be
over, the oil-producing regions such as Newfoundland and Labrador and
Alberta continue to deal with the aftermath of low oil prices – made
worse for Alberta by this year’s wildfires.
After falling below a 3% rate over the previous year, global growth
has been showing signs of firming comfortably within the 3-3.5%
range since mid-2016. Nevertheless, there are numerous headwinds
at play that should limit any further acceleration in the near term.
Economic uncertainty in Europe remains elevated post-Brexit,
particularly as the timing of the start of negotiations and the type of
trading relationship the United Kingdom will have with the European
Union remain highly fluid. Both the Bank of England and the European
Central Bank appear likely to maintain their aggressive monetary easing
policies over the coming months, with little further stimulus anticipated
by year end. The Bank of Japan continues its pursuit of reflation,
shifting its focus to targeting the level of 10-year bond yields while
attempting to engineer an overshoot of its inflation target. Overall,
the easy stance of monetary policy globally should continue to support
financial markets and risk appetite. While China remains a key source
of world growth, the pace of economic expansion should continue
to decelerate into next year, with negative implications for countries
within its supply chain such as South Korea, Vietnam, and others.
25
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
Economic growth in the United States, which had been weak over
the first half of the year, appears to have picked up. Real gross domestic
product (GDP) rose 2.9% at annual rates in the July to September 2016
period according to the advance estimate. This follows three quarters
in which economic activity expanded by just 1% on average. Growth
in the most recent period was wide-spread across major categories,
although residential investment contracted for a second straight
quarter. Higher frequency indicators, such as hiring and wage growth
continue to point to a healthy economy. The post-election stabilization
in financial markets and rising measures of inflation compensation
should provide further support for the Federal Reserve to raise its policy
interest rate by 25 bps on December 14, 2016.
Looking forward, U.S. consumer spending is expected to continue
to outpace overall economic growth in coming quarters, supported by
a healthy labour market. Residential construction is forecast to return
to positive growth, helping drive economic activity. Healthy demand
and a lack of inventory, as well as an improvement in recent data all
suggest that the recent pull-back in the sector has come to an end.
The U.S. 2016 election results have shifted market expectations
towards larger budget deficits, higher inflation, and increased monetary
tightening by the Federal Reserve. Bond yields have risen markedly as
a result, as has the U.S. dollar. However, there remains a high degree
of uncertainty at present regarding the size and composition of any
potential fiscal stimulus. As a result, there is some downside risk to the
U.S. economy resulting from the twin headwinds of higher bond yields
and a stronger dollar, absent a fiscal offset.
The key economic theme in Canada remains the complex adjustment
process resulting from the marked declines in commodity prices since
2014. The wildfires in Fort McMurray exerted an additional drag,
although the effect appears to have already largely dissipated. Business
investment is thought to have finished contracting, but meaningful
growth is not expected until early 2018, as oil prices remain unsupportive
of further investment and manufacturing sales growth remains weak.
As the economic adjustment process continues, external demand
for Canadian goods and services should provide some relief. Following
a disappointing performance in early 2016, export volumes have
recovered somewhat. Continued U.S. growth should provide support
to Canadian exports going forward.
The real estate sector has been a key driver of economic growth
in Canada, supported by a low interest rate environment and gains
in home prices. Growth is expected to remain strong in 2016, but
momentum is projected to ease significantly as the impact of past
interest rate decreases fade and a number of recently-implemented
tax and regulatory changes act to ease demand. While a correction
is expected, it will likely be modest in scope in light of continued low
interest rates and a stable unemployment rate.
Government spending is also expected to provide a boost to growth
over the second half of calendar 2016 and throughout 2017. Although
the impact of the Canada Child Benefit on consumer spending appears
modest, significant infrastructure spending is poised to lift Canada’s
real GDP growth rate in 2017 by as much as 0.3 percentage points.
Newly-announced measures by the federal government in its recent
Fall Update, including a “Canada Infrastructure Bank” as well as a new
global skills strategy could provide some additional economic stimulus
over the medium-to-longer term.
Against the backdrop of modest economic growth and a labour
market that is expected to generate only modest employment gains,
inflationary pressures are likely to remain in line with the Bank of
Canada’s renewed target of 2%. Although overall inflation is currently
below this target, the impacts of past energy price declines are fading,
while import prices are rising. As a result, we expect inflation to
converge back towards the central bank’s target by the middle of
the 2017 calendar year.
Given the muted inflationary pressures, the Bank of Canada
is expected to maintain its policy rate at 0.50% through the end
of 2018. This is consistent with the Bank of Canada’s most recent
forecast, which showed that a degree of economic slack would
persist until the middle of the 2018 calendar year.
There are a number of important risks that may push the Canadian
economy off course. Should U.S. demand disappoint, Canadian export
growth is likely to follow suit, removing an important source of
growth. While focused on Mexico and China, protectionist sentiment
may impact Canadian exports, and by extension business investment.
A renegotiated North American Free Trade Agreement may also see
a reduction of trade access, permanently slowing economic growth.
A string of upcoming elections in the euro area may result in increased
global uncertainty and volatility. Domestically, high household debt
levels may precipitate a consumer deleveraging cycle. With the
consumer accounting for more than half of economic activity, a sharp
slowdown in personal consumption growth will have a deleterious
effect on the economy as a whole. Similarly, a moderation in housing
activity, whether driven by weakened affordability or a stronger than
expected impact of recent regulatory changes, would remove what has
been a key driver of growth in recent quarters.
26
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS BUSINESS SEGMENT ANALYSIS
Canadian Retail
Canadian Retail provides a full range of financial products and services to nearly 15 million customers
in the Canadian personal and commercial banking, wealth, and insurance businesses.
NET INCOME
(millions of Canadian dollars)
TOTAL REVENUE
(millions of Canadian dollars)
AVERAGE DEPOSITS
(millions of Canadian dollars)
$7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
$21,000
18,000
15,000
12,000
9,000
6,000
3,000
0
$300
250
200
150
100
50
0
14
15
16
14
15
16
14
15
16
Reported
Adjusted
Personal
Business
Wealth
T A B L E 1 4
REVENUE – Reported
(millions of Canadian dollars)
Personal banking
Business banking
Wealth
Insurance
Total
2016
$ 10,157
2,454
3,640
3,958
$ 20,209
2015
$ 9,993
2,323
3,436
3,933
$ 19,685
2014
$ 9,600
2,284
3,226
4,051
$ 19,161
27
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS HIGHLIGHTS
• Record reported earnings of $5,988 million.
• Continued to focus on customer service and convenience by
optimizing our branch network, and investing in our digital
channel experience, including mobile and online banking.
CHALLENGES IN 2016
• Continued low interest rate environment contributed to
lower margins.
• Fierce competition for new and existing customers from the
major Canadian banks and non-bank competitors.
• Recognized as an industry leader in customer service
• Challenging credit conditions, including increased credit losses
excellence with distinctions that included the following:
– Retained the #1 spot in “Customer Service Excellence”2,3
among the Big 5 Canadian Banks for the twelfth consecutive
year according to Ipsos, a global market research firm;
– Won the “Online Banking Excellence”2,4 award among the
Big 5 Canadian Banks for the twelfth consecutive year
according to Ipsos; and
– Won the “Mobile Banking Excellence”2,5 award among the
Big 5 Canadian Banks for the fourth consecutive year
according to Ipsos.
• Ranked first in Canadian mobile banking with the highest
number of mobile unique visitors according to Comscore6.
• Continued to generate strong volume growth across
key businesses:
– Record total originations in real estate secured lending;
– Personal Banking recorded strong chequing and savings
deposit volume growth of 9.5%;
– Business Banking generated strong loan volume
growth of 10.5%;
– TD Auto Finance Canada had record originations in Canada;
– TD Asset Management (TDAM), the manager of TD Mutual
Funds, accumulated record assets under management; and
– TD Wealth Private Investment Advice had record net asset
acquisition and record assets under administration.
• TD Insurance remained the largest direct distribution insurer7
and leader in the affinity market7 in Canada.
• TD has maintained strong Canadian market share8 in
key products:
– #1 in personal deposit and credit card market share;
– #2 in real estate secured lending and personal loan
market share;
– #2 in Business Banking deposit and loan market share; and
– #1 in Direct Investing by asset, trades, and revenue
market share.
primarily in oil-impacted regions.
INDUSTRY PROFILE
The personal and business banking environment in Canada is very
competitive among the major banks as well as some strong regional
players and non-bank competitors. The intense competition makes
it difficult to achieve market share gains and distinctive competitive
advantage over the long term. Continued success depends upon
delivering outstanding customer service and convenience, maintaining
disciplined risk management practices, and prudent expense
management. Business growth in the fiercely competitive wealth
management industry depends on the ability to differentiate on client
experience by providing the right products, services, tools and solutions
to serve our clients’ needs. Insurance operates in both the Canadian
property and casualty insurance, and the life and health insurance
industries. The property and casualty insurance industry in Canada is
a fragmented and competitive market, consisting of both personal and
commercial lines writers, whereas the life and health insurance industry
is made up of several larger competitors.
OVERALL BUSINESS STRATEGY
The strategy for Canadian Retail is to:
• Consistently deliver legendary customer experiences and
provide trusted advice to help our customers achieve their
goals and aspirations.
• Be recognized as an extraordinary place to work by embracing
diversity and inclusion and helping all our colleagues achieve
their full potential.
• Deliver organic growth by deepening relationships and focusing
•
on underrepresented products and markets.
Innovate with purpose for our customers and colleagues, simplifying
to make it easier to get things done.
• Execute with speed and impact, taking only those risks we can
understand and manage.
Improve the well-being of our communities.
•
2 Ipsos 2016 Best Banking Awards are based on full year Customer Service Index (CSI)
survey results. Sample size for the total 2016 CSI program year ended with the
August 2016 survey wave was 47,305 completed surveys yielding 67,678 financial
institution ratings nationally. Leadership is defined as either a statistically significant
lead over the other Big 5 Canadian Banks (at a 95% confidence interval) or a
statistically equal tie with one or more of the Big 5 Canadian Banks.
6 Comscore reporting as of August 30, 2016. TD had the highest number of mobile
unique visitors accessing financial services over the past 3 months, over the full
year-to-date, and over the third quarter of 2016.
7 Based on Gross Written Premiums for Property and Casualty business. Ranks based
on data available from OSFI, Insurers, Insurance Bureau of Canada and Provincial
Regulators, as at December 31, 2015.
3 TD Canada Trust achieved leadership in banking excellence in the following channels in
the 2016 Ipsos Best Banking Awards: Automated Teller Machine, Online and Mobile.
4 TD Canada Trust won the Online Banking Excellence award among the Big 5
Canadian Banks in the proprietary Ipsos 2006-2016 Best Banking StudiesSM.
5 TD Canada Trust won the Mobile Banking Excellence award among the Big 5
Canadian Banks in the proprietary Ipsos 2013-2016 Best Banking StudiesSM.
The award was introduced in 2013.
8 Market share ranking is based on most current data available from OSFI for
Personal Deposits and Loans as at August 2016, public financial disclosures
for average credit card balances as at June 2016, from the Canadian Bankers
Association for Real Estate Secured Lending as at June 2016 and Business
Deposits and Loans as at March 2016, and from Investor Economics for Direct
Investing asset, trades and revenue metrics as at June 2016.
28
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 1 5
CANADIAN RETAIL
(millions of Canadian dollars, except as noted)
Net interest income
Non-interest income
Total revenue
Provision for credit losses
Insurance claims and related expenses
Non-interest expenses – reported
Non-interest expenses – adjusted
Net income – reported
Adjustments for items of note, net of income taxes1
Integration charges and direct transaction costs relating to the acquisition of the
credit card portfolio of MBNA Canada
Set-up, conversion and other one-time costs related to affinity relationship
with Aimia and acquisition of Aeroplan Visa credit card accounts
Net income – adjusted
Selected volumes and ratios
Return on common equity – reported2
Return on common equity – adjusted2
Margin on average earning assets (including securitized assets)
Efficiency ratio – reported
Efficiency ratio – adjusted
Assets under administration (billions of Canadian dollars)
Assets under management (billions of Canadian dollars)
Number of Canadian retail branches
Average number of full-time equivalent staff
2016
$ 9,979
10,230
20,209
1,011
2,462
8,557
8,557
5,988
2015
$ 9,781
9,904
19,685
887
2,500
8,407
8,407
5,938
2014
$ 9,538
9,623
19,161
946
2,833
8,438
8,091
5,234
–
–
125
–
$ 5,988
–
$ 5,938
131
$ 5,490
41.9%
41.9
2.78
42.3
42.3
345
268
1,156
38,575
$
42.8%
42.8
2.87
42.7
42.7
310
245
1,165
39,218
$
41.7%
43.7
2.95
44.0
42.2
293
227
1,165
39,389
$
1 For explanations of items of note, refer to the “Non-GAAP Financial Measures –
2 Capital allocated to the business segments was based on 8% CET1 Capital in fiscal
Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results
Overview” section of this document.
2014 and 9% in fiscal 2015 and 2016.
REVIEW OF FINANCIAL PERFORMANCE
Canadian Retail net income for the year was $5,988 million, an increase
of $50 million, or 1%, compared with last year. The increase in earnings
reflected revenue growth and lower insurance claims, partially offset by
the impact of a higher effective tax rate, higher non-interest expenses,
and higher PCL. The ROE for the year was 41.9%, compared with
42.8% last year.
Canadian Retail revenue is derived from the Canadian personal
and commercial banking, wealth and insurance businesses. Revenue
for the year was $20,209 million, an increase of $524 million, or 3%,
compared with last year. Net interest income increased $198 million,
or 2%, reflecting loan and deposit volume growth, partially offset by
lower margins. Non-interest income increased $326 million, or 3%,
reflecting wealth asset growth and higher personal and business
banking fee-based revenue. Margin on average earning assets was
2.78%, a 9 bps decrease, reflecting the low rate environment and
competitive pricing.
Average loan volumes increased $19 billion, or 5%, compared with
last year, comprised of 4% growth in personal loan volumes and 10%
growth in business loan volumes. Average deposit volumes increased
$19 billion, or 7%, compared with last year, comprised of 6% growth
in personal deposit volumes, 7% growth in business deposit volumes
and 14% growth in wealth deposit volumes.
Assets under administration (AUA) were $345 billion as at
October 31, 2016, an increase of $35 billion, or 11%, and assets
under management (AUM) were $268 billion as at October 31, 2016,
an increase of $23 billion, or 9%, compared with last year, both
reflecting new asset growth and increases in market value.
PCL for the year was $1,011 million, an increase of $124 million, or
14% compared with last year. Personal banking PCL was $970 million,
an increase of $115 million, or 13%, reflecting higher provisions in
the auto lending portfolio. Business banking PCL was $41 million,
an increase of $9 million. Annualized PCL as a percentage of credit
volume was 0.28%, or an increase of 2 bps, compared with last year.
Net impaired loans were $705 million, a decrease of $10 million, or
1%, compared with last year.
Insurance claims and related expenses for the year were
$2,462 million, a decrease of $38 million, or 2%, compared with
last year, reflecting more favourable prior years’ claims development,
partially offset by more severe weather conditions and a change
in mix of reinsurance contracts.
Non-interest expenses for the year were $8,557 million, an increase
of $150 million, or 2%, compared with last year. The increase reflected
business growth, higher employee-related expenses including revenue-
based variable expenses in the wealth business, and higher investment
in technology, partially offset by productivity savings.
The efficiency ratio was 42.3%, compared with 42.7% last year.
29
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
KEY PRODUCT GROUPS
Personal Banking
• Personal Deposits – offers a full suite of chequing, savings and
investment products to retail clients across Canada.
• Consumer Lending – offers a diverse range of financing products
to suit the needs of retail clients across Canada.
• Credit Cards and Merchant Solutions – offers a range of credit
card products including proprietary, co-branded and affinity credit
card programs.
• Auto Finance – offers retail automotive and recreational vehicle
financing through an extensive network of dealers across Canada.
Business Banking
• Commercial Banking – serves the needs of Canadian businesses
across a wide range of industries.
• Small Business Banking – offers a wide range of financial products
and services to small businesses across Canada.
Wealth
• Direct Investing – offers a comprehensive product and service
offering to self-directed retail investors.
• Advice-based business – offers financial planning and private wealth
services to help clients protect, grow and transition their wealth.
The advice-based wealth business has a strong partnership with the
Canadian personal and commercial banking businesses.
• Asset Management – TDAM is a leading investment manager with
deep retail and institutional capabilities. TD Mutual Funds is a
leading mutual fund business, providing a broadly diversified range
of mutual funds and professionally managed portfolios. TDAM’s
institutional investment business has a leading market share in
Canada and includes clients of some of the largest pension funds,
endowments, and corporations in Canada. All asset management
units work in close partnership with other TD businesses, including
the advice-based wealth business and retail banking, to align
products and services to ensure a legendary client experience.
Insurance
• Property and Casualty – TD is the largest direct distribution insurer9
and the fourth largest personal insurer9 in Canada. It is also the
national leader in the affinity market9 offering home and auto
insurance to members of affinity groups such as professional
associations, universities and employer groups, and other customers,
through direct channels.
• Life and Health – offers credit protection and travel insurance
products mostly distributed through TD Canada Trust branches.
Other simple life and health insurance products and credit card
balance protection are distributed through direct channels.
BUSINESS OUTLOOK AND FOCUS FOR 2017
The Canadian Retail business will remain focused on delivering
legendary customer service and convenience across all channels
and deepening client relationships. We anticipate ongoing
regulatory pressures and expect another year of moderate
earnings growth due to the challenging operating environment.
Over the next year, we expect moderate pressure on margins
due to the impact of the sustained low interest rate environment
and competitive pricing in the market. We expect the personal
loan growth rate to be in-line with current year levels. Business
lending is forecasted to remain strong as we maintain our focus
on winning market share. Wealth asset acquisition is expected
to be strong; however, benefits from market appreciation next
year are subject to capital markets performance. Insurance
results will continue to depend upon, among other things, the
frequency and severity of weather-related events, as well as
the impact of regulatory reforms and legislative changes. We
expect an increase in credit losses for 2017 driven by volume
growth. We will maintain our disciplined approach to expense
management while making necessary investments in our
business and infrastructure.
Our key priorities for 2017 are as follows:
• Continue to deliver legendary customer experiences while
building on our lead in digital engagement to enable omni-
channel experiences.
• Deliver organic growth by deepening relationships and
focusing on underrepresented products and markets.
• Accelerate our growth in the Wealth Advice channels,
enrich the client offering in the Direct Investing business,
and innovate for leadership in Asset Management.
• Continue to invest in our insurance products and services,
ensuring that they are competitive, easy to understand and
provide the protection our clients need.
• Keep our focus on productivity and simplify key processes
to enhance customer experience, employee satisfaction, and
shareholder value.
• Continue to be an extraordinary place to work.
9 Based on Gross Written Premiums for Property and Casualty business. Ranks based
on data available from OSFI, Insurers, Insurance Bureau of Canada and Provincial
Regulators, as at December 31, 2015.
30
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS SEGMENT ANALYSIS
U.S. Retail
Operating under the brand name, TD Bank, America’s Most Convenient Bank,® the U.S. Retail Bank offers
a full range of financial products and services to nearly 9 million customers in the bank’s U.S. personal and
business banking operations, including wealth management services. U.S. Retail includes an equity investment
in TD Ameritrade; it also refers mass affluent clients to TD Ameritrade for their direct investing needs.
NET INCOME
(millions of Canadian dollars)
TOTAL REVENUE
(millions of Canadian dollars)
EFFICIENCY RATIO
(percent)
$3,200
2,800
2,400
2,000
1,600
1,200
800
400
0
$10,000
8,000
6,000
4,000
2,000
0
80%
60
40
20
0
14
15
16
14
15
16
14
15
16
Reported
Adjusted
Reported
Adjusted
Reported
Adjusted
T A B L E 1 6
REVENUE – Reported 1,2
(millions of dollars)
Personal Banking
Business Banking
Wealth
Other3
Total
2016
$ 5,153
3,173
455
678
$ 9,459
Canadian dollars
2015
$ 4,354
2,804
411
660
$ 8,229
2014
$ 3,652
2,418
331
764
$ 7,165
2016
$ 3,884
2,391
343
512
$ 7,130
2015
$ 3,498
2,253
330
533
$ 6,614
U.S. dollars
2014
$ 3,350
2,218
303
701
$ 6,572
1 Certain comparative amounts have been recast to conform with the revised
presentation for the U.S. strategic cards portfolio adopted in fiscal 2016. For
further details, refer to the “Business Focus” section of this document.
2 Certain comparative periods have been reclassified to reflect internal allocation
methodology changes.
3 Other revenue consists primarily of revenue from investing activities.
31
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS HIGHLIGHTS
• Record reported earnings of US$2,234 million, up 11%
compared with last year.
• Continued to provide legendary customer service
and convenience:
– Won the 2016 J.D. Power U.S. Retail Banking Satisfaction
Award for the Florida Region10; and
– Named to DiversityInc.’s Top 50 Companies in the U.S. for
diversity for the fourth year in a row.
• Outperformed our peers in loan and deposit growth, as well
as household acquisition.
• Deepened the relationship with new and existing customers.
• Continued to invest in digital and in our omni-channel
experience.
• Announced agreement to acquire Scottrade Bank11.
CHALLENGES IN 2016
• The competitive lending landscape continued to impact
loan margins.
• Continuously challenging environment for residential real
estate related lending.
• Normalizing credit conditions resulted in a moderate
earnings headwind.
INDUSTRY PROFILE
The U.S. consumer and commercial banking industry is highly competitive
and includes several very large financial institutions as well as regional
banks, small community and savings banks, finance companies, credit
unions, and other providers of financial services. Traditional competitors
have embraced new technologies and strengthened their focus on
the customer experience. Non-traditional competitors (such as Fintech)
have continued to gain momentum and are increasingly collaborating
with banks to evolve customer products and experience. The wealth
management industry is also competitive and includes national and
regional banks, insurance companies, independent mutual fund
companies, brokers, and independent asset management companies.
The keys to profitability are attracting and retaining customer
relationships with legendary service and convenience, offering
products that meet customers’ evolving needs, managing expenses,
and disciplined risk management.
OVERALL BUSINESS STRATEGY
The strategy for U.S. Retail is to:
• Deliver legendary omni-channel service and convenience.
• Grow and deepen customer relationships.
• Leverage our differentiated brand as the “human” bank.
• Deliver productivity initiatives that enhance both the employee and
• Competition for new and existing customers from both U.S.
customer experience.
banks and non-bank competitors remained fierce.
• Continuously evolving regulatory and legislative environment.
• Maintain our conservative risk appetite.
• Build upon our unique employee culture.
10 TD Bank, N.A. received the highest numerical score among retail banks in
Florida in the J.D. Power 2016 Retail Banking Satisfaction Study, based on
76,233 responses from 10 banks, measuring opinions of consumers with
their primary banking provider, surveyed April 2015-February 2016.
Your experiences may vary. Visit www.jdpower.com.
11 Acquisition is subject to the satisfaction of closing conditions, including
obtaining regulatory approvals.
32
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 1 7
U.S. RETAIL1
(millions of dollars, except as noted)
Canadian Dollars
U.S. Retail Bank net income – reported2
U.S. Retail Bank net income – adjusted2
Equity in net income of an investment in TD Ameritrade
Net income – adjusted
Net income – reported
U.S. Dollars
Net interest income
Non-interest income
Total revenue – reported
Total revenue – adjusted
Provision for credit losses
Non-interest expenses – reported
Non-interest expenses – adjusted
U.S. Retail Bank net income – reported2
Adjustments for items of note, net of income taxes3
Charge related to the acquisition in U.S. strategic cards
portfolio and related integration costs
Litigation and litigation-related charge(s)/reserve(s)
U.S. Retail Bank net income – adjusted2
Equity in net income of an investment in TD Ameritrade
Net income – adjusted
Net income – reported
Selected volumes and ratios
Return on common equity – reported4
Return on common equity – adjusted4
Margin on average earning assets5
Efficiency ratio – reported
Efficiency ratio – adjusted
Assets under administration (billions of U.S. dollars)
Assets under management (billions of U.S. dollars)6
Number of U.S. retail stores
Average number of full-time equivalent staff
2016
2015
2014
$ 2,524
2,524
435
$ 2,959
2,959
$ 5,346
1,784
7,130
7,130
559
4,289
4,289
1,906
–
–
1,906
328
$ 2,234
2,234
$ 2,112
2,171
376
$ 2,547
2,488
$ 4,925
1,689
6,614
6,670
430
4,165
4,146
1,701
39
7
1,747
306
$ 2,053
2,007
$ 1,805
1,805
305
$ 2,110
2,110
$ 4,749
1,823
6,572
6,572
401
4,136
4,136
1,657
–
–
1,657
281
$ 1,938
1,938
8.8%
8.8
3.12
60.2
60.2
13
63
1,278
25,732
$
8.0%
8.2
3.12
63.0
62.2
12
77
1,298
25,647
$
8.4%
8.4
3.20
63.0
63.0
12
59
1,318
26,074
$
1 Certain comparative amounts and ratios have been recast to conform with the
5 The margin on average earning assets excludes the impact related to the
revised presentation, which includes only the Bank’s agreed portion of revenue,
PCL, and expenses for the U.S. strategic cards portfolio and was adopted in fiscal
2016. For further details, refer to the “Business Focus” section of this document.
TD Ameritrade IDA and the impact of intercompany deposits and cash collateral.
In addition, the value of tax-exempt interest income is adjusted to its equivalent
before-tax value.
2 Before the equity in net income of the Bank’s investment in TD Ameritrade.
3 For explanations of items of note, refer to the “Non-GAAP Financial Measures –
Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results
Overview” section of this document.
4 Capital allocated to the business segments was based on 8% CET1 Capital in fiscal
6 On August 30, 2016, a sub-advisory agreement with respect to $14 billion in assets
was terminated, of which $3 billion were withdrawn before October 31, 2016 with
the remainder to be completed by December 8, 2016. The revenue and net income
associated with the terminated sub-advisory agreement is not significant to the
Wealth business in U.S. Retail.
2014 and 9% in fiscal 2015 and 2016.
REVIEW OF FINANCIAL PERFORMANCE
U.S. Retail net income for the year was $2,959 million (US$2,234 million),
which included net income of $2,524 million (US$1,906 million) from the
U.S. Retail Bank and $435 million (US$328 million) from TD’s investment
in TD Ameritrade. U.S. Retail reported earnings increased US$227 million,
or 11%, compared with last year, while adjusted earnings increased
US$181 million, or 9%. U.S. Retail Canadian dollar earnings benefited
from a strengthening of the U.S. dollar with reported earnings up
$471 million, or 19%, and adjusted earnings up $412 million, or 16%.
The reported and adjusted ROE for the year was 8.8%, compared with
8.0% and 8.2%, respectively, last year.
The contribution from TD Ameritrade of US$328 million increased
US$22 million, or 7%, compared with last year, primarily due to
increased asset-based revenue and favourable tax items, partially
offset by higher operating expenses and decreased trading volumes.
U.S. Retail Bank reported net income for the year was US$1,906 million,
an increase of US$205 million, or 12%, compared with last year,
primarily due to higher loan and deposit volumes, positive operating
leverage, and the positive impact from an acquisition in the strategic
cards portfolio, partially offset by higher PCL. U.S. Retail Bank adjusted
net income increased US$159 million, or 9%.
U.S. Retail Bank revenue is derived from personal and business
banking, wealth management services, and investments. Revenue
for the year was US$7,130 million. Reported revenue increased
US$516 million, or 8%, compared with last year, while adjusted
revenue was up US$460 million, or 7%. Net interest income increased
US$421 million, or 9%, primarily reflecting higher loan and deposit
volumes, the benefit of the December 2015 Fed rate increase (the
“rate increase”) and the benefit of an acquisition in the strategic
cards portfolio. Margin on average earning assets was 3.12%, or flat
compared with last year, primarily due to higher deposit margins, the
rate increase, and favourable balance sheet mix, offset by lower loan
margins. Reported non-interest income increased US$95 million, or
6%, primarily reflecting fee income growth in personal banking, and
the positive impact from an acquisition in the strategic cards portfolio,
offset by a change in time order posting of customer transactions and
unfavourable hedging impact. Adjusted non-interest income increased
US$39 million, or 2%.
Excluding an acquisition in the strategic cards portfolio, average
loan volumes increased US$13 billion, or 11%, compared with last
year, due to growth in business and personal loans of 17% and 4%,
respectively. Average deposit volumes increased US$19 billion, or
9%, reflecting 7% growth in business deposit volumes, 8% growth
in personal deposit volumes and an 11% increase in sweep deposit
volume from TD Ameritrade.
33
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
AUA were US$13 billion as at October 31, 2016, an increase of 11%,
compared with last year, primarily due to an increase in private banking
balances. AUM were US$63 billion as at October 31, 2016, a decrease
of 17%, primarily due to net outflows from institutional accounts.
PCL was US$559 million, an increase of US$129 million, or 30%,
compared with last year. Personal banking PCL was US$390 million,
an increase of US$25 million, or 7%, primarily due to higher provisions
for auto loans and credit cards, partially offset by release of South
Carolina flooding reserve, as well as improvements on residential
mortgages and home equity loans. Business banking PCL was
US$165 million, an increase of US$71 million, primarily due to
commercial loan volume growth and an allowance increase reflecting
the current economic environment, partially offset by release of South
Carolina flooding reserve. PCL associated with debt securities classified
as loans was US$4 million, an increase of US$33 million, due to a
recovery last year. Annualized PCL as a percentage of credit volume
for loans excluding debt securities classified as loans was 0.39%,
an increase of 4 bps. Net impaired loans, excluding acquired credit-
impaired (ACI) loans and debt securities classified as loans, were
US$1.5 billion, an increase of US$10 million, or 1%. Net impaired
loans, excluding ACI loans and debt securities classified as loans,
as a percentage of total loans were 1.0% as at October 31, 2016,
a decrease of 8 bps compared with last year. Net impaired debt
securities classified as loans were US$641 million, a decrease of
US$157 million, or 20%.
Non-interest expenses for the year were US$4,289 million.
Reported non-interest expenses increased US$124 million, or 3%,
compared with last year, primarily due to business initiatives, volume
growth, and investments in front line employees, partially offset by
productivity savings. Adjusted non-interest expenses increased
US$143 million, or 3%.
The reported and adjusted efficiency ratios for the year were 60.2%,
compared with 63.0% and 62.2%, respectively, last year.
KEY PRODUCT GROUPS
Personal Banking
• Personal Deposits – offers a full suite of chequing and savings
products to retail customers through multiple delivery channels.
• Consumer Lending – offers a diverse range of financing products
to suit the needs of retail customers.
• Credit Cards Services – offers TD branded credit cards for retail and
small business franchise customers. TD also offers private label and
co-brand credit cards through nationwide, retail partnerships to
provide credit card products to their U.S. customers. This portfolio
includes Target and Nordstrom.
• Auto Finance – offers dealer floorplan financing and indirect
retail automotive financing through a network of auto dealers
throughout the U.S.
Business Banking
• Commercial Banking – serves the needs of U.S. businesses and
governments across a wide range of industries.
• Small Business Banking – offers a range of financial products and
services to small businesses.
Wealth
• Advice-based Business – provides private banking, investment
advisory, and trust services to retail and institutional clients. The
advice-based business is integrated with the U.S. personal and
commercial banking businesses.
• Asset Management – the U.S. asset management business is
comprised of the U.S. arm of TDAM’s institutional investment
business and Epoch Investment Partners Inc.
BUSINESS OUTLOOK AND FOCUS FOR 2017
The U.S. Retail business will remain focused on acquiring
customers, deepening client relationships, and enhancing
productivity. We anticipate the operating environment to
remain challenging, characterized by modest economic growth,
ongoing regulatory pressures, and fierce competition. We
expect good loan and deposit growth and improving net
interest margin. Credit losses are expected to increase in 2017,
reflecting volume growth and normalizing credit conditions.
We will continue to maintain a disciplined expense management
approach as the benefits from on-going productivity initiatives
are expected to partially fund strategic business investments.
This will help generate positive operating leverage for the year.
Our key priorities for 2017 are as follows:
• Outgrow our competitors by acquiring more customers and
deepening relationships.
• Advance our omni-channel strategy, including making key
strategic investments in digital capabilities.
• Enhance the customer and employee experience.
• Continue to meet heightened regulatory expectations.
• Drive productivity initiatives across the Bank.
TD AMERITRADE HOLDING CORPORATION
Refer to Note 12 of the 2016 Consolidated Financial Statements for
further information on TD Ameritrade.
34
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS SEGMENT ANALYSIS
Wholesale Banking
Operating under the brand name TD Securities, Wholesale Banking provides a wide range of capital
markets, investment banking, and corporate banking products and services to corporate, government,
and institutional clients in key global financial centres.
NET INCOME
(millions of Canadian dollars)
TOTAL REVENUE
(millions of Canadian dollars)
$1,000
800
600
400
200
0
$3,500
3,000
2,500
2,000
1,500
1,000
500
0
14
15
16
14
15
16
T A B L E 1 8
REVENUE
(millions of Canadian dollars)
Investment banking and capital markets
Corporate banking
Total
2016
$ 2,410
620
$ 3,030
2015
$ 2,334
592
$ 2,926
2014
$ 2,170
510
$ 2,680
35
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS HIGHLIGHTS
• Earnings of $920 million and an ROE of 15.5%.
• Higher revenue, reflecting a strengthening franchise in
Canada and growth in the U.S.
• Notable deals in the year:
– Joint book-runner on TransCanada Corporation’s
$4.2 billion equity underwriting – the largest ever
bought deal in Canada
– Lead book-runner on Suncor Energy’s $2.5 billion
equity underwriting
– Joint book-runner on Aritzia Inc.’s $460 million initial public
offering (IPO) – the largest Canadian IPO of the year
• Signed an agreement to acquire Albert Fried & Company –
a New York-based broker-dealer with services and
capabilities including self-clearing, securities lending, and
a prime brokerage technology platform in its final stages
of development12.
• Ranked #1 overall in Thomson Reuters’ Analyst Awards for
equity research13.
• Maintained a top-three dealer status in Canada
(for the nine-month period ended September 30, 2016)14:
– #1 in equity options block trading;
– #1 in equity underwriting;
– #2 in equity block trading;
– #2 in government debt and corporate debt
underwriting; and
– #3 in Canadian syndicated loans (on a rolling
twelve-month basis).
• Continued investment in our infrastructure model to be
more efficient and agile and meet regulatory changes.
CHALLENGES IN 2016
• Sustained low interest rate environment and uncertainty
over the timing of rate increases.
• Global fiscal and political environment contributed to
investor uncertainty.
• Low energy prices resulted in increased specific provisions
for credit losses in the oil and gas sector.
• Regulatory changes continued to have an impact on
TD Securities’ businesses.
T A B L E 1 9
WHOLESALE BANKING
(millions of Canadian dollars, except as noted)
Net interest income (TEB)
Non-interest income
Total revenue
Provision for credit losses1
Non-interest expenses
Net income
Selected volumes and ratios
Trading-related revenue
Gross drawn (billions of Canadian dollars)2
Return on common equity3
Efficiency ratio
Average number of full-time equivalent staff
INDUSTRY PROFILE
The wholesale banking sector is a mature, highly competitive market
with competition arising from banks, large global investment firms,
and independent niche dealers. Wholesale banking provides services
to government, corporate and institutional clients. Products include
capital markets services, investment banking, and corporate banking.
Regulatory requirements for wholesale banking businesses have
continued to evolve, impacting strategy and returns for the sector.
Overall, wholesale banks have continued to shift their focus to client-
driven trading revenue and fee income to reduce risk and to preserve
capital. Competition is expected to remain intense for transactions
with high quality counterparties, as securities firms focus on prudent
risk and capital management. Longer term, wholesale banks that
have a diversified client-focused business model, offer a wide range
of products and services, and exhibit effective cost and capital
management will be well-positioned to achieve attractive returns
for shareholders.
OVERALL BUSINESS STRATEGY
• Expand our client franchise through organic growth.
• Provide superior advice and execution to meet clients’ needs.
• Strengthen our position as a top investment dealer in Canada.
• Grow our U.S. franchise.
• Leverage our enterprise partners.
• Maintain a prudent risk profile by focusing on high quality clients,
counterparties, and products.
• Adapt to rapid industry and regulatory changes.
• Be an extraordinary and inclusive place to work by attracting,
developing, and retaining top talent.
2016
$ 1,685
1,345
3,030
74
1,739
$ 920
2015
$ 2,295
631
2,926
18
1,701
$ 873
2014
$ 2,210
470
2,680
11
1,589
$ 813
$ 1,636
20.7
15.5%
57.4
3,766
$ 1,545
16.1
15.2%
58.1
3,748
$ 1,394
12.2
17.5%
59.3
3,654
1 PCL is comprised of specific provisions for credit losses and accrual costs for
credit protection. The change in market value of the credit protection, in excess
of the accrual cost, is reported in the Corporate segment. Refer to Note 30 for
further details.
2 Includes gross loans and bankers’ acceptances, excluding letters of credit,
cash collateral, credit default swaps (CDS), and reserves for the corporate
lending business.
3 Capital allocated to the business segments was based on 8% CET1 Capital
in fiscal 2014 and 9% in fiscal 2015 and 2016.
12 Acquisition is subject to the satisfaction of closing conditions, including obtaining
regulatory approvals.
13 The Thomson Reuters Analyst Awards are recognized as the gold standard in
objective measurement of sell-side analyst performance. The awards recognize
the world’s top individual sell-side analysts and sell-side firms. They measure
the performance of sell-side analysts based on the returns of their buy/sell
recommendations relative to industry benchmarks, and the accuracy of their
earnings estimates in 16 regions across the globe. TD Securities ranking is based
on receiving the highest number of equity research awards in 2016.
36
14 Equity options block trading and equity block trading: block trades by value on all
Canadian exchanges, Source: IRESS. Equity underwriting, Source: Bloomberg.
Government and corporate debt underwriting: excludes self-led domestic bank
deals and credit card deals, bonus credit to lead, Source: Bloomberg; Canadian
syndicated loans: deal volume awarded proportionately to the Lead Arrangers.
Source: Bloomberg. Rankings reflect TD Securities’ position among Canadian peers.
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS OUTLOOK AND FOCUS FOR 2017
We are cautiously optimistic about improved capital markets
activity in 2017. However, we remain watchful of market
sentiment as a combination of global market events, uncertainty
over the outlook for interest rates and energy markets, increased
competition, and evolving capital and regulatory requirements
that will continue to impact our business. While these factors
will likely affect corporate and investor sentiment in the near
term, we believe our diversified, integrated, client-focused
business model will continue to deliver solid results and grow
our North American franchise. We remain focused on growing
and deepening client relationships in Canada and the U.S., being
a valued counterparty, and managing our risks, capital, and
productivity in 2017.
Our key priorities for 2017 are as follows:
• Deepen client relationships.
• Continue to be a top ranked investment dealer in Canada.
• Grow our U.S. franchise in partnership with U.S. Retail.
• Expand our products and services in the U.S.
• Invest in an efficient and agile infrastructure to support
growth and adapt to industry and regulatory changes.
• Maintain our focus on productivity.
• Continue to be an extraordinary place to work.
REVIEW OF FINANCIAL PERFORMANCE
Wholesale Banking net income for the year was $920 million, an
increase of $47 million, or 5%, compared with the prior year. The
increase in earnings was due to higher revenue and a lower effective
tax rate, partially offset by higher PCL, and higher non-interest
expenses. The ROE for the year was 15.5%, compared with 15.2%
in the prior year.
Revenue for the year was $3,030 million, an increase of
$104 million, or 4%, compared with the prior year, reflecting higher
origination activity in debt and equity capital markets, higher corporate
lending fees and higher fixed income and foreign exchange trading,
partially offset by lower equity trading. Net interest income decreased
$610 million or 27%, reflecting higher funding costs and lower
dividends. Non-interest income increased $714 million reflecting
higher trading and fees.
PCL is comprised of specific provisions for credit losses and accrual
costs for credit protection. PCL for the year was $74 million, an increase
of $56 million compared with the prior year reflecting higher specific
provisions in the oil and gas sector.
Non-interest expenses for the year were $1,739 million, an increase
of $38 million, or 2%, compared with the prior year reflecting higher
variable compensation and the unfavourable impact of foreign
exchange translation, partially offset by productivity savings.
KEY PRODUCT GROUPS
Investment Banking and Capital Markets
•
Includes advisory, underwriting, trading, facilitation, and
trade execution services.
Corporate Banking
•
Includes corporate lending, trade finance, and cash
management services.
BUSINESS SEGMENT ANALYSIS
Corporate
Corporate segment comprises of a number of service and control functional groups. Certain costs relating
to these functions are allocated to operating business segments. The basis of allocation and methodologies
are reviewed periodically to align with management’s evaluation of the Bank’s business segments.
T A B L E 2 0
CORPORATE
(millions of Canadian dollars)
Net income (loss) – reported
Adjustments for items of note, net of income taxes1
Amortization of intangibles
Fair value of derivatives hedging the reclassified available-for-sale securities portfolio
Impairment of goodwill, non-financial assets, and other charges
Restructuring charges
Impact of Alberta flood on the loan portfolio
Gain on sale of TD Waterhouse Institutional Services
Total adjustments for items of note
Net income (loss) – adjusted
Decomposition of items included in net income (loss) – adjusted
Net corporate expenses
Other
Non-controlling interests
Net income (loss) – adjusted
Selected volumes
Average number of full-time equivalent staff
1 For explanations of items of note, refer to the “Non-GAAP Financial Measures –
Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results
Overview” section of this document.
2016
2015
2014
$
(931)
$ (1,275)
$
(274)
246
(6)
116
–
–
–
356
(575)
(836)
146
115
(575)
$
$
$
255
(55)
–
471
–
–
671
(604)
(734)
18
112
(604)
$
$
$
246
(43)
–
–
(19)
(196)
(12)
(286)
(727)
334
107
(286)
$
$
$
13,160
12,870
12,020
37
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
Corporate segment results include unallocated revenue and expenses,
the impact of treasury and balance sheet management activities,
provisions for incurred but not identified losses related to the Canadian
Retail and Wholesale loan portfolios, tax items at an enterprise level,
and intercompany adjustments such as elimination of taxable
equivalent basis and the retailer program partners’ share relating
to the U.S. strategic cards portfolio.
The Corporate segment reported net loss for the year was $931 million,
compared with a reported net loss of $1,275 million last year. The year-
over-year decrease in reported net loss was attributable to restructuring
charges of $471 million after tax in the prior year and higher contribution
from Other items in the current year, partially offset by impairment of
goodwill, non-financial assets, and other charges of $116 million after
tax, an increase in net corporate expenses, and lower gain due to change
in fair value of derivatives hedging the reclassified available-for-sale
securities portfolio in the current year. Higher contribution from Other
items was primarily due to higher revenue from treasury and balance
sheet management activities and favourable impact of tax items, partially
offset by higher provisions for incurred but not identified credit
losses. Net corporate expenses increased primarily due to ongoing
investments in enterprise and regulatory projects. The adjusted
net loss for the year was $575 million, compared with an adjusted
net loss of $604 million last year.
BUSINESS OUTLOOK AND FOCUS FOR 2017
As part of Corporate segment’s mandate, we will continue to
focus on enterprise and regulatory initiatives and effectively
manage the Bank’s capital and investment positions, interest
rate, liquidity, funding and the market risks of TD’s non-trading
banking activities. We continue to address the complexities and
challenges from changing demands and expectations of our
customers, shareholders, employees, governments, regulators,
and the community at large. We maintain constant focus on
the design, development, and implementation of processes,
systems, and technologies to ensure that the Bank’s key
businesses operate efficiently, reliably, and in compliance
with all applicable regulatory requirements.
2015 FINANCIAL RESULTS OVERVIEW
Summary of 2015 Performance
T A B L E 2 1
REVIEW OF 2015 FINANCIAL PERFORMANCE1
(millions of Canadian dollars)
Net interest income
Non-interest income
Total revenue
Provision for (recovery of) credit losses
Insurance claims and related expenses
Non-interest expenses
Net income (loss) before provision for income taxes
Provision for (recovery of) income taxes
Equity in net income of an investment in TD Ameritrade
Net income (loss) – reported
Adjustments for items of note, net of income taxes
Net income (loss) – adjusted
1 Certain comparative amounts and ratios have been recast to conform with the
revised presentation for the U.S. strategic cards portfolio adopted in fiscal 2016.
For further details, refer to the “Business Focus” section of this document.
NET INTEREST INCOME
Net interest income for the year was $18,724 million, an increase of
$1,140 million, or 6%, compared with last year. The increase in net
interest income was primarily driven by increases in the U.S. Retail,
Canadian Retail, and Wholesale Banking segments, partially offset
by a decline in the Corporate segment. U.S. Retail net interest income
increased primarily due to strong organic loan and deposit growth,
higher fee revenue, the benefit of an acquisition in the strategic cards
portfolio, and the impact of foreign currency translation, partially
offset by net margin compression and lower accretion. Canadian Retail
net interest income increased primarily due to good loan and deposit
volume growth and the full year impact of Aeroplan, partially offset
by lower margins. Wholesale Banking net interest income increased
primarily due to higher trading-related revenue and strong corporate
lending growth. Corporate segment net interest income decreased
primarily due to lower revenue from treasury and balance sheet
management activities, partially offset by the contribution from
an acquisition in the strategic cards portfolio.
38
Canadian
Retail
$ 9,781
9,904
19,685
887
2,500
8,407
7,891
1,953
–
5,938
–
$ 5,938
U.S.
Retail
$ 6,131
2,098
8,229
535
–
5,188
2,506
394
376
2,488
59
$ 2,547
Wholesale
Banking
$ 2,295
631
2,926
18
–
1,701
1,207
334
–
873
–
$ 873
Corporate
$ 517
69
586
243
–
2,777
(2,434)
(1,158)
1
(1,275)
671
(604)
$
Total
$ 18,724
12,702
31,426
1,683
2,500
18,073
9,170
1,523
377
8,024
730
$ 8,754
NON-INTEREST INCOME
Non-interest income for the year on a reported basis was
$12,702 million, an increase of $325 million, or 3%, compared with
last year. The increase in reported non-interest income was primarily
driven by increases in the Canadian Retail, Wholesale Banking, and
U.S. Retail segments, partially offset by a decline in the Corporate
segment. Canadian Retail non-interest income increased primarily
due to wealth asset growth, higher personal and business banking
fee-based revenue, and insurance premiums, partially offset by the
impact of a change in mix of reinsurance contracts. Wholesale
Banking non-interest income increased primarily due to strong
debt underwriting fees and corporate lending growth. U.S. Retail
non-interest income increased primarily due to higher fee revenue,
the benefit of an acquisition in the strategic cards portfolio, and
the impact of foreign currency translation, partially offset by lower
gains on sales of securities. Corporate segment non-interest income
decreased primarily due to the gains on sales of TD Ameritrade
shares in the prior year, partially offset by the contribution from
an acquisition in the strategic cards portfolio. Adjusted non-interest
income for the year was $12,713 million, an increase of $616 million,
or 5%, compared with last year.
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
PROVISION FOR CREDIT LOSSES
Reported PCL for the year was $1,683 million, an increase of
$126 million, or 8%, compared with last year. The increase was
primarily driven by increases in the U.S. Retail and Corporate
segments, partially offset by a decrease in the Canadian Retail
segment. U.S. Retail PCL increased primarily due to volume growth,
provisions related to the flooding in South Carolina, and the impact
of foreign currency translation, partially offset by continued credit
quality improvement across various portfolios. Corporate segment
PCL increased primarily due to higher provisions for incurred but not
identified credit losses related to the Canadian loan portfolio, partially
offset by the contribution from an acquisition in the strategic cards
portfolio. Canadian Retail PCL decreased primarily due to higher
recoveries in business banking, the sale of charged-off accounts,
and strong credit performance in personal banking. Adjusted PCL
for the year was $1,683 million, an increase of $101 million, or 6%,
compared with last year.
INSURANCE CLAIMS AND RELATED EXPENSES
Insurance claims and related expenses were $2,500 million, a decrease
of $333 million, or 12%, compared with last year, primarily due to
a change in mix of reinsurance contracts, more favourable prior years’
development, less severe weather conditions, and lower current
year claims costs.
NON-INTEREST EXPENSES
Reported non-interest expenses for the year were $18,073 million,
an increase of $1,577 million, or 10%, compared with last year. The
increase in reported non-interest expenses was driven by increases in
the Corporate, U.S. Retail, and Wholesale Banking segments, partially
offset by the Canadian Retail segment. Corporate non-interest expenses
increased primarily due to restructuring charges of $686 million,
which were reported as an item of note, and the contribution from
an acquisition in the strategic cards portfolio. U.S. Retail non-interest
expenses increased primarily due to investments to support business
growth, the impact of foreign currency translation, and an acquisition
in the strategic cards portfolio, partially offset by productivity savings.
Canadian Retail non-interest expenses decreased primarily due
to productivity savings, partially offset by higher employee-related
costs, including higher revenue-based variable expenses in the
wealth business, business growth, and higher initiative spend.
Wholesale Banking non-interest expenses increased primarily due
to the impact of foreign exchange translation and higher operating
expenses. Adjusted non-interest expenses were $17,076 million,
an increase of $1,213 million, or 8%, compared with last year.
PROVISION FOR INCOME TAXES
Reported total income and other taxes increased by $50 million,
or 2%, compared with last year. Income tax expense, on a reported
basis, was up $11 million, or 1%, compared with last year. Other
taxes were up $39 million, or 3%, compared with last year. Adjusted
total income and other taxes were up $252 million from last year.
Total income tax expense, on an adjusted basis, was up $213 million,
or 13%, from last year.
The Bank’s effective income tax rate on a reported basis was
16.6% for 2015, compared with 16.7% last year. For a reconciliation
of the Bank’s effective income tax rate with the Canadian statutory
income tax rate, refer to Note 26 of the 2015 Consolidated
Financial Statements.
The Bank’s adjusted effective tax rate for the year was 18.3%,
compared with 17.5% last year. The year-over-year increase was
largely due to changes in business mix and the resolution of certain
audit items in 2014.
The Bank reports its investment in TD Ameritrade using the equity
method of accounting. TD Ameritrade’s tax expense of $221 million
in the year, compared with $198 million last year, was not part of the
Bank’s effective tax rate.
BALANCE SHEET
Total assets were $1,104 billion as at October 31, 2015, an increase
of $144 billion, or 15%, from October 31, 2014. The net increase
was primarily due to a $65 billion increase in loans (net of allowance
for loan losses), a $26 billion increase in available-for-sale securities,
a $15 billion increase in securities purchased under reverse repurchase
agreements, $17 billion increase in held-to-maturity securities, and
a $14 billion increase in derivatives. The impact of foreign currency
translation added $42 billion, or 4%, to growth in total assets.
Total liabilities were $1,037 billion as at October 31, 2015, an
increase of $133 billion, or 15%, from October 31, 2014. The
net increase was primarily due to a $95 billion increase in deposits,
a $15 billion increase in trading deposits, and a $14 billion increase
in obligations related to securities sold under repurchase agreements.
The impact of foreign currency translation added $41 billion, or 4%,
to growth in total liabilities.
Equity was $67 billion as at October 31, 2015, an increase of
$11 billion, or 19%, from October 31, 2014. The increase was primarily
due to higher retained earnings and an increase in accumulated other
comprehensive income due to foreign currency translation.
39
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS 2015 FINANCIAL RESULTS OVERVIEW
2015 Financial Performance by Business Line
Canadian Retail net income for the year ended October 31, 2015
on a reported basis was $5,938 million, an increase of $704 million,
or 13%, compared with the year ended October 31, 2014. The
increase in reported earnings reflected increased revenue, partially
offset by expense growth. Adjusted net income for the year ended
October 31, 2015 was $5,938 million, an increase of $448 million,
or 8%, compared with the year ended October 31, 2014. Revenue for
the year ended October 31, 2015 was $19,685 million, an increase of
$524 million, or 3%, compared with the year ended October 31, 2014.
Net interest income increased $243 million, or 3%, reflecting loan and
deposit volume growth and the full year impact of Aeroplan, partially
offset by lower margins. Non-interest income increased $281 million,
or 3%, reflecting wealth asset growth, higher personal and business
banking fee-based revenue, and insurance premium growth, partially
offset by a change in mix of reinsurance contracts. PCL for the year
ended October 31, 2015 was $887 million, a decrease of $59 million,
or 6% compared with the year ended October 31, 2014. Personal
banking PCL was $855 million, a decrease of $20 million, or 2%,
due primarily to the sale of charged off accounts and strong credit
performance, partially offset by higher provisions in the auto lending
portfolio. Business banking PCL was $32 million, a decrease of
$39 million compared with the year ended October 31, 2014.
Insurance claims and related expenses were $2,500 million, a
decrease of $333 million, or 12%, compared with the year ended
October 31, 2014, primarily due to a change in mix of reinsurance
contracts, more favourable prior years’ claims development, less
severe weather conditions and lower current year claims costs.
Reported non-interest expenses for the year ended October 31, 2015
were $8,407 million, a decrease of $31 million compared with the
year ended October 31, 2014. The decrease in reported non-interest
expenses reflected higher employee-related expenses, including higher
revenue-based variable expenses in the wealth business, business
growth, and higher initiative spend, partially offset by productivity
savings. Adjusted non-interest expenses for the year ended
October 31, 2015 were $8,407 million, an increase of $316 million,
or 4%, compared with the year ended October 31, 2014.
U.S. Retail net income for the year on a reported basis was
$2,488 million (US$2,007 million), which included net income of
$2,112 million (US$1,701 million) from the U.S. Retail Bank and
$376 million (US$306 million) from TD’s investment in TD Ameritrade.
U.S. Retail adjusted net income for the year was $2,547 million
(US$2,053 million). Canadian dollar earnings benefited from a
strengthening of the U.S. dollar during the year. The reported and
adjusted annualized ROE for the year was 8.0% and 8.2% respectively,
compared with 8.4% last year. U.S. Retail Bank reported net income
for the year was US$1,701 million, an increase of US$44 million, or
3%, compared with last year, primarily due to strong organic growth,
lower PCL, good expense management, and a lower effective tax rate,
partially offset by lower loan margins, lower gains on sales of securities,
and a charge related to an acquisition in the strategic cards portfolio
and related integration costs. U.S. Retail Bank adjusted earnings of
US$1,747 million increased US$90 million, or 5%. The contribution
from TD Ameritrade of US$306 million was up 9% compared with
last year, primarily due to strong asset growth and higher transaction
revenue, partially offset by higher operating expenses and lower
investment gains. Reported revenue for the year was US$6,614 million,
an increase of US$42 million, primarily due to strong organic loan and
deposit growth, higher fee revenue, and the benefit of an acquisition in
the strategic cards portfolio, partially offset by net margin compression,
as well as, lower accretion, lower gains on sales of securities, and
a charge related to an acquisition in the strategic cards portfolio
and related integration costs. Adjusted revenue was US$6,670 million,
an increase of US$98 million, or 1%, compared with last year. PCL for
the year was US$430 million, an increase of US$29 million, or 7%,
compared with last year, primarily due to volume growth and the
South Carolina flooding reserve, partially offset by continued credit
quality improvement across various portfolios. Reported non-interest
expenses for the year were US$4,165 million, an increase of
US$29 million, compared with last year, primarily due to the impact
of an acquisition in the strategic cards portfolio, investments to
support business growth and increased provisions, partially offset
by productivity savings. On an adjusted basis, non-interest expenses
were US$4,146 million, an increase of US$10 million compared
with last year.
Wholesale Banking net income for the year was $873 million, an
increase of $60 million, or 7%, compared with last year. The increase
in earnings was due to higher revenue, partially offset by higher non-
interest expenses and a higher effective tax rate. Revenue for the year
was $2,926 million, an increase of $246 million, or 9%, compared
with the prior year. Revenue increased mainly due to higher trading-
related revenue, while our continued focus on originations both in
Canada and the U.S. resulted in robust debt underwriting fees and
strong corporate lending growth. The increase in debt underwriting fees
was largely driven by improved client activity, and corporate lending
revenue increased on strong loan volume growth. The revenue increase
also included the positive impact of foreign exchange translation. This
was partially offset by lower mergers and acquisition (M&A) and equity
underwriting fees. Trading-related revenue increased due to improved
foreign exchange and fixed income trading that benefited from strong
client activity in the year despite a challenging global environment,
and higher equity trading on improved client volumes and increased
volatility in the latter half of the year. PCL is comprised of specific
provisions for credit losses and accrual costs for credit protection.
The change in market value of the credit protection, in excess of the
accrual cost, is reported in the Corporate segment. PCL for the year
was $18 million, an increase of $7 million compared with last year,
and consisted of the accrual cost of credit protection and a specific
credit provision in the corporate lending portfolio. PCL in the prior year
consisted primarily of the accrual cost of credit protection. Non-interest
expenses for the year were $1,701 million, an increase of $112 million,
or 7%, compared with last year. Non-interest expenses increased
primarily due to the impact of foreign exchange translation and higher
operating expenses.
Corporate segment reported net loss for the year was $1,275 million,
compared with a reported net loss of $274 million last year. Current
year reported net loss includes restructuring charges of $686 million
($471 million after-tax) on a net basis. The adjusted net loss for
the year was $604 million, compared with an adjusted net loss of
$286 million last year. The year-over-year increase in the reported net
loss was attributable to Other items. Other items were lower due to
the gain on sale of TD Ameritrade shares ($85 million after-tax) and
favourable impact of tax items in the prior year, lower revenue from
treasury and balance sheet management activities, and higher provisions
for incurred but not identified credit losses due to volume growth and
refinements in allowance methodology in the Canadian Retail and
Wholesale loan portfolios.
40
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS GROUP FINANCIAL CONDITION
Balance Sheet Review
AT A GLANCE OVERVIEW
Total assets were $1,177 billion as at October 31, 2016, an
increase of $73 billion, or 7%, compared with October 31, 2015.
T A B L E 2 2
CONDENSED CONSOLIDATED BALANCE SHEET
(millions of Canadian dollars)
Assets
Interest-bearing deposits with banks
Available-for-sale securities
Held-to-maturity securities
Loans, net of allowance for loan losses
Other
Total assets
Liabilities
Trading deposits
Derivatives
Deposits
Obligations related to securities sold
under repurchase agreements
Other
Total liabilities
Total equity
Total liabilities and equity
As at
October 31
2016
October 31
2015
$
53,714
107,571
84,395
585,656
345,631
$ 1,176,967
$
42,483
88,782
74,450
544,341
354,317
$ 1,104,373
79,786
65,425
773,660
74,759
57,218
695,576
48,973
134,909
1,102,753
74,214
$ 1,176,967
67,156
142,636
1,037,345
67,028
$ 1,104,373
Total assets were $1,177 billion as at October 31, 2016, an increase
of $73 billion, or 7%, from October 31, 2015. The increase was
primarily due to an increase in loans, net of allowance for loan losses of
$41 billion, available-for-sale securities of $19 billion, interest-bearing
deposits with banks of $11 billion, and held-to-maturity securities of
$10 billion. The foreign currency translation impact on total assets,
primarily in the U.S. Retail segment, was $12 billion or 1%.
Loans (net of allowance for loan losses) increased $41 billion
primarily due to an increase in the U.S. Retail, Canadian Retail, and
Wholesale Banking segments. The increase in U.S. Retail was primarily
due to growth in business and government loans and personal loans.
The increase in Canadian Retail was primarily due to growth in business
and government loans, personal loans, and residential mortgages. The
increase in Wholesale was primarily due to growth in business and
government loans.
Available-for-sale securities increased $19 billion primarily due to
new investments, net of maturities and sales.
Interest-bearing deposits with banks increased $11 billion primarily
due to higher personal deposit volumes.
Held-to-maturity securities increased $10 billion primarily due to
new investments, net of maturities and foreign currency translations.
Total liabilities were $1,103 billion as at October 31, 2016, an
increase of $66 billion, or 6%, from October 31, 2015. The increase
was primarily due to an increase in deposits of $78 billion, derivatives
of $8 billion, trading deposits of $5 billion, partially offset by
obligations related to securities sold under repurchase agreements of
$18 billion. The foreign currency translation impact on total liabilities,
primarily in the U.S. Retail segment, was $11 billion or 1%.
Deposits increased $78 billion largely driven by the U.S. Retail,
Canadian Retail, and Corporate segments. U.S. Retail deposits
increased primarily due to personal non-term deposits and business
and government deposits. Canadian Retail reflected increases in
business and government deposits, and personal non-term deposits.
Corporate segment’s deposits increased primarily due to senior debt
and covered bond issuances, net of maturities.
Derivatives increased $8 billion primarily due to the current interest
rate and foreign exchange environment, partially offset by netting of
positions.
Trading deposits increased $5 billion primarily due to higher issuance
of certificates of deposits and commercial paper in Wholesale Banking.
Obligations related to securities sold under repurchase agreements
decreased $18 billion primarily due to a decrease in trading volumes.
Equity was $74 billion as at October 31, 2016, an increase of $7 billion,
or 11%, from October 31, 2015. The increase was primarily due to
higher retained earnings, higher preferred shares due to new issuances,
and an increase in accumulated other comprehensive income due to
foreign currency translation.
41
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
GROUP FINANCIAL CONDITION
Credit Portfolio Quality
AT A GLANCE OVERVIEW
• Loans and acceptances net of allowance for loan losses were
$601 billion, an increase of $40 billion compared with last year.
• Impaired loans net of counterparty-specific and individually
insignificant allowances were $2,785 million, an increase of
$125 million compared with last year.
• Provision for credit losses was $2,330 million, compared with
Geographically, the credit portfolio remained concentrated in
Canada. In 2016, the percentage of loans held in Canada was 66%,
down from 68% in 2015. The largest Canadian exposure was in
Ontario, which represented 39% of total loans net of counterparty-
specific and individually insignificant allowance for loan losses for
2016, down from 40% in 2015.
The balance of the credit portfolio was predominantly in the U.S.,
$1,683 million last year.
• Total allowance for loan losses increased by $439 million
to $3,873 million.
LOAN PORTFOLIO
Overall in 2016, the Bank’s credit quality remained stable despite
uncertain economic conditions. During 2016, the Bank increased its
credit portfolio by $40 billion, or 7%, from the prior year, largely due
to volume growth in the Canadian and U.S. Retail segments and the
impact of foreign exchange.
While the majority of the credit risk exposure is related to loans and
acceptances, the Bank also engaged in activities that have off-balance
sheet credit risk. These include credit instruments and derivative financial
instruments, as explained in Note 32 of the 2016 Consolidated
Financial Statements.
CONCENTRATION OF CREDIT RISK
The Bank’s loan portfolio continued to be dominated by Canadian
and U.S. residential mortgages, consumer instalment and other
personal loans, and credit cards, representing 65% of total loans
net of counterparty-specific and individually insignificant allowances,
down from 67% in 2015. During the year, these portfolios increased
by $16 billion, or 4%, and totalled $393 billion at year end. Residential
mortgages represented 36% of the portfolio in 2016, down from 38%
in 2015. Consumer instalment and other personal loans, and credit
cards were 29% of total loans net of counterparty-specific and
individually insignificant allowances in 2016, consistent with 2015.
The Bank’s business and government credit exposure was 35% of
total loans net of counterparty-specific and individually insignificant
allowances, up from 33% in 2015. The largest business and government
sector concentrations in Canada were the real estate and financial
sectors, which comprised 4.8% and 1.7%, respectively. Real estate
was the leading U.S. sector of concentration and represented 4.7%
of net loans, up from 4.3% in 2015.
which represented 33% of the portfolio, up from 31% in 2015
primarily due to the impact of foreign exchange and volume growth in
business and government and consumer indirect auto loans. Exposures
to debt securities classified as loans, ACI loans, and other geographic
regions were relatively small. The largest U.S. exposures by state were
in New England, New Jersey, and New York which represented 6%,
6%, and 5% of total loans net of counterparty-specific and individually
insignificant allowances, respectively, compared with 7%, 6% and
5%, respectively, in the prior year.
Oil and Gas Exposure
From the beginning of fiscal 2015, West Texas Intermediate crude
oil prices fell from approximately US$80 per barrel to US$47 as at
October 31, 2016. Within the Commercial and Wholesale portfolios,
TD had $3.7 billion of drawn exposure to oil and gas producers
and services as at October 31, 2016, representing less than 1% of
the Bank’s total gross loans and acceptances outstanding. Of the
$3.7 billion drawn exposure, $1.2 billion is to investment grade
borrowers and $2.5 billion to non-investment grade borrowers based on
the Bank’s internal rating system. The portfolio of oil and gas exposure
is broadly diversified and consistent with TD’s North American strategy.
For certain producers, a borrowing base re-determination is performed
on a semi-annual basis, the results of which are used to determine
exposure levels and credit terms. Within the retail credit portfolios, TD
had $62.8 billion of consumer and small business outstanding exposure
in Alberta, Saskatchewan, and Newfoundland and Labrador as at
October 31, 2016, the regions most impacted by lower oil prices.
Excluding real estate secured lending, consumer and small business
banking drawn exposure represents 2% of the Bank’s total gross loans
and acceptances outstanding. The Bank regularly conducts stress testing
on its credit portfolios in light of current market conditions. The Bank’s
portfolios continue to perform within expectations given the current
level and near term outlook for commodity prices in this sector.
42
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 2 3
LOANS AND ACCEPTANCES, NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT
ALLOWANCES BY INDUSTRY SECTOR1
(millions of Canadian dollars, except as noted)
As at
Percentage of total
October 31
2016
October 31
2015
October 31
2014
October 31
2016
October 31
2015
October 31
2014
Counterparty-
specific and
individually
insignificant
allowances
Gross
loans
Net
loans
Net
loans
Net
loans
$ 189,299
$ 15
$ 189,284
$ 184,992
$ 175,112
31.3%
32.8%
35.4%
65,068
20,577
16,456
18,226
309,626
9
40
32
106
202
65,059
20,537
16,424
18,120
309,424
61,303
19,008
16,042
17,833
299,178
59,549
16,453
16,073
17,822
285,009
Canada
Residential mortgages
Consumer instalment and other personal
HELOC
Indirect Auto
Other
Credit card
Total personal
Real estate
Residential
Non-residential
Total real estate
Agriculture
Automotive
Financial
Food, beverage, and tobacco
Forestry
Government, public sector entities,
and education
Health and social services
Industrial construction and
16,001
12,780
28,781
6,017
5,483
10,198
2,076
523
6,589
5,480
trade contractors
Metals and mining
Pipelines, oil, and gas
Power and utilities
Professional and other services
Retail sector
Sundry manufacturing and wholesale
Telecommunications, cable, and media
Transportation
Other
Total business and government
Total Canada
2,486
1,379
3,871
1,792
4,065
2,517
2,305
2,083
1,634
3,775
91,054
$ 400,680
1 Primarily based on the geographic location of the customer’s address.
7
2
9
2
2
–
–
–
–
4
22
1
36
–
8
11
16
–
2
2
115
$ 317
15,994
12,778
28,772
6,015
5,481
10,198
2,076
523
6,589
5,476
2,464
1,378
3,835
1,792
4,057
2,506
2,289
2,083
1,632
3,773
90,939
$ 400,363
14,855
11,327
26,182
5,409
4,048
10,590
1,452
492
5,851
4,926
2,121
1,252
3,384
1,549
3,726
2,215
2,300
2,427
1,386
4,747
84,057
$ 383,235
14,592
9,766
24,358
4,586
3,288
7,616
1,641
379
4,492
4,298
1,888
1,146
2,690
1,594
3,471
2,201
1,811
945
1,070
4,258
71,732
$ 356,741
10.8
3.4
2.7
3.0
51.2
2.7
2.1
4.8
1.0
0.9
1.7
0.3
0.1
1.1
0.9
0.4
0.2
0.6
0.3
0.7
0.4
0.4
0.4
0.3
0.6
15.1
66.3%
10.9
3.4
2.8
3.2
53.1
2.6
2.0
4.6
1.0
0.7
1.9
0.3
0.1
1.0
0.9
0.4
0.2
0.6
0.3
0.7
0.4
0.4
0.4
0.2
0.8
14.9
68.0%
12.0
3.3
3.3
3.6
57.6
3.0
2.0
5.0
0.9
0.7
1.5
0.3
0.1
0.9
0.9
0.4
0.2
0.5
0.3
0.7
0.5
0.4
0.2
0.2
0.9
14.6
72.2%
43
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 2 3
LOANS AND ACCEPTANCES, NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT
ALLOWANCES BY INDUSTRY SECTOR (continued) 1
(millions of Canadian dollars, except as noted)
As at
Percentage of total
October 31
2016
October 31
2015
October 31
2014
October 31
2016
October 31
2015
October 31
2014
Counterparty-
specific and
individually
insignificant
allowances
Gross
loans
Net
loans
Net
loans
Net
loans
$ 27,662
$ 34
$ 27,628
$ 26,892
$ 23,326
4.6%
4.8%
4.7%
United States
Residential mortgages
Consumer instalment and other personal
HELOC
Indirect Auto
Other
Credit card
Total personal
Real estate
Residential
Non-residential
Total real estate
Agriculture
Automotive
Financial
Food, beverage, and tobacco
Forestry
Government, public sector entities,
and education
Health and social services
Industrial construction and
trade contractors
Metals and mining
Pipelines, oil, and gas
Power and utilities
Professional and other services
Retail sector
Sundry manufacturing and wholesale
Telecommunications, cable, and media
Transportation
Other
Total business and government
Total United States
International
Personal
Business and government
Total international
Total excluding other loans
Other loans
Debt securities classified as loans
Acquired credit-impaired loans2
Total other loans
Total
13,208
28,370
745
13,680
83,665
6,852
21,675
28,527
570
5,757
4,719
3,741
594
11,388
10,792
1,834
1,490
3,006
2,643
11,215
4,553
7,395
4,819
11,648
2,022
116,713
200,378
16
1,513
1,529
602,587
1,674
974
2,648
$ 605,235
Incurred but not identified allowance
Personal, business and government
Debt securities classified as loans
Total incurred but not identified allowance
Total, net of allowance
Percentage change over previous year –
loans and acceptances, net of
counterparty-specific and individually
insignificant allowances
Percentage change over previous year –
loans and acceptances, net of allowance
2.2
4.7
0.1
2.2
13.8
1.1
3.6
4.7
0.1
1.0
0.8
0.6
0.1
1.9
1.8
0.3
0.2
0.5
0.4
1.9
0.8
1.2
0.8
1.9
0.3
19.3
33.1
–
0.2
0.2
99.6
2.3
4.4
0.1
2.2
13.8
1.0
3.3
4.3
0.1
0.5
1.0
0.4
0.1
1.6
1.7
0.3
0.2
0.3
0.3
1.5
0.7
1.3
0.7
2.0
0.2
17.2
31.0
–
0.4
0.4
99.4
2.4
3.8
0.1
1.5
12.5
0.9
2.8
3.7
0.1
0.5
0.7
0.4
0.2
1.2
1.5
0.3
0.2
0.2
0.3
1.2
0.6
0.9
0.4
1.3
0.3
14.0
26.5
–
0.5
0.5
99.2
0.2
0.2
0.4
100.0%
0.4
0.2
0.6
100.0%
0.5
0.3
0.8
100.0%
76
6
3
184
303
7
12
19
–
1
3
2
7
1
5
4
4
25
1
8
8
6
1
1
8
104
407
–
–
–
724
206
62
268
$ 992
13,132
28,364
742
13,496
83,362
6,845
21,663
28,508
570
5,756
4,716
3,739
587
11,387
10,787
1,830
1,486
2,981
2,642
11,207
4,545
7,389
4,818
11,647
2,014
116,609
199,971
16
1,513
1,529
601,863
1,468
912
2,380
$ 604,243
13,285
24,855
690
12,165
77,887
5,680
18,303
23,983
467
3,025
5,877
2,534
562
9,088
9,716
1,491
1,160
1,485
1,797
8,663
4,207
7,002
4,068
11,115
891
97,131
175,018
5
1,978
1,983
560,236
1,980
1,331
3,311
$ 563,547
11,646
18,777
613
7,543
61,905
4,288
14,023
18,311
363
2,529
3,342
2,085
469
6,422
7,371
1,300
1,075
940
1,269
6,403
3,150
4,257
1,985
7,164
908
69,343
131,248
9
2,124
2,133
490,122
2,482
1,616
4,098
$ 494,220
2,826
55
2,881
$ 601,362
2,503
57
2,560
$ 560,987
2,172
59
2,231
$ 491,989
7.2%
14.0%
9.0%
7.2
14.0
9.0
1 Primarily based on the geographic location of the customer’s address.
2 Includes all FDIC covered loans and other ACI loans.
44
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 2 4
LOANS AND ACCEPTANCES, NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT
ALLOWANCES BY GEOGRAPHY1,2
(millions of Canadian dollars, except as noted)
As at
Percentage of total
October 31
2016
October 31
2015
October 31
2014
October 31
2016
October 31
2015
October 31
2014
Counterparty-
specific and
individually
insignificant
allowances
Gross
loans
Net
loans
Net
loans
Net
loans
Canada
Atlantic provinces
British Columbia3
Ontario3
Prairies3
Québec
Total Canada
United States
Carolinas (North and South)
Florida
New England4
New Jersey
New York
Pennsylvania
Other
Total United States
International
Europe
Other
Total international
Total excluding other loans
Other loans
Total
$ 10,909
54,195
236,667
67,585
31,324
400,680
9,803
13,893
38,831
33,961
31,370
13,171
59,349
200,378
500
1,029
1,529
602,587
2,648
$ 605,235
Incurred but not identified allowance
Total, net of allowance
Percentage change over previous year –
loans and acceptances, net of
counterparty-specific and individually
insignificant allowances for loan losses
Canada
United States
International
Other loans
Total
$ 14
26
159
87
31
317
$ 10,895
54,169
236,508
67,498
31,293
400,363
$ 10,706
51,979
224,532
66,083
29,935
383,235
$ 10,350
50,137
202,734
64,151
29,369
356,741
15
23
87
51
47
27
157
407
–
–
–
724
268
$ 992
9,788
13,870
38,744
33,910
31,323
13,144
59,192
199,971
500
1,029
1,529
601,863
2,380
$ 604,243
2,881
$ 601,362
8,293
12,015
36,781
31,749
26,363
14,008
45,809
175,018
196
1,787
1,983
560,236
3,311
$ 563,547
2,560
$ 560,987
6,390
8,836
30,903
23,459
23,677
8,514
29,469
131,248
369
1,764
2,133
490,122
4,098
$ 494,220
2,231
$ 491,989
2016
4.5%
14.3
(22.9)
(28.1)
7.2%
2015
7.4%
33.3
(7.0)
(19.2)
14.0%
2014
6.5%
19.1
(5.2)
(31.0)
9.0%
1.8%
9.0
39.1
11.2
5.2
66.3
1.6
2.3
6.4
5.6
5.2
2.2
9.8
33.1
–
0.2
0.2
99.6
0.4
100.0%
1.9%
9.2
39.9
11.7
5.3
68.0
1.5
2.1
6.5
5.6
4.7
2.5
8.1
31.0
–
0.4
0.4
99.4
0.6
100.0%
2.1%
10.2
41.0
13.0
5.9
72.2
1.3
1.8
6.2
4.7
4.8
1.7
6.0
26.5
0.1
0.4
0.5
99.2
0.8
100.0%
1 Certain comparative amounts have been reclassified to conform with the
presentation adopted in the current period.
3 The territories are included as follows: Yukon is included in British Columbia; Nunavut
is included in Ontario; and Northwest Territories is included in the Prairies region.
2 Primarily based on the geographic location of the customer’s address.
4 The states included in New England are as follows: Connecticut, Maine,
Massachusetts, New Hampshire, and Vermont.
REAL ESTATE SECURED LENDING
Retail real estate secured lending includes mortgages and lines of
credit to North American consumers to satisfy financing needs including
home purchases and refinancing. While the Bank retains first lien on
the majority of properties held as security, there is a small portion of
loans with second liens, but most of these are behind a TD mortgage
that is in first position. In Canada, credit policies ensure that the
combined exposure of all uninsured facilities on one property does
not exceed 80% of the collateral value at origination. Lending at
a higher loan-to-value ratio is permitted by legislation but requires
default insurance. This insurance is contractual coverage for the life
of eligible facilities and protects the Bank’s real estate secured lending
portfolio against potential losses caused by borrower default. The Bank
also purchases default insurance on lower loan-to-value ratio loans.
The insurance is provided by either government-backed entities or
approved private mortgage insurers. In the U.S., for residential
mortgage originations, mortgage insurance is usually obtained from
either government-backed entities or approved private mortgage
insurers when the loan-to-value exceeds 80% of the collateral value
at origination.
The Bank regularly performs stress tests on its real estate lending
portfolio as part of its overall stress testing program. This is done with a
view to determine the extent to which the portfolio would be vulnerable
to a severe downturn in economic conditions. The effect of severe
changes in house prices, interest rates, and unemployment levels are
among the factors considered when assessing the impact on credit losses
and the Bank’s overall profitability. A variety of portfolio segments,
including dwelling type and geographical regions, are examined during
the exercise to determine whether specific vulnerabilities exist. Based
on the Bank’s most recent reviews, potential losses on all real estate
secured lending exposures are considered manageable.
45
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 2 5
REAL ESTATE SECURED LENDING1,2
(millions of Canadian dollars,
except as noted)
Residential mortgages
Insured3
Uninsured
Home equity lines of credit
Insured3
Uninsured
As at
Total
Insured3
Uninsured
October 31, 2016
Canada
Atlantic provinces
British Columbia4
Ontario4
Prairies4
Québec
Total Canada
United States
Total
Canada
Atlantic provinces
British Columbia4
Ontario4
Prairies4
Québec
Total Canada
United States
Total
2.1% $ 1,940
$ 4,007
16,789
17,134
9.1
42,234
48,307 25.5
12,999
27,236 14.4
11,750
6,903
6.2
108,434 57.3% 80,865
27,120
$ 107,985
917
$ 109,351
1.0% $
8.9
22.3
6.9
3.6
42.7%
515
2,639
9,053
4,100
1,595
17,902
10
$ 17,912
0.8% $ 1,052
9,211
4.1
25,181
13.9
8,321
6.3
3,401
2.5
27.6% 47,166
13,280
$ 60,446
14.2
38.6
12.8
5.2
1.6% $ 4,522
19,773
57,360
31,336
13,345
72.4% 126,336
927
$ 127,263
1.8% $ 2,992
26,000
7.8
67,415
22.6
21,320
12.3
10,304
5.2
49.7% 128,031
40,400
$ 168,431
1.2%
10.2
26.4
8.4
4.1
50.3%
$ 4,086
19,364 10.5
29.0
15.1
6.7
2.2% $ 1,675
14,099
34,447
53,592
11,477
27,890
12,435
5,944
117,367 63.5% 67,642
26,413
$ 94,055
951
$ 118,318
October 31, 2015
0.9% $
7.6
18.6
6.2
3.2
36.5%
580
3,173
10,603
4,607
1,816
20,779
10
$ 20,789
0.9% $
5.2
17.4
7.5
3.0
965
7,798
21,411
7,596
2,768
34.0% 40,538
13,439
$ 53,977
12.7
34.8
12.4
4.5
1.6% $ 4,666
22,537
64,195
32,497
14,251
66.0% 138,146
961
$ 139,107
1.9% $ 2,640
21,897
9.1
55,858
26.1
19,073
13.2
8,712
5.8
56.1% 108,180
39,852
$ 148,032
1.1%
8.9
22.7
7.7
3.5
43.9%
1 Geographic location is based on the address of the property mortgaged.
2 Excludes loans classified as trading as the Bank intends to sell the loans
immediately or in the near term, and loans designated at fair value through
profit or loss for which no allowance is recorded.
3 Default insurance is contractual coverage for the life of eligible facilities whereby
the Bank’s exposure to real estate secured lending, all or in part, is protected against
potential losses caused by borrower default. It is provided by either government-
backed entities or other approved private mortgage insurers.
4 The territories are included as follows: Yukon is included in British Columbia; Nunavut
is included in Ontario; and the Northwest Territories is included in the Prairies region.
The following table provides a summary of the Bank’s residential
mortgages by remaining amortization period. All figures are calculated
based on current customer payment behaviour in order to properly
reflect the propensity to prepay by borrowers. The current customer
payment basis accounts for any accelerated payments made to-date
and projects remaining amortization based on existing balance
outstanding and current payment terms.
T A B L E 2 6
RESIDENTIAL MORTGAGES BY REMAINING AMORTIZATION1,2
Canada
United States
Total
Canada
United States
Total
<5
years
5– <10
years
10– <15
years
15– <20
years
20– <25
years
25– <30
years
30– <35
years
>=35
years
As at
Total
1.1%
3.7
1.5%
4.2%
4.8
4.2%
7.7%
12.1
8.2%
14.3%
4.7
13.1%
39.4%
14.7
36.3%
31.7%
58.5
35.2%
1.6%
1.2
1.5%
–% 100.0%
0.3
100.0
–% 100.0%
October 31, 2016
1.2%
2.6
1.4%
4.4%
2.9
4.3%
7.9%
16.1
8.9%
14.3%
4.1
13.0%
37.5%
12.3
34.3%
31.8%
61.2
35.4%
2.9%
0.6
2.6%
–% 100.0%
100.0
0.2
0.1% 100.0%
October 31, 2015
1 Excludes loans classified as trading as the Bank intends to sell the loans
immediately or in the near term, and loans designated at fair value through
profit or loss for which no allowance is recorded.
2 Percentage based on outstanding balance.
46
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 2 7
UNINSURED AVERAGE LOAN-TO-VALUE – Newly Originated and Newly Acquired1,2,3
Canada
Atlantic provinces
British Columbia5
Ontario5
Prairies5
Québec
Total Canada
United States
Total
October 31, 2016
October 31, 2015
Residential Home equity
mortgages
lines of credit4,6
Total
Residential
mortgages
Home equity
lines of credit4,6
Total
73%
67
69
73
72
69
67
69%
69%
62
65
69
71
65
62
64%
72%
65
67
71
72
68
65
67%
73%
68
69
73
72
70
69
70%
68%
62
65
68
70
65
62
65%
71%
66
67
71
71
68
66
68%
1 Geographic location is based on the address of the property mortgaged.
2 Excludes loans classified as trading as the Bank intends to sell the loans
4 Home equity lines of credit loan-to-value includes first position collateral mortgage
if applicable.
immediately or in the near term, and loans designated at fair value through
profit or loss for which no allowance is recorded.
5 The territories are included as follows: Yukon is included in British Columbia; Nunavut
is included in Ontario; and the Northwest Territories is included in the Prairies region.
3 Based on house price at origination.
6 Home equity lines of credit fixed rate advantage option is included in loan-to-
value calculation.
IMPAIRED LOANS
A loan is considered impaired when there is objective evidence that
there has been a deterioration of credit quality to the extent that the
Bank no longer has reasonable assurance as to the timely collection
of the full amount of principal and interest. Excluding debt securities
classified as loans, FDIC covered loans, and other ACI loans, gross
impaired loans increased $265 million, or 8%, compared with the prior
year, due to new credit impaired formations outpacing resolutions and
the impact of foreign exchange.
In Canada, net impaired loans decreased by $9 million, or 1% in
2016. Residential mortgages, consumer instalment and other personal
loans, and credit cards, generated impaired loans net of counterparty-
specific and individually insignificant allowances of $600 million,
a decrease of $25 million, or 4%, compared to with the prior year.
Business and government loans had $137 million in net impaired loans,
an increase of $16 million, or 13%, compared with the prior year,
primarily due to new credit impaired formations in the metals and
mining, industrial construction and trade contractors, and health and
social services sectors.
In the U.S., net impaired loans increased by $134 million, or 7% in
2016. Residential mortgages, consumer instalment and other personal
loans, and credit cards, had net impaired loans of $1,513 million, an
increase of $168 million, or 12%, compared with the prior year, due
primarily to U.S. home equity line of credit new formations and the
impact of foreign exchange. Business and government loans generated
$535 million in net impaired loans, a decrease of $34 million, or 6%,
compared with the prior year primarily due to decreases in the real
estate and retail sectors, offset by an increase in the pipelines, oil
and gas sector.
Geographically, 26% of total impaired loans net of counterparty-
specific and individually insignificant allowances were generated by
Canada and 74% by the U.S. Net impaired loans in Canada were
concentrated in Ontario, which represented 10% of total net impaired
loans, down from 12% in the prior year. U.S. net impaired loans were
concentrated in New England, New Jersey and New York representing
20%, 14% and 12% respectively of net impaired loans, compared
with 20%, 15% and 12%, respectively, in the prior year.
T A B L E 2 8
CHANGES IN GROSS IMPAIRED LOANS AND ACCEPTANCES
(millions of Canadian dollars)
Personal, Business and Government Loans1,2
Impaired loans as at beginning of period
Classified as impaired during the period
Transferred to not impaired during the period
Net repayments
Disposals of loans
Amounts written off
Recoveries of loans and advances previously written off
Exchange and other movements
Impaired loans as at end of year
2016
2015
2014
$ 3,244
5,621
(1,521)
(1,523)
(4)
(2,350)
–
42
$ 3,509
$ 2,731
4,836
(1,179)
(1,257)
(8)
(2,141)
–
262
$ 3,244
$ 2,692
4,613
(1,352)
(1,157)
(7)
(2,178)
–
120
$ 2,731
1 Excludes debt securities classified as loans. For additional information refer to the
“Exposure to Non-Agency Collateralized Mortgage Obligations” section of this
document and Note 8 of the 2016 Consolidated Financial Statements.
2 Excludes FDIC covered loans and other ACI loans. For additional information refer
to the “Exposure to Acquired Credit-Impaired Loans” discussion and table in this
section of the document and Note 8 of the 2016 Consolidated Financial Statements.
47
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 2 9
IMPAIRED LOANS NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT ALLOWANCES
BY INDUSTRY SECTOR1,2,3
(millions of Canadian dollars,
except as noted)
Oct. 31
2016
Oct. 31
2015
Oct. 31
2014
Oct. 31
2013
Oct. 31 Oct. 31
2016
2012
Oct. 31
2015
Oct. 31
2014
Oct. 31
2013
Oct. 31
2012
As at
Percentage of total
Counterparty-
specific and
individually
insignificant
allowances
Gross
impaired
loans
Net
impaired
loans
Net
impaired
loans
Net
impaired
loans
Net
impaired
loans
Net
impaired
loans
Canada
Residential mortgages
Consumer instalment and
other personal
HELOC
Indirect Auto
Other
Credit card
Total personal
Real estate
Residential
Non-residential
Total real estate
Agriculture
Automotive
Financial
Food, beverage,
and tobacco
Forestry
Government, public sector
entities, and education
Health and social services
Industrial construction
and trade contractors
Metals and mining
Pipelines, oil, and gas
Power and utilities
Professional and
other services
Retail sector
Sundry manufacturing
and wholesale
Telecommunications,
cable, and media
Transportation
Other
Total business and government
Total Canada
$ 400
$ 15
$ 385
$ 378
$ 427
$ 434
$ 465
13.9%
14.2%
19.0%
19.3%
22.1%
149
49
52
152
802
9
40
32
106
202
140
9
20
46
600
166
17
19
45
625
249
17
20
66
779
301
16
21
43
815
306
14
30
95
910
5.0
0.3
0.7
1.7
21.6
6.2
0.7
0.7
1.7
23.5
11.1
0.8
0.9
2.9
34.7
13.4
0.7
0.9
2.0
36.3
14.6
0.7
1.4
4.5
43.3
10
9
19
11
3
2
2
–
–
15
33
19
87
–
12
22
19
7
2
9
2
2
–
–
–
–
4
22
1
36
–
8
11
16
3
7
10
9
1
2
2
–
–
11
11
18
51
–
4
11
3
6
7
13
3
1
1
1
–
1
3
2
6
68
–
4
9
2
10
4
14
5
1
1
–
2
3
5
1
1
1
–
4
7
2
13
5
18
5
–
1
3
1
4
2
6
9
20
–
3
18
7
15
1
16
4
2
21
2
4
2
17
6
1
1
–
4
22
8
0.1
0.3
0.4
0.3
–
0.1
0.1
–
–
0.4
0.4
0.7
1.8
–
0.1
0.4
0.1
0.2
0.3
0.5
0.1
–
–
–
–
–
0.1
0.1
0.2
2.6
–
0.2
0.3
0.1
0.4
0.2
0.6
0.3
–
–
–
0.1
0.1
0.3
–
–
–
–
0.2
0.4
0.1
0.6
0.2
0.8
0.2
–
0.1
0.1
0.1
0.2
0.1
0.2
0.4
0.9
–
0.1
0.8
0.3
0.7
0.1
0.8
0.2
0.1
1.0
0.1
0.2
0.1
0.8
0.3
0.1
0.1
–
0.2
1.0
0.3
–
2
6
252
$ 1,054
–
2
2
115
$ 317
–
–
4
137
$ 737
2
2
3
121
$ 746
1
1
5
54
$ 833
–
1
2
100
$ 915
19
–
3
132
$ 1,042
–
–
0.1
4.9
26.5%
0.1
0.1
0.1
4.5
28.0%
–
–
0.3
2.4
37.1%
–
0.1
0.1
4.5
40.8%
0.9
–
0.1
6.3
49.6%
1 Primarily based on the geographic location of the customer’s address.
2 Excludes FDIC covered loans and other ACI loans. For additional information refer
to the “Exposure to Acquired Credit-Impaired Loans” discussion and table in this
section of the document and Note 8 of the 2016 Consolidated Financial Statements.
3 Excludes debt securities classified as loans. For additional information refer to
the “Exposure to Non-Agency Collateralized Mortgage Obligations” section of
this document and Note 8 of the 2016 Consolidated Financial Statements.
48
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 2 9
IMPAIRED LOANS NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT ALLOWANCES
BY INDUSTRY SECTOR (continued) 1,2,3
(millions of Canadian dollars,
except as noted)
Oct. 31
2016
Oct. 31
2015
Oct. 31
2014
Oct. 31
2013
Oct. 31 Oct. 31
2016
2012
Oct. 31
2015
Oct. 31
2014
Oct. 31
2013
Oct. 31
2012
As at
Percentage of total
Counterparty-
specific and
individually
insignificant
allowances
Gross
impaired
loans
Net
impaired
loans
Net
impaired
loans
Net
impaired
loans
Net
impaired
loans
Net
impaired
loans
$ 452
$ 34 $ 418 $ 361 $ 303 $ 250 $ 187
15.0%
13.6%
13.5%
11.1%
8.9%
United States
Residential mortgages
Consumer instalment and
other personal
HELOC
Indirect Auto
Other
Credit card
Total personal
Real estate
Residential
Non-residential
Total real estate
Agriculture
Automotive
Financial
Food, beverage,
and tobacco
Forestry
Government, public sector
entities, and education
Health and social services
Industrial construction
and trade contractors
Metals and mining
Pipelines, oil, and gas
Power and utilities
Professional and
other services
Retail sector
Sundry manufacturing
and wholesale
Telecommunications,
cable, and media
Transportation
Other
Total business and government
Total United States
International
Business and government
Total international
Total
Net impaired loans as a
% of common equity
61
99
160
1
15
27
6
19
9
34
26
8
102
1
83
51
47
10
26
14
639
2,455
–
–
$ 3,509
939
196
7
222
1,816
76
6
3
184
303
863
190
4
38
1,513
780
155
5
44
1,345
325
128
4
29
789
79
154
233
1
14
25
9
1
16
49
26
9
–
–
84
80
39
204
76
1
98
629
98
205
303
1
12
8
10
1
19
23
46
18
–
–
68
99
28
179
24
2
3
395
133
191
324
2
15
6
7
1
7
18
40
26
4
–
41
70
46
7
12
19
–
1
3
2
7
1
5
4
4
25
1
8
8
6
54
87
141
1
14
24
4
12
8
29
22
4
77
–
75
43
41
68
133
201
1
11
26
7
–
8
38
30
13
6
–
74
65
40
1
1
8
104
407
9
25
6
535
2,048
13
31
5
569
1,914
16
15
5
622
1,411
12
39
12
699
1,328
10
32
14
663
1,058
–
–
–
–
$ 724 $ 2,785 $ 2,660 $ 2,244 $ 2,243 $ 2,100
–
–
–
–
–
–
–
–
4.09%
4.24%
4.28%
4.83%
4.86%
31.0
6.8
0.1
1.4
54.3
29.3
5.8
0.2
1.7
50.6
1.9
3.1
5.0
–
0.5
0.9
0.1
0.4
0.3
1.1
0.8
0.1
2.8
–
2.7
1.6
1.5
0.3
0.9
0.2
19.2
73.5
–
–
2.6
5.0
7.6
–
0.4
1.0
0.3
–
0.3
1.4
1.1
0.5
0.2
–
2.8
2.4
1.5
0.5
1.2
0.2
21.4
72.0
–
–
14.5
5.7
0.2
1.3
35.2
3.5
6.9
10.4
–
0.6
1.1
0.4
–
0.7
2.2
1.2
0.4
–
–
3.7
3.6
1.7
0.7
0.7
0.3
27.7
62.9
–
–
9.1
3.4
0.1
4.3
28.0
4.4
9.1
13.5
0.1
0.5
0.4
0.4
0.1
0.8
1.0
2.1
0.8
–
–
3.0
4.4
1.3
0.5
1.8
0.5
31.2
59.2
–
–
8.5
1.2
0.1
0.1
18.8
6.3
9.1
15.4
0.1
0.7
0.3
0.3
0.1
0.3
0.8
1.9
1.2
0.2
–
2.0
3.4
2.2
0.5
1.5
0.7
31.6
50.4
–
–
100.0% 100.0% 100.0% 100.0% 100.0%
1 Primarily based on the geographic location of the customer’s address.
2 Excludes FDIC covered loans and other ACI loans. For additional information refer
to the “Exposure to Acquired Credit-Impaired Loans” discussion and table in this
section of the document and Note 8 of the 2016 Consolidated Financial Statements.
3 Excludes debt securities classified as loans. For additional information refer to
the “Exposure to Non-Agency Collateralized Mortgage Obligations” section of
this document and Note 8 of the 2016 Consolidated Financial Statements.
49
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 3 0
IMPAIRED LOANS NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT ALLOWANCES
FOR LOAN LOSSES BY GEOGRAPHY1,2,3,4
(millions of Canadian dollars, except as noted)
As at
Percentage of total
October 31
2016
October 31
2015
October 31
2014
October 31
2016
October 31
2015
October 31
2014
Canada
Atlantic provinces
British Columbia5
Ontario5
Prairies5
Québec
Total Canada
United States
Carolinas (North and South)
Florida
New England6
New Jersey
New York
Pennsylvania
Other
Total United States
Total
Counterparty-
specific and
individually
insignificant
allowances
Gross
impaired
loans
Net
impaired
loans
Net
impaired
loans
$
46
111
436
318
143
1,054
113
177
651
447
375
188
504
2,455
$ 3,509
$ 14
26
159
87
31
317
15
23
87
51
47
27
157
407
$ 724
$
32
85
277
231
112
737
98
154
564
396
328
161
347
2,048
$ 2,785
$
34
109
318
156
129
746
110
163
524
387
318
171
241
1,914
$ 2,660
Net
impaired
loans
$
38
185
332
149
129
833
67
96
419
322
202
147
158
1,411
$ 2,244
1.2%
3.1
9.9
8.3
4.0
26.5
3.5
5.5
20.2
14.2
11.8
5.8
12.5
73.5
100.0%
1.3%
4.1
11.9
5.9
4.8
28.0
4.1
6.1
19.7
14.6
12.0
6.4
9.1
72.0
100.0%
1.7%
8.2
14.8
6.6
5.8
37.1
3.0
4.3
18.7
14.3
9.0
6.6
7.0
62.9
100.0%
Net impaired loans as a % of net loans7
0.46%
0.48%
0.46%
1 Certain comparative amounts have been reclassified to conform with the
presentation adopted in the current period.
2 Primarily based on the geographic location of the customer’s address.
3 Excludes FDIC covered loans and other ACI loans. For additional information refer
to the “Exposure to Acquired Credit-Impaired Loans” discussion and table in this
section of the document and Note 8 of the 2016 Consolidated Financial Statements.
4 Excludes debt securities classified as loans. For additional information refer to
the “Exposure to Non-Agency Collateralized Mortgage Obligations” section of
this document and Note 8 of the 2016 Consolidated Financial Statements.
ALLOWANCE FOR CREDIT LOSSES
Total allowance for credit losses consists of counterparty-specific and
collectively assessed allowances. The allowance is increased by the
PCL, and decreased by write-offs net of recoveries and disposals.
The Bank maintains the allowance at levels that management believes
is adequate to absorb incurred credit-related losses in the lending
portfolio. Individual problem accounts, general economic conditions,
loss experience, as well as the sector and geographic mix of the
lending portfolio are all considered by management in assessing the
appropriate allowance levels.
Counterparty-specific allowance
The Bank establishes counterparty-specific allowances for individually
significant impaired loans when the estimated realizable value of the
loan is less than its recorded value, based on the discounting of
expected future cash flows.
During 2016, counterparty-specific allowances increased by
$30 million, or 8%, resulting in a total counterparty-specific allowance
of $399 million primarily due to an increase in the oil and gas sector
and the impact of foreign exchange. Excluding debt securities classified
as loans, FDIC covered loans and other ACI loans, counterparty-specific
allowances increased by $33 million, or 21% from the prior year,
primarily due to an increase in the oil and gas sector and the impact
of foreign exchange.
5 The territories are included as follows: Yukon is included in British Columbia; Nunavut
is included in Ontario; and the Northwest Territories is included in the Prairies region.
6 The states included in New England are as follows: Connecticut, Maine,
Massachusetts, New Hampshire, and Vermont.
7 Includes customers’ liability under acceptances.
Collectively assessed allowance for individually insignificant
impaired loans
Individually insignificant loans, such as the Bank’s personal and small
business banking loans and credit cards, are collectively assessed
for impairment. Allowances are calculated using a formula that
incorporates recent loss experience, historical default rates, and the
type of collateral pledged.
During 2016, the collectively assessed allowance for individually
insignificant impaired loans increased by $88 million, or 17%, resulting
in a total of $593 million, primarily due to the U.S. credit card portfolio
and the impact of foreign exchange. Excluding FDIC covered loans and
other ACI loans, the collectively assessed allowance for individually
insignificant impaired loans increased by $107 million, or 25% from
the prior year, primarily due to the U.S. credit card portfolio and the
impact of foreign exchange.
Collectively assessed allowance for incurred but not identified
credit losses
The collectively assessed allowance for incurred but not identified
credit losses is established to recognize losses that management
estimates to have occurred in the portfolio at the balance sheet
date for loans not yet specifically identified as impaired. The level
of collectively assessed allowance for incurred but not identified
losses reflects exposures across all portfolios and categories. The
collectively assessed allowance for incurred but not identified credit
losses is reviewed on a quarterly basis using credit risk models and
management’s judgment. The allowance level is calculated using
the probability of default (PD), the loss given default (LGD), and the
exposure at default (EAD) of the related portfolios. The PD is the
likelihood that a borrower will not be able to meet its scheduled
repayments. The LGD is the amount of the loss the Bank would likely
incur when a borrower defaults on a loan, which is expressed as a
percentage of EAD. EAD is the total amount the Bank expects to be
exposed to at the time of default.
50
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
For the commercial and wholesale portfolios, allowances are
estimated using borrower specific information. The LGD is based on
the security and structure of the facility; EAD is a function of the
current usage, the borrower’s risk rating, and the committed amount
of the facility. For the consumer lending and small business banking
portfolios, the collectively assessed allowance for incurred but not
identified credit losses is calculated on a pooled portfolio level with
each pool comprising exposures with similar credit risk characteristics
segmented, for example by product type and PD estimate. Recovery
data models are used in the determination of the LGD for each
pool. EAD is a function of the current usage and historical exposure
experience at default.
As at October 31, 2016, the collectively assessed allowance for
incurred but not identified credit losses was $3,381 million, up from
$2,873 million as at October 31, 2015. Excluding debt securities
classified as loans, the collectively assessed allowance for incurred
but not identified credit losses increased by $509 million, or 18%
from the prior year, primarily due to changes in risk, volume growth,
and the impact of foreign exchange. The Bank periodically reviews
the methodology for calculating the allowance for incurred but not
identified credit losses. As part of this review, certain revisions may
be made to reflect updates in statistically derived loss estimates for
the Bank’s recent loss experience of its credit portfolios, which may
cause the Bank to provide or release amounts from the allowance
for incurred but not identified losses. During the year ended
October 31, 2016, certain refinements were made to the methodology,
the cumulative effect of which was not material. Allowance for credit
losses are further described in Note 8 of the 2016 Consolidated
Financial Statements.
PROVISION FOR CREDIT LOSSES
The PCL is the amount charged to income to bring the total allowance
for credit losses, including both counterparty-specific and collectively
assessed allowances, to a level that management considers adequate
to absorb incurred credit-related losses in the Bank’s loan portfolio.
Provisions in the year are reduced by any recoveries in the year.
The Bank recorded a total PCL of $2,330 million in 2016, compared
with a total PCL of $1,683 million in 2015. This amount comprised
$1,871 million of counterparty-specific and individually insignificant
provisions and $459 million in collectively assessed incurred but not
identified provisions. The total PCL as a percentage of net average
loans and acceptances increased to 0.40% from 0.32%.
In Canada, residential mortgages, consumer instalment and other
personal loans, and credit cards, required counterparty-specific and
individually insignificant provisions of $945 million, an increase of
$117 million, or 14%, compared to 2015 primarily due to increases
in provisions for the indirect auto portfolio. Business and government
loans required counterparty-specific and individually insignificant
provisions of $103 million, an increase of $41 million, or 66%,
compared to 2015 primarily in the professional and other services
and pipeline, oil and gas sectors.
In the U.S., residential mortgages, consumer instalment and other
personal loans, and credit cards, required counterparty-specific and
individually insignificant provisions of $807 million, an increase of
$177 million, or 28%, compared to 2015, primarily due to increases in
provisions for the credit card portfolio. Business and government loans
required counterparty-specific and individually insignificant provisions
of $39 million, a decrease of $41 million, compared to 2015 primarily
due to higher recoveries across various industries offset by higher
provisions in the pipeline, oil and gas sector.
Geographically, 56% of counterparty-specific and individually
insignificant provisions were attributed to Canada and 45% to the U.S.
Canadian counterparty-specific and individually insignificant provisions
were concentrated in Ontario, which represented 21% of total
counterparty-specific and individually insignificant provisions, down
from 27% in 2015. U.S. counterparty-specific and individually
insignificant provisions were concentrated in New England, New York,
and New Jersey, representing 6%, 5% and 4%, respectively, of total
counterparty-specific and individually insignificant provisions, down
from 9%, 5% and 6% respectively, in the prior year.
The following table provides a summary of provisions charged to the
Consolidated Statement of Income.
T A B L E 3 1
PROVISION FOR CREDIT LOSSES1
(millions of Canadian dollars)
Provision for credit losses – counterparty-specific and individually insignificant
Provision for credit losses – counterparty-specific
Provision for credit losses – individually insignificant
Recoveries
Total provision for credit losses for counterparty-specific and individually insignificant
Provision for credit losses – incurred but not identified
Canadian Retail and Wholesale Banking2
U.S. Retail
Corporate3
Total provision for credit losses – incurred but not identified
Provision for credit losses
1 Certain comparative amounts have been recast to conform with revised
presentation for the U.S. strategic cards portfolio adopted in fiscal 2016.
For further details, refer to the “Business Focus” section of this document.
2 The incurred but not identified PCL is included in the Corporate segment results
for management reporting.
3 The retailer program partners’ share of the U.S. strategic cards portfolio.
2016
2015
2014
$ 139
2,334
(602)
1,871
165
210
84
459
$ 2,330
$
76
2,062
(601)
1,537
44
76
26
146
$ 1,683
$ 168
1,849
(533)
1,484
8
8
57
73
$ 1,557
51
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 3 2
PROVISION FOR CREDIT LOSSES BY INDUSTRY SECTOR1
(millions of Canadian dollars, except as noted)
For the years ended
Percentage of total
October 31
2016
October 31
2015
October 31
2014
October 31
2016
October 31
2015
October 31
2014
Provision for credit losses – counterparty-specific
and individually insignificant
Canada
Residential mortgages
Consumer instalment and other personal
HELOC
Indirect auto
Other
Credit card
Total personal
Real estate
Residential
Non-residential
Total real estate
Agriculture
Automotive
Financial
Food, beverage, and tobacco
Forestry
Government, public sector entities, and education
Health and social services
Industrial construction and trade contractors
Metals and mining
Pipelines, oil, and gas
Professional and other services
Retail sector
Sundry manufacturing and wholesale
Telecommunications, cable, and media
Transportation
Other
Total business and government
Total Canada
United States
Residential mortgages
Consumer instalment and other personal
HELOC
Indirect auto
Other
Credit card
Total personal
Real estate
Residential
Non-residential
Total real estate
Agriculture
Automotive
Financial
Food, beverage, and tobacco
Forestry
Government, public sector entities, and education
Health and social services
Industrial construction and trade contractors
Metals and mining
Pipelines, oil, and gas
Power and utilities
Professional and other services
Retail sector
Sundry manufacturing and wholesale
Telecommunications, cable, and media
Transportation
Other
Total business and government
Total United States
Total excluding other loans
Other loans
Debt securities classified as loans
Acquired credit-impaired loans2
Total other loans
Total provision for credit losses – counterparty-specific
and individually insignificant
Provision for credit losses – incurred but not identified
Personal, business and government
Debt securities classified as loans
Total provision for credit losses – incurred but not identified
Total provision for credit losses
1 Primarily based on the geographic location of the customer’s address.
2 Includes all FDIC covered loans and other ACI loans.
52
$
15
$
25
$
15
0.8%
1.6%
1.0%
5
253
169
503
945
–
–
–
–
1
–
(3)
–
(1)
4
11
1
43
9
12
14
1
4
7
103
1,048
16
58
146
96
491
807
(5)
6
1
–
1
(3)
1
7
(6)
2
(1)
3
25
1
(2)
(4)
(4)
3
1
14
39
846
1,894
8
(31)
(23)
7
153
148
495
828
(3)
3
–
2
2
–
11
–
–
–
21
(1)
21
(18)
9
–
–
4
11
62
890
24
69
123
77
337
630
–
15
15
–
4
1
4
–
2
2
9
–
–
–
8
11
18
2
–
4
80
710
1,600
(27)
(36)
(63)
8
137
167
462
789
(1)
3
2
1
2
1
–
–
–
2
9
2
(2)
31
19
9
1
6
1
84
873
8
38
148
59
309
562
(7)
(4)
(11)
–
2
(13)
(1)
–
(1)
8
6
–
–
–
7
3
9
–
(2)
13
20
582
1,455
31
(2)
29
0.3
13.5
9.0
26.9
50.5
–
–
–
–
0.1
–
(0.2)
–
(0.1)
0.2
0.6
0.1
2.3
0.5
0.6
0.7
0.1
0.2
0.4
5.5
56.0
0.9
3.1
7.8
5.1
26.2
43.1
(0.3)
0.4
0.1
–
0.1
(0.2)
0.1
0.4
(0.4)
0.1
(0.1)
0.2
1.2
0.1
(0.1)
(0.2)
(0.2)
0.2
0.1
0.7
2.1
45.2
101.2
0.4
(1.6)
(1.2)
0.4
10.0
9.6
32.2
53.8
(0.2)
0.2
–
0.1
0.1
–
0.7
–
–
–
1.4
(0.1)
1.4
(1.1)
0.6
–
–
0.3
0.7
4.1
57.9
1.6
4.5
8.0
5.0
21.9
41.0
–
1.0
1.0
–
0.3
0.1
0.3
–
0.1
0.1
0.6
–
–
–
0.5
0.7
1.1
0.1
–
0.3
5.2
46.2
104.1
(1.8)
(2.3)
(4.1)
0.6
9.2
11.3
31.1
53.2
(0.1)
0.2
0.1
0.1
0.1
0.1
–
–
–
0.1
0.6
0.1
(0.1)
2.1
1.2
0.6
0.1
0.4
0.1
5.6
58.8
0.6
2.5
10.0
4.0
20.8
37.9
(0.5)
(0.3)
(0.8)
–
0.1
(0.9)
(0.1)
–
(0.1)
0.6
0.4
–
–
–
0.5
0.2
0.6
–
(0.1)
0.9
1.3
39.2
98.0
2.1
(0.1)
2.0
$ 1,871
$ 1,537
$ 1,484
100.0%
100.0%
100.0%
463
(4)
459
$ 2,330
157
(11)
146
$ 1,683
120
(47)
73
$ 1,557
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 3 3
PROVISION FOR CREDIT LOSSES BY GEOGRAPHY1,2
(millions of Canadian dollars, except as noted)
For the years ended
Percentage of total
October 31
2016
October 31
2015
October 31
2014
October 31
2016
October 31
2015
October 31
2014
Canada
Atlantic provinces
British Columbia3
Ontario3
Prairies3
Québec
Total Canada
United States
Carolinas (North and South)
Florida
New England4
New Jersey
New York
Pennsylvania
Other
Total United States
International
Other
Total international
Total excluding other loans
Other loans
Total counterparty-specific and individually insignificant provision
Incurred but not identified provision
Total provision for credit losses
$
69
120
400
310
149
1,048
33
53
112
81
98
41
428
846
–
–
1,894
(23)
1,871
459
$ 2,330
$
53
112
415
174
136
890
26
43
135
87
84
41
294
710
$
49
109
446
141
128
873
30
36
84
52
56
33
291
582
–
–
1,600
(63)
1,537
146
$ 1,683
–
–
1,455
29
1,484
73
$ 1,557
3.0%
5.1
17.2
13.3
6.4
45.0
1.4
2.3
4.8
3.4
4.2
1.8
18.4
36.3
–
–
81.3
(1.0)
80.3
19.7
100.0%
3.1%
6.7
24.7
10.3
8.1
52.9
1.5
2.6
8.0
5.2
5.0
2.4
17.5
42.2
–
–
95.1
(3.8)
91.3
8.7
100.0%
3.1%
7.0
28.6
9.1
8.2
56.0
1.9
2.3
5.4
3.4
3.6
2.1
18.7
37.4
–
–
93.4
1.9
95.3
4.7
100.0%
Provision for credit losses as a % of average
net loans and acceptances5
October 31
2016
October 31
2015
October 31
2014
Canada
Residential mortgages
Credit card, consumer instalment and other personal
Business and government
Total Canada
United States
Residential mortgages
Credit card, consumer instalment and other personal
Business and government
Total United States
International
Total excluding other loans
Other loans
Total counterparty-specific and individually insignificant provision
Incurred but not identified provision
Total provision for credit losses as a % of average
0.01%
0.81
0.12
0.27
0.06
1.50
0.04
0.46
–
0.33
(0.84)
0.32
0.08
0.01%
0.72
0.08
0.24
0.09
1.38
0.10
0.46
–
0.31
(1.69)
0.29
0.03
0.01%
0.72
0.13
0.25
0.04
1.54
0.03
0.49
–
0.31
0.59
0.32
0.02
net loans and acceptances
0.40%
0.32%
0.33%
1 Certain comparative amounts have been reclassified to conform with the
4 The states included in New England are as follows: Connecticut, Maine,
presentation adopted in the current period.
2 Primarily based on the geographic location of the customer’s address.
3 The territories are included as follows: Yukon is included in British Columbia; Nunavut
is included in Ontario; and Northwest Territories is included in the Prairies region.
Massachusetts, New Hampshire, and Vermont.
5 Includes customers’ liability under acceptances.
NON-PRIME LOANS
As at October 31, 2016, the Bank had approximately $2.6 billion
(October 31, 2015 – $2.6 billion), gross exposure to non-prime loans,
which primarily consist of automotive loans originated in Canada. The
credit loss rate, which is an indicator of credit quality and is defined
as the annual PCL divided by the average month-end loan balance was
approximately 6.79% on an annual basis (October 31, 2015 – 3.84%).
PCL primarily increased due to higher provisions for individually
insignificant impaired loans, reflecting continued weakness in oil and
gas impacted regions. These loans are recorded at amortized cost.
53
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
SOVEREIGN RISK
The following table provides a summary of the Bank’s credit exposure
to certain European countries, including Greece, Italy, Ireland, Portugal,
and Spain (GIIPS).
T A B L E 3 4
EXPOSURE TO EUROPE – Total Net Exposure by Country and Counterparty
(millions of Canadian dollars)
As at
Loans and commitments1
Derivatives, repos, and securities lending2
Trading and investment portfolio3,4
Country
Corporate Sovereign
Financial
Total Corporate Sovereign
Financial
Total Corporate Sovereign
Financial
Total
Total Exposure5
October 31, 2016
GIIPS
Greece
Italy
Ireland
Portugal
Spain
Total GIIPS
Rest of Europe
Belgium
Finland
France
Germany
Netherlands
Sweden
Switzerland
United Kingdom
Other 6
Total Rest of Europe
Total Europe
GIIPS
Greece
Italy
Ireland
Portugal
Spain
Total GIIPS
Rest of Europe
Belgium
Finland
France
Germany
Netherlands
Sweden
Switzerland
United Kingdom
Other 6
Total Rest of Europe
Total Europe
$
– $
–
–
–
–
–
– $
168
–
–
105
273
– $
6
–
–
48
54
– $
174
–
–
153
327
– $
–
45
–
–
45
– $
–
–
–
–
–
– $
9
592
26
52
679
–
9
637
26
52
724
$
– $
– $
22
–
1
2
25
36
–
–
–
36
– $
1
–
–
–
1
– $
–
242
637
27
207
1,113
59
–
1
2
62
232
268
121
7
2,541
437
1,911
1,037
1,211
588
323
–
877
1,125
6,373
1,787
1,060
–
5,249
14,649
$ 5,249 $ 5,436 $ 958 $ 11,643 $ 2,510 $ 3,021 $ 9,842 $ 15,373
273
84
1,371
1,736
1,414
286
1,308
4,833
11
11,316
21
100
1,582
709
367
76
802
4,823
683
9,163
–
64
765
644
555
64
58
3,009
4
5,163
166
–
96
464
604
–
75
1,000
60
2,465
45
21
863
738
240
247
–
550
317
3,021
5
13
169
55
271
222
125
37
7
904
–
–
262
94
5
604
1,584
1,379
–
11,016
108
6,734
14,631
186 10,779
7,418
4,271
2,426
1,359
2,404
–
16,558
1,765
3,015
1,366
538 27,747
59,656
$ 563 $ 27,783 $ 5,407 $ 33,753 $ 60,769
99
1,379
7,104
19 10,984
4,793
1,817
219
5,352
1,944
5,406 33,691
506
451
168
3,429
571
16
7
51
158
7
$
– $
–
–
–
–
–
– $
203
–
–
63
266
– $
4
–
–
47
51
– $
207
–
–
110
317
– $
–
–
–
–
–
– $
–
–
–
–
–
– $
3
375
–
37
415
–
3
375
–
37
415
$
– $
1
–
–
7
8
– $
25
–
–
–
25
– $
2
–
–
–
2
– $
28
–
–
7
35
–
238
375
–
154
767
October 31, 2015
131
4,794
87
7
1,892
469
1,999
1,451
1,194
457
89
–
729
1,103
5,496
2,161
532
118
10,560
12,149
$ 10,560 $ 4,380 $ 1,445 $ 16,385 $ 2,178 $ 2,660 $ 7,726 $ 12,564
4,834
85
674
2,645
1,269
197
1,500
4,723
141
16,068
1
64
1,178
738
223
62
707
3,982
356
7,311
–
65
–
1,094
295
30
181
2,434
15
4,114
40
13
205
100
517
167
216
128
8
1,394
98
–
97
507
641
–
22
750
63
2,178
32
23
617
754
330
27
–
764
113
2,660
6
–
29
88
14
28
11
114
9
–
–
176
127
464
441
211
4,002
137
4,971
–
1,124
952
6,110
3,339
14,301
9,442
7,130
4,189
1,213
458
2,451
–
14,883
548
2,054
1,235
299 20,163
54,237
$ 307 $ 20,188 $ 5,560 $ 26,055 $ 55,004
6
952
3,544
9,657
4,667
927
222
4,664
1,381
5,558 26,020
1 Exposures include interest-bearing deposits with banks and are presented net
of impairment charges where applicable. There were no impairment charges for
European exposures as at October 31, 2016, or October 31, 2015.
4 The fair values of the GIIPS exposures in Level 3 in the trading and investment
portfolio were not significant as at October 31, 2016, and October 31, 2015.
5 The reported exposures do not include $0.3 billion of protection the Bank
2 Exposures are calculated on a fair value basis and are net of collateral. Total market
value of pledged collateral is $6.9 billion for GIIPS (October 31, 2015 – $5.6 billion)
and $24.7 billion for the rest of Europe (October 31, 2015 – $41.9 billion). Derivatives
are presented as net exposures where there is an International Swaps and Derivatives
Association (ISDA) master netting agreement.
3 Trading portfolio exposures are net of eligible short positions. Deposits of
$1.3 billion (October 31, 2015 – $1.5 billion) are included in the trading and
investment portfolio.
purchased through CDS (October 31, 2015 – $0.4 billion).
6 Other European exposure is distributed across 9 countries (October 31, 2015 –
10 countries), each of which has a net exposure including loans and commitments,
derivatives, repos and securities lending, and trading and investment portfolio
below $1 billion as at October 31, 2016, and October 31, 2015.
54
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 3 5
EXPOSURE TO EUROPE – Gross European Lending Exposure by Country
(millions of Canadian dollars)
Country
GIIPS
Greece
Italy
Ireland
Portugal
Spain
Total GIIPS
Rest of Europe
Belgium
Finland
France
Germany
Netherlands
Sweden
Switzerland
United Kingdom
Other3
Total Rest of Europe
Total Europe
October 31, 2016
Loans and Commitments
Indirect2
Total
As at
October 31, 2015
Direct1
Loans and Commitments
Indirect2
Total
$
–
4
–
–
153
157
273
13
541
948
444
4
746
1,716
6
4,691
$ 4,848
$
–
174
–
–
153
327
273
84
1,371
1,736
1,414
286
1,308
4,833
11
11,316
$ 11,643
$
–
204
–
–
63
267
–
61
179
1,730
744
193
662
2,581
135
6,285
$ 6,552
$
–
3
–
–
47
50
4,834
24
495
915
525
4
838
2,142
6
9,783
$ 9,833
$
–
207
–
–
110
317
4,834
85
674
2,645
1,269
197
1,500
4,723
141
16,068
$ 16,385
Direct1
$
–
170
–
–
–
170
–
71
830
788
970
282
562
3,117
5
6,625
$ 6,795
1 Includes interest-bearing deposits with banks, funded loans, and banker’s
3 Other European exposure is distributed across 9 countries (October 31, 2015 –
acceptances.
2 Includes undrawn commitments and letters of credit.
10 countries), each of which has a net exposure including loans and commitments,
derivatives, repos and securities lending, and trading and investment portfolio
below $1 billion as at October 31, 2016, and October 31, 2015.
EXPOSURE TO ACQUIRED CREDIT-IMPAIRED LOANS
ACI loans are generally loans with evidence of incurred credit loss
where it is probable at the purchase date that the Bank will be unable
to collect all contractually required principal and interest payments.
Evidence of credit quality deterioration as of the acquisition date may
include statistics such as past due status and credit scores. ACI loans
are initially recorded at fair value and, as a result, no allowance for
credit losses is recorded on the date of acquisition.
ACI loans were acquired through the acquisitions of FDIC-assisted
transactions, which include FDIC covered loans subject to loss sharing
agreements with the FDIC, South Financial, Chrysler Financial, and a
credit card portfolio within the U.S. strategic cards portfolio. The
following table presents the unpaid principal balance, carrying value,
counterparty-specific allowance, allowance for individually insignificant
impaired loans, and the net carrying value as a percentage of the
unpaid principal balance for ACI loans.
Of the Bank’s European exposure, approximately 98%
(October 31, 2015 – 99%) is to counterparties in countries
rated AA or better by either Moody’s Investor Services (Moody’s)
or Standard & Poor’s (S&P), with the majority of this exposure to
the sovereigns themselves and to well-rated, systemically important
banks in these countries. Derivatives and securities repurchase
transactions are completed on a collateralized basis. The vast
majority of derivatives exposure is offset by cash collateral while
the repurchase transactions are backed largely by government
securities rated A+ or better by either Moody’s or S&P, and cash.
Additionally, the Bank has exposure to well-rated corporate issuers
in Europe where the Bank also does business with their related
entities in North America.
In addition to the European exposure identified above, the Bank also
has $8.9 billion (October 31, 2015 – $8.8 billion) of direct exposure to
supranational entities with European sponsorship and indirect exposure
including $0.2 billion (October 31, 2015 – $1.6 billion) of European
collateral from non-European counterparties related to repurchase and
securities lending transactions that are margined daily.
As part of the Bank’s usual credit risk and exposure monitoring
processes, all exposures are reviewed on a regular basis. European
exposures are reviewed monthly or more frequently as circumstances
dictate and are periodically stress tested to identify and understand
any potential vulnerabilities. Based on the most recent reviews, all
European exposures are considered manageable.
55
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 3 6
ACQUIRED CREDIT-IMPAIRED LOAN PORTFOLIO
(millions of Canadian dollars, except as noted)
FDIC-assisted acquisitions
South Financial
Other2
Total ACI loan portfolio
FDIC-assisted acquisitions
South Financial
Other2
Total ACI loan portfolio
Unpaid
principal
balance1
$ 508
529
2
$ 1,039
$ 636
853
40
$ 1,529
Carrying
value
$ 480
494
–
$ 974
$ 601
813
–
$ 1,414
Counterparty-
specific
allowance
Allowance for
individually
insignificant
impaired loans
$ 1
3
–
$ 4
$ 1
5
–
$ 6
$ 35
23
–
$ 58
$ 45
32
–
$ 77
As at
Carrying
Percentage of
value net of unpaid principal
balance
allowances
October 31, 2016
$ 444
468
–
$ 912
87.4%
88.5
–
87.8%
October 31, 2015
$ 555
776
–
$ 1,331
87.3%
91.0
–
87.1%
1 Represents contractual amount owed net of charge-offs since acquisition of the loan.
2 Other includes the ACI loan portfolios of Chrysler Financial and an acquired credit
card portfolio within the U.S. strategic cards portfolio.
During the year ended October 31, 2016, the Bank recorded a
recovery of $31 million in PCL on ACI loans (2015 – $36 million,
2014 – $2 million). The following table provides key credit statistics
by past due contractual status and geographic concentrations based
on ACI loans unpaid principal balance.
T A B L E 3 7
ACQUIRED CREDIT-IMPAIRED LOANS – Key Credit Statistics
(millions of Canadian dollars, except as noted)
Past due contractual status
Current and less than 30 days past due
30-89 days past due
90 or more days past due
Total ACI loans
Geographic region
Florida
South Carolina
North Carolina
Other U.S. and Canada
Total ACI loans
October 31, 2016
Unpaid principal balance1
October 31, 2015
Unpaid principal balance1
As at
$ 914
24
101
$ 1,039
$ 691
260
83
5
$ 1,039
88.0%
2.3
9.7
100.0%
66.5%
25.0
8.0
0.5
100.0%
$ 1,314
42
173
$ 1,529
$ 933
443
110
43
$ 1,529
85.9%
2.8
11.3
100.0%
61.0%
29.0
7.2
2.8
100.0%
1 Represents contractual amount owed net of charge-offs since acquisition of the loan.
EXPOSURE TO NON-AGENCY COLLATERALIZED
MORTGAGE OBLIGATIONS
As a result of the acquisition of Commerce Bancorp Inc., the Bank has
exposure to non-agency Collateralized Mortgage Obligations (CMOs)
collateralized primarily by Alt-A and Prime Jumbo mortgages, most
of which are pre-payable fixed-rate mortgages without rate reset
features. At the time of acquisition, the portfolio was recorded at fair
value, which became the new cost basis for this portfolio.
These debt securities are classified as loans and carried at amortized
cost using the effective interest rate method, and are evaluated
for loan losses on a quarterly basis using the incurred credit loss
model. The impairment assessment follows the loan loss accounting
model, where there are two types of allowances for credit losses,
counterparty-specific and collectively assessed. Counterparty-specific
allowances represent individually significant loans, including the
Bank’s debt securities classified as loans, which are assessed
for whether impairment exists at the counterparty-specific level.
Collectively assessed allowances consist of loans for which no
impairment is identified on a counterparty-specific level and are
grouped into portfolios of exposures with similar credit risk
characteristics to collectively assess if impairment exists at the
portfolio level.
The allowance for losses that are incurred but not identified
as at October 31, 2016, was US$41 million (October 31, 2015 –
US$43 million). During the year ended October 31, 2016, the Bank
recorded an increase of allowances for credit losses of US$3 million
in PCL (net release of allowance for credit losses of US$29 million
in 2015 and of US$14 million in 2014).
56
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table presents the par value, carrying value, allowance
for loan losses, and the net carrying value as a percentage of the par
value for the non-agency CMO portfolio as at October 31, 2016, and
October 31, 2015. As at October 31, 2016, the balance of the remaining
acquisition-related incurred loss was US$160 million (October 31, 2015 –
US$158 million). This amount is reflected in the following table as a
component of the discount from par to carrying value.
T A B L E 3 8
NON-AGENCY CMO LOANS PORTFOLIO
(millions of U.S. dollars, except as noted)
Non-agency CMOs
Non-agency CMOs
Par
value
Carrying
value
Allowance
for loan
losses
Carrying
value net of
allowance
As at
Percentage
of par
value
$ 1,158
$ 1,020
$ 195
$ 825
71.2%
October 31, 2016
$ 1,431
$ 1,268
$ 202
$ 1,066
74.5%
October 31, 2015
During the second quarter of 2009, the Bank re-securitized a portion
of the non-agency CMO portfolio. As part of the on-balance sheet
re-securitization, new credit ratings were obtained for the re-securitized
securities that better reflect the discount on acquisition and the Bank’s
risk inherent on the entire portfolio. The net capital benefit of the
re-securitization transaction is reflected in the changes in RWA. For
accounting purposes, the Bank retained a majority of the beneficial
interests in the re-securitized securities resulting in no financial
statement impact. The Bank’s assessment of impairment for these
reclassified securities is not impacted by a change in the credit ratings.
T A B L E 3 9
NON-AGENCY ALT-A AND PRIME JUMBO CMO PORTFOLIO BY VINTAGE YEAR
(millions of U.S. dollars)
2003
2004
2005
2006
2007
Total portfolio net of counterparty-specific and
individually insignificant credit losses
Less: allowance for incurred but not identified credit losses
Total
2003
2004
2005
2006
2007
Total portfolio net of counterparty-specific and
individually insignificant credit losses
Less: allowance for incurred but not identified credit losses
Total
Prime Jumbo
Amortized
cost
Fair
value
Amortized
cost
As at
Total
Fair
value
October 31, 2016
Amortized
cost
$ 20
49
204
157
226
Alt-A
Fair
value
$ 23
55
248
187
270
$ 20
15
14
73
88
$ 21
17
16
84
99
$ 656
$ 783
$ 210
$ 237
$ 36
62
256
201
274
$ 41
69
297
220
314
$ 41
19
18
90
112
$ 44
21
20
101
120
$ 829
$ 941
$ 280
$ 306
$
44
72
264
271
369
$ 1,020
$
40
64
218
230
314
$ 866
41
$ 825
October 31, 2015
$
85
90
317
321
434
$ 1,247
$
77
81
274
291
386
$ 1,109
43
$ 1,066
57
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
GROUP FINANCIAL CONDITION
Capital Position
T A B L E 4 0
CAPITAL STRUCTURE AND RATIOS – Basel III1
(millions of Canadian dollars, except as noted)
Common Equity Tier 1 Capital
Common shares plus related contributed surplus
Retained earnings
Accumulated other comprehensive income
Common Equity Tier 1 Capital before regulatory adjustments
Common Equity Tier 1 Capital regulatory adjustments
Goodwill (net of related tax liability)
Intangibles (net of related tax liability)
Deferred tax assets excluding those arising from temporary differences
Cash flow hedge reserve
Shortfall of provisions to expected losses
Gains and losses due to changes in own credit risk on fair valued liabilities
Defined benefit pension fund net assets (net of related tax liability)
Investment in own shares
Significant investments in the common stock of banking, financial,
and insurance entities that are outside the scope of regulatory consolidation,
net of eligible short positions (amount above 10% threshold)
Total regulatory adjustments to Common Equity Tier 1 Capital
Common Equity Tier 1 Capital
Additional Tier 1 Capital instruments
Directly issued qualifying Additional Tier 1 instruments plus stock surplus
Directly issued capital instruments subject to phase out from Additional Tier 1
Additional Tier 1 instruments issued by subsidiaries and held by third parties subject to phase out
Additional Tier 1 Capital instruments before regulatory adjustments
Additional Tier 1 Capital instruments regulatory adjustments
Investment in own Additional Tier 1 instruments
Significant investments in the capital of banking, financial, and insurance entities
that are outside the scope of regulatory consolidation, net of eligible short positions
Total regulatory adjustments to Additional Tier 1 Capital
Additional Tier 1 Capital
Tier 1 Capital
Tier 2 Capital instruments and provisions
Directly issued qualifying Tier 2 instruments plus related stock surplus
Directly issued capital instruments subject to phase out from Tier 2
Tier 2 instruments issued by subsidiaries and held by third parties subject to phase out
Collective allowances
Tier 2 Capital before regulatory adjustments
Tier 2 regulatory adjustments
Significant investments in the capital of banking, financial, and insurance entities
that are outside consolidation, net of eligible short positions
Total regulatory adjustments to Tier 2 Capital
Tier 2 Capital
Total Capital
Risk-weighted assets2
Common Equity Tier 1 Capital
Tier 1 Capital
Total Capital
Capital Ratios and Multiples
Common Equity Tier 1 Capital (as percentage of CET1 Capital risk-weighted assets)
Tier 1 Capital (as percentage of Tier 1 Capital risk-weighted assets)
Total Capital (as percentage of Total Capital risk-weighted assets)
Leverage ratio3
1 Capital position has been calculated using the “all-in” basis.
2 Each capital ratio has its own RWA measure due to the OSFI-prescribed scalar
for inclusion of the CVA. The scalar for inclusion of CVA for CET1, Tier 1, and
Total Capital RWA are 64%, 71%, and 77%, respectively.
58
2016
2015
$ 20,881
35,452
11,834
68,167
$ 20,457
32,053
10,209
62,719
(19,517)
(2,241)
(172)
(1,690)
(906)
(166)
(11)
(72)
(1,064)
(25,839)
42,328
3,899
3,236
286
7,421
(19,143)
(2,192)
(367)
(1,498)
(140)
(188)
(104)
(4)
(1,125)
(24,761)
37,958
2,202
3,211
399
5,812
–
(2)
(352)
(352)
7,069
49,397
5,760
4,899
270
1,660
12,589
(170)
(170)
12,419
61,816
(352)
(354)
5,458
43,416
2,489
5,927
207
1,731
10,354
(170)
(170)
10,184
53,600
$ 405,844
405,844
405,844
$ 382,360
383,301
384,108
10.4%
12.2
15.2
4.0
9.9%
11.3
14.0
3.7
3 The leverage ratio is calculated as Tier 1 Capital divided by leverage exposure,
as defined.
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
REGULATORY CAPITAL
Capital requirements of the Basel Committee on Banking and
Supervision (BCBS) are commonly referred to as Basel III. Under
Basel III, Total Capital consists of three components, namely CET1,
Additional Tier 1, and Tier 2 Capital. Risk sensitive regulatory capital
ratios are calculated by dividing CET1, Tier 1, and Total Capital by their
respective RWA. In 2015, Basel III implemented a non-risk sensitive
leverage ratio to act as a supplementary measure to the risk-sensitive
capital requirements. The objective of the leverage ratio is to constrain
the build-up of excess leverage in the banking sector. The leverage ratio
is calculated by dividing Tier 1 Capital by leverage ratio exposure which
is primarily comprised of on balance sheet assets with adjustments
made to derivative and securities financing transaction exposures, and
credit equivalent amounts of off-balance sheet exposures.
OSFI’s Capital Requirements under Basel III
The Office of the Superintendent of Financial Institutions Canada’s
(OSFI) Capital Adequacy Requirements (CAR) guideline details how
the Basel III capital rules apply to Canadian banks.
Effective January 1, 2014, the CVA capital charge is to be phased
in over a five year period based on a scalar approach. For fiscal 2016,
the scalars for inclusion of the CVA for CET1, Tier 1, and Total Capital
RWA are 64%, 71%, and 77%, respectively, unchanged from fiscal
2015. This scalar for the CET1 calculation increases to 72% in 2017,
80% in 2018, and 100% in 2019. A similar set of scalar phase-in
percentages apply to the Tier 1 and Total Capital ratio calculations.
Effective January 1, 2013, all newly issued non-common Tier 1 and
Tier 2 capital instruments must include non-viability contingent capital
(NVCC) provisions to qualify as regulatory capital. NVCC provisions
require the conversion of non-common capital instruments into a
variable number of common shares of the Bank upon the occurrence
of a trigger event as defined in the guidance. Existing non-common
Tier 1 and Tier 2 capital instruments which do not include NVCC
provisions are non-qualifying capital instruments and are subject
to a phase-out period which began in 2013 and ends in 2022.
The CAR guideline contains two methodologies for capital ratio
calculation: (1) the “transitional” method; and (2) the “all-in” method.
The minimum CET1, Tier 1, and Total Capital ratios, based on the
“all-in” method, are 4.5%, 6%, and 8%, respectively. OSFI expects
Canadian banks to include an additional capital conservation buffer
of 2.5%, effectively raising the CET1, Tier 1 Capital, and Total Capital
ratio minimum requirements to 7%, 8.5%, and 10.5%, respectively.
At the discretion of OSFI, a common equity countercyclical capital
buffer (CCB) within a range of 0% to 2.5% could be imposed. No CCB
is currently in effect.
In July 2013, the BCBS published the updated final rules on global
systemically important banks (G-SIB). None of the Canadian banks have
been designated as a G-SIB. In March 2013, OSFI designated the six
major Canadian banks as domestic systemically important banks (D-SIB),
for which a 1% common equity capital surcharge is in effect from
January 1, 2016. As a result, the six Canadian banks designated as
D-SIBs, including TD, are required to meet an “all-in” Pillar 1 target CET1,
Tier 1, and Total Capital ratios of 8%, 9.5%, and 11.5% respectively.
The leverage ratio is calculated as per OSFI’s Leverage Requirements
guideline and has a regulatory minimum requirement of 3%.
THE BANK’S CAPITAL MANAGEMENT OBJECTIVES
The Bank’s capital management objectives are:
• To be an appropriately capitalized financial institution
as determined by:
– the Bank’s Risk Appetite Statement (RAS);
– capital requirements defined by relevant regulatory authorities; and
– the Bank’s internal assessment of capital requirements consistent
with the Bank’s risk profile and risk tolerance levels.
• To have the most economically achievable weighted average cost
of capital, consistent with preserving the appropriate mix of capital
elements to meet targeted capitalization levels.
• To ensure ready access to sources of appropriate capital,
at reasonable cost, in order to:
– insulate the Bank from unexpected events; and
– support and facilitate business growth and/or acquisitions
consistent with the Bank’s strategy and risk appetite.
• To support strong external debt ratings, in order to manage
the Bank’s overall cost of funds and to maintain accessibility
to required funding.
These objectives are applied in a manner consistent with the Bank’s
overall objective of providing a satisfactory return on shareholders’ equity.
CAPITAL SOURCES
The Bank’s capital is primarily derived from common shareholders and
retained earnings. Other sources of capital include the Bank’s preferred
shareholders and holders of the Bank’s subordinated debt.
CAPITAL MANAGEMENT
Enterprise Capital Management manages capital for the Bank and
is responsible for forecasting and monitoring compliance with capital
targets. The Board of Directors (the “Board”) oversees capital
adequacy risk management.
The Bank continues to hold sufficient capital levels to ensure that
flexibility is maintained to grow operations, both organically and
through strategic acquisitions. The strong capital ratios are the result
of the Bank’s internal capital generation, management of the balance
sheet, and periodic issuance of capital securities.
ECONOMIC CAPITAL
Economic capital is the Bank’s internal measure of required capital
and is one of the key components in the Bank’s assessment of internal
capital adequacy. Economic capital is comprised of both risk-based
capital required to fund losses that could occur under extremely adverse
economic or operational conditions and investment capital utilized to
fund acquisitions or investments to support future earnings growth.
The Bank uses internal models to determine the amount of risk-based
capital required to support the risks resulting from the Bank’s business
operations. Characteristics of these models are described in the
“Managing Risk” section of this document. The objective of the Bank’s
economic capital framework is to hold risk-based capital to cover
unexpected losses consistent with TD’s solvency and ratings standards.
The Bank’s chosen standards are well-founded and consistent with its
overall risk profile and current operating environment.
Since November 1, 2007, the Bank has been operating its capital
regime under the Basel Capital Framework. Consequently, in addition
to addressing Pillar 1 risks covering credit risk, market risk, and
operational risk, the Bank’s economic capital framework captures
other material Pillar 2 risks including non-trading market risk for the
retail portfolio (interest rate risk in the banking book), additional
credit risk due to concentration (commercial and wholesale portfolios)
and risks classified as “Other”, namely business risk, insurance risk,
and the Bank’s significant investments. The framework also captures
diversification benefits across risk types and business segments.
Please refer to the “Economic Capital and Risk-Weighted Assets by
Segment” section for a business segment breakdown of the Bank’s
economic capital.
59
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS Capital Position and Capital Ratios
The Basel framework allows qualifying banks to determine capital
levels consistent with the way they measure, manage, and mitigate
risks. It specifies methodologies for the measurement of credit, market,
and operational risks. The Bank uses the advanced approaches for the
majority of its portfolios. Effective the third quarter of 2016, OSFI
approved the Bank to calculate the majority of the retail portfolio
credit RWA in the U.S. Retail segment using the Advanced Internal
Ratings Based (AIRB) approach. The remaining assets in the U.S. Retail
segment continue to use the standardized approach for credit risk.
For accounting purposes, IFRS is followed for consolidation of
subsidiaries and joint ventures. For regulatory capital purposes,
insurance subsidiaries are deconsolidated and reported as a deduction
from capital. Insurance subsidiaries are subject to their own capital
adequacy reporting, such as OSFI’s Minimum Continuing Capital
Surplus Requirements and Minimum Capital Test. Currently, for
regulatory capital purposes, all the entities of the Bank are either
consolidated or deducted from capital and there are no entities from
which surplus capital is recognized.
Some of the Bank’s subsidiaries are individually regulated by either
OSFI or other regulators. Many of these entities have minimum capital
requirements which they must maintain and which may limit the
Bank’s ability to extract capital or funds for other uses.
As at October 31, 2016, the Bank’s CET1, Tier 1, and Total Capital
ratios were 10.4%, 12.2%, and 15.2%, respectively. Compared with
the Bank’s CET1 Capital ratio of 9.9% at October 31, 2015, the CET1
Capital ratio, as at October 31, 2016, increased due to growth in
retained earnings, partially offset by a combination of common shares
repurchased, actuarial losses on employee benefit plans primarily due
to a decline in long term interest rates, and RWA growth in the
Canadian and U.S. Retail segments.
As at October 31, 2016, the Bank’s leverage ratio was 4.0%.
Compared with the Bank’s leverage ratio of 3.7% at October 31, 2015,
the leverage ratio, as at October 31, 2016, increased mainly from
capital generation and preferred share issuances, partially offset by
business growth in all segments.
Common Equity Tier 1 Capital
CET1 Capital was $42.3 billion as at October 31, 2016. Strong earnings
growth contributed the majority of CET1 Capital growth in the year.
Capital management funding activities during the year included the
common share issuance of $521 million under the dividend reinvestment
plan and from stock option exercises.
Tier 1 and Tier 2 Capital
Tier 1 Capital was $49 billion as at October 31, 2016, consisting of
CET1 Capital and Additional Tier 1 Capital of $42 billion and $7 billion,
respectively. Tier 1 Capital management activities during the year
consisted of the issuance of $700 million non-cumulative Rate Reset
Preferred Shares, Series 12 and $1 billion non-cumulative Rate Reset
Preferred Shares, Series 14, both of which included NVCC Provisions
to ensure loss absorbency at the point of non-viability.
Tier 2 Capital was $12 billion as at October 31, 2016. Tier 2 Capital
management activities during the year consisted of the issuance of
$1.25 billion 4.859% subordinated debentures due March 4, 2031,
and US$1.5 billion 3.625% subordinated debentures due September
15, 2031, both of which included NVCC Provisions to ensure loss
absorbency at the point of non-viability, and the redemption of
$1 billion 3.367% subordinated debentures due November 2, 2020.
On October 27, 2016, the Bank announced its intention to redeem
$2.25 billion 4.779% subordinated debentures due December 14, 2105
on December 14, 2016.
INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS
The Bank’s Internal Capital Adequacy Assessment Process (ICAAP) is an
integrated enterprise-wide process that encompasses the governance,
management, and control of risk and capital functions within the
Bank. It provides a framework for relating risks to capital requirements
through the Bank’s capital modeling and stress testing practices which
help inform the Bank’s overall CAR.
60
The ICAAP is led by Risk Management and is supported by numerous
functional areas who together help assess the Bank’s internal capital
adequacy. This assessment ultimately represents the capacity to
bear risk in congruence with the Bank’s risk profile and RAS. Risk
Management alongside Enterprise Capital Management assesses and
monitors the overall adequacy of the Bank’s available capital in relation
to both internal and regulatory capital requirements under normal and
stressed conditions.
DIVIDENDS
At October 31, 2016, the quarterly dividend was $0.55 per share,
consistent with the Bank’s current target payout range of 40% to 50%
of adjusted earnings. Cash dividends declared and paid during the year
totalled $2.16 per share (2015 – $2.00). For cash dividends payable on
the Bank’s preferred shares, refer to Note 21 of the 2016 Consolidated
Financial Statements. As at October 31, 2016, 1,857 million common
shares were outstanding (2015 – 1,855 million). The Bank’s ability to
pay dividends is subject to the requirements of the Bank Act (Canada)
(the “Bank Act”) and OSFI. Refer to Note 21 of the 2016 Consolidated
Financial Statements for further information on dividend restrictions.
NORMAL COURSE ISSUER BID
On December 9, 2015, the Bank announced that the Toronto Stock
Exchange and OSFI approved the Bank’s normal course issuer bid
(NCIB) to repurchase for cancellation up to 9.5 million of the Bank’s
common shares. During the year ended October 31, 2016, the Bank
completed its share repurchase under the NCIB and repurchased
9.5 million common shares at an average price of $51.23 per share
for a total amount of $487 million.
RISK-WEIGHTED ASSETS
Based on Basel III, RWA are calculated for each of credit risk, market
risk, and operational risk. Details of the Bank’s RWA are included in
the following table.
T A B L E 4 1
COMMON EQUITY TIER 1 CAPITAL
RISK-WEIGHTED ASSETS1
(millions of Canadian dollars)
Credit risk2
Retail
Residential secured
Qualifying revolving retail
Other retail
Non-retail
Corporate
Sovereign
Bank
Securitization exposures
Equity exposures
Exposures subject to standardized or
Internal Ratings Based (IRB) approaches
Adjustment to IRB RWA for scaling factor
Other assets not included in standardized
or IRB approaches
Total credit risk
Market risk
Trading book
Operational risk3
Regulatory floor
Total
As at
October 31 October 31
2015
2016
$ 29,563 $ 28,726
12,586
60,976
18,965
43,288
169,559 150,497
4,071
11,412
13,074
866
5,139
9,087
16,161
789
292,551 282,208
6,347
8,515
39,230
40,032
340,296 328,587
12,211
48,001
5,336
12,655
41,118
–
$ 405,844 $ 382,360
1 Each capital ratio has its own RWA measure due to the OSFI-prescribed scalar for
inclusion of the CVA. The scalar for inclusion of CVA for CET1, Tier 1 and Total
Capital RWA are 64%, 71%, and 77%, respectively.
2 Effective the third quarter of 2016, the majority of U.S. Retail’s retail portfolio
credit risk RWA are calculated using the AIRB approach. Prior to the third quarter
of 2016, RWA were calculated using the Standardized Approach.
3 Effective the third quarter of 2016, operational risk RWA is calculated using a
combination of the Advanced Measurement Approach (AMA) and the Standardized
Approach (TSA). Prior to the third quarter of 2016, RWA were calculated using TSA.
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 4 2
FLOW STATEMENT FOR RISK-WEIGHTED ASSETS – Disclosure for Non-Counterparty Credit Risk and
Counterparty Credit Risk – Risk-Weighted Assets Movement by Key Driver
October 31, 2016
For the years ended
October 31, 2015
Non-counterparty
credit risk
Counterparty Non-counterparty
credit risk
credit risk
Counterparty
credit risk
$ 308,164
18,589
2,556
(11,195)
–
(318)
5,124
1,415
16,171
$ 324,335
$ 20,423
(527)
(223)
(4,144)
–
–
432
–
(4,462)
$ 15,961
$ 258,009
21,254
(679)
(910)
–
2,169
26,242
2,079
50,155
$ 308,164
$ 17,917
680
(405)
–
705
–
1,526
–
2,506
$ 20,423
The Movement in risk levels category reflects changes in risk due to
position changes and market movements.
The Model updates category reflects updates to the model to reflect
recent experience and changes in model scope.
The Methodology and policy category reflects methodology changes
to the calculations driven by regulatory policy changes. Methodology
changes related to debt specific risk drove the decrease in RWA.
Foreign exchange movements and other are deemed not meaningful
since RWA exposure measures are calculated in Canadian dollars.
Therefore, no foreign exchange translation is required.
FLOW STATEMENT FOR RISK-WEIGHTED ASSETS –
Disclosure for Operational Risk – Risk-Weighted
Assets Movement by Key Driver
T A B L E 4 4
(millions of Canadian dollars)
RWA, balance at beginning of period
Revenue generation
Movement in risk levels
Methodology and policy
Acquisitions and disposals
RWA, balance at end of period
For the years ended
October 31 October 31
2015
2016
$ 41,118 $ 38,092
3,026
–
–
–
$ 48,001 $ 41,118
790
–
6,093
–
The movement in the Revenue generation category is due to a change
in gross income. The Movement in risk levels category primarily reflects
changes in risk due to operational loss experience, business environment
and internal control factors, scenario analysis and movements in foreign
exchange. The Model updates category relates to model implementation,
changes in model scope, or any changes to address model malfunctions.
The Methodology and policy category reflects newly adopted
methodology changes to the calculations driven by regulatory policy
changes. Effective the third quarter of 2016, OSFI approved the Bank
to use the AMA to calculate operational risk weighted assets.
(millions of Canadian dollars)
Common Equity Tier 1 Capital RWA, balance at beginning of period
Book size
Book quality
Model updates
Methodology and policy
Acquisitions and disposals
Foreign exchange movements
Other
Total RWA movement
Common Equity Tier 1 Capital RWA, balance at end of period
Counterparty credit risk is comprised of over-the-counter derivatives,
repo-style transactions, trades cleared through central counterparties,
and CVA RWA which was phased in at 64% for fiscal 2016 (2015 –
64%). Non-counterparty credit risk includes loans and advances to
retail customers (individuals and small business), corporate entities
(wholesale and commercial customers), banks and governments, as
well as holdings of debt, equity securities, and other assets (including
prepaid expenses, current and deferred income taxes, land, building,
equipment, and other depreciable property).
The Book size category consists of organic changes in book size and
composition (including new business and maturing loans) and, for fiscal
2016, is mainly due to growth in commercial loans in the U.S. Retail
segment and across various portfolios in the Canadian Retail segment.
The Book quality category includes quality of book changes caused
by experience such as underlying customer behaviour or demographics,
including changes through model calibrations/realignments.
The Model updates category relates to model implementation,
changes in model scope, or any changes to address model malfunctions.
Effective the third quarter of 2016, OSFI approved the Bank to calculate
the majority of the retail portfolio credit RWA in the U.S. Retail segment
using the AIRB approach. RWA in counterparty credit risk decreased
due to optimization in the potential future exposures calculation for
certain derivatives allowed under the Basel III framework.
The Methodology and policy category impacts are methodology
changes to the calculations driven by regulatory policy changes, such
as new regulations.
Foreign exchange movements are mainly due to fluctuations in the
U.S. dollar to Canadian dollar exchange rate on the U.S. portfolios in
the U.S. Retail segment.
The Other category consists of items not described in the above
categories including changes in exposures not included under
advanced or standardized methodologies such as prepaid expenses,
current and deferred income taxes, land, building, equipment and
other depreciable property, and other assets.
FLOW STATEMENT FOR RISK-WEIGHTED ASSETS –
Disclosure for Market Risk – Risk-Weighted
Assets Movement by Key Driver
T A B L E 4 3
(millions of Canadian dollars)
RWA, balance at beginning of period
Movement in risk levels
Model updates
Methodology and policy
Acquisitions and disposals
Foreign exchange movements and other
Total RWA movement
RWA, balance at end of period
1 Not meaningful.
For the years ended
October 31 October 31
2015
2016
$ 12,655.0 $ 14,376.0
49.0
–
(1,770.0)
–
n/m1
(1,721.0)
$ 12,211.0 $ 12,655.0
548.0
–
(992.0)
–
n/m1
(444.0)
61
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
ECONOMIC CAPITAL AND RISK-WEIGHTED ASSETS BY SEGMENT
The following chart provides a breakdown of the Bank’s RWA and
economic capital as at October 31, 2016. RWA reflects capital
requirements assessed based on regulatory prescribed rules for credit
risk, trading market risk, and operational risk. Economic capital reflects
the Bank’s internal view of capital required for these risks as well as
risks not captured within the assessment of RWA as described in
the “Economic Capital” section of this document. The results shown
in the chart do not reflect attribution of goodwill and intangibles.
For additional information on the risks highlighted below, refer
to the “Managing Risk” section of this document.
Economic Capital (%)
CET1 RWA1
Credit Risk
Market Risk
Operational Risk
Other Risks
67%
7%
10%
16%
$ 340,296
Credit Risk
Market Risk
$ 12,211
Operational Risk $ 48,001
Other2
$ 5,336
TD Bank Group
Corporate
Canadian Retail
U.S. Retail3
Wholesale Banking
• Investment Banking
and Capital Markets
• Corporate Banking
• Treasury and Balance
Sheet Management
• Other Control Functions
• Personal Deposits
• Consumer Lending
• Credit Cards and
Merchant Solutions
• Auto Finance
• Commercial Banking
• Small Business Banking
• Direct Investing
• Advice-based
Wealth Business
• Asset Management
• Insurance
• Personal Deposits
• Consumer Lending
• Credit Cards Services
• Auto Finance
• Commercial Banking
• Small Business Banking
• Advice-based
Wealth Business
• Asset Management
• TD Ameritrade
Economic Capital (%)
Credit Risk
Market Risk
Operational Risk
Other Risks
74%
3%
9%
14%
Credit Risk
Market Risk
Operational Risk
Other Risks
60%
6%
11%
23%
Credit Risk
Market Risk
Operational Risk
Other Risks
76%
13%
10%
1%
Credit Risk
Market Risk
Operational Risk
Other Risks
36%
6%
14%
44%
CET1 RWA1
$ 87,593
Credit Risk
Market Risk
$
–
Operational Risk $ 11,432
$ 196,162
Credit Risk
Market Risk
$
–
Operational Risk $ 26,833
$ 46,308
Credit Risk
Market Risk
$ 12,211
Operational Risk $ 8,897
Credit Risk
Market Risk
Operational Risk
Other2
$ 10,233
$
–
$ 839
$ 5,336
1 Amounts are in millions of Canadian dollars
2 Includes regulatory floor
3 U.S. Retail includes TD Ameritrade in Other Risks
62
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 4 5
OUTSTANDING EQUITY AND SECURITIES
EXCHANGEABLE/CONVERTIBLE INTO EQUITY1
(millions of shares/units, except as noted)
Common shares outstanding
Treasury shares – common
Total common shares
Stock options
Vested
Non-vested
Series S
Series T
Series Y
Series Z
Series 1
Series 3
Series 5
Series 7
Series 9
Series 11
Series 122
Series 143
Total preferred shares – equity
Treasury shares – preferred
Total preferred shares
Capital Trust Securities (thousands of shares)
Trust units issued by TD Capital Trust III:
TD Capital Trust III Securities – Series 2008
Debt issued by TD Capital Trust IV:
TD Capital Trust IV Notes – Series 1
TD Capital Trust IV Notes – Series 2
TD Capital Trust IV Notes – Series 3
As at
October 31 October 31
2015
2016
Number of Number of
shares/units shares/units
1,857.6 1,856.2
(1.1)
1,857.2 1,855.1
(0.4)
5.5
9.9
5.4
4.6
5.5
4.5
20.0
20.0
20.0
14.0
8.0
6.0
28.0
40.0
176.0
(0.2)
175.8
7.0
11.4
5.4
4.6
5.5
4.5
20.0
20.0
20.0
14.0
8.0
6.0
–
–
108.0
(0.1)
107.9
1,000.0 1,000.0
550.0
450.0
750.0
550.0
450.0
750.0
1 For further details, including the principal amount, conversion and exchange features,
and distributions, refer to Note 21 of the 2016 Consolidated Financial Statements.
2 On January 14, 2016, the Bank issued 28 million non-cumulative 5-Year Rate Reset
Preferred Shares, Series 12 (“Series 12 shares”) for gross cash consideration of
$700 million, which included NVCC Provisions to ensure loss absorbency at the
point of non-viability. If the NVCC Provisions were to be triggered, the maximum
number of common shares that could be issued based on the formula for
conversion applicable to the Series 12 shares, and assuming there are no declared
and unpaid dividends on the Series 12 shares or Series 13 shares, as applicable,
would be 140 million.
3 On September 8, 2016, the Bank issued 40 million non-cumulative 5-Year Rate
Reset Preferred Shares, Series 14 (“Series 14 shares”) for gross cash consideration
of $1 billion, which included NVCC Provisions to ensure loss absorbency at the
point of non-viability. If the NVCC Provisions were to be triggered, the maximum
number of common shares that could be issued based on the formula for
conversion applicable to the Series 14 shares, and assuming there are no declared
and unpaid dividends on the Series 14 shares or Series 15 shares, as applicable,
would be 200 million.
FUTURE REGULATORY CAPITAL DEVELOPMENTS
In February 2014, the U.S. Federal Reserve Board released final rules
on Enhanced Prudential Standards for large Foreign Bank Organizations
and U.S. Bank Holding Companies (BHCs). As a result of these rules,
as of July 1, 2016, TD has consolidated 90% of its U.S. legal entity
ownership interests under a single top tier U.S. Intermediate Holding
Company (IHC), and will consolidate 100% of its U.S. legal entity
ownership interests by July 1, 2017. The IHC will be subject to the
same extensive capital, liquidity, and risk management requirements
as large BHCs.
On August 1, 2014, the Department of Finance released a public
consultation paper (the “Bail-in Consultation”) regarding a proposed
Taxpayer Protection and Bank Recapitalization regime (commonly
referred to as “bail-in”) which outlines their intent to implement
a comprehensive risk management framework for Canada’s D-SIBs.
Refer to the section on “Regulatory Developments Concerning
Liquidity and Funding” in this document for more details.
In December 2014, BCBS released a consultative document
introducing a capital floor framework based on Basel II/III standardized
approaches to calculate RWA. This framework will replace the current
transitional floor, which is based on the Basel I standard. The objectives
of a capital floor are to ensure minimum levels of banking system
capital, mitigate internal approaches model risk, and enhance
comparability of capital ratios across banks. The calibration of the
floor is outside the scope of this consultation. The impact on the
Bank will be dependent on the final calibration of the capital floor
and on the revised credit, market, and operational risk standardized
approaches which are currently all under review and consultation.
In July 2015, BCBS released a consultative document on a revision
of the CVA framework set out in the current Basel III capital standards
for the treatment of counterparty credit risk. The revised framework
proposes to better align the capital standard with the fair value
measurement of CVA employed under various accounting regimes
and the proposed revisions to the market risk framework under the
Fundamental Review of the Trading Book. The estimated timing for
implementation is early 2018 to align with the implementation of the
revised market risk framework.
In December 2015, BCBS released the second consultative document
on revisions to the standardized approach for credit risk. Similar to the
first consultative document published in December 2014, the scope
covers most asset classes, including Bank and Corporate exposures,
Residential and Commercial real estate and off-balance sheet exposures.
In January 2016, OSFI issued for comment a draft guideline on Pillar 3
Disclosure Requirements. This guideline clarifies OSFI’s expectations
regarding domestic implementation by federally regulated deposit-
taking institutions of the Revised Pillar 3 Disclosure Requirements issued
by the BCBS in January 2015, which require disclosure of standard
templates to provide comparability and consistency of capital and
risk disclosures amongst banks. The final version of the guideline
will replace OSFI’s November 2007 Advisory on Pillar 3 Disclosure
Requirements. The implementation date for these requirements
is expected to be no later than the fourth quarter of 2018.
63
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
In March 2016, BCBS issued a consultative document “Reducing
variation in credit risk-weighted assets – constraints on the use of
internal model approaches”. The key aspects of the proposal include
removing the option to use the Internal Ratings Based approaches for
certain exposure categories, such as loans to financial institutions and
large corporations, and providing greater specification of parameter
estimation practices, including model-parameter floors.
In March 2016, BCBS also released the consultative paper on a new
Standardized Measurement Approach (SMA) to replace the AMA to
measure operational risk.
In April 2016, BCBS issued a consultative document on revisions to
the Basel III Leverage Ratio Framework and reaffirmed the 3% minimum
leverage ratio requirement, but is considering higher requirements
for G-SIBs, which would not currently be applicable to TD. Proposed
revisions to the design and calibration of the framework include
changes to the measurement of derivative exposures, equalization of
trade date and settlement date accounting methodologies, treatment
of provisions and alignment of the credit conversion factors for
off-balance sheet items with those proposed in the revised standardized
approach for credit risk.
In April 2016, OSFI released for public consultation proposed
updates to the regulatory capital requirements for loans secured by
residential real estate. The update introduces a risk-sensitive floor for
capital models that will be tied to the behaviour of property prices,
both in terms of recent housing price trends and the behaviour of
housing prices relative to household incomes, thereby increasing risk
weights for certain loans secured by residential real estate. The new
rule will come into effect for fiscal 2017 and will apply prospectively
to newly issued loans.
In July 2016, BCBS published an updated standard on the revised
securitization framework to incorporate the final standard for the
capital treatment for “simple, transparent, and comparable” (STC)
securitizations. Securitization exposures that meet the STC criteria
qualify for reduced minimum capital requirements. The updated
framework will be effective January 2018.
In October 2016, BCBS issued a discussion paper on the options for
the long-term regulatory treatment of accounting provisions, given the
upcoming changes in accounting provisioning standards under IFRS 9
that require the use of expected credit loss (ECL) models instead
of incurred loss models. Simultaneously, BCBS issued a consultative
document that proposes to retain, for the interim period, the current
regulatory treatment of accounting provisions. The BCBS is also
considering a transitional arrangement for the impact of ECL accounting
on regulatory capital. Refer to the section on “Future Changes in
Accounting Policy” in this document for additional details on IFRS 9.
GROUP FINANCIAL CONDITION
Securitization and Off-Balance Sheet Arrangements
In the normal course of operations, the Bank engages in a variety of
financial transactions that, under IFRS, are either not recorded on the
Bank’s Consolidated Balance Sheet or are recorded in amounts that
differ from the full contract or notional amounts. These off-balance
sheet arrangements involve, among other risks, varying elements of
market, credit, and liquidity risks which are discussed in the “Managing
Risk” section of this document. Off-balance sheet arrangements are
generally undertaken for risk management, capital management, and
funding management purposes and include securitizations, contractual
obligations, and certain commitments and guarantees.
STRUCTURED ENTITIES
TD carries out certain business activities through arrangements with
structured entities, including special purpose entities (SPEs). The Bank
uses SPEs to raise capital, obtain sources of liquidity by securitizing
certain of the Bank’s financial assets, to assist TD’s clients in securitizing
their financial assets, and to create investment products for the
Bank’s clients. Securitizations are an important part of the financial
markets, providing liquidity by facilitating investor access to specific
portfolios of assets and risks. Refer to Note 2 of the 2016 Consolidated
Financial Statements for further information regarding the Bank’s
involvement with SPEs.
Securitization of Bank-Originated Assets
The Bank securitizes residential mortgages, business and government
loans, credit cards, and personal loans to enhance its liquidity position,
to diversify sources of funding, and to optimize the management of
the balance sheet.
The Bank securitizes residential mortgages under the National
Housing Act Mortgage-Backed Securities (NHA MBS) program
sponsored by the Canada Mortgage and Housing Corporation (CMHC).
The securitization of the residential mortgages with the CMHC does
not qualify for derecognition and remain on the Bank’s Consolidated
Balance Sheet. Additionally, the Bank securitizes credit cards and
personal loans by selling them to Bank-sponsored SPEs that are
consolidated by the Bank. The Bank also securitizes U.S. residential
mortgages with U.S. government-sponsored entities which qualify for
derecognition and are removed from the Bank’s Consolidated Balance
Sheet. Refer to Notes 9 and 10 of the 2016 Consolidated Financial
Statements for further information.
64
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 4 6
EXPOSURES SECURITIZED BY THE BANK AS ORIGINATOR1
(millions of Canadian dollars)
Significant
unconsolidated SPEs
Significant
consolidated
SPEs
As at
Non-SPE third-parties
Residential mortgage loans
Consumer instalment and other personal loans2
Credit card loans
Business and government loans
Total exposure
Residential mortgage loans
Consumer instalment and other personal loans2
Credit card loans
Business and government loans
Total exposure
Securitized
assets
$ 23,081
–
–
–
$ 23,081
$ 23,452
–
–
–
$ 23,452
Carrying
value of
retained
interests
Securitized
assets
Securitized
assets
Carrying
value of
retained
interests
$ –
–
–
–
$ –
$ –
–
–
–
$ –
$
–
3,642
2,012
–
$ 5,654
$
–
3,642
–
–
$ 3,642
October 31, 2016
$ 3,661
–
–
1,664
$ 5,325
$ –
–
–
31
$ 31
October 31, 2015
$ 6,759
–
–
1,828
$ 8,587
$ –
–
–
38
$ 38
1 Includes all assets securitized by the Bank, irrespective of whether they are
on-balance or off-balance sheet for accounting purposes, except for securitizations
through U.S. government-sponsored entities.
2 In securitization transactions that the Bank has undertaken for its own assets
it has acted as an originating bank and retained securitization exposure from
a capital perspective.
Residential Mortgage Loans
The Bank securitizes residential mortgage loans through significant
unconsolidated SPEs and Canadian non-SPE third-parties. Residential
mortgage loans securitized by the Bank may give rise to full derecognition
of the financial assets depending on the individual arrangement of each
transaction. In instances where the Bank fully derecognizes residential
mortgage loans, the Bank may be exposed to the risks of transferred
loans through retained interests. As at October 31, 2016, the Bank has
not recognized any retained interests due to the securitization of
residential mortgage loans on its Consolidated Balance Sheet.
Business and Government Loans
The Bank securitizes business and government loans through significant
unconsolidated SPEs and Canadian non-SPE third parties. Business and
government loans securitized by the Bank may be derecognized from
the Bank’s balance sheet depending on the individual arrangement
of each transaction. In instances where the Bank fully derecognizes
business and government loans, the Bank may be exposed to the risks
of transferred loans through retained interests. There are no expected
credit losses on the retained interests of the securitized business and
government loans as the mortgages are all government insured.
Consumer Instalment and Other Personal Loans
The Bank securitizes consumer instalment and other personal loans
through consolidated SPEs. The Bank consolidates the SPEs as they
serve as financing vehicles for the Bank’s assets, the Bank has power
over the key economic decisions of the SPE, and the Bank is exposed to
the majority of the residual risks of the SPEs. As at October 31, 2016,
the SPEs had $4 billion of issued notes outstanding (October 31, 2015 –
$4 billion). As at October 31, 2016, the Bank’s maximum potential
exposure to loss for these conduits was $4 billion (October 31, 2015 –
$4 billion) of which $4 billion underlying consumer instalment and
other personal loans was government insured (October 31, 2015 – nil).
Credit Card Loans
The Bank securitizes credit card loans through an SPE. The Bank has
consolidated the SPE as it serves as a financing vehicle for the Bank’s
assets, and the Bank is exposed to the majority of the residual risks of
the SPE. As at October 31, 2016, the Bank securitized $2 billion of
credit card receivables. As at October 31, 2016, the consolidated SPE
had US$1.5 billion variable rate notes outstanding (October 31, 2015 –
nil). The notes are issued to third party investors and have fair value of
US$1.5 billion as at October 31, 2016 (October 31, 2015 – nil). Due to
the nature of the credit card receivables, their carrying amounts
approximate fair value.
Securitization of Third Party-Originated Assets
Significant Unconsolidated Special Purpose Entities
Multi-Seller Conduits
The Bank administers multi-seller conduits and provides liquidity
facilities as well as securities distribution services; it may also provide
credit enhancements. Third party-originated assets are securitized
through Bank-sponsored SPEs, which are not consolidated by the
Bank. TD’s maximum potential exposure to loss due to its ownership
interest in commercial paper and through the provision of
liquidity facilities for multi-seller conduits was $14.5 billion as at
October 31, 2016 (October 31, 2015 – $10.6 billion). Further, as at
October 31, 2016, the Bank had committed to provide an additional
$3.5 billion in liquidity facilities that can be used to support future
asset-backed commercial paper (ABCP) in the purchase of deal-specific
assets (October 31, 2015 – $1.7 billion).
65
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
All third-party assets securitized by the Bank’s unconsolidated
multi-seller conduits were originated in Canada and sold to Canadian
securitization structures. Details of the Bank-administered multi-seller
ABCP conduits are included in the following table.
T A B L E 4 7
EXPOSURE TO THIRD PARTY-ORIGINATED ASSETS SECURITIZED BY BANK-SPONSORED UNCONSOLIDATED CONDUITS
(millions of Canadian dollars, except as noted)
Residential mortgage loans
Credit card loans
Automobile loans and leases
Trade receivables
Total exposure
1 The Bank’s total liquidity facility exposure only relates to ‘AAA’ rated assets.
2 Expected weighted-average life for each asset type is based upon each of the
conduit’s remaining purchase commitment for revolving pools and the expected
weighted-average life of the assets for amortizing pools.
As at October 31, 2016, the Bank held $1.1 billion of ABCP issued
by Bank-sponsored multi-seller conduits within the Available-for-sale
securities and Trading loans, securities, and other categories on its
Consolidated Balance Sheet (October 31, 2015 – $1.1 billion).
OFF-BALANCE SHEET EXPOSURE TO THIRD
PARTY-SPONSORED CONDUITS
The Bank has off-balance sheet exposure to third party-sponsored
conduits arising from providing liquidity facilities and funding
commitments of $1.8 billion as at October 31, 2016 (October 31, 2015 –
$1.3 billion). The assets within these conduits are comprised of
individual notes backed by automotive loan receivables, credit card
receivables, and trade receivables. As at October 31, 2016, these
assets have maintained ratings from various credit rating agencies,
with a minimum rating of A. On-balance sheet exposure to third party-
sponsored conduits have been included in the financial statements.
COMMITMENTS
The Bank enters into various commitments to meet the financing needs
of the Bank’s clients and to earn fee income. Significant commitments
of the Bank include financial and performance standby letters of credit,
documentary and commercial letters of credit, and commitments to
extend credit. These products may expose the Bank to liquidity, credit
and reputational risks. There are adequate risk management and
control processes in place to mitigate these risks. Certain commitments
still remain off-balance sheet. Note 28 of the 2016 Consolidated
Financial Statements provides detailed information about the maximum
amount of additional credit the Bank could be obligated to extend.
October 31, 2016
October 31, 2015
As at
Exposure and
ratings profile of
unconsolidated
SPEs
AAA1
$ 9,826
–
2,637
1,989
$ 14,452
Expected
weighted-
average life
(years)2
3.0
–
1.3
2.3
2.6
Exposure and
ratings profile of
unconsolidated
SPEs
AAA1
$ 6,962
–
1,847
1,792
$ 10,601
Expected
weighted-
average life
(years)2
3.2
–
1.6
2.2
2.7
Leveraged Finance Credit Commitments
Also included in “Commitments to extend credit” in Note 28 of the
2016 Consolidated Financial Statements are leveraged finance credit
commitments. Leveraged finance credit commitments are agreements
that provide funding to a borrower with higher leverage ratio, relative to
the industry in which it operates, and for the purposes of acquisitions,
buyouts or capital distributions. During the year, the Bank refined the
definition and it may be subject to further refinement moving forward.
As at October 31, 2016, the Bank’s exposure to leveraged finance
credit commitments, including funded and unfunded amounts, was
$24.9 billion (October 31, 2015 – $11.2 billion).
GUARANTEES
In the normal course of business, the Bank enters into various
guarantee contracts to support its clients. The Bank’s significant
types of guarantee products are financial and performance standby
letters of credit, assets sold with recourse, credit enhancements,
written options, and indemnification agreements. Certain guarantees
remain off-balance sheet. Refer to Note 28 of the 2016 Consolidated
Financial Statements for further information regarding the accounting
for guarantees.
66
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
GROUP FINANCIAL CONDITION
Related-Party Transactions
TRANSACTIONS WITH KEY MANAGEMENT PERSONNEL, THEIR
CLOSE FAMILY MEMBERS, AND THEIR RELATED ENTITIES
Key management personnel are those persons having authority and
responsibility for planning, directing, and controlling the activities of
the Bank, directly or indirectly. The Bank considers certain of its officers
and directors to be key management personnel. The Bank makes loans
to its key management personnel, their close family members, and their
related entities on market terms and conditions with the exception of
banking products and services for key management personnel, which
are subject to approved policy guidelines that govern all employees.
In addition, the Bank offers deferred share and other plans to
non-employee directors, executives, and certain other key employees.
Refer to Note 24 of the 2016 Consolidated Financial Statements
for more details.
In the ordinary course of business, the Bank also provides various
banking services to associated and other related corporations on terms
similar to those offered to non-related parties.
TRANSACTIONS WITH EQUITY-ACCOUNTED INVESTEES
(1) TD AMERITRADE HOLDING CORPORATION
The Bank has significant influence over TD Ameritrade and accounts
for its investment in TD Ameritrade using the equity method. Pursuant
to the Stockholders Agreement in relation to the Bank’s equity
investment in TD Ameritrade, the Bank has the right to designate
five of twelve members of TD Ameritrade’s Board of Directors.
The Bank’s designated directors include the Bank’s Group President
and Chief Executive Officer and four independent directors of TD.
The following is a description of significant transactions between the
Bank and TD Ameritrade.
Insured Deposit Account (formerly known as Money Market Deposit
Account) Agreement
The Bank is party to an IDA agreement, as amended, with TD Ameritrade,
pursuant to which the Bank makes available to clients of TD Ameritrade,
IDAs as designated sweep vehicles. TD Ameritrade provides marketing
and support services with respect to the IDA. The Bank paid fees of
$1,235 million in 2016 (2015 – $1,051 million; 2014 – $895 million)
to TD Ameritrade for the deposit accounts. The fee paid by the Bank is
based on the average insured deposit balance of $112 billion in 2016
(2015 – $95 billion; 2014 – $80 billion) with a portion of the fee tied
to the actual yield earned by the Bank on the investments, less the
actual interest paid to clients of TD Ameritrade, with the balance based
on an agreed rate of return. The Bank earns a servicing fee of 25 bps
on the aggregate average daily balance in the sweep accounts (subject
to adjustment based on a specified formula).
As at October 31, 2016, amounts receivable from TD Ameritrade
were $72 million (October 31, 2015 – $79 million). As at
October 31, 2016, amounts payable to TD Ameritrade were
$141 million (October 31, 2015 – $140 million).
(2) TRANSACTIONS WITH SYMCOR
The Bank has one-third ownership in Symcor, a Canadian provider
of business process outsourcing services offering a diverse portfolio
of integrated solutions in item processing, statement processing
and production, and cash management services. The Bank accounts
for Symcor’s results using the equity method of accounting. During
the year ended October 31, 2016, the Bank paid $97 million
(October 31, 2015 – $124 million; October 31, 2014 – $122 million)
for these services. As at October 31, 2016, the amount payable to
Symcor was $16 million (October 31, 2015 – $10 million).
The Bank and two other shareholder banks have also provided
a $100 million unsecured loan facility to Symcor which was undrawn
as at October 31, 2016, and October 31, 2015.
GROUP FINANCIAL CONDITION
Financial Instruments
As a financial institution, the Bank’s assets and liabilities are substantially
composed of financial instruments. Financial assets of the Bank include,
but are not limited to, cash, interest-bearing deposits, securities, loans,
derivative instruments and securities purchased under reverse repurchase
agreements; while financial liabilities include, but are not limited
to, deposits, obligations related to securities sold short, securitization
liabilities, obligations related to securities sold under repurchase
agreements, derivative instruments, and subordinated debt.
The Bank uses financial instruments for both trading and
non-trading activities. The Bank typically engages in trading activities
by the purchase and sale of securities to provide liquidity and meet the
needs of clients and, less frequently, by taking trading positions with
the objective of earning a profit. Trading financial instruments include,
but are not limited to, trading securities, trading deposits, and trading
derivatives. Non-trading financial instruments include the majority of the
Bank’s lending portfolio, non-trading securities, hedging derivatives, and
financial liabilities. In accordance with accounting standards related to
financial instruments, financial assets or liabilities classified as trading
loans and securities, and financial instruments designated at fair value
through profit or loss, securities classified as available-for-sale, and
all derivatives are measured at fair value in the Bank’s Consolidated
Financial Statements, with the exception of certain available-for-sale
securities recorded at cost. Financial instruments classified as
held-to-maturity, loans and receivables, and other liabilities are carried
at amortized cost using the effective interest rate method. For details
on how fair values of financial instruments are determined, refer
to the “Accounting Judgements, Estimates, and Assumptions” –
“Fair Value Measurement” section of this document. The use of
financial instruments allows the Bank to earn profits in trading,
interest, and fee income. Financial instruments also create a variety
of risks which the Bank manages with its extensive risk management
policies and procedures. The key risks include interest rate, credit,
liquidity, market, and foreign exchange risks. For a more detailed
description on how the Bank manages its risk, refer to the “Managing
Risk” section of this document.
67
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS RISK FACTORS AND MANAGEMENT
Risk Factors That May Affect Future Results
In addition to the risks described in the “Managing Risk” section, there
are numerous other risk factors, many of which are beyond the Bank’s
control and the effects of which can be difficult to predict, that could
cause our results to differ significantly from our plans, objectives, and
estimates or could impact the Bank’s reputation or sustainability of its
business model. All forward-looking statements, including those in
this MD&A, are, by their very nature, subject to inherent risks and
uncertainties, general and specific, which may cause the Bank’s actual
results to differ materially from the expectations expressed in the
forward-looking statements. Some of these factors are discussed
below and others are noted in the “Caution Regarding Forward-
Looking Statements” section of this document.
TOP AND EMERGING RISKS THAT MAY AFFECT THE BANK
AND FUTURE RESULTS
TD considers it critical to regularly assess its operating environment
and highlight top and emerging risks. These are risks with a potential
to have a material effect on the Bank and where the attention of
senior leaders is focused due to the potential magnitude or immediacy
of their impact.
Risks are identified, discussed, and actioned by senior leaders and
reported quarterly to the Risk Committee of the Board. Specific plans
to mitigate top and emerging risks are prepared, monitored, and
adjusted as required.
General Business and Economic Conditions
TD and its customers operate in Canada, the U.S., and other countries.
As a result, the Bank’s earnings are significantly affected by the
general business and economic conditions in these regions. These
conditions include short-term and long-term interest rates, inflation,
fluctuations in the debt, commodity and capital markets, and related
market liquidity, real estate prices, employment levels, consumer
spending and debt levels, business investment, government spending,
exchange rates, sovereign debt risks, the strength of the economy,
threats of terrorism, civil unrest, geopolitical risk associated with
political unrest, the effects of public health emergencies, the effects
of disruptions to public infrastructure, natural disasters and the level
of business conducted in a specific region. Management maintains an
ongoing awareness of the macroeconomic environment in which it
operates and incorporates potential material changes into its business
plans and strategies; it also incorporates potential material changes
into the portfolio stress tests that are conducted. As a result, the
Bank is better able to understand the likely impact of many of these
negative scenarios and better manage the potential risks.
Executing on Key Priorities and Strategies
The Bank has a number of priorities and strategies, including those
detailed in each segment’s “Business Segment Analysis” section of
this document, which may include large scale strategic or regulatory
initiatives that are at various stages of development or implementation.
Examples include organic growth strategies, new acquisitions,
integration of recently acquired businesses, projects to meet new
regulatory requirements, new platforms and new technology or
enhancement to existing technology. Risk can be elevated due to the
size, scope, velocity, interdependency, and complexity of projects, the
limited timeframes to complete the projects, and competing priorities
for limited specialized resources.
In respect of acquisitions, the Bank undertakes deal assessments and
due diligence before completing a merger or an acquisition and closely
monitors integration activities and performance post acquisition.
However, there is no assurance that TD will achieve its objectives,
including anticipated cost savings, or revenue synergies following
acquisitions and integration. In general, while significant management
attention is placed on the governance, oversight, methodology, tools,
and resources needed to manage our priorities and strategies, our
ability to execute on them is dependent on a number of assumptions
and factors. These include those set out in the “Business Outlook and
Focus for 2017” and “Managing Risk” sections of this document, as
well as disciplined resource and expense management and our ability
to implement (and the costs associated with the implementation of)
enterprise-wide programs to comply with new or enhanced regulations
or regulator demands, all of which may not be in the Bank’s control
and are difficult to predict.
If any of the Bank’s acquisitions, strategic plans or priorities are not
successful, there could be an impact on the Bank’s operations and
financial performance and the Bank’s earnings could grow more
slowly or decline.
Technology and Information Security Risk
Technology and information security risks for large financial institutions
like the Bank have increased in recent years. This is due, in part, to the
proliferation, sophistication and constant evolution of new technologies
and attack methodologies used by sociopolitical entities, organized
criminals, hackers and other external parties. The increased risks are
also a factor of our size and scale of operations, our geographic
footprint, the complexity of our technology infrastructure, and our
use of internet and telecommunications technologies to conduct
financial transactions, such as our continued development of mobile
and internet banking platforms. The Bank’s technologies, systems
and networks, and those of our customers and the third parties
providing services to us, may be subject to attacks, breaches or other
compromises. These may include cyber-attacks such as targeted
attacks on banking systems and applications, malicious software,
denial of service attacks, phishing attacks and theft of data, and may
involve attempts to fraudulently induce employees, customers, third
party service providers or other users of the Bank’s systems to disclose
sensitive information in order to gain access to the Bank’s data or that
of its customers. The Bank actively monitors, manages, and continues
to enhance its ability to mitigate these technology and information
security risks through enterprise-wide programs, using industry
best practices, and robust threat and vulnerability assessments and
responses. The Bank also invests in projects to continually review and
enhance its information technology infrastructure. It is possible that
the Bank, or those with whom the Bank does business, may not
anticipate or implement effective measures against all such information
and technology related risks, particularly because the techniques used
change frequently and risks can originate from a wide variety of
sources that have also become increasingly sophisticated. As such,
with any attack, breach or compromise of technology or information
systems, hardware or related processes, or any significant issues
caused by weakness in information technology infrastructure, the Bank
may experience, among other things, financial loss; a loss of customers
or business opportunities; disruption to operations; misappropriation
or unauthorized release of confidential, financial or personal
information; damage to computers or systems of the Bank and those
of its customers and counterparties; violations of applicable privacy
and other laws; litigation; regulatory penalties or intervention,
remediation, investigation or restoration cost; increased costs to
maintain and update our operational and security systems and
infrastructure; and reputational damage.
68
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS Evolution of Fraud and Criminal Behaviour
As a financial institution, TD is inherently exposed to various types
of fraud and other financial crime. The sophistication, complexity and
materiality of these crimes evolves quickly. In deciding whether to extend
credit or enter into other transactions with customers or counterparties,
the Bank may rely on information furnished by or on behalf of such other
parties including financial statements and financial information. The Bank
may also rely on the representations of customers and counterparties as
to the accuracy and completeness of such information. In addition to the
risk of material loss that could result in the event of a financial crime,
client and market confidence in the Bank could be potentially impacted.
TD has invested in a coordinated approach to strengthen the Bank’s
fraud defences and build upon existing practices in Canada and the
U.S. The Bank continues to introduce new capabilities and defences to
strengthen the Bank’s control posture to combat more complex fraud.
Third Party Service Providers
The Bank recognizes the value of using third parties to support its
businesses, as they provide access to leading applications, processes,
products and services, specialized expertise, innovation, economies of
scale, and operational efficiencies. However, they also create reliance
upon the continuity, reliability and security of these relationships,
and their associated processes, people and facilities. As the financial
services industry and its supply chains become more complex, the need
for robust, holistic and sophisticated controls and ongoing oversight
also grows. Just as the Bank’s owned and operated applications,
processes, products and services could be subject to failures or
disruptions as a result of human error, natural disasters, utility
disruptions, and criminal or terrorist acts (such as cyber-attacks),
each of its suppliers may be exposed to similar risks which could in
turn impact the Bank’s operations. Such adverse effects could limit
the Bank’s ability to deliver products and services to customers, and/or
damage the Bank’s reputation, which in turn could lead to disruptions
to our businesses and financial loss. Consequently, the Bank has
established expertise and resources dedicated to third party supplier
risk management, as well as policies and procedures governing third
party relationships from the point of selection through the life cycle of
both the relationship and the good or service. The Bank develops and
tests robust business continuity management plans which contemplate
customer, employee, and operational implications, including
technology and other infrastructure contingencies.
Introduction of New and Changes to Current Laws and Regulations
The introduction of new, and changes to current laws and regulations,
changes in interpretation or application of existing laws and regulations,
judicial decisions, as well as the fiscal, economic and monetary policies
of various regulatory agencies and governments in Canada, the U.S. and
other countries, and changes in their interpretation or implementation,
could adversely affect TD’s operations, profitability and reputation. Such
adverse effects may include incurring additional costs and resources to
address initial and ongoing compliance; limiting the types or nature of
products and services the Bank can provide and fees it can charge;
unfavourably impacting the pricing and delivery of products and
services the Bank provides; increasing the ability of new and existing
competitors to compete with their pricing, products and services
(including, in jurisdictions outside Canada, the favouring of certain
domestic institutions); and increasing risks associated with potential
non-compliance. In addition to the adverse impacts described above,
the Bank’s failure to comply with applicable laws and regulations could
result in sanctions and financial penalties that could adversely impact
its earnings and its operations and damage its reputation.
The most recent financial crisis resulted in, and could further result
in, unprecedented and considerable change to laws and regulations
applicable to financial institutions and the financial industry. The
global privacy landscape continues to experience regulatory change,
with significant new legislation anticipated to come into force in the
jurisdictions in which TD does business in the short- and medium-term.
In the U.S., updates to the definition of ‘fiduciary’ under rules
promulgated by the Department of Labor could impact a broad
range of products and sales practices. Finally, in Canada, there are a
number of regulatory initiatives underway that could impact financial
institutions, including with respect to the deposit insurance system,
credit cards, payment evolution and modernization, consumer
protection, and the Canadian housing market.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank), a U.S. federal law, was signed into law on July 21, 2010.
It requires significant structural reform to the U.S. financial services
industry and affects every banking organization operating in the U.S.,
including the Bank. Due to certain aspects with extraterritorial effect,
Dodd-Frank also impacts the Bank’s operations outside the U.S.,
including in Canada. Many parts of Dodd-Frank are in effect and
others are in the implementation stage. Certain of the rules that
impact the Bank include:
• The “Volcker Rule” – In December 2013, the U.S. Board of
Governors of the Federal Reserve System (the “Federal Reserve”)
and other U.S. federal regulatory agencies issued final regulations
implementing the Volcker Rule provisions of Dodd-Frank, which
restrict banking entities from engaging, as principal, in proprietary
trading and from sponsoring or holding ownership interests
in or having certain relationships with certain hedge funds and
private equity funds, subject to certain exceptions and exclusions.
The Volcker Rule also requires banking entities to establish
comprehensive compliance programs that are reasonably designed
to document, describe, monitor, and limit covered trading and fund
activities. The Bank has established compliance programs under the
Volcker Rule where applicable. However, given the complexity of
the Volcker Rule’s application, and the lack of regulatory guidance
on certain matters, it is possible that future regulatory guidance or
review could result in additional limitations on the Bank’s trading
and fund activities. The Volcker Rule will likely continue to increase
our operational and compliance costs.
• Capital Planning and Stress Testing – Pursuant to the Federal
Reserve’s Comprehensive Capital Analysis and Review (CCAR)
process, the Bank is required to submit an annual capital plan,
as well as annual and semi-annual stress test results for our top-tier
U.S. bank holding company (TD Group US Holdings LLC), on a
consolidated basis, to the Federal Reserve. The Federal Reserve
defines stress test scenarios for both the company-run and
supervisory stress tests by bank holding companies. In addition,
the U.S. Office of the Comptroller of the Currency (OCC) defines
requirements for company-run stress tests by national banks. On
April 5, 2016, TD Group US Holdings LLC submitted its first annual
capital plan and prescribed stress testing results to the Federal
Reserve. TD Bank, N.A. and TD Bank USA, N.A. also submitted
prescribed stress testing results to the OCC. On June 29, 2016,
the Federal Reserve announced that it did not object to the annual
capital plan of TD Group US Holdings LLC. On October 5, 2016,
TD Group US Holdings LLC provided its first semi-annual stress test
submission. Any issues arising from U.S. regulators’ review of such
capital plan and stress testing may negatively impact the Bank’s
operations and/or reputation and lead to increased costs.
69
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS •
Intermediate Holding Company Establishment – In February 2014,
the Federal Reserve adopted a final rule that imposes “enhanced
prudential standards” on certain non-U.S. banking organizations
(“FBOs”) having a U.S. presence and global consolidated assets of
US$10 billion or more. Such standards include enhanced capital and
liquidity requirements, stress testing obligations and risk management
standards with additional requirements and expectations for FBOs
with at least US$50 billion in combined U.S. assets. In addition,
FBOs with U.S. non-branch assets of US$50 billion or more, such
as the Bank, were required to establish, by July 1, 2016, a separately
capitalized top-tier U.S. intermediate holding company (IHC). The
IHC is required to hold the FBO’s ownership interests in all of its
U.S. subsidiaries (with certain limited exceptions) but not the assets
of the FBO’s U.S. branches and agencies. TD is implementing the
IHC requirements in phases, the first of which was concluded in
July 2015, at which time TD Group US Holdings LLC was established
as the top-tier bank holding company in the U.S. On July 1, 2016,
TD Group US Holdings LLC was officially designated as the Bank’s
IHC and at least 90% of the Bank’s U.S. non-branch assets were
transferred to it, with the remaining ownership interests in the
Bank’s U.S. subsidiaries to be transferred to the IHC by July 1, 2017.
Compliance with the rule, including adopted proposals, also requires
increased reporting, recordkeeping and disclosure requirements.
The foregoing actions did, and will continue to, require TD to incur
operational, capital, liquidity, and compliance costs and may impact
its businesses, operations, and results in the U.S. and overall.
In general, in connection with Dodd-Frank and its implementing
regulations and actions by regulators, the Bank could be negatively
impacted by loss of revenue, limitations on the products or services
it offers, and additional operational and compliance costs.
Basel III
OSFI’s guideline on Liquidity Adequacy Requirements (LAR) will
incorporate the finalized Basel Committee on Banking Supervision Net
Stable Funding Ratio (NSFR) rules in the near future. TD expects that
OSFI will require banks to meet the 100% NSFR ratio no later than
2018. The Bank will continue to evaluate the impact of implementing
the NSFR and determine adjustments required to liquidity and funding
management strategies.
Regulatory Oversight and Compliance Risk
Our businesses are subject to extensive regulation and oversight.
Regulatory change is occurring in all of the geographies where TD
operates, with some of the most noteworthy changes arising in the
U.S. Regulators have demonstrated a trend towards establishing new
standards and best practice expectations via enforcement actions and
an increased use of public enforcement with substantial fines and
penalties when compliance breaches occur. TD continually monitors
and evaluates the potential impact of rules, proposals, consent orders,
and regulatory guidance relevant within all of its business segments.
However, while the Bank devotes substantial compliance, legal, and
operational business resources to facilitate compliance with these rules
by their respective effective dates and consideration of regulator
expectations set out in enforcement actions, it is possible that TD may
not be able to accurately predict the impact of final versions of rules
or the interpretation or enforcement actions taken by regulators. This
could require the Bank to take further actions or incur more costs than
expected. In addition, TD believes that regulators may continue to take
formal enforcement action, rather than taking informal/supervisory
actions, more frequently than they have done historically. As a result,
despite its prudence and management efforts, the Bank’s operations,
business strategies and product and service offerings may be adversely
impacted, therefore impacting financial results. Also, it may be
determined that the Bank has not successfully addressed new rules,
orders or enforcement actions to which it is subject. As such, the Bank
may continue to face a greater number or wider scope of investigations,
enforcement actions and litigation. The Bank may incur greater than
expected costs associated with enhancing its compliance, or may
incur fines, penalties or judgments not in its favour associated with
non-compliance, all of which could also lead to negative impacts on
the Bank’s financial performance and its reputation.
Principles for Effective Risk Data Aggregation
In January 2013, the Basel Committee on Banking Supervision
(BCBS) finalized its “Principles for Effective Risk Data Aggregation
and Reporting”. The principles provide guidelines for areas such as:
governance of risk data, architecture and infrastructure, accuracy,
completeness, timeliness, and adaptability of reporting. As a result,
the Bank faces increased complexity with respect to operational
compliance and increased compliance and operating costs. Programs
are in place to manage the enhancement of risk data aggregation
and reporting.
Level of Competition and Disruptive Technology
The Bank operates in a highly competitive industry and its performance
is impacted by the level of competition. Customer retention and
attraction of new customers can be influenced by many factors,
including the quality, pricing and variety of products and services
offered, as well as an institution’s reputation and ability to innovate.
Ongoing or increased competition may impact the Bank’s pricing
of products and services and may cause us to lose market share.
Increased competition also may require us to make additional short
and long-term investments in order to remain competitive, which may
increase expenses. In addition, the Bank operates in environments
where laws and regulations that apply to it may not universally apply
to its current competitors, which include domestic institutions in
jurisdictions outside of Canada or non-traditional providers of financial
products and services. Non-depository or non-financial institutions
are often able to offer products and services that were traditionally
banking products and to compete with banks in the provision of
electronic and Internet-based financial solutions, without facing the
same regulatory requirements or oversight. These evolving distribution
methods by such competitors can also increase fraud and privacy risks
for customers and financial institutions in general. The nature of
disruption is such that it can be difficult to anticipate and/or respond
to adequately or quickly, representing inherent risks to certain Bank
businesses, including payments. As such, this type of competition
could also adversely impact the Bank’s earnings by reducing revenue.
Each of the business segments of the Bank monitors the competitive
environment including reviewing and amending customer acquisition
and management strategies as appropriate. The Bank has been
investing in enhanced capabilities for our customers to transact
across all of our channels seamlessly, with a particular emphasis
on mobile technologies.
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TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS OTHER RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Legal Proceedings
The Bank or its subsidiaries are from time to time named as defendants
or are otherwise involved in various class actions and other litigations
or disputes with third parties, including regulatory investigations and
enforcement proceedings, related to its businesses and operations. The
Bank manages and mitigates the risks associated with these proceedings
through a robust litigation management function. The Bank’s material
litigation and regulatory enforcement proceedings are disclosed in its
Consolidated Financial Statements. There is no assurance that the volume
of claims and the amount of damages and penalties claimed in litigation,
arbitration and regulatory proceedings will not increase in the future.
Actions currently pending against the Bank may result in judgments,
settlements, fines, penalties, disgorgements, injunctions, business
improvement orders or other results adverse to the Bank, which could
materially adversely affect the Bank’s business, financial condition, results
of operations, cash flows, capital and credit ratings; require material
changes in the Bank’s operations; result in loss of customers; or cause
serious reputational harm to the Bank. Moreover, some claims asserted
against the Bank may be highly complex, and include novel or untested
legal theories. The outcome of such proceedings may be difficult to
predict or estimate until late in the proceedings, which may last several
years. In addition, settlement or other resolution of certain types of
matters are subject to external approval, which may or may not be
granted. Although the Bank establishes reserves for these matters
according to accounting requirements, the amount of loss ultimately
incurred in relation to those matters may substantially differ from the
amounts accrued. As a participant in the financial services industry,
the Bank will likely continue to experience the possibility of significant
litigation and regulatory investigations and enforcement proceedings
related to its businesses and operations. Regulators and other
government agencies examine the operations of the Bank and its
subsidiaries on both a routine- and targeted-exam basis, and there is no
assurance that they will not pursue additional regulatory settlements or
other enforcement actions against the Bank in the future. For additional
information relating to the Bank’s material legal proceedings, refer to
Note 28 of the Consolidated Financial Statements.
Acquisitions and Strategic Plans
The Bank regularly explores opportunities to acquire other companies,
or parts of their businesses directly or indirectly through the acquisition
strategies of its subsidiaries. There is no assurance that the Bank will
achieve its financial or strategic objectives, including anticipated cost
savings or revenue synergies following acquisitions and integration
efforts. The Bank’s, or a subsidiary’s, ability to successfully complete
an acquisition is often subject to regulatory and other approvals,
and the Bank cannot be certain when or if, or on what terms and
conditions, any required approvals will be granted. The Bank’s financial
performance is also influenced by its ability to execute strategic plans
developed by management. If these strategic plans do not meet with
success or there is a change in strategic plans, there could be an
impact on the Bank’s financial performance and the Bank’s earnings
could grow more slowly or decline. The Bank undertakes due diligence
before completing an acquisition and closely monitors integration
activities and performance post acquisition.
Ability to Attract, Develop and Retain Key Executives
The Bank’s future performance depends to a large extent on the
availability of qualified people and the Bank’s ability to attract, develop
and retain key executives. There is intense competition for the best
people in the financial services sector. Although it is the goal of the
Bank’s management resource policies and practices to attract, develop,
and retain key executives employed by the Bank or an entity acquired
by the Bank, there is no assurance that the Bank will be able to do so.
Annually, the Bank undertakes a comprehensive formal resource
planning process that assesses critical capability requirements for all
areas of the business and facilitates an assessment of current executive
leadership capabilities and developmental opportunities against both
current and future business needs. The outcomes from the process
inform plans at both the enterprise and business level to retain,
develop, or acquire the required executive talent which are actioned
throughout the course of the year.
Currency and Interest Rates
Currency and interest rate movements in Canada, the U.S. and other
jurisdictions in which the Bank does business impact the Bank’s
financial position (as a result of foreign currency translation adjustments)
and its future earnings. Changes in the value of the Canadian dollar
relative to the U.S. dollar may also affect the earnings of the Bank’s small
business, commercial, and corporate clients in Canada. A change in the
level of interest rates, or a prolonged low interest rate environment,
affects the interest spread between the Bank’s deposits and loans and
as a result impacts the Bank’s net interest income. The Bank manages
non-trading currency and interest rate risk exposures in accordance
with policies established by the Risk Committee through its Asset
Liability Management framework, which is further discussed in the
“Managing Risk” section of this document.
Accounting Policies and Methods Used by the Bank
The Bank’s accounting policies and estimates are essential to
understanding its results of operations and financial condition.
Some of the Bank’s policies require subjective, complex judgments
and estimates as they relate to matters that are inherently uncertain.
Changes in these judgments or estimates and changes to accounting
standards and policies could have a materially adverse impact on the
Bank’s Consolidated Financial Statements, and therefore its reputation.
The Bank has established procedures to ensure that accounting
policies are applied consistently and that the processes for changing
methodologies, determining estimates and adopting new accounting
standards are well controlled and occur in an appropriate and
systematic manner. Significant accounting policies as well as current
and future changes in accounting policies are described in Note 2 and
Note 4, respectively, of the Consolidated Financial Statements.
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TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS RISK FACTORS AND MANAGEMENT
Managing Risk
EXECUTIVE SUMMARY
Growing profitability in financial services involves selectively taking
and managing risks within TD’s risk appetite. The Bank’s goal is to
earn a stable and sustainable rate of return for every dollar of risk
it takes, while putting significant emphasis on investing in TD’s
businesses to ensure it can meet its future strategic objectives.
The Bank’s Enterprise Risk Framework (ERF) reinforces TD’s risk
culture, which emphasizes transparency and accountability, and
supports a common understanding among stakeholders of how the
Bank manages risk. The ERF addresses: (1) the nature of risks to the
Bank’s strategy and operations; (2) how the Bank defines the types of
risk it is exposed to; (3) risk management governance and organization;
and (4) how the Bank manages risk through processes that identify
and assess, measure, control, and monitor and report risk. The Bank’s
risk management resources and processes are designed to both
challenge and enable all its businesses to understand the risks they
face and to manage them within TD’s risk appetite.
RISKS INVOLVED IN TD’S BUSINESSES
TD’s Risk Inventory describes the major risk categories and related
subcategories to which the Bank’s businesses and operations could
be exposed. The Risk Inventory facilitates consistent risk identification
and is the starting point in developing risk management strategies and
processes. TD’s major risk categories are: Strategic Risk, Credit Risk,
Market Risk, Operational Risk, Model Risk, Insurance Risk, Liquidity
Risk, Capital Adequacy Risk, Legal and Regulatory Compliance Risk,
and Reputational Risk.
Major Risk Categories
Strategic
Risk
Credit
Risk
Market
Risk
Operational
Risk
Model
Risk
Insurance
Risk
Liquidity
Risk
Capital
Adequacy
Risk
Legal and
Regulatory
Compliance
Risk
Reputational
Risk
RISK APPETITE
TD’s RAS is the primary means used to communicate how TD views risk
and determines the type and amount of risk it is willing to take to deliver
on the Bank’s strategy and enhance shareholder value. In defining its
risk appetite, the Bank takes into account its vision, mission, strategy,
guiding principles, risk philosophy, and capacity to bear risk. The
guiding principles for TD’s RAS are as follows:
The Bank takes risks required to build its business, but only if those risks:
1. Fit the business strategy, and can be understood and managed.
2. Do not expose the enterprise to any significant single loss events; TD
does not ‘bet the Bank’ on any single acquisition, business, or product.
3. Do not risk harming the TD brand.
TD considers current operating conditions and the impact of emerging
risks in developing and applying its risk appetite. Adherence to
enterprise risk appetite is managed and monitored across the Bank
and is informed by the RAS and a broad collection of principles,
policies, processes, and tools. TD’s RAS describes, by major risk
category, the Bank’s risk principles and establishes both qualitative
and quantitative measures with key indicators, thresholds, and limits,
as appropriate. RAS measures consider both normal and stress
scenarios and include those that can be aggregated at the enterprise
level and disaggregated at the business segment level.
Risk Management is responsible for establishing practices and
processes to formulate, monitor, and report on TD’s RAS measures.
The function also monitors and evaluates the effectiveness of these
practices and measures. RAS measures are reported regularly to senior
management, the Board, and the Risk Committee; other measures are
tracked on an ongoing basis by management, and escalated to senior
management and the Board, as required. Risk Management regularly
assesses management’s performance against TD’s RAS measures.
RISK CULTURE
The Bank’s risk culture embodies the “tone at the top” set by the
Board, Chief Executive Officer (CEO), and Senior Executive Team (SET),
which informs TD’s vision, mission, guiding principles, and leadership
profile. These governing objectives describe the attitudes and
behaviours that the Bank seeks to foster, among its employees, in
building a culture where the only risks taken are those that can be
understood and managed. TD’s risk culture promotes accountability,
learning from past experiences, and encourages open communication
and transparency on all aspects of risk taking. TD employees are
encouraged to challenge and escalate when they believe the Bank
is operating outside of its risk appetite.
Ethical behaviour is a key component of TD’s risk culture. TD’s Code of
Conduct and Ethics guides employees and Directors to make decisions
that meet the highest standards of integrity, professionalism, and
ethical behaviour. Every TD employee and Director is expected and
required to assess business decisions and actions on behalf of the
organization in light of whether it is right, legal, and fair. TD’s desired
risk culture is reinforced by linking compensation to management’s
performance against the Bank’s risk appetite. Performance against
risk appetite is a key consideration in determining compensation for
executives, including adjustments to incentive awards both at the time
of award and again at maturity for deferred compensation. An annual
consolidated assessment of management’s performance against
the RAS prepared by Risk Management and reviewed by the Risk
Committee is used by the Human Resources Committee as a key input
into compensation decisions. All executives are individually assessed
against objectives that include consideration of risk and control
behaviours. This comprehensive approach allows the Bank to consider
whether the actions of executive management resulted in risk and
control events within their area of responsibility.
72
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS In addition, governance, risk, and oversight functions operate
independently from business segments supported by an organizational
structure that provides independent oversight and objective challenge.
Governance, risk, and oversight function heads, including the
Chief Risk Officer (CRO), have unfettered access to respective Board
Committees to raise risk, compliance, and other issues. Lastly, awareness
and communication of TD’s RAS and the ERF take place across the
organization through enterprise risk communication programs,
employee orientation and training, and participation in internal risk
management conferences. These activities further strengthen TD’s risk
culture by increasing the knowledge and understanding of the Bank’s
expectations for risk taking.
is provided by the Board and its committees (primarily the Audit
and Risk Committees). The CEO and SET determine TD’s long-term
direction within the Bank’s risk appetite and apply it to the business
segments. Risk Management, headed by the Group Head and CRO,
sets enterprise risk strategy and policy and provides independent
oversight to support a comprehensive and proactive risk management
approach. The CRO, who is also a member of the SET, has unfettered
access to the Risk Committee. The Bank also employs a “three lines of
defence” model to describe the role of business segments (first line),
governance, risk, and oversight functions, such as Risk Management
and Legal and Regulatory Compliance functions (second line), and
Internal Audit (third line) in managing risk across TD.
WHO MANAGES RISK
TD’s risk governance structure emphasizes and balances strong
independent oversight with clear ownership for risk control within
each business segment. Under the Bank’s approach to risk governance,
business segments are accountable for risks arising in their business
and are responsible for identifying, assessing, and measuring the risks,
as well as designing and implementing mitigating controls. Business
segments also monitor and report on the ongoing effectiveness of
their controls to safeguard TD from exceeding its risk appetite.
The Bank’s risk governance model includes a senior management
committee structure that is designed to support transparent risk
reporting and discussions. TD’s overall risk and control oversight
The Bank has a robust subsidiary governance framework to support
its overall risk governance structure, including boards of directors, and
committees for various subsidiary entities where appropriate. Within
the U.S. Retail business segment, risk and control oversight is provided
by a separate and distinct Board of Directors which includes a fully
independent Board Risk Committee and Board Audit Committee.
The U.S. Chief Risk Officer (U.S. CRO) has unfettered access to the
Board Risk Committee.
The following section provides an overview of the key roles and
responsibilities involved in risk management. The Bank’s risk governance
structure is illustrated in the following figure.
RISK GOVERNANCE STRUCTURE
Board of Directors
Audit Committee
Risk Committee
Chief Executive Officer
Senior Executive Team
CRO
Executive Committees
Enterprise Risk Management Committee (ERMC)
Asset/Liability & Capital
Committee (ALCO)
Operational Risk Oversight
Committee (OROC)
Disclosure
Committee
Reputational Risk
Committee (RRC)
Governance, Risk and Oversight Functions
Internal
Audit
Canadian Retail
U.S. Retail
Wholesale Banking
Business Segments
Internal
Audit
73
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS The Board of Directors
The Board oversees the Bank’s strategic direction, the implementation
of an effective risk management culture, and the internal control
framework across the enterprise. It accomplishes its risk management
mandate both directly and indirectly through its four committees,
primarily the Audit Committee and Risk Committee, as well as the
Human Resources and Corporate Governance Committees. On an
annual basis, the Board reviews and approves TD’s RAS and related
measures to ensure ongoing relevance and alignment with TD’s strategy.
The Audit Committee
The Audit Committee oversees financial reporting, the adequacy and
effectiveness of internal controls, including internal controls over
financial reporting, and the activities of the Bank’s Global Anti-Money
Laundering (AML) group, Compliance group and Internal Audit. The
Committee monitors compliance with policies in respect of ethical
personal and business conduct, including the Bank’s Code of Conduct
and Ethics and the Whistleblower Policy.
The Risk Committee
The Risk Committee is responsible for reviewing and recommending
TD’s RAS for approval by the Board annually. The Risk Committee
oversees the management of TD’s risk profile and performance against
its risk appetite. In support of this oversight, the Committee reviews
and approves certain enterprise-wide risk management frameworks
and policies that support compliance with TD’s risk appetite, and
monitors the management of risks and risk trends.
The Human Resources Committee
The Human Resources Committee, in addition to its other responsibilities,
satisfies itself that Human Resources risks are appropriately identified,
assessed, and managed in a manner consistent with the risk programs
within the Bank, and with the sustainable achievement of the Bank’s
business objectives.
The Corporate Governance Committee
The Corporate Governance Committee, in addition to its other
responsibilities, develops and where appropriate recommends
to the Board a set of corporate governance principles, including
a code of conduct and ethics, aimed at fostering a healthy
governance culture at TD.
Chief Executive Officer and Senior Executive Team
The CEO and the SET develop and recommend to the Board the
Bank’s long-term strategic plan and direction and also develop and
recommend for Board approval TD’s risk appetite. The SET manages
risk in accordance with TD’s risk appetite and considers the impact
of emerging risks on the Bank’s strategy and risk profile. This
accountability includes identifying and reporting significant risks
to the Risk Committee.
Executive Committees
The CEO, in consultation with the CRO determines TD’s Executive
Committees, which are chaired by SET members. The committees meet
regularly to oversee governance, risk, and control activities and to review
and monitor risk strategies and associated risk activities and practices.
The ERMC, chaired by the CEO, oversees the management of major
enterprise governance, risk, and control activities and promotes an
integrated and effective risk management culture. The following
Executive Committees have been established to manage specific major
risks based on the nature of the risk and related business activity:
• ALCO – chaired by the Group Head and Chief Financial Officer, the
ALCO oversees directly and through its standing subcommittees (the
Risk Capital Committee (RCC) and Global Liquidity Forum (GLF)) the
management of TD’s consolidated non-trading market risk and each of
its consolidated liquidity, funding, investments, and capital positions.
• OROC – chaired by the Group Head and CRO, the OROC oversees
the identification, monitoring, and control of key risks within TD’s
operational risk profile.
• Disclosure Committee – chaired by the Group Head and Chief
Financial Officer, the Disclosure Committee oversees that
appropriate controls and procedures are in place and operating
to permit timely, accurate, balanced, and compliant disclosure
to regulators, shareholders, and the market.
• RRC – chaired by the Group Head and CRO, the RRC oversees the
management of reputational risk within the Bank’s risk appetite.
Risk Management
The Risk Management function, headed by the CRO, provides
independent oversight of enterprise risk management, risk governance,
and control including the setting of risk strategy and policy to manage
risk in alignment with the Bank’s risk appetite and business strategy.
Risk Management’s primary objective is to support a comprehensive
and proactive approach to risk management that promotes a strong
risk management culture. Risk Management works with the business
segments and other corporate oversight functions to establish policies,
standards, and limits that align with TD’s risk appetite and monitors
and reports on existing and emerging risks and compliance with
TD’s risk appetite. The CRO is supported by a dedicated team of risk
management professionals organized to oversee risks arising from each
of the Bank’s major risk categories. There is an established process
in place for the identification and assessment of top and emerging
risks. In addition, the Bank has clear procedures governing when and
how risk events and issues are brought to the attention of senior
management and the Risk Committee.
Business Segments
Each business segment has a dedicated risk management function that
reports directly to a senior risk executive, who, in turn, reports to the
CRO. This structure supports an appropriate level of independent
oversight while emphasizing accountability for risk within the business
segment. Business management is responsible for setting the business-
level risk appetite and measures, which are reviewed and challenged by
Risk Management, endorsed by the ERMC and approved by the CEO, to
align with TD’s risk appetite and manage risk within approved risk limits.
Internal Audit
TD’s internal audit function provides independent and objective
assurance to the Board regarding the effectiveness of risk management,
control, and governance processes employed to ensure compliance
with TD’s risk appetite. Internal Audit reports on its evaluation to
management and the Board.
Compliance
The Compliance Department is responsible for ensuring there is effective
management of compliance risk across TD globally; driving a consistent,
adaptable and effective culture across the organization; and assessing
the adequacy of, adherence to and effectiveness of TD’s day-to-day
Regulatory Compliance Management controls.
Global Anti-Money Laundering
The Global AML Department is responsible for Anti-Money Laundering,
Anti-Terrorist Financing, and Economic Sanctions regulatory compliance
and prudential risk management across TD in alignment with enterprise
policies so that the money laundering, terrorist financing and economic
sanctions risks are appropriately identified and mitigated.
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TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS Treasury and Balance Sheet Management
The Treasury and Balance Sheet Management (TBSM) group manages,
directs, and reports on the Bank’s capital and investment positions,
interest rate risk, liquidity and funding risk, and the market risks of
TD’s non-trading banking activities. The Risk Management function
oversees TBSM’s capital and investment activities.
Three Lines of Defence
In order to further the understanding of responsibilities for risk
management, the Bank employs a “three lines of defence” model
that describes the roles and responsibilities of the business segments,
governance, risk and oversight functions, and Internal Audit in
managing risk across the Bank. The following chart describes the
respective accountabilities of each line of defence at TD.
THREE LINES OF DEFENCE
First Line
Identify and Control
Business Segment Accountabilities
• Manage and identify risk in day-to-day activities.
• Ensure activities are within TD’s risk appetite and risk management policies.
• Design, implement, and maintain effective internal controls.
•
• Deliver training, tools, and advice to support its accountabilities.
• Monitor and report on risk profile.
Implement risk based approval processes for all new products, activities, processes, and systems.
Second Line
Governance, Risk, and Oversight Function Accountabilities
Set Standards and Challenge
• Establish and communicate enterprise governance, risk, and control strategies and policies.
• Provide oversight and independent challenge to the first line through review, inquiry, and discussion.
• Provide training, tools, and advice to support the first line in carrying out its accountabilities.
• Monitor and report on compliance with risk appetite and policies.
Third Line
Internal Audit Accountabilities
Independent Assurance
• Verify independently that TD’s ERF is operating effectively.
• Validate the effectiveness of the first and second lines in fulfilling their mandates and managing risk.
In support of a strong risk culture, TD applies the following principles
in governing how it manages risks:
• Enterprise-Wide in Scope – Risk Management will span all areas
of TD, including third-party alliances and joint venture undertakings
to the extent they may impact TD, and all boundaries both
geographic and regulatory.
• Transparent and Effective Communication – Matters relating to
risk will be communicated and escalated in a timely, accurate, and
forthright manner.
• Enhanced Accountability – Risks will be explicitly owned,
understood, and actively managed by business management
and all employees, individually and collectively.
• Independent Oversight – Risk policies, monitoring, and reporting
will be established and conducted independently and objectively.
• Integrated Risk and Control Culture – Risk management
disciplines will be integrated into TD’s daily routines, decision-
making, and strategy formulation.
• Strategic Balance – Risk will be managed to an acceptable
level of exposure, recognizing the need to protect and grow
shareholder value.
APPROACH TO RISK MANAGEMENT PROCESSES
TD’s comprehensive and proactive approach to risk management is
comprised of four basic processes: risk identification and assessment,
measurement, control, and monitoring and reporting.
Risk Identification and Assessment
Risk identification and assessment is focused on recognizing and
understanding existing risks, risks that may arise from new or evolving
business initiatives, aggregate risks, and emerging risks from the
changing environment. The Bank’s objective is to establish and
maintain integrated risk identification and assessment processes that
enhance the understanding of risk interdependencies, consider how
risk types intersect, and support the identification of emerging risk. To
that end, TD’s Enterprise-Wide Stress Testing (EWST) program enables
senior management, the Board, and its committees to identify and
articulate enterprise-wide risks and understand potential vulnerabilities
for the Bank.
Risk Measurement
The ability to quantify risks is a key component of the Bank’s risk
management process. TD’s risk measurement process aligns with
regulatory requirements such as capital adequacy, leverage ratios,
liquidity measures, stress testing, and maximum credit exposure
guidelines established by its regulators. Additionally, the Bank has
a process in place to quantify risks to provide accurate and timely
measurements of the risks it assumes.
In quantifying risk, the Bank uses various risk measurement
methodologies, including Value-at-Risk (VaR) analysis, scenario analysis,
stress testing, and limits. Other examples of risk measurements include
credit exposures, PCL, peer comparisons, trending analysis, liquidity
coverage, leverage ratios, capital adequacy metrics, and operational risk
event notification metrics. The Bank also requires significant business
segments and corporate oversight functions to assess their own key
risks and internal controls annually through a structured Risk and
Control Self-Assessment (RCSA) program. Internal and external risk
events are monitored to assess whether the Bank’s internal controls
are effective. This allows the Bank to identify, escalate, and monitor
significant risk issues as needed.
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TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS Risk Control
TD’s risk control processes are established and communicated through
Risk Committee and Management approved policies, and associated
management approved procedures, control limits, and delegated
authorities which reflect TD’s risk appetite and risk tolerances.
The Bank’s approach to risk control also includes risk and capital
assessments to appropriately capture key risks in TD’s measurement
and management of capital adequacy. This involves the review,
challenge, and endorsement by senior management committees of the
ICAAP and related economic capital practices. At TD, performance is
measured based on the allocation of risk-based capital to businesses
and the cost charged against that capital.
Risk Monitoring and Reporting
The Bank monitors and reports on risk levels on a regular basis against
TD’s risk appetite and Risk Management reports on its risk monitoring
activities to senior management, the Board and its Committees, and
appropriate executive and management committees. The ERMC,
the Risk Committee, and the Board also receive annual and periodic
reporting on EWST and an annual update on the Bank’s ICAAP.
Complementing regular risk monitoring and reporting, ad hoc risk
reporting is provided to senior management, the Risk Committee,
and the Board, as appropriate, for new and emerging risks or any
significant changes to the Bank’s risk profile.
Enterprise-Wide Stress Testing
EWST at TD is part of the long-term strategic, financial, and capital
planning exercise that is a key component of the ICAAP framework
and helps validate the risk appetite of the Bank. TD’s EWST program
involves the development, application, and assessment of severe, but
plausible, stress scenarios on earnings, capital, and liquidity. It enables
management to identify and articulate enterprise-wide risks and
understand potential vulnerabilities that are relevant to TD’s risk profile.
Stress scenarios are developed considering the key macroeconomic
and idiosyncratic risks facing the Bank. A combination of approaches
incorporating both quantitative modelling and qualitative analysis
are utilized to assess the impact on the Bank’s performance in stress
environments. Stress testing engages senior management in each
business segment, Finance, TBSM, Economics, and Risk Management.
The RCC, which is a subcommittee of the ALCO, provides oversight
of the processes and practices governing the EWST program.
As part of its 2016 program, the Bank evaluated two internally
generated macroeconomic stress scenarios covering a range of severities
and duration, as described below. The scenarios were constructed
to cover a wide variety of risk factors meaningful to TD’s risk
profile in both the North American and global economies. Stressed
macroeconomic variables such as unemployment, GDP, resale home
prices, and interest rates were forecasted over the stress horizon which
drives the assessment of impacts. In both scenarios evaluated in the 2016
program, the Bank remained adequately capitalized. Results of the
scenarios were reviewed by senior executives, incorporated in the Bank’s
planning process, and presented to the Risk Committee and the Board.
ENTERPRISE-WIDE STRESS SCENARIOS
Extreme Scenario
Severe Scenario
• The scenario emanates from a financial crisis stemming from
• The scenario is benchmarked against historical recessions that
have taken place in the U.S. and Canada. The recession extends
four consecutive quarters followed by a modest recovery.
• The scenario incorporates deterioration in key macroeconomic
variables such as GDP, resale home prices, and unemployment
that align with historically observed recessions.
• TD Economics maintains a risk index that measures current
vulnerabilities to a number of key risk factors. This risk index is then
leveraged to scale the severity of the above mentioned indicators.
China where severe and persistent disruptions in financial markets
lead to a dramatic unwinding in Chinese debt markets. China’s
difficulties rapidly spread to other emerging markets triggering
widespread banking failures and a banking crisis across numerous
emerging markets. Market contagion spills over into Western
Europe more broadly with banks in core euro zone countries
facing severe pressure due to their exposure to emerging market
credit. European financial institutions record significant losses and
sovereigns across Europe suffer debt downgrades. This results in
losses imposed on North American banks through their exposures
to European banks and sovereigns. Combined with a dramatic
loss in investor confidence and severe declines in global equity
and commodity markets, the European financial crisis rapidly
spreads to North America, ushering in a deep global recession.
• External shocks to the Canadian economy trigger an unwinding
of household imbalances. Unemployment rises sharply as home
prices deteriorate significantly. Extremely low oil prices lead
to a disproportionate impact on the Canadian economy relative
to the U.S.
Separate from the EWST program, the Bank’s U.S.-based
subsidiaries complete their own capital planning and regulatory
stress testing exercises. These include OCC Dodd-Frank Act stress
testing requirements for operating banks, and the Federal Reserve
Board’s capital plan rule and related CCAR requirements for the
holding company.
TD also employs reverse stress testing as part of a comprehensive
Crisis Management Recovery Planning program to assess potential
mitigating actions and contingency planning strategies. The
scenario contemplates significantly stressful events that would
result in TD reaching the point of non-viability in order to consider
meaningful remedial actions for replenishing the Bank’s capital
and liquidity position.
76
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS Strategic Risk
Strategic risk is the potential for financial loss or reputational damage
arising from the choice of sub-optimal or ineffective strategies, the
improper implementation of chosen strategies, choosing not to pursue
certain strategies, or a lack of responsiveness to changes in the business
environment. Strategies include merger and acquisition activities.
WHO MANAGES STRATEGIC RISK
The CEO manages strategic risk supported by the members of the SET
and the ERMC. The CEO, together with the SET, defines the overall
strategy, in consultation with, and subject to approval by the Board.
The Enterprise Strategy group, under the leadership of the Group Head
and Chief Financial Officer is charged with developing the Bank’s
overall long-term and short-term strategy with input and support from
senior executives across TD. In addition, each member of the SET is
responsible for establishing and managing long-term and short-term
strategies for their business areas (organic and through acquisitions),
and for ensuring such strategies are aligned with the overall enterprise
strategy and risk appetite. Each SET member is also accountable to
the CEO for identifying and assessing, measuring, controlling, and
monitoring and reporting on the effectiveness and risks of their business
strategies. The ERMC oversees the identification and monitoring of
significant and emerging risks related to TD’s strategies and ensures
that mitigating actions are taken where appropriate. The CEO, SET
members, and other senior executives report to the Board on the
implementation of the Bank’s strategies, identifying the risks within
those strategies, and explaining how they are managed.
The shaded areas of this MD&A represent a discussion on risk
management policies and procedures relating to credit, market,
and liquidity risks as required under IFRS 7, Financial Instruments:
Disclosures, which permits these specific disclosures to be included
in the MD&A. Therefore, the shaded areas which include Credit
Risk, Market Risk, and Liquidity Risk, form an integral part of the
audited Consolidated Financial Statements for the years ended
October 31, 2016 and 2015.
Credit Risk
Credit risk is the risk of loss if a borrower or counterparty in a transaction
fails to meet its agreed payment obligations.
Credit risk is one of the most significant and pervasive risks in
banking. Every loan, extension of credit, or transaction that involves
the transfer of payments between the Bank and other parties or
financial institutions exposes the Bank to some degree of credit risk.
The Bank’s primary objective is to be methodical in its credit risk
assessment so that the Bank can better understand, select, and
manage its exposures to reduce significant fluctuations in earnings.
The Bank’s strategy is to ensure central oversight of credit risk in
each business, and reinforce a culture of transparency, accountability,
independence, and balance.
WHO MANAGES CREDIT RISK
The responsibility for credit risk management is enterprise-wide.
To reinforce ownership of credit risk, credit risk control functions
are integrated into each business, but each credit risk control
unit separately reports to Risk Management to ensure objectivity
and accountability.
Each business segment’s credit risk control unit is responsible for its
credit decisions and must comply with established policies, exposure
guidelines, credit approval limits, and policy/limit exception procedures.
It must also adhere to established enterprise-wide standards of credit
assessment and obtain Risk Management’s approval for credit decisions
beyond their discretionary authority.
Risk Management provides independent oversight of credit risk
by developing policies that govern and control portfolio risks, and
product-specific policies, as required.
The Risk Committee oversees the management of credit risk and
annually approves certain significant credit risk policies.
HOW TD MANAGES STRATEGIC RISK
The strategies and operating performance of significant business units
and corporate functions are assessed regularly by the CEO and the
relevant members of the SET through an integrated financial and
strategic planning process, management meetings, operating/financial
reviews, and strategic business updates. The Bank’s annual planning
process considers enterprise and individual segment long-term
and short-term strategies and associated key initiatives while also
establishing enterprise asset concentration limits. The process evaluates
alignment between segment-level and enterprise-level strategies and
risk appetite. Once the strategy is set, regular strategic business
updates conducted throughout the year ensure that alignment is
maintained. The reviews include an evaluation of the strategy of each
business, the overall operating environment including competitive
position, performance assessment, initiatives for strategy execution,
and key business risks. The frequency of strategic business reviews
depends on the risk profile and size of the business or function. The
overall state of Strategic Risk and adherence to TD’s risk appetite is
reviewed by the ERMC in the normal course, as well as by the Board.
Additionally, each material acquisition is assessed for its fit with the
Bank’s strategy and risk appetite in accordance with the Bank’s Due
Diligence Policy. This assessment is reviewed by the SET and Board as
part of the decision process.
HOW TD MANAGES CREDIT RISK
The Bank’s Credit Risk Management Framework outlines the internal
risk and control structure to manage credit risk and includes risk
appetite, policies, processes, limits and governance. The Credit Risk
Management Framework is maintained by Risk Management and
supports alignment with the Bank’s risk appetite for credit risk.
Risk Management centrally approves all credit risk policies and credit
decision-making strategies, as well as the discretionary limits of officers
throughout the Bank for extending lines of credit.
Limits are established to monitor and control country, industry,
product, geographic and group exposure risks in the portfolios in
accordance with enterprise-wide policies.
In TD’s Retail businesses, the Bank uses established underwriting
guidelines (which include collateral and loan-to-value constraints)
along with approved scoring techniques and standards in extending,
monitoring, and reporting personal credit. Credit scores and decision
strategies are used in the origination and ongoing management of
new and existing retail credit exposures. Scoring models and decision
strategies utilize a combination of borrower attributes, including
employment status, existing loan exposure and performance, and
size of total bank relationship, as well as external data such as credit
bureau information, to determine the amount of credit the Bank is
prepared to extend to retail customers and to estimate future credit
performance. Established policies and procedures are in place to
govern the use and ongoing monitoring and assessment of the
performance of scoring models and decision strategies to ensure
alignment with expected performance results. Retail credit exposures
approved within the regional credit centres are subject to ongoing
Retail Risk Management review to assess the effectiveness of credit
decisions and risk controls, as well as identify emerging or systemic
issues and trends. Larger dollar exposures and material exceptions
to policy are escalated to Retail Risk Management. Material policy
exceptions are tracked and reported to monitor portfolio trends
and identify potential weaknesses in underwriting guidelines and
strategies. Where unfavourable trends are identified, remedial actions
are taken to address those weaknesses.
77
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS The Bank’s Commercial Banking and Wholesale Banking businesses
use credit risk models and policies to establish borrower and facility
risk ratings, quantify and monitor the level of risk, and facilitate its
management. The businesses also use risk ratings to determine the
amount of credit exposure it is willing to extend to a particular borrower.
Management processes are used to monitor country, industry, and
borrower or counterparty risk ratings, which include daily, monthly,
quarterly, and annual review requirements for credit exposures. The
key parameters used in the Bank’s credit risk models are monitored
on an ongoing basis.
Unanticipated economic or political changes in a foreign country
could affect cross-border payments for goods and services, loans,
dividends, and trade-related finance, as well as repatriation of the
Bank’s capital in that country. The Bank currently has credit exposure
in a number of countries, with the majority of the exposure in North
America. The Bank measures country risk using approved risk rating
models and qualitative factors that are also used to establish country
exposure limits covering all aspects of credit exposure across all
businesses. Country risk ratings are managed on an ongoing basis
and are subject to a detailed review at least annually.
As part of the Bank’s credit risk strategy, the Bank sets limits on the
amount of credit it is prepared to extend to specific industry sectors.
The Bank monitors its concentration to any given industry to ensure
that the loan portfolio is diversified. The Bank manages its risk using
limits based on an internal risk rating score that combines TD’s industry
risk rating model and industry analysis, and regularly reviews industry
risk ratings to ensure that those ratings properly reflect the risk of the
industry. The Bank assigns a maximum exposure limit or a concentration
limit to each major industry segment which is a percentage of its total
wholesale and commercial private sector exposure.
The Bank may also set limits on the amount of credit it is prepared
to extend to a particular entity or group of entities, also referred
to as “entity risk”. All entity risk is approved by the appropriate
decision-making authority using limits based on the entity’s borrower
risk rating (BRR) and, for certain portfolios, the risk rating of the
industry in which the entity operates. This exposure is monitored
on a regular basis.
The Bank may also use credit derivatives to mitigate borrower-specific
exposure as part of its portfolio risk management techniques.
The Basel Framework
The objective of the Basel Framework is to improve the consistency
of capital requirements internationally and make required regulatory
capital more risk-sensitive. The Basel Framework sets out several
options which represent increasingly more risk-sensitive approaches
for calculating credit, market, and operational RWA.
Credit Risk and the Basel Framework
The Bank received approval from OSFI to use the Basel AIRB Approach
for credit risk, effective November 1, 2007. The Bank uses the AIRB
Approach for all material portfolios, except in the following areas:
• TD has approved exemptions to use the Standardized Approach for
some small credit exposures in North America. Risk Management
reconfirms annually that this approach remains appropriate.
• Effective the third quarter of 2016, OSFI approved the Bank
to calculate the majority of the retail portfolio credit RWA
in the U.S. Retail segment using the AIRB Approach. The
non-retail portfolio in the U.S. retail segment continues to use
the Standardized approach subject to regulatory approval to
transition to the AIRB Approach.
To continue to qualify using the AIRB Approach for credit risk, the
Bank must meet the ongoing conditions and requirements established
by OSFI and the Basel Framework. The Bank regularly assesses its
compliance with these requirements.
Credit Risk Exposures Subject to the AIRB Approach
Banks that adopt the AIRB Approach to credit risk must report credit
risk exposures by counterparty type, each having different underlying
risk characteristics. These counterparty types may differ from the
presentation in the Bank’s Consolidated Financial Statements. The
Bank’s credit risk exposures are divided into two main portfolios, retail
and non-retail.
Risk Parameters
Under the AIRB Approach, credit risk is measured using the following
risk parameters:
• PD – the likelihood that the borrower will not be able to meet its
scheduled repayments within a one year time horizon.
• LGD – the amount of loss the Bank would likely incur when a borrower
defaults on a loan, which is expressed as a percentage of EAD.
• EAD – the total amount the Bank is exposed to at the time of default.
By applying these risk parameters, TD can measure and monitor its
credit risk to ensure it remains within pre-determined thresholds.
Retail Exposures
In the retail portfolio, including individuals and small businesses, the Bank
manages exposures on a pooled basis, using predictive credit scoring
techniques. There are three sub-types of retail exposures: residential
secured (for example, individual mortgages and home equity lines of
credit), qualifying revolving retail (for example, individual credit cards,
unsecured lines of credit, and overdraft protection products), and other
retail (for example, personal loans, including secured automobile loans,
student lines of credit, and small business banking credit products).
The Bank calculates RWA for its retail exposures using the AIRB
Approach. All retail PD, LGD, and EAD parameter models are based
exclusively on the internal default and loss performance history for
each of the three retail exposure sub-types.
Account-level PD, LGD, and EAD models are built for each product
portfolio and calibrated based on the observed account-level default
and loss performance for the portfolio.
Consistent with the AIRB Approach, the Bank defines default for
exposures as delinquency of 90 days or more for all retail credit
portfolios. LGD estimates used in the RWA calculations reflect
economic losses, such as, direct and indirect costs as well as any
appropriate discount to account for time between default and ultimate
recovery. EAD estimates reflect the historically observed utilization
of undrawn credit limit prior to default. PD, LGD and EAD models are
calibrated using logistic and linear regression techniques. Predictive
attributes in the models may include account attributes, such as loan
size, interest rate, and collateral, where applicable; an account’s
previous history and current status; an account’s age on books; a
customer’s credit bureau attributes; and a customer’s other holdings
with the Bank. For secured products such as residential mortgages,
property characteristics, loan-to-value ratios, and a customer’s equity
in the property, play a significant role in PD as well as in LGD models.
All risk parameter estimates are updated on a quarterly basis based
on the refreshed model inputs. Parameter estimation is fully automated
based on approved formulas and is not subject to manual overrides.
Exposures are then assigned to one of nine pre-defined PD segments
based on their estimated long-run average one-year PD.
The risk discriminative and predictive power of the Bank’s retail credit
models is assessed against the most recently available one-year default
and loss performance on a quarterly basis. All models are also subject
to a comprehensive independent validation prior to implementation
and on an annual basis as outlined in the “Model Risk Management”
section of this disclosure.
Long-run PD estimates are generated by including key economic
indicators, such as interest rates and unemployment rates, and using
their long-run average over the credit cycle to estimate PD.
LGD estimates are required to reflect a downturn scenario.
Downturn LGD estimates are generated by using macroeconomic
inputs, such as changes in housing prices and unemployment rates
expected in an appropriately severe downturn scenario.
78
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS For unsecured products, downturn LGD estimates reflect the
observed lower recoveries for exposures defaulted during the 2008 to
2009 recession. For products secured by residential real estate, such as
mortgages and home equity lines of credit, downturn LGD reflects the
potential impact of a severe housing downturn. EAD estimates similarly
reflect a downturn scenario.
The following table maps PD ranges to risk levels:
Risk Assessment
Low Risk
Normal Risk
Medium Risk
High Risk
Default
PD Segment
PD Range
1
2
3
4
5
6
7
8
9
0.00 to 0.15%
0.16 to 0.41
0.42 to 1.10
1.11 to 2.93
2.94 to 4.74
4.75 to 7.59
7.60 to 18.20
18.21 to 99.99
100.00
Non-Retail Exposures
In the non-retail portfolio, the Bank manages exposures on an individual
borrower basis, using industry and sector-specific credit risk models,
and expert judgment. The Bank has categorized non-retail credit risk
exposures according to the following Basel counterparty types:
corporate, including wholesale and commercial customers, sovereign,
and bank. Under the AIRB Approach, CMHC-insured mortgages are
considered sovereign risk and are therefore classified as non-retail.
The Bank evaluates credit risk for non-retail exposures by using both
a BRR and facility risk rating (FRR). The Bank uses this system for all
corporate, sovereign, and bank exposures. The Bank determines the
risk ratings using industry and sector-specific credit risk models that are
based on internal historical data for the years of 1994-2015, covering
both wholesale and commercial lending experience. All borrowers and
facilities are assigned an internal risk rating that must be reviewed at
least once each year. External data such as rating agency default rates
or loss databases are used to validate the parameters.
Internal risk ratings (BRR and FRR) are key to portfolio monitoring
and management, and are used to set exposure limits and loan pricing.
Internal risk ratings are also used in the calculation of regulatory
capital, economic capital, and incurred but not identified allowance
for credit losses. Consistent with the AIRB Approach to measure capital
adequacy at a one-year risk horizon, the parameters are estimated to
a twelve-month forward time horizon.
Borrower Risk Rating and PD
Each borrower is assigned a BRR that reflects the PD of the borrower
using proprietary models and expert judgment. In assessing borrower
risk, the Bank reviews the borrower’s competitive position, financial
performance, economic and industry trends, management quality, and
access to funds. Under the AIRB Approach, borrowers are grouped into
BRR grades that have similar PD. Use of projections for model implied
risk ratings is not permitted and BRRs may not incorporate a projected
reversal, stabilization of negative trends, or the acceleration of existing
positive trends. Historic financial results can however be sensitized to
account for events that have occurred, or are about to occur, such as
additional debt incurred by a borrower since the date of the last set
of financial statements. In conducting an assessment of the BRR, all
relevant and material information must be taken into account and the
information being used must be current. Quantitative rating models
are used to rank the expected through-the-cycle PD, and these models
are segmented into categories based on industry and borrower size.
The quantitative model output can be modified in some cases by
expert judgement, as prescribed within the Bank’s credit policies.
To calibrate PDs for each BRR band, the Bank computes yearly
transition matrices based on annual cohorts and then estimates
the average annual PD for each BRR. The PD is set at the average
estimation level plus an appropriate adjustment to cover statistical
and model uncertainty. The calibration process for PD is a through-
the-cycle approach.
TD’s 21-point BRR scale broadly aligns to external ratings as follows:
Description
Investment grade
Non-investment grade
Watch and classified
Impaired/default
Rating Category
Standard & Poor’s
Moody’s Investor Services
0 to 1C
2A to 2C
3A to 3C
4A to 4C
5A to 5C
6 to 8
9A to 9B
AAA to AA-
A+ to A-
BBB+ to BBB-
BB+ to BB-
B+ to B-
CCC+ to CC and below
Default
Aaa to Aa3
A1 to A3
Baa1 to Baa3
Ba1 to Ba3
B1 to B3
Caa1 to Ca and below
Default
Facility Risk Rating and LGD
The FRR maps to LGD and takes into account facility-specific
characteristics such as collateral, seniority ranking of debt, and
loan structure.
Different FRR models are used based on industry and obligor size.
Where an appropriate level of historical defaults is available per model,
this data is used in the LGD estimation process. Data considered in
the calibration of the LGD model includes variables such as collateral
coverage, debt structure, and borrower enterprise value. Average
LGD and the statistical uncertainty of LGD are estimated for each FRR
grade. In some FRR models, lack of historical data requires the model
to output a rank-ordering which is then mapped through expert
judgement to the quantitative LGD scale.
The AIRB Approach stipulates the use of downturn LGD, where the
downturn period, as determined by internal and/or external experience,
suggests higher than average loss rates or lower than average recovery,
such as during an economic recession. To reflect this, average calibrated
LGDs take into account both the statistical estimation uncertainty and
the higher than average LGDs experienced during downturn periods.
Exposure at Default
The Bank calculates non-retail EAD by first measuring the drawn
amount of a facility and then adding a potential increased utilization
at default from the undrawn portion, if any. Usage Given Default
(UGD) is measured as the percentage of Committed Undrawn exposure
that would be expected to be drawn by a borrower defaulting in the
next year, in addition to the amount that already has been drawn by
the borrower. In the absence of credit mitigation effects or other
details, the EAD is set at the drawn amount plus (UGD x Committed
Undrawn), where UGD is a percentage between 0% and 100%.
Given that UGD is determined in part by PD, UGD data is consolidated
by BRR up to one-year prior to default. An average UGD is then calculated
for each BRR along with the statistical uncertainty of the estimates.
Historical UGD experience is studied for any downturn impacts,
similar to the LGD downturn analysis. The Bank has not found
downturn UGD to be significantly different than average UGD, therefore
the UGDs are set at the average calibrated level, per BRR grade, plus
an appropriate adjustment for statistical and model uncertainty.
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TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
Credit Risk Exposures Subject to the Standardized Approach
Currently the Standardized Approach to credit risk is used primarily for
assets in the U.S. non-retail credit portfolio. The Bank is currently in
the process of transitioning this portfolio to the AIRB Approach. Under
the Standardized Approach, the assets are multiplied by risk weights
prescribed by OSFI to determine RWA. These risk weights are assigned
according to certain factors including counterparty type, product type,
and the nature/extent of credit risk mitigation. TD uses external credit
ratings, including Moody’s and S&P to determine the appropriate risk
weight for its exposures to sovereigns (governments, central banks,
and certain public sector entities) and banks (regulated deposit-taking
institutions, securities firms, and certain public sector entities).
The Bank applies the following risk weights to on-balance sheet
exposures under the Standardized Approach:
Sovereign
Bank
Corporate
0%1
20%1
100%
1 The risk weight may vary according to the external risk rating.
Lower risk weights apply where approved credit risk mitigants exist.
Non-retail loans that are more than 90 days past due receive a risk
weight of 150%. For off-balance sheet exposures, specified credit
conversion factors are used to convert the notional amount of the
exposure into a credit equivalent amount.
Derivative Exposures
Credit risk on derivative financial instruments, also known as
counterparty credit risk, is the risk of a financial loss occurring as
a result of the failure of a counterparty to meet its obligation to TD.
The Bank uses the Current Exposure Method to calculate the credit
equivalent amount, which is defined by OSFI as the replacement
cost plus an amount for potential future exposure, to estimate the
risk and determine regulatory capital requirements for derivative
exposures. The Global Counterparty Control group within Capital
Markets Risk Management is responsible for estimating and managing
counterparty credit risk in accordance with credit policies established
by Risk Management.
The Bank uses various qualitative and quantitative methods to
measure and manage counterparty credit risk. These include statistical
methods to measure the current and future potential risk, as well as
conduct stress tests to identify and quantify exposure to extreme
events. The Bank establishes various limits, including gross notional
limits, to manage business volumes and concentrations. TD regularly
assesses market conditions and the valuation of underlying financial
instruments. Counterparty credit risk may increase during periods of
receding market liquidity for certain instruments. Capital Markets Risk
Management meets regularly with Market and Credit Risk Management
and Trading businesses to discuss how evolving market conditions may
impact the Bank’s market risk and counterparty credit risk.
The Bank actively engages in risk mitigation strategies through the
use of multi-product derivative master netting agreements, collateral
pledging and other credit risk mitigation techniques. The Bank also
executes certain derivatives through a central clearing house which
reduces counterparty credit risk due to the ability to net offsetting
positions amongst counterparty participants that settle within clearing
houses. Derivative-related credit risks are subject to the same credit
approval, limit, monitoring, and exposure guideline standards that
the Bank uses for managing other transactions that create credit risk
exposure. These standards include evaluating the creditworthiness
of counterparties, measuring and monitoring exposures, including
wrong-way risk exposures, and managing the size, diversification,
and maturity structure of the portfolios.
There are two types of wrong-way risk exposures, namely general
and specific. General wrong-way risk arises when the PD of the
counterparties moves in the same direction as a given market risk
factor. Specific wrong-way risk arises when the exposure to a
particular counterparty moves in the same direction as the PD of the
counterparty due to the nature of the transactions entered into with
that counterparty. These exposures require specific approval within
the credit approval process. The Bank measures and manages
specific wrong-way risk exposures in the same manner as direct loan
obligations and controls them by way of approved credit facility limits.
As part of the credit risk monitoring process, management meets
on a periodic basis to review all exposures, including exposures
resulting from derivative financial instruments to higher risk
counterparties. As at October 31, 2016, after taking into account risk
mitigation strategies, TD does not have material derivative exposure
to any counterparty considered higher risk as defined by the Bank’s
credit policies. In addition, the Bank does not have a material credit
risk valuation adjustment to any specific counterparty.
Validation of the Credit Risk Rating System
Credit risk rating systems and methodologies are independently validated
on a regular basis to verify that they remain accurate predictors of risk.
The validation process includes the following considerations:
• Risk parameter estimates – PDs, LGDs and EADs are reviewed and
updated against actual loss experience to ensure estimates continue
to be reasonable predictors of potential loss.
• Model performance – Estimates continue to be discriminatory,
stable, and predictive.
• Data quality – Data used in the risk rating system is accurate,
appropriate, and sufficient.
• Assumptions – Key assumptions underlying the development of the
model remain valid for the current portfolio and environment.
Risk Management ensures that the credit risk rating system complies
with the Bank’s Model Risk Policy. At least annually, the Risk Committee
is informed of the performance of the credit risk rating system. The
Risk Committee must approve any material changes to the Bank’s
credit risk rating system.
Stress Testing
To determine the potential loss that could be incurred under a range
of adverse scenarios, the Bank subjects its credit portfolios to stress
tests. Stress tests assess vulnerability of the portfolios to the effects
of severe but plausible situations, such as an economic downturn or
a material market disruption.
Credit Risk Mitigation
The techniques the Bank uses to reduce or mitigate credit risk include
written policies and procedures to value and manage financial and
non-financial security (collateral) and to review and negotiate netting
agreements. The amount and type of collateral, and other credit risk
mitigation techniques required, are based on the Bank’s own assessment
of the borrower’s or counterparty’s credit quality and capacity to pay.
In the retail and commercial banking businesses, security for loans
is primarily non-financial and includes residential real estate, real estate
under development, commercial real estate, automobiles, and other
business assets, such as accounts receivable, inventory, and fixed
assets. In the Wholesale Banking business, a large portion of loans
is to investment grade borrowers where no security is pledged.
Non-investment grade borrowers typically pledge business assets in the
same manner as commercial borrowers. Common standards across the
Bank are used to value collateral, determine frequency of recalculation,
and to document, register, perfect, and monitor collateral.
80
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS The Bank also uses collateral and master netting agreements to
mitigate derivative counterparty exposure. Security for derivative
exposures is primarily financial and includes cash and negotiable
securities issued by highly rated governments and investment grade
issuers. This approach includes pre-defined discounts and procedures
for the receipt, safekeeping, and release of pledged securities.
In all but exceptional situations, the Bank secures collateral by
taking possession and controlling it in a jurisdiction where it can
legally enforce its collateral rights. In exceptional situations and when
demanded by TD’s counterparty, the Bank holds or pledges collateral
with an acceptable third-party custodian. The Bank documents all
such third-party arrangements with industry standard agreements.
Occasionally, the Bank may take guarantees to reduce the risk
in credit exposures. For credit risk exposures subject to AIRB, the
Bank only recognizes irrevocable guarantees for Commercial Banking
and Wholesale Banking credit exposures that are provided by entities
with a better risk rating than that of the borrower or counterparty
to the transaction.
The Bank makes use of credit derivatives to mitigate credit risk.
The credit, legal, and other risks associated with these transactions
are controlled through well-established procedures. The Bank’s policy
is to enter into these transactions with investment grade financial
institutions and transact on a collateralized basis. Credit risk to these
counterparties is managed through the same approval, limit, and
monitoring processes the Bank uses for all counterparties for which
it has credit exposure.
The Bank uses appraisals and automated valuation models (AVMs)
to support property values when adjudicating loans collateralized
by residential real property. These are computer-based tools used
to estimate or validate the market value of residential real property
using market comparables and price trends for local market areas.
The primary risk associated with the use of these tools is that the value
of an individual property may vary significantly from the average for
the market area. The Bank has specific risk management guidelines
addressing the circumstances when they may be used, and processes
to periodically validate AVMs including obtaining third party appraisals.
Gross Credit Risk Exposure
Gross credit risk exposure, also referred to as EAD, is the total amount
the Bank is exposed to at the time of default of a loan and is measured
before counterparty-specific provisions or write-offs. Gross credit risk
exposure does not reflect the effects of credit risk mitigation and includes
both on-balance sheet and off-balance sheet exposures. On-balance
sheet exposures consist primarily of outstanding loans, acceptances, non-
trading securities, derivatives, and certain other repo-style transactions.
Off-balance sheet exposures consist primarily of undrawn commitments,
guarantees, and certain other repo-style transactions.
Gross credit risk exposures for the two approaches the Bank uses
to measure credit risk are included in the following table.
T A B L E 4 8
GROSS CREDIT RISK EXPOSURES – Standardized and Advanced Internal Ratings Based Approaches1,2
(millions of Canadian dollars)
Retail
Residential secured
Qualifying revolving retail
Other retail
Total retail
Non-retail
Corporate
Sovereign
Bank
Total non-retail
Gross credit risk exposures
October 31, 2016
As at
October 31, 2015
Standardized
AIRB
Total
Standardized
AIRB
Total
$
1,334
–
18,894
20,228
127,399
77,166
17,721
222,286
$ 242,514
$ 334,878
90,778
71,940
497,596
$ 336,212
90,778
90,834
517,824
252,616
139,367
66,432
458,415
$ 956,011
380,015
216,533
84,153
680,701
$ 1,198,525
$ 32,897
–
59,655
92,552
114,698
55,934
13,542
184,174
$ 276,726
$ 276,526
63,169
38,952
378,647
$ 309,423
63,169
98,607
471,199
225,263
128,496
111,602
465,361
$ 844,008
339,961
184,430
125,144
649,535
$ 1,120,734
1 Gross credit risk exposures represent EAD and are before the effects of credit risk
mitigation. This table excludes securitization, equity, and other credit RWA.
2 Effective the third quarter of 2016, the majority of U.S. Retail’s retail portfolio
credit risk RWA are calculated using AIRB approach. Prior to the third quarter
of 2016, RWA were calculated using the Standardized Approach.
Other Credit Risk Exposures
Non-trading Equity Exposures
TD’s non-trading equity exposures are at a level that represents less
than 5% of the Bank’s combined Tier 1 and Tier 2 Capital. As a result,
the Bank uses OSFI prescribed risk weights to calculate RWA on non-
trading equity exposures.
Securitization Exposures
For externally rated securitization exposures, the Bank uses both the
Standardized Approach and the Ratings Based Approach (RBA). Both
approaches assign risk weights to exposures using external ratings.
The Bank uses ratings assigned by one or more external rating
agencies, including Moody’s and S&P. The RBA also takes into account
additional factors, including the time horizon of the rating (long-term
or short-term), the number of underlying exposures in the asset pool,
and the seniority of the position.
The Bank uses the Internal Assessment Approach (IAA) to manage
the credit risk of its exposures relating to ABCP securitizations that are
not externally rated.
Under the IAA, the Bank considers all relevant risk factors in assessing
the credit quality of these exposures, including those published by the
Moody’s and S&P rating agencies. The Bank also uses loss coverage
models and policies to quantify and monitor the level of risk, and
facilitate its management. The Bank’s IAA process includes an assessment
of the extent by which the enhancement available for loss protection
provides coverage of expected losses. The levels of stressed coverage the
Bank requires for each internal risk rating are consistent with the rating
agencies’ published stressed factor requirements for equivalent external
ratings by asset class.
All exposures are assigned an internal risk rating based on the Bank’s
assessment, which must be reviewed at least annually. The Bank’s
ratings reflect its assessment of risk of loss, consisting of the combined
PD and LGD for each exposure. The ratings scale TD uses corresponds
to the long-term ratings scales used by the rating agencies.
81
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
The Bank’s IAA process is subject to all of the key elements and
principles of the Bank’s risk governance structure, and is managed
in the same way as outlined in this “Credit Risk” section.
The Bank uses the results of the IAA in all aspects of its credit risk
management, including performance tracking, control mechanisms,
management reporting, and the calculation of capital. Under the IAA,
exposures are multiplied by OSFI prescribed risk weights to calculate
RWA for capital purposes.
Market Risk
Trading Market Risk is the risk of loss in financial instruments or the
balance sheet due to adverse movements in market factors such as
interest rates, foreign exchange rates, equity prices, commodity prices,
credit spreads, volatilities, and correlations from trading activities.
Non-Trading Market Risk is the risk of loss in financial instruments,
the balance sheet or in earnings, or the risk of volatility in earnings
from non-trading activities such as asset-liability management or
investments, predominantly from interest rate, foreign exchange
and equity risks.
The Bank is exposed to market risk in its trading and investment
portfolios, as well as through its non-trading activities. In the Bank’s
trading and investment portfolios, it is an active participant in the
market, seeking to realize returns for TD through careful management
of its positions and inventories. In the Bank’s non-trading activities, it is
exposed to market risk through the everyday banking transactions that
the Bank’s customers execute with TD.
The Bank complied with the Basel III market risk requirements as at
October 31, 2016, using the Internal Model Approach.
MARKET RISK LINKAGE TO THE BALANCE SHEET
The following table provides a breakdown of the Bank’s balance sheet
into assets and liabilities exposed to trading and non-trading market
risks. Market risk of assets and liabilities included in the calculation of
VaR and other metrics used for regulatory market risk capital purposes
is classified as trading market risk.
T A B L E 4 9
MARKET RISK LINKAGE TO THE BALANCE SHEET
(millions of Canadian dollars)
October 31, 2016
As at
October 31, 2015
Assets subject to market risk
Interest-bearing deposits with banks
Trading loans, securities, and other
Derivatives
Financial assets designated at fair value
through profit or loss
Available-for-sale securities
Held-to-maturity securities
Securities purchased under reverse
repurchase agreements
Loans
Customers’ liability under acceptances
Investment in TD Ameritrade
Other assets1
Assets not exposed to market risk
Total Assets
Liabilities subject to market risk
Trading deposits
Derivatives
Securitization liabilities at fair value
Other financial liabilities designated at
fair value through profit or loss
Deposits
Acceptances
Obligations related to securities sold short
Obligations related to securities sold
under repurchase agreements
Securitization liabilities at amortized cost
Subordinated notes and debentures
Other liabilities1
Liabilities and Equity not exposed
Balance
Trading Non-trading
sheet market risk market risk
Balance
Trading Non-trading
sheet market risk market risk
Non-trading market risk –
primary risk sensitivity
$
53,714
99,257
72,242
$
258
92,282
63,931
$ 53,456 $
6,975
8,311
42,483
95,157
69,438
$
219
89,372
58,144
$ 42,264
5,785
Interest rate
Interest rate
11,294 Equity, foreign exchange, interest rate
4,283
107,571
84,395
–
–
–
4,283
107,571
84,395
4,378
88,782
74,450
–
–
–
4,378
88,782
74,450
Interest rate
Foreign exchange, interest rate
Foreign exchange, interest rate
86,052
589,529
15,706
7,091
1,769
55,358
1,176,967
1,728
–
–
–
–
–
158,199
84,324
589,529
15,706
7,091
1,769
–
97,364
547,775
16,646
6,683
1,545
59,672
963,410 1,104,373
13,201
–
–
–
–
–
160,936
84,163
547,775
16,646
6,683
1,545
–
883,765
Interest rate
Interest rate
Interest rate
Equity
Interest rate
79,786
65,425
12,490
190
773,660
15,706
33,115
48,973
17,918
10,891
15,526
3,876
60,221
12,490
177
–
–
29,973
3,657
–
–
–
75,910
5,204
–
74,759
57,218
10,986
2,231
52,752
10,986
72,528
4,466
–
Interest rate
Foreign exchange, interest rate
Interest rate
13
773,660
15,706
3,142
1,415
695,576
16,646
38,803
1,402
–
–
33,594
13
695,576
16,646
5,209
45,316
17,918
10,891
15,526
67,156
22,743
8,637
11,866
12,376
–
–
–
54,780
22,743
8,637
11,866
Interest rate
Equity, interest rate
Interest rate
Interest rate
Interest rate
Interest rate
Interest rate
Interest rate
to market risk
Total Liabilities and Equity
103,287
$ 1,176,967
–
$ 110,394
–
98,568
$ 963,286 $ 1,104,373
–
$ 113,341
–
$ 892,464
1 Relates to retirement benefits, insurance, and structured entity liabilities.
82
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
MARKET RISK IN TRADING ACTIVITIES
The overall objective of TD’s trading businesses is to provide wholesale
banking services, including facilitation and liquidity, to clients of the
Bank. TD must take on risk in order to provide effective service
in markets where its clients trade. In particular, the Bank needs to
hold inventory, act as principal to facilitate client transactions, and
underwrite new issues. The Bank also trades in order to have in-depth
knowledge of market conditions to provide the most efficient and
effective pricing and service to clients, while balancing the risks
inherent in its dealing activities.
WHO MANAGES MARKET RISK IN TRADING ACTIVITIES
Primary responsibility for managing market risk in trading activities
lies with Wholesale Banking, with oversight from Market Risk Control
within Risk Management. The Market Risk Control Committee meets
regularly to conduct a review of the market risk profile, trading results
of the Bank’s trading businesses as well as changes to market risk
policies. The committee is chaired by the Senior Vice President, Market
Risk, and includes Wholesale Banking senior management.
There were no significant reclassifications between trading and
non-trading books during the year ended October 31, 2016.
HOW TD MANAGES MARKET RISK IN TRADING ACTIVITIES
Market risk plays a key part in the assessment of any trading business
strategy. The Bank launches new trading initiatives or expands existing
ones only if the risk has been thoroughly assessed, and is judged to
be within the Bank’s risk appetite and business expertise, and if the
appropriate infrastructure is in place to monitor, control, and manage
the risk. The Trading Market Risk Framework outlines the management
of trading market risk and incorporates risk appetite, risk governance
structure, risk identification, measurement, and control. The Trading
Market Risk Framework is maintained by Risk Management and
supports alignment with TD’s Risk Appetite for trading market risk.
Trading Limits
The Bank sets trading limits that are consistent with the approved
business strategy for each business and its tolerance for the
associated market risk, aligned to its market risk appetite. In setting
limits, the Bank takes into account market volatility, market liquidity,
organizational experience, and business strategy. Limits are prescribed
at the Wholesale Banking level in aggregate, as well as at more
granular levels.
The core market risk limits are based on the key risk drivers in the
business and includes notional, credit spread, yield curve shift, price,
and volatility limits.
Another primary measure of trading limits is VaR, which the Bank
uses to monitor and control overall risk levels and to calculate the
regulatory capital required for market risk in trading activities. VaR
measures the adverse impact that potential changes in market rates
and prices could have on the value of a portfolio over a specified
period of time.
At the end of each day, risk positions are compared with risk limits,
and any excesses are reported in accordance with established market
risk policies and procedures.
Calculating VaR
TD computes total VaR on a daily basis by combining the General
Market Risk (GMR) and Idiosyncratic Debt Specific Risk (IDSR) associated
with the Bank’s trading positions.
GMR is determined by creating a distribution of potential changes
in the market value of the current portfolio using historical simulation.
The Bank values the current portfolio using the market price and rate
changes of the most recent 259 trading days for equity, interest rate,
foreign exchange, credit, and commodity products. GMR is computed
as the threshold level that portfolio losses are not expected to exceed
more than one out of every 100 trading days. A one-day holding
period is used for GMR calculation, which is scaled up to ten days
for regulatory capital calculation purposes.
IDSR measures idiosyncratic (single-name) credit spread risk for
credit exposures in the trading portfolio using Monte Carlo simulation.
The IDSR model is based on the historical behaviour of five-year
idiosyncratic credit spreads. Similar to GMR, IDSR is computed as the
threshold level that portfolio losses are not expected to exceed more
than one out of every 100 trading days. IDSR is measured for a ten-day
holding period.
The following graph discloses daily one-day VaR usage and trading-
related revenue within Wholesale Banking. Trading-related revenue is
the total of trading income reported in non-interest income and the
net interest income on trading positions reported in net interest
income, and is reported on a TEB. For the year ending October 31, 2016,
there were 24 days of trading losses and trading-related revenue was
positive for 91% of the trading days, reflecting normal trading activity.
Losses in the year did not exceed VaR on any trading day.
TOTAL VALUE-AT-RISK AND TRADING-RELATED REVENUE
(millions of Canadian dollars)
Trading-related Revenue
Total Value-at-Risk
$50
40
30
20
10
0
(10)
(20)
(30)
(40)
5
1
0
2
,
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83
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
VaR is a valuable risk measure but it should be used in the context
of its limitations, for example:
• VaR uses historical data to estimate future events, which limits
•
•
its forecasting abilities;
it does not provide information on losses beyond the selected
confidence level; and
it assumes that all positions can be liquidated during the holding
period used for VaR calculation.
of stressed market conditions. Stressed VaR is determined using similar
techniques and assumptions in GMR and IDSR VaR. However, instead
of using the most recent 259 trading days (one year), the Bank uses
a selected year of stressed market conditions. In the fourth quarter of
fiscal 2016, Stressed VaR was calculated using the one-year period that
began on February 1, 2008. The appropriate historical one-year period
to use for Stressed VaR is determined on a quarterly basis. Stressed
VaR is a part of regulatory capital requirements.
The Bank continuously improves its VaR methodologies and incorporates
new risk measures in line with market conventions, industry best
practices, and regulatory requirements.
To mitigate some of the shortcomings of VaR, the Bank uses
additional metrics designed for risk management and capital purposes.
These include Stressed VaR, IRC, Stress Testing Framework, as well as
limits based on the sensitivity to various market risk factors.
Calculating Stressed VaR
In addition to VaR, the Bank also calculates Stressed VaR, which
includes Stressed GMR and Stressed IDSR. Stressed VaR is designed
to measure the adverse impact that potential changes in market rates
and prices could have on the value of a portfolio over a specified period
Calculating the Incremental Risk Charge
The IRC is applied to all instruments in the trading book subject
to migration and default risk. Migration risk represents the risk of
changes in the credit ratings of the Bank’s exposures. TD applies
a Monte Carlo simulation with a one-year horizon and a 99.9%
confidence level to determine IRC, which is consistent with regulatory
requirements. IRC is based on a “constant level of risk” assumption,
which requires banks to assign a liquidity horizon to positions that are
subject to IRC. IRC is a part of regulatory capital requirements.
The following table presents the end of year, average, high, and low
usage of TD’s portfolio metrics.
T A B L E 5 0
PORTFOLIO MARKET RISK MEASURES
(millions of Canadian dollars)
As at Average
High
Interest rate risk
Credit spread risk
Equity risk
Foreign exchange risk
Commodity risk
Idiosyncratic debt specific risk
Diversification effect1
Total Value-at-Risk (one-day)
Stressed Value-at-Risk (one-day)
Incremental Risk Capital Charge (one-year)
$ 10.1
7.2
5.9
2.7
1.1
13.5
(22.4)
$ 18.1
32.8
240.6
$ 10.8
8.4
8.6
3.2
2.1
12.7
(25.3)
$ 20.5
34.8
205.8
2016
Low
5.4
5.1
3.5
1.4
1
7.9
n/m2
As at
Average
High
2015
Low
$
8.4
7.9
9.8
4.9
1.5
12.9
(26.5)
$ 18.9
18.3
255.4
$
8.0
7.8
9.0
3.8
1.5
15.9
(25.3)
$ 20.7
28.8
246.4
$ 14.9
11.8
13.5
9
3.3
22.5
n/m2
26
35.1
319.6
$
$
3.8
4.6
4
1.1
0.8
12.6
n/m2
$ 15.3
18.3
164.5
$
$ 21.9
15.6
11.2
7.4
4.2
22.6
n/m2
$ 33.8
43.6
287.9
$ 11.7
21.6
144.9
1 The aggregate VaR is less than the sum of the VaR of the different risk types due
2 Not meaningful. It is not meaningful to compute a diversification effect because
to risk offsets resulting from portfolio diversification.
the high and low may occur on different days for different risk types.
Stress tests are produced and reviewed regularly with the Market
Risk Control Committee.
MARKET RISK IN OTHER WHOLESALE BANKING ACTIVITIES
The Bank is also exposed to market risk arising from a legacy portfolio
of bonds and preferred shares held in TD Securities and in its remaining
merchant banking investments. Risk Management reviews and approves
policies and procedures, which are established to monitor, measure,
and mitigate these risks.
Asset/Liability Management
Asset/liability management deals with managing the market risks of
TD’s traditional banking activities. Such market risks primarily include
interest rate risk and foreign exchange risk.
WHO IS RESPONSIBLE FOR ASSET/LIABILITY MANAGEMENT
TBSM measures and manages the market risks of the Bank’s non-trading
banking activities, with oversight from the Asset/Liability and Capital
Committee, which is chaired by the Group Head and CFO, and includes
other senior executives. The Market Risk Control function provides
independent oversight, governance, and control over these market
risks. The Risk Committee periodically reviews and approves key asset/
liability management and non-trading market risk policies and receives
reports on compliance with approved risk limits.
Average VaR was relatively unchanged compared to the prior year,
reflecting a combination of changes in risk positions and market rates.
The year-over-year average Stressed VaR increase was mostly driven by
equity positions. The average IRC declined by $40.6 million over the
year due to changes in U.S. Agency positions.
Validation of VaR Model
The Bank uses a back-testing process to compare the actual and
theoretical profit and losses to VaR to ensure that they are consistent
with the statistical results of the VaR model. The theoretical profit or
loss is generated using the daily price movements on the assumption
that there is no change in the composition of the portfolio. Validation
of the IRC model must follow a different approach since the one-year
horizon and 99.9% confidence level preclude standard back-testing
techniques. Instead, key parameters of the IRC model such as transition
and correlation matrices are subject to independent validation by
benchmarking against external study results or through analysis using
internal or external data.
Stress Testing
The Bank’s trading business is subject to an overall global stress test
limit. In addition, global businesses have stress test limits, and each
broad risk class has an overall stress test threshold. Stress scenarios
are designed to model extreme economic events, replicate worst-case
historical experiences, or introduce severe but plausible hypothetical
changes in key market risk factors. The stress testing program includes
scenarios developed using actual historical market data during periods
of market disruption, in addition to hypothetical scenarios developed
by Risk Management. The events the Bank has modeled include the
1987 equity market crash, the 1998 Russian debt default crisis, the
aftermath of September 11, 2001, the 2007 ABCP crisis, and the credit
crisis of Fall 2008.
84
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
HOW TD MANAGES ITS ASSET AND LIABILITY POSITIONS
Non-trading interest rate risk is viewed as a non-productive risk as it
has the potential to increase earnings volatility and incur loss without
providing long run expected value. As a result, TBSM’s mandate is
to structure the asset and liability positions of the balance sheet in
order to achieve a target profile that controls the impact of changes
in interest rates on the Bank’s net interest income and economic
value that is consistent with the Bank’s RAS.
Managing Interest Rate Risk
Interest rate risk is the impact that changes in interest rates could have
on the Bank’s margins, earnings, and economic value. The objective
of interest rate risk management is to ensure that earnings are stable
and predictable over time. The Bank has adopted a disciplined hedging
approach to manage the net interest income contribution from its
asset and liability positions, including an assigned target-modeled
maturity profile for non-rate sensitive assets, liabilities, and equity.
Key aspects of this approach are:
• evaluating and managing the impact of rising or falling interest
rates on net interest income and economic value, and developing
strategies to manage overall sensitivity to rates across varying
interest rate scenarios;
• measuring the contribution of each TD product on a risk-adjusted,
fully-hedged basis, including the impact of financial options such as
mortgage commitments that are granted to customers; and
• developing and implementing strategies to stabilize net interest
income from all retail banking products.
The Bank is exposed to interest rate risk when asset and liability
principal and interest cash flows (determined using the target-modeled
maturity profile) have different interest payment or maturity dates.
These are called “mismatched positions”. An interest-sensitive asset
or liability is repriced when interest rates change, when there is cash
flow from final maturity, normal amortization, or when customers
exercise prepayment, conversion, or redemption options offered for
the specific product.
TD’s exposure to interest rate risk depends on the size and
direction of interest rate changes, and on the size and maturity of
the mismatched positions. It is also affected by new business volumes,
renewals of loans or deposits, and how actively customers exercise
embedded options, such as prepaying a loan or redeeming a deposit
before its maturity date.
Interest rate risk exposure, after economic hedging activities, is
measured using various interest rate “shock” scenarios. Two of the
measures used are Net Interest Income Sensitivity (NIIS) and Economic
Value at Risk (EVaR). NIIS is defined as the change in net interest
income over the next twelve months resulting from mismatched positions
for an immediate and sustained 100 bps interest rate shock. NIIS
measures the extent to which the maturing and repricing asset and
liability cash flows are matched over the next twelve-month period
and reflects how the Bank’s net interest income will change over that
period from the effect of the interest rate shock on the mismatched
positions. EVaR is defined as the difference between the change in
the present value of the Bank’s asset portfolio and the change in the
present value of the Bank’s liability portfolio, including off-balance
sheet instruments and assumed profiles for non-rate sensitive products,
resulting from an immediate and sustained 100 bps unfavourable
interest rate shock. EVaR measures the relative sensitivity of asset and
liability cash flow mismatches to changes in long-term interest rates.
Closely matching asset and liability cash flows reduces EVaR and
mitigates the risk of volatility in future net interest income.
To the extent that interest rates are sufficiently low and it is
not feasible to measure the impact of a 100 bps decline in interest
rates, EVaR and NIIS exposures will be calculated by measuring the
impact of a decline in interest rates where the resultant rates do
not become negative.
The model used to calculate NIIS and EVaR captures the impact
of changes to assumed customer behaviours, such as interest rate
sensitive mortgage prepayments, but does not assume any balance
sheet growth, change in business mix, product pricing philosophy,
or management actions in response to changes in market conditions.
TD’s policy sets overall limits on EVaR and NIIS which are linked to
capital and net interest income, respectively. These Board limits are
consistent with the Bank’s enterprise risk appetite and are periodically
reviewed and approved by the Risk Committee. Exposures against Board
limits are routinely monitored and reported, and breaches of these Board
limits, if any, are escalated to both the ALCO and the Risk Committee.
In addition to Board policy limits, book-level risk limits are set
for TBSM’s management of non-trading interest rate risk by Risk
Management. These book-level risk limits are set at a more granular
level than Board policy limits for NIIS and EVaR, and developed to
be consistent with the overall Board Market Risk policy. Breaches of
these book-level risk limits, if any, are escalated to the ALCO in a
timely manner.
The Bank regularly performs valuations of all asset and liability
positions, as well as off-balance sheet exposures. TD’s objective is to
stabilize net interest income over time through disciplined asset/liability
matching and hedging.
The interest rate risk exposures from products with closed (non-
optioned) fixed-rate cash flows are measured and managed separately
from products that offer customers prepayment options. The Bank
projects future cash flows by looking at the impact of:
• a target interest sensitivity profile for its core deposit portfolio;
• a target investment profile on its net equity position; and
•
liquidation assumptions on mortgages other than from embedded
pre-payment options.
The objective of portfolio management within the closed book is
to eliminate cash flow mismatches to the extent practically possible,
so that net interest income becomes more predictable. Product
options, whether they are freestanding options such as mortgage rate
commitments or embedded in loans and deposits, expose TD to a
significant financial risk.
• Rate Commitments: The Bank models its exposure from freestanding
mortgage rate commitment options using an expected funding profile
based on historical experience. Customers’ propensity to fund,
and their preference for fixed or floating rate mortgage products,
is influenced by factors such as market mortgage rates, house
prices, and seasonality.
• Asset Prepayment: The Bank models its exposure to written
options embedded in other products, such as the right to prepay
residential mortgage loans, based on analysis of customer behaviour.
Econometric models are used to model prepayments and the
effects of prepayment behaviour to the Bank. In general mortgage
prepayments are also affected by non-market incentives, such
as mortgage age, house prices, and GDP growth. The combined
impacts from these parameters are also assessed to determine a
core liquidation speed which is independent of market incentives.
• Non-Maturity Liabilities: The Bank models its exposure to
non-maturity liabilities, such as core deposits, by assessing interest
rate elasticity and balance permanence using historical data and
business judgement. Fluctuations of non-maturity deposits can occur
because of factors such as interest rate movements, equity market
movements, and changes to customer liquidity preferences.
To manage product option exposures the Bank purchases options
or uses a dynamic hedging process designed to replicate the payoff
of a purchased option. The Bank also models the margin compression
that would be caused by declining interest rates on certain interest
rate sensitive demand deposit accounts.
Other market risks monitored on a regular basis include:
• Basis Risk: The Bank is exposed to risks related to the difference
in various market indices.
• Equity Risk: The Bank is exposed to equity risk through its
equity-linked guaranteed investment certificate product offering.
The exposure is managed by purchasing options to replicate the
equity payoff.
85
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS Interest Rate Risk15
The following graph shows the Bank’s interest rate risk exposure
(as measured by Economic Value at Risk (EVaR)) on all non-trading
assets, liabilities, and derivative instruments used for interest rate
risk management.
ALL INSTRUMENTS PORTFOLIO
Economic Value at Risk After-tax –
October 31, 2016 and October 31, 2015
(millions of Canadian dollars)
October 31, 2015
October 31, 2016
)
s
n
o
i
l
l
i
m
(
e
u
a
v
l
t
n
e
s
e
r
p
n
i
e
g
n
a
h
C
$150
50
(50)
(150)
(250)
(350)
(450)
(550)
(650)
October 31, 2015: $(143)
October 31, 2016: $(234)
The Bank uses derivative financial instruments, wholesale investments,
funding instruments, other capital market alternatives, and, less
frequently, product pricing strategies to manage interest rate risk.
As at October 31, 2016, an immediate and sustained 100 bps increase
in interest rates would have decreased the economic value of
shareholders’ equity by $234 million (October 31, 2015 – $143 million)
after tax. An immediate and sustained 100 bps decrease in interest
rates is typically used to determine the reduction in the economic value
of shareholders’ equity. However, due to the low rate environment
in both Canada and in the U.S. at the end of the quarter, it was only
possible to shock Canadian and U.S. rates by 75 bps and 50 bps
respectively, while maintaining a floor at 0%. The impact of these
scenarios would have reduced the economic value of shareholders’
equity by $103 million (October 31, 2015 – $27 million) after tax.
The interest risk exposure, or EVaR, in the insurance business is not
included in the above graph. Interest rate risk is managed using
defined exposure limits and processes, as set and governed by the
insurance Board of Directors.
The following table shows the sensitivity of the economic value of
shareholders’ equity (after tax) by currency for those currencies where
TD has material exposure.
(2.0)
(1.5)
(1.0)
(0.5)
0
0.5
1.0
1.5
2.0
Parallel interest rate shock percentage
T A B L E 5 1
SENSITIVITY OF AFTER-TAX ECONOMIC VALUE AT RISK BY CURRENCY1,2
(millions of Canadian dollars)
Currency
Canadian dollar
U.S. dollar
1 Effective the second quarter of 2016, unfunded pension and benefit liabilities
are included in EVaR sensitivity.
2 Effective the third quarter of 2016, the Bank enhanced the methodology used
to stabilize product margins over time.
3 Due to the low rate environment EVaR sensitivity has been measured
using a 75 bps rate decline for Canadian interest rates for the year ended
October 31, 2016, and a 50 bps decline for the year ended October 31, 2015,
corresponding to an interest rate environment that is floored at 0%.
October 31, 2016
October 31, 2015
100 bps
increase
$
8
(242)
$ (234)
100 bps
decrease
$
(64)3
(39)4
$ (103)
100 bps
increase
$
(5)
(138)
$ (143)
100 bps
decrease
$ (15)3
(12)4
$ (27)
4 Due to the low rate environment EVaR sensitivity has been measured using a 50 bps
rate decline for U.S. interest rates for the year ended October 31, 2016, 25 bps
decline for the year ended October 31, 2015. All rate shocks are floored at 0%.
For the NIIS measure (not shown on the graph), a 100 bps increase
in interest rates on October 31, 2016, would have increased pre-tax
net interest income by $131 million (October 31, 2015 – $345 million
increase) in the next twelve months due to the mismatched positions.
A 100 bps decrease in interest rates on October 31, 2016, would
have decreased pre-tax net interest income by $123 million
(October 31, 2015 – $272 million decrease) in the next twelve months
due to the mismatched positions. Over the last year, the reported NIIS
exposures have decreased due to a decreasing portion of permanent
non-rate sensitive deposits being invested in a longer term maturity
profile. This is consistent with net interest income management
strategies overseen by ALCO. Reported NIIS remains consistent with
the Bank’s risk appetite and within established Board limits.
15 The footnotes included in Table 51 are also applicable to this graph.
86
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table shows the sensitivity of net interest income (pre-tax)
by currency for those currencies where the Bank has material exposure.
T A B L E 5 2
SENSITIVITY OF PRE-TAX NET INTEREST INCOME SENSITIVITY BY CURRENCY
(millions of Canadian dollars)
Currency
Canadian dollar
U.S. dollar
October 31, 2016
October 31, 2015
100 bps
increase
100 bps
decrease
$ 52
79
$ 131
$
(65)1
(58)2
$ (123)
100 bps
increase
$ 235
110
$ 345
100 bps
decrease
$ (234)1
(38)2
$ (272)
1 NIIS sensitivity has been measured using a 75 bps rate decline for Canadian interest
rates for the year ended October 31, 2016, and a 75 bps rate decline for the year
ended October 31, 2015, corresponding to an interest rate environment that is
floored at 0%.
2 NIIS sensitivity has been measured using a 50 bps rate decline for U.S. interest
rates for the year ended October 31, 2016, and a 25 bps rate decline for the year
ended October 31, 2015, corresponding to an interest rate environment that is
floored at 0%.
WHY MARGINS ON AVERAGE EARNING ASSETS
FLUCTUATE OVER TIME
As previously noted, the objective of the Bank’s approach to asset/
liability management is to ensure that earnings are stable and predictable
over time, regardless of cash flow mismatches and the exercise of
embedded options. This approach also creates margin certainty on fixed
rate loans and deposits as they are booked. Despite this approach
however, the margin on average earning assets is subject to change
over time for the following reasons:
• margins earned on new and renewing fixed-rate products relative
to the margin previously earned on matured products will affect the
overall portfolio margin;
• the weighted-average margin on average earning assets will shift
as the mix of business changes; and
• changes in the basis between the Prime Rate and the Bankers’
Acceptance rate, or the Prime Rate and the London Interbank
Offered Rate; and/or
• the lag in changing product prices in response to changes
in wholesale rates.
The general level of interest rates will affect the return the Bank
generates on its modeled maturity profile for core deposits and the
investment profile for its net equity position as it evolves over time.
The general level of interest rates is also a key driver of some modeled
option exposures, and will affect the cost of hedging such exposures.
The Bank’s approach tends to moderate the impact of these factors
over time, resulting in a more stable and predictable earnings stream.
Managing Non-trading Foreign Exchange Risk
Foreign exchange risk refers to losses that could result from changes
in foreign-currency exchange rates. Assets and liabilities that are
denominated in foreign currencies have foreign exchange risk.
The Bank is exposed to non-trading foreign exchange risk primarily
from its investments in foreign operations. When the Bank’s foreign
currency assets are greater or less than its liabilities in that currency,
they create a foreign currency open position. An adverse change in
foreign exchange rates can impact the Bank’s reported net interest
income and shareholders’ equity, and also its capital ratios.
Minimizing the impact of an adverse foreign exchange rate change
on reported equity will cause some variability in capital ratios, due to
the amount of RWA denominated in a foreign currency. If the Canadian
dollar weakens, the Canadian dollar equivalent of the Bank’s RWA in
a foreign currency increases, thereby increasing the Bank’s capital
requirement. For this reason, the foreign exchange risk arising from
the Bank’s net investments in foreign operations is hedged to the point
where capital ratios change by no more than an acceptable amount for
a given change in foreign exchange rates.
Managing Investment Portfolios
The Bank manages a securities portfolio that is integrated into the
overall asset and liability management process. The securities portfolio
is managed using high quality low risk securities in a manner appropriate
to the attainment of the following goals: (1) to generate a targeted
credit of funds to deposits balances that are in excess of loan balances;
(2) to provide a sufficient pool of liquid assets to meet unanticipated
deposit and loan fluctuations and overall funds management objectives;
(3) to provide eligible securities to meet collateral and cash management
requirements; and (4) to manage the target interest rate risk profile of
the balance sheet. Strategies for the investment portfolio are managed
based on the interest rate environment, balance sheet mix, actual and
anticipated loan demand, liquidity risk management objectives and
regulatory requirements, funding opportunities, and the overall interest
rate sensitivity of the Bank. The Risk Committee reviews and approves
the Enterprise Investment Policy that sets out limits for the Bank’s
investment portfolio.
87
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed
internal processes or technology or from human activities or from
external events.
Operating a complex financial institution exposes the Bank’s
businesses to a broad range of operational risks, including failed
transaction processing, documentation errors, fiduciary and information
breaches, technology failures, business disruption, theft and fraud,
workplace injury, and damage to physical assets as a result of internal
or outsourced business activities. The impact can result in significant
financial loss, reputational harm, or regulatory censure and penalties.
Operational risk is embedded in all of the Bank’s business activities,
including the practices for managing other risks such as credit, market,
and liquidity risk. The Bank must mitigate and manage operational risk
so that it can create and sustain shareholder value, successfully execute
the Bank’s business strategies, operate efficiently, and provide reliable,
secure, and convenient access to financial services. The Bank maintains
a formal enterprise-wide operational risk management framework that
emphasizes a strong risk management and internal control culture
throughout TD.
WHO MANAGES OPERATIONAL RISK
Operational Risk Management is an independent function that
designs and maintains the Bank’s overall operational risk management
framework. This framework sets out the enterprise-wide governance
processes, policies, and practices to identify and assess, measure,
control, monitor, escalate, and report operational risk. Operational
Risk Management ensures that there is appropriate monitoring and
reporting of the Bank’s operational risk profile and exposures to senior
management through the OROC, the ERMC, and the Risk Committee.
The Bank also maintains groups who oversee specific enterprise
wide operational risk policies. These policies govern the activities
of the corporate functions responsible for the management and
appropriate oversight of business continuity and crisis/incident
management, third party supplier management, financial crime and
fraud management, project management, technology, information
and cyber security management.
The senior management of individual business units is responsible
for the day-to-day management of operational risk following the
Bank’s established operational risk management policies and three
lines of defence model. An independent risk management function
supports each business segment and corporate area, and monitors
and challenges the implementation and use of the operational risk
management framework programs according to the nature and scope
of the operational risks inherent in the area. The senior executives in
each business unit participate in a Risk Management Committee that
oversees operational risk management issues and initiatives.
Ultimately, every employee has a role to play in managing
operational risk. In addition to policies and procedures guiding
employee activities, training is available to all staff regarding specific
types of operational risks and their role in helping to protect the
interests and assets of the Bank.
HOW TD MANAGES OPERATIONAL RISK
The Operational Risk Management Framework outlines the internal risk
and control structure to manage operational risk and includes the risk
appetite for operational risk, limits, governance, policies, and processes.
The Operational Risk Management Framework is maintained by Risk
Management and supports alignment with TD’s ERF and risk appetite.
The framework incorporates sound industry practices and meets
regulatory requirements. Key components of the framework include:
Governance and Policy
Management reporting and organizational structures emphasize
accountability, ownership, and effective oversight of each business
unit and each corporate area’s operational risk exposures. In addition,
the expectations of the Risk Committee and senior management
for managing operational risk are set out by enterprise-wide policies
and practices.
Risk and Control Self-Assessment
Internal controls are one of the primary methods of safeguarding
the Bank’s employees, customers, assets, and information, and in
preventing and detecting errors and fraud. Management undertakes
comprehensive assessments of key risk exposures and the internal
controls in place to reduce or offset these risks. Senior management
reviews the results of these evaluations to ensure that risk management
and internal controls are effective, appropriate, and compliant with
the Bank’s policies.
Operational Risk Event Monitoring
In order to reduce the Bank’s exposure to future loss, it is critical that
the Bank remains aware of and responds to its own and industry
operational risks. The Bank’s policies and processes require that
operational risk events be identified, tracked, and reported to the
appropriate level of management to ensure that the Bank analyzes
and manages such risks appropriately and takes suitable corrective
and preventative action. The Bank also reviews, analyzes, and
benchmarks TD against operational risk losses that have occurred
at other financial institutions using information acquired through
recognized industry data providers.
Scenario Analysis
Scenario Analysis is a systematic and repeatable process to assess the
likelihood and loss impact of low frequency, high impact operational
risk events. The Bank applies this practice to meet risk measurement
and risk management objectives. The process includes the use of
relevant external operational loss event data that is assessed considering
the Bank’s operational risk profile and control structure. The program
raises awareness and educates business owners regarding existing
and emerging risks, which may result in the identification and
implementation of risk mitigation action plans to minimize tail risk.
Risk Reporting
Risk Management, in partnership with senior management, regularly
monitors risk-related measures and the risk profile throughout the
Bank to report to senior business management and the Risk
Committee. Operational risk measures are systematically tracked,
assessed, and reported to ensure management accountability and
attention are maintained over current and emerging issues.
Insurance
Operational Risk Management includes oversight of the effective use
of insurance aligned with the Bank’s risk management strategy and risk
appetite. To provide additional protection from loss, the Bank manages
a comprehensive portfolio of insurance and other risk mitigating
arrangements. The insurance terms and provisions, including types
and amounts of coverage in the portfolio, are continually assessed to
ensure that both the Bank’s tolerance for risk and, where applicable,
statutory requirements are satisfied. The management process includes
conducting regular in-depth risk and financial analysis and identifying
opportunities to transfer elements of TD’s risk to third parties where
appropriate. The Bank transacts with external insurers that satisfy TD’s
minimum financial rating requirements.
Technology, Information and Cyber Security
Virtually all aspects of the Bank’s business and operations use
technology and information to create and support new markets,
competitive products, delivery channels, as well as other business
operations and opportunities. The Bank needs to manage risks
to ensure adequate and proper day-to-day operations; and only
authorized access of the Bank’s technology, infrastructure, systems,
information, or data. To achieve this, the Bank actively monitors,
manages, and continues to enhance its ability to mitigate these
technology and information security risks through enterprise-wide
programs using industry best practices and robust threat and
vulnerability assessments and responses. Together with the Bank’s
operational risk management framework, technology, information
and cyber security programs also include enhanced resiliency planning
and testing, as well as disciplined change management practices.
88
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS Business Continuity and Crisis/Incident Management
During incidents that could disrupt the Bank’s business and operations,
Business Continuity and Crisis Management supports the ability of senior
management to continue to manage and operate their businesses, and
provide customers access to products and services. The Bank’s robust
enterprise-wide business continuity and crisis management program
leverages a multi-tiered, global crisis/incident management governance
structure to ensure effective oversight, ownership, and management of
crises and incidents affecting the Bank. All areas of the Bank are required
to maintain and regularly test business continuity plans designed to
respond to a broad range of potential scenarios.
Supplier Management
A third party supplier/vendor is an entity that supplies a particular
product or service to or on behalf of the Bank. While these relationships
bring benefits to the Bank’s businesses and customers, the Bank also
needs to manage and minimize any risks related to the activity. The
Bank does this through an enterprise-level third-party risk management
program that guides third-party activities throughout the life cycles of
the arrangements and ensures the level of risk management and senior
management oversight is appropriate to the size, risk, and importance
of the third-party arrangement.
Project Management
The Bank has established a disciplined approach to project management
across the enterprise coordinated by the Bank’s Enterprise Project
Management Office. This approach involves senior management
governance and oversight of the Bank’s project portfolio and
leverages leading industry practices to guide TD’s use of standardized
project management methodology, defined project management
accountabilities and capabilities, and project portfolio reporting and
management tools to support successful project delivery.
Financial Crime and Fraud Management
The Financial Crime and Fraud Management Group leads the
development and implementation of enterprise-wide financial crime
and fraud management strategies, policies, and practices. TD employs
advanced fraud analytics capabilities to strengthen the Bank’s defences
and enhance governance, oversight, and collaboration across the
enterprise to protect customers, shareholders, and employees from
increasingly sophisticated financial crimes and fraud.
Operational Risk Capital Measurement
The Bank’s operational risk capital is determined using the AMA, a
risk-sensitive capital model, along with TSA. Effective the third quarter
of 2016, OSFI approved the Bank to use AMA. Entities not reported
under AMA, use the TSA methodology.
The Bank’s AMA Capital Model uses a Loss Distribution Approach (LDA)
and incorporates Internal Loss Data and Scenario Analysis results.
External Loss Data is indirectly considered through the identification and
assessment of Scenario Analysis estimations. Business, Environment and
Internal Control Factors (BEICF) are used as a post-model adjustment to
capital estimates to reflect forward-looking indicators of risk exposure.
The Bank’s AMA model includes the incorporation of a diversification
benefit, which considers correlations across risk types and business
lines as extreme loss events may not occur simultaneously across all
categories. The capital is estimated at the 99.9% confidence level.
Although the Bank manages a comprehensive portfolio of insurance
and other risk mitigating arrangements to provide additional protection
from loss, the Bank’s AMA model does not consider risk mitigation
through insurance.
Excluding those events involving litigation, the Bank did not experience
any material single operational risk loss event in 2016. Refer to
Note 28 of the 2016 Consolidated Financial Statements for further
information on material legal or regulatory actions.
Model Risk
Model risk is the potential for adverse consequences arising from
decisions based on incorrect or misused models and their outputs.
It can lead to financial loss, reputational risk, or incorrect business
and strategic decisions.
WHO MANAGES MODEL RISK
Primary accountability for the management of model risk resides
with the senior management of individual businesses with respect
to the models they use. The Model Risk Governance Committee
provides oversight of governance, risk, and control matters
by providing a platform to guide, challenge, and advise decision
makers and model owners in model risk related matters. Model Risk
Management monitors and reports on existing and emerging model
risks, and provides periodic assessments to senior management,
Risk Management, the Risk Committee of the Board, and regulators
on the state of model risk at TD and alignment with the Bank’s
Model Risk Appetite. The Risk Committee of the Board annually
approves the Bank’s Model Risk Framework and Model Risk Policy.
HOW TD MANAGES MODEL RISK
The Bank manages model risk in accordance with management
approved model risk policies and supervisory guidance which encompass
the life cycle of a model, including proof of concept, development,
validation, implementation, usage, and ongoing model performance
monitoring. The Bank’s Model Risk Management Framework captures
key processes that may be partially or wholly qualitative, or based on
expert judgment.
Business segments identify the need for a new model or process and
are responsible for model development and documentation according
to the Bank’s policies and standards. During model development,
controls with respect to code generation, acceptance testing, and
usage are established and documented to a level of detail and
comprehensiveness matching the materiality and complexity of the
model. Once models are implemented, business owners are responsible
for ongoing performance monitoring and usage in accordance with the
Bank’s Model Risk Policy. In cases where a model is deemed obsolete
or unsuitable for its originally intended purposes, it is decommissioned
in accordance with the Bank’s policies.
Model Risk Management and Model Validation provide oversight,
maintain a centralized inventory of all models as defined in the Bank’s
Model Risk Policy, validate and approve new and existing models on
a pre-determined schedule depending on regulatory requirements
and materiality, monitor model performance, and provide training
to all stakeholders. The validation process varies in rigour, depending
on the model type and use, but at a minimum contains a detailed
determination of:
• the conceptual soundness of model methodologies and underlying
quantitative and qualitative assumptions;
• the risk associated with a model based on complexity and materiality;
• the sensitivity of a model to model assumptions and changes in data
inputs including stress testing; and
• the limitations of a model and the compensating risk mitigation
mechanisms in place to address the limitations.
89
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS When appropriate, validation includes a benchmarking exercise which
may include the building of an independent model based on a similar
or alternative validation approach. The results of the benchmark
model are compared to the model being assessed to validate the
appropriateness of the model’s methodology and its use.
At the conclusion of the validation process, a model will either be
approved for use or will be rejected and require redevelopment or other
courses of action. Models or processes identified as obsolete or no longer
appropriate for use through changes in industry practice, the business
environment, or Bank strategies are subject to decommissioning.
Model risk exists on a continuum from the most complex and material
models to analytical tools (also broadly referred to as non-models)
that may still expose the Bank to risk based on their incorrect use or
inaccurate outputs. The Bank has policies and procedures in place to
ensure that the level of independent challenge and oversight corresponds
to the materiality and complexity of both models and non-models.
Insurance Risk
Insurance risk is the risk of financial loss due to actual experience
emerging differently from expectations in insurance product pricing
or reserving. Unfavourable experience could emerge due to adverse
fluctuations in timing, actual size, and/or frequency of claims
(for example, driven by non-life premium risk, non-life reserving risk,
catastrophic risk, mortality risk, morbidity risk, and longevity risk),
policyholder behaviour, or associated expenses.
Insurance contracts provide financial protection by transferring
insured risks to the issuer in exchange for premiums. The Bank is
engaged in insurance businesses relating to property and casualty
insurance, life and health insurance, and reinsurance, through various
subsidiaries; it is through these businesses that the Bank is exposed
to insurance risk.
WHO MANAGES INSURANCE RISK
Senior management within the insurance business units has primary
responsibility for managing insurance risk with oversight by the CRO
for Insurance who reports into Risk Management. The Audit Committee
of the Board acts as the Audit and Conduct Review Committee for
the Canadian insurance company subsidiaries. The insurance company
subsidiaries also have their own Boards of Directors who provide
additional risk management oversight.
HOW TD MANAGES INSURANCE RISK
The Bank’s risk governance practices ensure strong independent
oversight and control of risk within the insurance business. The
Risk Committee for the insurance business provides critical oversight
of the risk management activities within the business and monitors
compliance with insurance risk policies. The Bank’s Insurance Risk
Management Framework and Insurance Risk Policy collectively outline
the internal risk and control structure to manage insurance risk
and include risk appetite, policies, processes, as well as limits and
governance. These documents are maintained by Risk Management
and support alignment with the Bank’s risk appetite for insurance risk.
The assessment of reserves for claim liabilities is central to the
insurance operation. The Bank establishes reserves to cover estimated
future payments (including loss adjustment expenses) on all claims
arising from insurance contracts underwritten. The reserves cannot
be established with complete certainty, and represent management’s
best estimate for future claim payments. As such, the Bank regularly
monitors liability estimates against claims experience and adjusts
reserves as appropriate if experience emerges differently than
anticipated. Claim liabilities are governed by the Bank’s general
insurance reserving policy.
Sound product design is an essential element of managing risk.
The Bank’s exposure to insurance risk is generally short-term in nature
as the principal underwriting risk relates to automobile and home
insurance for individuals.
Insurance market cycles, as well as changes in automobile insurance
legislation, the judicial environment, trends in court awards, climate
patterns, and the economic environment may impact the performance
of the insurance business. Consistent pricing policies and underwriting
standards are maintained.
There is also exposure to geographic concentration risk associated
with personal property coverage. Exposure to insurance risk
concentration is managed through established underwriting guidelines,
limits, and authorization levels that govern the acceptance of risk.
Concentration of insurance risk is also mitigated through the purchase
of reinsurance. The insurance business’ reinsurance programs are
governed by catastrophe and reinsurance risk management policies.
Strategies are in place to manage the risk to the Bank’s reinsurance
business. Underwriting risk on business assumed is managed through
a policy that limits exposure to certain types of business and countries.
The vast majority of reinsurance treaties are annually renewable,
which minimizes long term risk. Pandemic exposure is reviewed and
estimated annually.
Liquidity Risk
The risk of having insufficient cash or collateral to meet financial
obligations and an inability to, in a timely manner, raise funding or sell
assets at a non-distressed price. Financial obligations can arise from
deposit withdrawals, debt maturities, commitments to provide credit
or liquidity support or the need to pledge additional collateral.
TD’S LIQUIDITY RISK APPETITE
The Bank maintains a prudent and disciplined approach to managing its
potential exposure to liquidity risk. The Bank targets a 90-day survival
horizon under a combined Bank-specific and market-wide stress scenario,
and a minimum buffer over regulatory requirements prescribed by the
OSFI LAR guidelines. Under the LAR guidelines, Canadian banks are
required to maintain a Liquidity Coverage Ratio (LCR) at the minimum
of 100%. The Bank operates under a prudent funding paradigm with an
emphasis on maximizing deposits as a core source of funding, and having
a ready access to wholesale funding markets across diversified terms,
funding types, and currencies so as to ensure low exposure to a sudden
contraction of wholesale funding capacity and to minimize structural
liquidity gaps. The Bank also maintains a comprehensive contingency
funding plan to enhance preparedness for recovery from potential
liquidity stress events. The resultant management strategies and actions
comprise an integrated liquidity risk management program that ensures
low exposure to identified sources of liquidity risk and compliance with
regulatory requirements.
90
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS LIQUIDITY RISK MANAGEMENT RESPONSIBILITY
The Bank’s ALCO oversees the Bank’s liquidity risk management
program. It ensures there are effective management structures and
policies in place to properly measure and manage liquidity risk. The
GLF, a subcommittee of the ALCO comprised of senior management
from TBSM, Risk Management, Finance, and Wholesale Banking,
identifies and monitors TD’s liquidity risks. The management of
liquidity risk is the responsibility of the Head of TBSM, while oversight
and challenge is provided by the ALCO and independently by Risk
Management. The Risk Committee of the Board regularly reviews
the Bank’s liquidity position and approves the Bank’s Liquidity Risk
Management Framework and Policies annually.
Pursuant to the Enhanced Prudential Standards for Bank Holding
Companies and Foreign Banking Organizations, TD has established
TD Group US Holding LLC (TDGUS), as TD’s U.S. Intermediate Holding
Company (IHC), and a Combined U.S. Operations (CUSO) reporting
unit that consists of the IHC and TD’s U.S. branch and agency network.
Both TDGUS and CUSO are managed to the U.S. Enhanced Prudential
Standards liquidity requirements in addition to the Bank’s liquidity
management framework.
The following treasury areas are responsible for measuring, monitoring,
and managing liquidity risks for major business segments:
• Liquidity Risk Management (LRM) in TBSM is responsible for
maintaining the liquidity risk management policy and asset
pledging policy, along with associated limits, standards, and
processes to ensure that consistent and efficient liquidity
management approaches are applied across all of the Bank’s
operations. TBSM LRM also manages and reports the combined
Canadian Retail (including domestic wealth businesses),
Corporate segment, and Wholesale Banking liquidity positions.
U.S. TBSM is responsible for managing the liquidity position
for U.S. Retail operations, as well as in conjunction with LRM,
the liquidity position of CUSO.
• Other regional operations, including those within TD’s insurance,
and non-U.S. foreign branches and/or subsidiaries are responsible
for managing their liquidity risk and positions in compliance with
their own policies, local regulatory requirements and, as applicable,
consistent with the enterprise policy.
HOW TD MANAGES LIQUIDITY RISK
The Bank’s overall liquidity requirement is defined as the amount
of liquid assets the Bank needs to hold to be able to cover expected
future cash flow requirements, plus a prudent reserve against potential
cash outflows in the event of a capital markets disruption or other
events that could affect TD’s access to funding or destabilize TD’s
deposit base. The Bank does not rely on short-term wholesale funding
for purposes other than funding trading assets.
The Bank has developed an internal view for managing liquidity that
uses an assumed “Severe Combined Stress Scenario” lasting for a
90-day period. The Severe Combined Stress scenario models potential
liquidity requirements during a crisis resulting in a loss of confidence
in TD’s ability to meet obligations as they come due. The Bank also
assumes loss of access to all forms of external wholesale funding
during the 90-day period.
In addition to this Bank-specific event, the Severe Combined Stress
Scenario also incorporates the impact of a stressed market-wide
liquidity event that results in a significant reduction in the availability
of funding for all institutions, a significant increase in the Bank’s
funding costs, and a significant decrease in the marketability of assets.
The Bank calculates “required liquidity” for this scenario related to the
following conditions:
• 100% of all maturing unsecured wholesale and secured funding
coming due;
• accelerated attrition or “run-off” of deposit balances;
•
increased utilization of available credit and liquidity facilities to
personal, commercial, and corporate lending customers;
increased collateral requirements associated with downgrades in
TD’s credit rating and adverse movement in reference rates for
derivative contracts; and
•
• coverage of maturities related to the bankers’ acceptances the Bank
issues on behalf of clients and ABCP.
The Bank also manages its liquidity to comply with the regulatory
liquidity requirements in the OSFI LAR (LCR and the Net Cumulative
Cash Flow (NCCF) monitoring tool). The LCR requires that banks
maintain a minimum liquidity coverage of 100% over a 30-day stress
period. TD’s liquidity policy stipulates that the Bank must maintain
sufficient “available liquidity” to cover “required liquidity” at all times
throughout the Severe Combined Stress Scenario subject to buffers
over the regulatory minimums. As a result, the Bank’s liquidity is
managed to the higher of TD’s 90-day surplus requirement and the
target buffers over the regulatory minimums.
The Bank does not consolidate the surplus liquidity of U.S. Retail
with the positions of other entities due to investment restrictions
imposed by the U.S. Federal Reserve Board on funds generated from
deposit taking activities by member financial institutions. Surplus
liquidity domiciled in insurance business subsidiaries is also excluded
in the enterprise liquidity position calculation due to regulatory
investment restrictions.
The Funds Transfer Pricing process in TBSM considers liquidity risk as
a key determinant of the cost or credit of funds provided to loans and
deposits, respectively. Liquidity costs applied to loans are determined
based on the appropriate term funding profile, while deposits are
assessed based on the required liquidity reserves and balance stability.
Liquidity costs are also applied to other contingent commitments like
undrawn lines of credit provided to customers.
LIQUID ASSETS
The unencumbered liquid assets TD holds to satisfy its liquidity
requirements must be high quality securities that the Bank believes can
be monetized quickly in stress conditions with minimum loss in market
value. Unencumbered liquid assets are represented in a cumulative
liquidity gap framework with adjustments made for estimated
market or trading depths, settlement timing, and/or other identified
impediments to potential sale or pledging. Overall, the Bank expects
any reduction in market value of its liquid asset portfolio to be modest
given the underlying high credit quality and demonstrated liquidity.
Although TD has access to the Bank of Canada’s Emergency
Lending Assistance Program, the Federal Reserve Bank Discount
Window in the U.S., and the European Central Bank standby facilities,
TD does not consider borrowing capacity at central banks under these
types of programs as a source of available liquidity when assessing
liquidity positions.
91
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS Assets held by TD to satisfy liquidity requirements are summarized in
the following tables. The tables do not include assets held within the
Bank’s insurance businesses due to investment restrictions.
T A B L E 5 3
SUMMARY OF LIQUID ASSETS BY TYPE AND CURRENCY1,2
(millions of Canadian dollars, except as noted)
As at
Cash and due from banks
Canadian government obligations
NHA MBS
Provincial government obligations
Corporate issuer obligations
Equities
Other marketable securities and/or loans
Total Canadian dollar-denominated
Cash and due from banks
U.S. government obligations
U.S. federal agency obligations, including U.S.
federal agency mortgage-backed obligations
Other sovereign obligations
Corporate issuer obligations
Equities
Other marketable securities and/or loans
Total non-Canadian dollar-denominated
Securities
received as
collateral from
securities
financing and
derivative
transactions3
–
$
39,156
211
10,255
3,699
6,049
1,037
60,407
–
32,914
6,091
20,027
9,192
8,787
1,027
78,038
Bank-owned
liquid assets
$
3,147
15,860
35,134
9,230
5,279
22,304
4,179
95,133
46,035
26,242
33,492
53,218
57,441
6,828
6,325
229,581
Total liquid assets
Encumbered Unencumbered
liquid assets3
liquid assets
October 31, 2016
$
3,147
55,016
35,345
19,485
8,978
28,353
5,216
155,540
46,035
59,156
39,583
73,245
66,633
15,615
7,352
307,619
1%
$
12
8
4
2
6
1
34
10
13
8
16
14
3
2
66
349
23,360
3,183
10,450
1,617
8,514
963
48,436
1,093
29,214
15,460
12,979
13,046
3,202
–
74,994
$
2,798
31,656
32,162
9,035
7,361
19,839
4,253
107,104
44,942
29,942
24,123
60,266
53,587
12,413
7,352
232,625
Total
$ 324,714
$ 138,445
$ 463,159
100%
$ 123,430
$ 339,729
Cash and due from banks
Canadian government obligations
NHA MBS
Provincial government obligations
Corporate issuer obligations
Equities
Other marketable securities and/or loans
Total Canadian dollar-denominated
Cash and due from banks
U.S. government obligations
U.S. federal agency obligations, including U.S.
federal agency mortgage-backed obligations
Other sovereign obligations
Corporate issuer obligations
Equities
Other marketable securities and/or loans
Total non-Canadian dollar-denominated
$
2,904
17,636
38,517
9,344
5,296
15,324
3,537
92,558
36,872
13,042
31,296
42,978
55,543
5,887
6,637
192,255
$
–
29,024
471
6,783
4,103
3,522
1,173
45,076
–
28,734
5,792
35,495
917
3,092
14,203
88,233
$
2,904
46,660
38,988
16,127
9,399
18,846
4,710
137,634
36,872
41,776
37,088
78,473
56,460
8,979
20,840
280,488
1%
$
11
9
4
2
5
1
33
9
10
9
19
13
2
5
67
October 31, 2015
$
2,734
27,038
35,715
9,125
7,896
11,654
4,040
98,202
36,851
12,666
22,681
56,635
52,185
7,704
8,411
197,133
170
19,622
3,273
7,002
1,503
7,192
670
39,432
21
29,110
14,407
21,838
4,275
1,275
12,429
83,355
Total
$ 284,813
$ 133,309
$ 418,122
100%
$ 122,787
$ 295,335
1 Certain comparative amounts have been restated to conform with the presentation
3 Liquid assets include collateral received that can be re-hypothecated or
adopted in the current period.
otherwise redeployed.
2 Positions stated include gross asset values pertaining to secured borrowing/lending
and reverse-repurchase/repurchase businesses.
The increase of $44.4 billion in total unencumbered liquid assets from
October 31, 2015, was mainly due to term wholesale funding activity
and deposit volume growth in the Canadian Retail and U.S. Retail
segments. Liquid assets are held in The Toronto-Dominion Bank
and multiple domestic and foreign subsidiaries and branches and
are summarized in the following table.
T A B L E 5 4
SUMMARY OF UNENCUMBERED LIQUID ASSETS BY BANK, SUBSIDIARIES, AND BRANCHES1
(millions of Canadian dollars)
The Toronto-Dominion Bank (Parent)
Bank subsidiaries
Foreign branches
Total
1 Certain comparative amounts have been restated to conform with the
presentation adopted in the current period.
92
October 31
2016
$ 115,816
201,945
21,968
$ 339,729
As at
October 31
2015
$ 91,426
176,350
27,559
$ 295,335
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
The Bank’s monthly average liquid assets (excluding those held in
insurance subsidiaries) for the years ended October 31, 2016, and
October 31, 2015, are summarized in the following table.
T A B L E 5 5
SUMMARY OF AVERAGE LIQUID ASSETS BY TYPE AND CURRENCY1,2
(millions of Canadian dollars, except as noted)
Average for the years ended
Cash and due from banks
Canadian government obligations
NHA MBS
Provincial government obligations
Corporate issuer obligations
Equities
Other marketable securities and/or loans
Total Canadian dollar-denominated
Cash and due from banks
U.S. government obligations
U.S. federal agency obligations, including U.S.
federal agency mortgage-backed obligations
Other sovereign obligations
Corporate issuer obligations
Equities
Other marketable securities and/or loans
Total non-Canadian dollar-denominated
Securities
received as
collateral from
securities
financing and
derivative
transactions3
$
–
38,636
258
10,509
3,916
6,039
1,020
60,378
–
36,415
5,768
25,448
10,858
8,689
898
88,076
Bank-owned
liquid assets
$
2,879
13,905
34,772
9,008
5,596
19,686
4,094
89,940
48,113
24,836
33,307
52,739
56,581
6,140
6,370
228,086
Total liquid assets
Encumbered Unencumbered
liquid assets3
liquid assets
October 31, 2016
$
2,879
52,541
35,030
19,517
9,512
25,725
5,114
150,318
48,113
61,251
39,075
78,187
67,439
14,829
7,268
316,162
1%
$
11
7
4
2
6
1
32
10
13
8
17
15
3
2
68
331
21,393
3,098
10,671
1,573
8,737
1,127
46,930
1,123
29,534
15,587
16,102
13,601
3,152
–
79,099
$
2,548
31,148
31,932
8,846
7,939
16,988
3,987
103,388
46,990
31,717
23,488
62,085
53,838
11,677
7,268
237,063
Total
$ 318,026
$ 148,454
$ 466,480
100%
$ 126,029
$ 340,451
Cash and due from banks
Canadian government obligations
NHA MBS
Provincial government obligations
Corporate issuer obligations
Equities
Other marketable securities and/or loans
Total Canadian dollar-denominated
Cash and due from banks
U.S. government obligations
U.S. federal agency obligations, including U.S.
federal agency mortgage-backed obligations
Other sovereign obligations
Corporate issuer obligations
Equities
Other marketable securities and/or loans
Total non-Canadian dollar-denominated
$
2,674
18,626
38,126
8,843
7,807
15,977
4,030
96,083
38,261
13,552
32,224
43,942
56,645
6,118
5,381
196,123
$
–
32,226
459
7,621
4,206
3,216
1,029
48,757
–
28,978
7,871
37,899
9,419
3,002
5,370
92,539
$
2,674
50,852
38,585
16,464
12,013
19,193
5,059
144,840
38,261
42,530
40,095
81,841
66,064
9,120
10,751
288,662
1%
$
12
9
4
3
4
1
34
9
10
9
19
15
2
2
66
October 31, 2015
$
2,255
30,785
35,083
8,995
10,351
12,712
4,435
104,616
37,420
12,128
24,208
59,912
54,398
8,081
6,517
202,664
419
20,067
3,502
7,469
1,662
6,481
624
40,224
841
30,402
15,887
21,929
11,666
1,039
4,234
85,998
Total
$ 292,206
$ 141,296
$ 433,502
100%
$ 126,222
$ 307,280
1 Certain comparative amounts have been restated to conform with the presentation
3 Liquid assets include collateral received that can be re-hypothecated or
adopted in the current period.
otherwise redeployed.
2 Positions stated include gross asset values pertaining to secured borrowing/lending
and reverse-repurchase/repurchase businesses.
Average liquid assets held in The Toronto-Dominion Bank and multiple
domestic and foreign subsidiaries (excluding insurance subsidiaries)
and branches are summarized in the following table.
T A B L E 5 6
SUMMARY OF AVERAGE UNENCUMBERED LIQUID ASSETS BY BANK, SUBSIDIARIES, AND BRANCHES1
(millions of Canadian dollars)
The Toronto-Dominion Bank (Parent)
Bank subsidiaries
Foreign branches
Total
1 Certain comparative amounts have been restated to conform with the presentation
adopted in the current period.
Average for the years ended
October 31
2016
$ 116,541
200,966
22,944
$ 340,451
October 31
2015
$ 100,820
180,908
25,552
$ 307,280
93
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
ASSET ENCUMBRANCE
In the course of the Bank’s day-to-day operations, securities and other
assets are pledged to obtain funding, support trading and prime
brokerage businesses, and participate in clearing and/or settlement
systems. In addition to liquid assets, a summary of encumbered and
unencumbered assets (excluding assets held in insurance subsidiaries)
is presented in the following table to identify assets that are used or
available for potential funding needs.
T A B L E 5 7
ENCUMBERED AND UNENCUMBERED ASSETS1
(millions of Canadian dollars, except as noted)
Cash and due from banks
Interest-bearing deposits with banks
Securities, trading loans, and other7
Derivatives
Securities purchased under reverse repurchase agreements8
Loans, net of allowance for loan losses
Customers’ liability under acceptances
Investment in TD Ameritrade
Goodwill
Other intangibles
Land, buildings, equipment, and other depreciable assets
Deferred tax assets
Other assets9
Total on-balance sheet assets
Off-balance sheet items10
Securities purchased under reverse repurchase agreements
Securities borrowing and collateral received
Margin loans and other client activity
Total off-balance sheet items
Total
Encumbered2
Unencumbered
Pledged as
collateral3
–
$
4,904
42,019
–
–
22,943
–
–
–
–
–
–
542
$ 70,408
66,538
26,527
3,380
96,445
$ 166,853
$
Other4
–
1,200
11,736
–
–
53,393
–
–
–
–
–
–
–
$ 66,329
–
569
–
569
$ 66,898
$
Available as
collateral5
–
43,714
227,909
–
–
74,077
–
–
–
–
–
–
–
$ 345,700
35,272
18,314
14,725
68,311
$ 414,011
$
Other6
3,907
3,896
13,842
72,242
86,052
435,243
15,706
7,091
16,662
2,639
5,482
2,084
29,684
$ 694,530
(86,052)
–
(8,747)
(94,799)
$ 599,731
Total on-balance sheet assets
Total off-balance sheet items
Total
$ 84,327
98,447
$ 182,774
$ 61,731
–
$ 61,731
$ 285,773
51,678
$ 337,451
$ 672,542
(104,452)
$ 568,090
As at
October 31, 2016
Encumbered
Total
assets as a %
assets of total assets
$
3,907
53,714
295,506
72,242
86,052
585,656
15,706
7,091
16,662
2,639
5,482
2,084
30,226
$ 1,176,967
–%
0.5
4.6
–
–
6.5
–
–
–
–
–
–
–
11.6%
October 31, 2015
$ 1,104,373
13.2%
1 Certain comparative amounts have been restated to conform with the presentation
adopted in the current year.
2 Asset encumbrance has been analyzed on an individual asset basis. Where a
particular asset has been encumbered and TD has holdings of the asset both
on-balance sheet and off-balance sheet, for the purpose of this disclosure,
the on and off-balance sheet holdings are encumbered in alignment with the
business practice.
3 Represents assets that have been posted externally to support the Bank’s liabilities
and day-to-day operations, including securities related to repurchase agreements,
securities lending, clearing and payment systems, and assets pledged for derivative
transactions. Also includes assets that have been pledged supporting Federal Home
Loan Bank (FHLB) activity.
4 Assets supporting TD’s funding activities, assets pledged against securitization
liabilities, and assets held by consolidated securitization vehicles or in pools for
covered bond issuance.
5 Assets that are considered readily available in their current legal form to generate
funding or support collateral needs. This category includes reported FHLB assets
that remain unutilized and held-to-maturity securities that are available for collateral
purposes however not regularly utilized in practice.
6 Assets that cannot be used to support funding or collateral requirements in their
current form. This category includes those assets that are potentially eligible as
funding program collateral (for example, CMHC insured mortgages that can be
securitized into NHA MBS).
7 Securities include trading loans, securities, and other financial assets designated
at fair value through profit or loss, available-for-sale securities, and held-to-
maturity securities.
8 Assets reported in Securities purchased under reverse repurchase
agreements represent the value of the loans extended and not the value
of the collateral received.
9 Other assets include amounts receivable from brokers, dealers, and clients.
10 Off-balance sheet items include the collateral value from the securities received
under reverse repurchase agreements, securities borrowing, margin loans,
and other client activity. The loan value from the reverse repurchase transactions
and margin loans/client activity is deducted from the on-balance sheet
Unencumbered – Other category.
94
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
LIQUIDITY STRESS TESTING AND CONTINGENCY
FUNDING PLANS
In addition to the “Severe Combined Stress” scenario, TD also
performs liquidity stress testing on multiple alternate scenarios. These
scenarios are a mix of TD-specific events, global macroeconomic stress
events, and/or regional/subsidiary specific events designed to test
the impact from unique drivers. Liquidity assessments are also part of
the Bank’s enterprise-wide stress testing program. Results from these
stress event scenarios are used to inform the establishment of or make
enhancements to policy limits and contingency funding plan actions.
The Bank has liquidity contingency funding plans in place at the
enterprise level (“Enterprise CFP”) and for subsidiaries operating
in both domestic and foreign jurisdictions (“Regional CFP”). The
Enterprise CFP provides a documented framework for managing
unexpected liquidity situations and thus is an integral component
of the Bank’s overall liquidity risk management program. It outlines
different contingency stages based on the severity and duration of
the liquidity situation, and identifies recovery actions appropriate for
each stage. For each recovery action, it provides key operational steps
required to execute the action. Regional CFP recovery actions are
aligned to support the Enterprise CFP as well as any identified local
liquidity needs during stress. The actions and governance structure
proposed in the Enterprise CFP are aligned with the Bank’s Crisis
Management Recovery Plan.
CREDIT RATINGS
Credit ratings impact TD’s borrowing costs and ability to raise funds.
Rating downgrades could potentially result in higher financing costs,
increased requirement to pledge collateral, reduced access to capital
markets, and could also affect the Bank’s ability to enter into derivative
or hedging transactions.
Credit ratings and outlooks provided by rating agencies reflect
their views and are subject to change from time-to-time, based on a
number of factors including the Bank’s financial strength, competitive
position, and liquidity, as well as factors not entirely within the Bank’s
control, including the methodologies used by rating agencies and
conditions affecting the overall financial services industry.
T A B L E 5 8
CREDIT RATINGS1
The Bank regularly reviews the level of increased collateral its trading
counterparties would require in the event of a downgrade of TD’s
credit rating. The Bank holds liquid assets to ensure TD is able to
provide additional collateral required by trading counterparties in the
event of a one-notch downgrade in the Bank’s senior long-term credit
ratings. A multi-notch downgrade could have an impact on liquidity
requirements by requiring the Bank to post additional collateral for the
benefit of the Bank’s trading counterparties. The following table presents
the additional collateral required as of the reporting date in the event
of one, two, and three-notch downgrades of the Bank’s credit ratings.
T A B L E 5 9
ADDITIONAL COLLATERAL REQUIREMENTS FOR
RATING DOWNGRADES
(millions of Canadian dollars)
One-notch downgrade
Two-notch downgrade
Three-notch downgrade
Average for the years ended
October 31 October 31
2015
2016
$ 141
168
386
$ 225
251
440
LIQUIDITY COVERAGE RATIO
The Bank must maintain the LCR above 100% under normal operating
conditions in accordance with the OSFI LAR requirement. The LCR
is calculated as the ratio of the stock of unencumbered high quality
liquid assets (HQLA) over the net cash outflow requirements in the
next 30 days under a hypothetical liquidity stress event. The stress
event incorporates a number of idiosyncratic and market-wide shocks,
including deposit run-offs, partial loss of wholesale funding, additional
collateral requirements due to credit rating downgrades and market
volatility, increases in usage of credit and liquidity facilities provided
to the Bank’s clients, and other obligations the Bank expects to honour
during stress to mitigate reputational risk. HQLA eligible for the LCR
calculation under the OSFI LAR are primarily central bank reserves,
sovereign issued or guaranteed securities, and high quality securities
issued by non-financial entities. In calculating the LCR, HQLA haircuts,
deposit run-off rates, and other outflow and inflow rates are
prescribed by the OSFI LAR guideline.
Rating agency
Moody’s
S&P
DBRS
As at
October 31, 2016
Senior
Short-term
long-term
debt rating debt rating
P-1
A-1+
R-1 (high)
Aa1
AA-
AA
Outlook
Negative
Stable
Negative
1 The above ratings are for The Toronto-Dominion Bank legal entity. A more
extensive listing, including subsidiaries’ ratings, is available on the Bank’s website
at http://www.td.com/investor/credit.jsp. Credit ratings are not recommendations
to purchase, sell, or hold a financial obligation inasmuch as they do not comment
on market price or suitability for a particular investor. Ratings are subject to
revision or withdrawal at any time by the rating organization.
95
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table summarizes the Bank’s average monthly LCR
position for the fourth quarter of 2016, calculated in accordance
with OSFI’s LAR guideline.
T A B L E 6 0
AVERAGE BASEL III LIQUIDITY COVERAGE RATIO1
(millions of Canadian dollars, except as noted)
High-quality liquid assets
Total high-quality liquid assets
Cash outflows
Retail deposits and deposits from small business customers, of which:
Stable deposits5
Less stable deposits
Unsecured wholesale funding, of which:
Operational deposits (all counterparties) and deposits in networks of cooperative banks6
Non-operational deposits (all counterparties)
Unsecured debt
Secured wholesale funding
Additional requirements, of which:
Outflows related to derivative exposures and other collateral requirements
Outflows related to loss of funding on debt products
Credit and liquidity facilities
Other contractual funding obligations
Other contingent funding obligations7
Total cash outflows
Cash inflows
Secured lending
Inflows from fully performing exposures
Other cash inflows
Total cash inflows
Total high-quality liquid assets8
Total net cash outflows9
Liquidity coverage ratio10
Average for the three months ended
October 31, 2016
Total
unweighted
value
(average)2
Total
weighted
value
(average)3
$
n/a4
$ 200,328
$ 399,760
173,541
226,219
218,112
100,863
89,011
28,238
n/a4
158,176
23,356
7,678
127,142
13,903
513,344
n/a4
$
$ 27,828
5,206
22,622
98,703
23,873
46,592
28,238
6,594
39,990
6,116
7,678
26,196
8,321
7,559
$ 188,995
$ 119,380
14,223
9,082
$ 142,685
$ 17,532
8,059
9,082
$ 34,673
Average for the three months ended
October 31
2016
July 31
2016
Total adjusted
value
Total adjusted
value
$ 200,328
154,322
$ 189,802
144,086
130%
132%
1 The average is comprised of the three month ends that are in the fiscal quarter.
2 Unweighted inflow and outflow values are outstanding balances maturing or
callable within 30 days.
3 Weighted values are calculated after the application of respective HQLA haircuts
or inflow and outflow rates, as prescribed by the OSFI LAR guidelines.
4 Not applicable.
5 As defined by OSFI LAR, stable deposits from retail and small medium-sized
enterprise (SME) customers are deposits that are insured, and are either held
in transactional accounts or the depositors have an established relationship with
the Bank that make deposit withdrawal highly unlikely.
6 Operational deposits from non-SME business customers are deposits kept with the
Bank in order to facilitate their access and ability to conduct payment and settlement
activities. These activities include clearing, custody, or cash management services.
7 Includes uncommitted credit and liquidity facilities, stable value money market
mutual funds, outstanding debt securities with remaining maturity greater than
30 days, and other contractual cash outflows. TD has no contractual obligation
to buyback these outstanding TD debt securities, and as a result, a 0% outflow
rate is applied under the OSFI LAR guideline.
8 Adjusted HQLA includes both asset haircut and applicable caps, as prescribed
by the OSFI LAR (HQLA assets after haircuts are capped at 40% for Level 2 and
15% for Level 2B).
9 Adjusted Net Cash Outflows include both inflow and outflow rates
and applicable caps, as prescribed by the OSFI LAR (inflows are capped
at 75% of outflows).
10 The LCR percentage is calculated as the simple average of the three month-end
LCR percentages.
The Bank’s average LCR of 130% for quarter ended October 31, 2016,
continues to meet the regulatory requirement.
The Bank holds a variety of liquid assets commensurate with
the liquidity needs of the organization. Many of these assets qualify
as HQLA under the OSFI LAR guidelines. The average HQLA of the
Bank for the quarter ended October 31, 2016, was $200.3 billion
(July 31, 2016 – $189.8 billion), with level 1 assets representing 84%.
The Bank’s reported HQLA excludes excess HQLA from the
U.S. Retail operations, as required by the OSFI LAR, to reflect
liquidity transfer considerations between U.S. Retail and its
affiliates as a result of U.S. Federal Reserve Board’s regulations.
By excluding excess HQLA, the U.S. Retail LCR is effectively
capped at 100% prior to total Bank consolidation.
96
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
FUNDING
The Bank has access to a variety of unsecured and secured funding
sources. The Bank’s funding activities are conducted in accordance
with the liquidity management policy that requires, among other
things, assets be funded to the appropriate term.
The Bank’s primary approach to managing funding activities is to
maximize the use of deposits raised through personal and commercial
banking channels. The following table illustrates the Bank’s large
base of personal and commercial, wealth, and TD Ameritrade sweep
deposits (collectively, “P&C deposits”) that make up over 73% of the
Bank’s total funding excluding securitization.
T A B L E 6 1
SUMMARY OF DEPOSIT FUNDING
(millions of Canadian dollars)
P&C deposits – Canadian Retail
P&C deposits – U.S. Retail
Other deposits
Total
As at
October 31 October 31
2015
2016
$ 324,606 $ 293,309
318,503 284,655
1,627
795
$ 643,904 $ 579,591
The Bank actively maintains various external wholesale term (greater than
1 year) funding programs to provide access to diversified funding sources,
including asset securitization, covered bonds, and unsecured wholesale
debt. The Bank’s wholesale funding is diversified by geography, by
currency, and by funding types. The Bank also utilizes certificates of
deposit and commercial paper as short term (1 year and less) funding.
The following table summarizes the Bank’s term funding programs
by geography, with the related program size. The Bank also
maintains Evergreen Credit Card Trust to issue notes securitized
by credit card receivables.
Canada
United States
Europe/Australia
Capital Securities Program ($10 billion)
U.S. SEC (F-3) Registered Linked Senior
Debt, Capital Securities and Linked Notes
Program (US$40 billion)
United Kingdom Listing Authority (UKLA)
Registered Legislative Covered Bond
Program ($40 billion)
Senior Medium Term Linked Notes Program
($2 billion)
UKLA Registered European Medium Term
Note Program (US$20 billion)
Australian Debt Issuance Program
(A$5 billion)
TD regularly evaluates opportunities to diversify its funding into
new markets and to new investors in order to manage funding risk
and cost. The following table presents a breakdown of the Bank’s
term debt by currency and funding type. Term funding for the year
ended October 31, 2016, was $112.4 billion (October 31, 2015 –
$102.2 billion).
T A B L E 6 2
LONG-TERM FUNDING
The Bank maintains depositor concentration limits in respect of
short-term wholesale deposits so that it is not overly-dependent
on large wholesale depositors for funding. The Bank also limits
the amount of short-term wholesale funding that can mature
within a given time period to mitigate exposures to refinancing
risk during a stress event.
Long-term funding by currency
Canadian dollar
U.S. dollar
Euro
British pound
Other
Total
Long-term funding by type
Senior unsecured medium term notes
Covered bonds
Mortgage securitization1
Term asset backed securities
Total
As at
October 31 October 31
2015
2016
40%
41
13
3
3
100%
53%
26
16
5
100%
41%
43
10
4
2
100%
51%
23
22
4
100%
1 Mortgage securitization excludes the residential mortgage trading business.
97
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
The Bank continues to explore all opportunities to access lower-cost
funding on a sustainable basis. The following table represents
the various sources of funding obtained as at October 31, 2016,
and October 31, 2015.
T A B L E 6 3
WHOLESALE FUNDING
(millions of Canadian dollars)
Less than
1 month months months
3 to 6 6 months Over 1 to
2 years
to 1 year
1 to 3
As at
October 31 October 31
2015
2016
Over
2 years
Total
Total
Deposits from banks1
Bearer deposit note
Certificates of deposit
Commercial paper
Asset backed commercial paper2
Covered bonds
Mortgage securitization
Senior unsecured medium term notes
Subordinated notes and debentures3
Term asset backed securitization
Other4
Total
Of which:
Secured
Unsecured
Total
$ 6,243 $ 4,077 $ 1,986 $
435
10,190
8,089
–
–
734
2,203
–
–
873
9,902
1,678
66,046
15,304
–
23,719
33,729
53,656
8,637
3,400
1,613
$ 21,218 $ 26,601 $ 31,422 $ 34,581 $ 27,610 $ 89,916 $ 231,348 $ 217,684
– $ 13,133 $
–
–
–
–
22,547
20,342
33,699
10,891
2,421
16
820 $
415
18,354
4,223
–
–
2,581
7,184
–
–
1,004
7 $
–
683
–
–
2,298
5,933
16,595
–
2,091
3
1,626
16,208
5,202
–
4,010
816
512
–
957
105
2,814
54,544
21,411
–
28,855
30,406
60,259
10,891
5,469
3,566
338
9,109
3,897
–
–
–
66
–
–
1,565
– $
734 $ 5,783 $ 2,581 $ 10,325 $ 45,326 $ 64,749 $ 60,871
$
21,218
44,590 166,599 156,813
$ 21,218 $ 26,601 $ 31,422 $ 34,581 $ 27,610 $ 89,916 $ 231,348 $ 217,684
25,867
32,000
25,639
17,285
1 Includes fixed-term deposits with banks.
2 Represents ABCP issued by consolidated bank-sponsored structured entities.
3 Subordinated notes and debentures are not considered wholesale funding as they
may be raised primarily for capital management purposes.
4 Includes fixed-term deposits from non-bank institutions (unsecured) of $3.5 billion
(October 31, 2015 – $1.6 billion).
Excluding the Wholesale Banking mortgage aggregation business, the
Bank’s total 2016 mortgage-backed securities issuance was $1.9 billion
(2015 – $2.1 billion), and other asset-backed securities was $2.0 billion
(2015 – $1.6 billion). The Bank also issued $22.2 billion of unsecured
medium-term notes (2015 – $14.8 billion) and $9.1 billion of covered
bonds (2015 – $6.5 billion), in various currencies and markets during the
year ended October 31, 2016. This includes unsecured medium-term
notes and covered bonds issued but settling subsequent to year end.
REGULATORY DEVELOPMENTS CONCERNING LIQUIDITY
AND FUNDING
On November 9, 2015, the Financial Stability Board issued the final
Total Loss-Absorbing Capacity (TLAC) standard for global systemically
important banks (G-SIBs). The TLAC standard defines a minimum
requirement for the instruments and liabilities that should be readily
available for bail-in in resolution. Separately and on the same day,
the Basel Committee on Banking Supervision (BCBS) released a
consultative document on TLAC holdings, setting out its proposed
prudential treatment of banks’ investments in TLAC. It is applicable
to all banks subject to the Basel Committee’s standards, including both
G-SIBs and non-G-SIBs. On October 12, 2016, BCBS released the final
standard on the regulatory capital treatment of banks’ investments in
instruments that comprise TLAC for G-SIBs. The main elements of the
final standard include treatments of the deduction of Tier 2 capital,
threshold levels and instruments ranking pari passu with subordinated
forms of TLAC.
Since TD is not a G-SIB, we do not expect the TLAC requirements
to apply to the Bank. As a Canadian D-SIB, however, TD will be subject
to the bail-in law in Canada. On March 22, 2016, the Government of
Canada in its 2016 federal budget, proposed to introduce framework
legislation for the bail-in regime along with accompanying enhancements
to Canada’s bank resolution toolkit. The regime will provide the Canada
Deposit Insurance Corporation (CDIC) with a new statutory power to
convert specified eligible liabilities of D-SIBs into common shares in the
unlikely event such banks become non-viable. On April 20, 2016, the
Budget Implementation Act was tabled, providing amendments to
the CDIC Act, Bank Act and other statutes to allow for bail-in. TD is
monitoring the bail-in developments and expects further details to
be included in the regulations and an implementation timeline to be
clarified in the near future.
In October 2014, the BCBS released the final standard for “Basel III:
the net stable funding ratio.” The Net Stable Funding Ratio (NSFR)
requires that the ratio of available stable funding over required stable
funding be greater than 100%. The NSFR is designed to reduce
structural funding risk by requiring banks to have sufficient stable
sources of funding and lower reliance on funding maturing in one year
to support their businesses. In June 2015, the BCBS released the final
requirements for the “Net Stable Funding Ratio Disclosure Standards”.
The standard defines a common public disclosure framework for the
NSFR calculated in accordance to the guidelines published by BCBS in
October 2014. The NSFR and its public disclosure requirements are
expected to become minimum standards by January 2018.
98
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
MATURITY ANALYSIS OF ASSETS, LIABILITIES, AND
OFF-BALANCE SHEET COMMITMENTS
The following table summarizes on-balance sheet and off-balance
sheet categories by remaining contractual maturity. Off-balance sheet
commitments include contractual obligations to make future payments
on operating and capital lease commitments, certain purchase obligations
and other liabilities. The values of credit instruments reported in the
following table represent the maximum amount of additional credit
that the Bank could be obligated to extend should such instruments
be fully drawn or utilized. Since a significant portion of guarantees
and commitments are expected to expire without being drawn upon,
the total of the contractual amounts is not representative of expected
future liquidity requirements. These contractual obligations have an
impact on the Bank’s short-term and long-term liquidity and capital
resource needs.
The maturity analysis presented does not depict the Bank’s asset/
liability matching or exposure to interest rate and liquidity risk. The
Bank ensures that assets are appropriately funded to protect against
borrowing cost volatility and potential reductions to funding market
availability. The Bank utilizes stable non- maturity deposits (chequing
and savings accounts) and term deposits as the primary source of long-
term funding for the Bank’s non-trading assets. The Bank also funds
the stable balance of revolving lines of credit with long term funding.
The Bank issues long-term funding based primarily on the projected
net growth of non-trading assets. The Bank raises short term funding
primarily to finance trading assets. The liquidity of trading assets
under stressed market conditions is considered when determining
the appropriate term of the related funding.
99
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 6 4
REMAINING CONTRACTUAL MATURITY
(millions of Canadian dollars)
Less than
1 month
1 to 3
months
3 to 6
months
6 to 9
months
9 months Over 1 to Over 2 to
5 years
to 1 year
2 years
As at
October 31, 2016
No
specific
5 years maturity
Over
Total
Assets
Cash and due from banks
Interest-bearing deposits with banks
Trading loans, securities, and other1
Derivatives
Financial assets designated at fair value
through profit or loss
Available-for-sale securities
Held-to-maturity securities
Securities purchased under reverse
repurchase agreements
Loans
Residential mortgages
Consumer instalment and other personal
Credit card
Business and government
Debt securities classified as loans
Total loans
Allowance for loan losses
Loans, net of allowance for loan losses
Customers’ liability under acceptances
Investment in TD Ameritrade
Goodwill2
Other intangibles2
Land, buildings, equipment, and other
depreciable assets2
Deferred tax assets
Amounts receivable from brokers,
dealers, and clients
Other assets
Total assets
Liabilities
Trading deposits
Derivatives
Securitization liabilities at fair value
Other financial liabilities designated at
fair value through profit or loss
Deposits3,4
Personal
Banks
Business and government
Total deposits
Acceptances
Obligations related to securities sold short1
Obligations related to securities sold
under repurchase agreements
Securitization liabilities at amortized cost
Amounts payable to brokers, dealers, and clients
Insurance-related liabilities
Other liabilities5
Subordinated notes and debentures
Equity
Total liabilities and equity
Off-balance sheet commitments
Purchase obligations
Operating lease commitments
Network service agreements
Automated teller machines
Contact center technology
Software licensing and
equipment maintenance
Credit and liquidity commitments
Financial and performance standby
letters of credit
Documentary and commercial
letters of credit
Commitments to extend credit and liquidity6,7
Unconsolidated structured entity commitments
Commitments to liquidity facilities for ABCP
$
$
3,907
52,081
843
5,577
41
200
560
–
617
2,466
6,938
83
1,976
5,791
$
–
236
6,685
5,001
801
995
3,290
$
–
199
5,211
3,821
353
1,757
1,065
$
– $
–
3,421
2,680
– $
–
8,069
10,103
– $
–
19,671
19,780
– $
–
15,589
18,342
– $
581
37,302
–
3,907
53,714
99,257
72,242
159
1,593
1,172
415
10,175
8,360
1,333
48,890
37,182
915
39,916
26,975
183
2,069
–
4,283
107,571
84,395
56,641
21,541
5,855
1,777
238
–
–
–
–
86,052
772
438
–
21,293
–
22,503
–
22,503
13,589
–
–
–
–
–
2,252
881
–
4,574
68
7,775
–
7,775
2,046
–
–
–
–
–
4,483
1,934
–
7,006
16
13,439
–
13,439
67
–
–
–
8,598
2,734
–
6,581
27
17,940
–
17,940
3
–
–
–
9,786
3,401
–
5,153
10
18,350
–
18,350
1
–
–
–
52,123
14,724
–
16,402
66
83,315
–
83,315
–
–
–
–
108,256
35,505
–
59,765
78
203,604
–
203,604
–
–
–
–
31,066
24,058
–
59,006
1,409
115,539
–
115,539
–
–
–
–
–
60,856
31,914
14,294
–
107,064
(3,873)
103,191
–
7,091
16,662
2,639
217,336
144,531
31,914
194,074
1,674
589,529
(3,873)
585,656
15,706
7,091
16,662
2,639
–
–
–
–
–
–
–
–
–
–
–
–
5,482
2,084
5,482
2,084
17,436
2,488
$ 175,866
–
518
$ 49,751
–
686
$ 37,055
–
128
$ 32,254
–
97
17,436
12,790
$ 27,711 $ 120,587 $ 330,729 $ 217,429 $ 185,585 $ 1,176,967
–
8,301
–
150
–
153
–
269
$ 13,002
5,526
–
$ 14,604
6,623
594
$ 23,930
4,890
334
$ 13,070
3,066
678
$ 12,071 $
1,962
226
1,103 $
8,106
1,944
1,226 $
780 $
17,779
4,989
17,473
3,725
73
41
13
25
37
–
–
1
– $
–
–
–
79,786
65,425
12,490
190
3,846
5,741
14,654
24,241
13,589
1,066
39,986
–
17,857
145
2,960
–
–
$ 118,445
6,024
3,056
15,307
24,387
2,046
1,118
5,315
141
–
216
2,247
–
–
$ 57,332
7,794
231
8,064
16,089
67
1,127
2,545
481
–
313
1,734
–
–
$ 51,523
6,038
77
7,563
13,678
3
1,311
540
570
–
378
276
–
–
$ 33,595
5,195
10
2,623
7,828
1
883
9,236
3
19,927
29,166
–
3,406
11,915
3
46,952
58,870
–
11,239
132
12
12,492
12,636
–
11,869
389,052
8,068
189,645
586,765
–
1,096
439,232
17,201
317,227
773,660
15,706
33,115
507
1,108
–
372
196
–
–
48,973
17,918
17,857
7,046
19,696
10,891
74,214
$ 25,191 $ 51,263 $ 107,182 $ 62,272 $ 670,164 $ 1,176,967
–
–
–
1,700
6,389
–
74,214
–
3,032
–
1,057
808
10,891
–
40
3,989
–
974
2,535
–
–
40
8,597
–
1,891
2,551
–
–
$
$
$
$
80
–
13
3
15
159
–
26
5
85
237
–
23
8
30
235
–
6
8
47
$
232 $
–
6
8
896 $
–
24
29
2,173 $
–
20
–
3,943 $
–
–
–
36
127
103
–
– $
–
–
–
–
7,955
–
118
61
443
841
1,386
3,159
3,006
1,856
3,951
8,405
142
–
22,746
24
16,582
21
15,349
217
9,217
68
6,405
9
5,544
30
15,116
67
73,544
–
3,342
–
2,271
436
147,370
–
1,180
830
395
923
212
–
–
–
3,540
1 Amount has been recorded according to the remaining contractual maturity
5 Includes $115 million of capital lease commitments with remaining contractual
of the underlying security.
2 For the purposes of this table, non-financial assets have been recorded as having
‘no specific maturity’.
3 As the timing of demand deposits and notice deposits is non-specific and callable
by the depositor, obligations have been included as having ‘no specific maturity’.
4 Includes $29 billion of covered bonds with remaining contractual maturities
of $4 billion in ‘over 3 months to 6 months’, $2 billion in ‘over 1 to 2 years’,
$20 billion in ‘over 2 to 5 years’, and $3 billion in ‘over 5 years’.
maturities of $1 million in ‘less than 1 month’, $5 million in ‘1 month to 3 months’,
$7 million in ‘3 months to 6 months’, $7 million in ‘6 months to 9 months’,
$7 million in ‘9 months to 1 year’, $28 million in ‘over 1 to 2 years’, $46 million
in ‘over 2 to 5 years’, and $14 million in ‘over 5 years’.
6 Includes $131 million in commitments to extend credit to private equity investments.
7 Commitments to extend credit exclude personal lines of credit and credit card lines,
which are unconditionally cancellable at the Bank’s discretion at any time.
100
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 6 4
REMAINING CONTRACTUAL MATURITY (continued) 1
(millions of Canadian dollars)
As at
October 31, 2015
Assets
Cash and due from banks
Interest-bearing deposits with banks
Trading loans, securities, and other2
Derivatives
Financial assets designated at fair value
through profit or loss
Available-for-sale securities
Held-to-maturity securities
Securities purchased under reverse
repurchase agreements
Loans
Residential mortgages
Consumer instalment and other personal
Credit card
Business and government
Debt securities classified as loans
Total loans
Allowance for loan losses
Loans, net of allowance for loan losses
Customers’ liability under acceptances
Investment in TD Ameritrade
Goodwill3
Other intangibles3
Land, buildings, equipment, and
other depreciable assets3
Deferred tax assets
Amounts receivable from brokers,
dealers, and clients
Other assets
Total assets
Liabilities
Trading deposits
Derivatives
Securitization liabilities at fair value
Other financial liabilities designated at
fair value through profit or loss
Deposits4,5
Personal
Banks
Business and government
Total deposits
Acceptances
Obligations related to securities sold short2
Obligations related to securities sold
under repurchase agreements
Securitization liabilities at amortized cost
Amounts payable to brokers,
dealers, and clients
Insurance-related liabilities
Other liabilities6
Subordinated notes and debentures
Equity
Total liabilities and equity
Off-balance sheet commitments
Purchase obligations
Operating lease commitments
Network service agreements
Automated teller machines
Contact center technology
Software licensing and
equipment maintenance
Credit and liquidity commitments
Financial and performance standby
letters of credit
Documentary and commercial
letters of credit
Commitments to extend credit
and liquidity7,8
Unconsolidated structured entity commitments
Commitments to liquidity facilities for ABCP
Less than
1 month
1 to 3
months
3 to 6
months
6 to 9
months
9 months
to 1 year
Over 1 to
2 years
Over 2 to
5 years
Over
5 years
No
specific
maturity
$
$
3,154
40,890
1,955
2,845
195
268
170
–
420
3,957
4,661
488
1,763
966
$
–
529
3,327
2,906
535
1,899
1,779
$
–
154
3,524
3,443
205
1,299
1,930
$
–
53
4,587
3,315
285
1,249
1,896
$
– $
–
9,410
10,102
– $
–
15,426
22,291
– $
–
17,958
19,875
– $
437
35,013
–
552
4,556
6,952
770
33,196
35,744
1,171
42,580
25,013
177
1,972
–
Total
3,154
42,483
95,157
69,438
4,378
88,782
74,450
57,371
21,490
14,315
3,002
1,083
95
8
–
–
97,364
1,301
477
–
18,755
1
20,534
–
20,534
13,889
–
–
–
–
–
2,418
1,140
–
4,682
5
8,245
–
8,245
2,380
–
–
–
–
–
12,045
2,779
–
7,030
94
21,948
–
21,948
337
–
–
–
11,703
2,058
–
6,699
43
20,503
–
20,503
40
–
–
–
11,579
2,256
–
4,132
–
17,967
–
17,967
–
–
–
–
30,751
2,454
–
11,578
120
44,903
–
44,903
–
–
–
–
111,105
36,243
–
49,473
243
197,064
–
197,064
–
–
–
–
31,471
26,251
–
52,845
1,681
112,248
–
112,248
–
–
–
–
–
61,813
30,215
12,335
–
104,363
(3,434)
100,929
–
6,683
16,337
2,671
212,373
135,471
30,215
167,529
2,187
547,775
(3,434)
544,341
16,646
6,683
16,337
2,671
–
–
–
–
–
–
–
–
–
–
–
–
5,314
1,931
5,314
1,931
21,996
2,356
$ 165,623
–
539
$ 44,909
–
1,468
$ 49,043
–
85
$ 34,185
–
120
$ 30,555
–
93
21,996
13,248
$ 76,663 $ 304,639 $ 218,927 $ 179,829 $ 1,104,373
–
8,365
–
140
–
82
$ 12,654
2,629
–
$ 16,457
4,462
471
$ 27,238
2,599
27
$ 11,751
2,720
285
$ 4,308
2,343
–
$
360 $
1,202 $
789 $
7,520
1,933
17,294
5,033
17,651
3,237
– $
–
–
74,759
57,218
10,986
190
204
284
337
224
176
–
–
–
1,415
4,580
6,118
15,815
26,513
13,889
942
54,621
24
6,736
2,782
10,600
20,118
2,380
1,631
7,075
774
6,622
14,471
337
2,017
5,252
173
5,813
11,238
40
1,917
4,896
211
13,950
19,057
–
417
9,333
1
13,265
22,599
–
3,113
7,884
983
2,499
1,366
1,427
1,547
424
1,971
225
4,104
12,353
6
37,896
50,255
–
9,583
76
10,013
190
13
10,266
10,469
–
10,904
–
2,735
345,403
7,002
168,451
520,856
–
8,279
395,818
17,080
282,678
695,576
16,646
38,803
–
–
67,156
22,743
22,664
127
1,356
–
–
$ 135,609
–
170
2,243
–
–
$ 57,003
–
257
682
–
–
$ 51,777
–
352
286
–
–
$ 31,900
–
330
170
–
–
$ 29,244
–
829
1,261
–
–
22,664
6,519
14,223
8,637
67,028
$ 42,120 $ 98,399 $ 55,577 $ 602,744 $ 1,104,373
–
1,672
4,909
–
67,028
–
1,054
101
8,637
–
–
1,728
3,215
–
–
$
$
77
2
9
3
12
$
$
155
3
19
5
71
$
231
5
28
8
36
228
5
29
8
38
227
–
30
8
27
$
874 $
–
21
32
2,183 $
–
35
29
4,091 $
–
–
–
112
74
7
868
1,406
2,415
2,917
1,586
3,183
8,479
53
50
97
64
12
35
19
192
–
– $
–
–
–
–
–
–
8,066
15
171
93
377
21,046
330
12,541
14,457
9,654
5,665
8,509
11,579
63,334
3,660
1,881
131,280
–
151
148
138
138
464
707
–
–
1,746
1 Certain comparative amounts have been reclassified to conform with the
6 Includes $106 million of capital lease commitments with remaining contractual
presentation adopted in the current period.
2 Amount has been recorded according to the remaining contractual maturity of the
underlying security.
3 For the purposes of this table, non-financial assets have been recorded as having
‘no specific maturity’.
4 As the timing of demand deposits and notice deposits is non-specific and callable
by the depositor, obligations have been included as having ‘no specific maturity’.
5 Includes $24 billion of covered bonds with remaining contractual maturities of
$4 billion in ‘9 months to 1 year’, $4 billion in ‘over 1 to 2 years’, $13 billion in
‘over 2 to 5 years’, and $3 billion in ‘over 5 years’.
maturities of $3 million in ‘less than 1 month’, $7 million in ‘1 month to 3 months’,
$8 million in ‘3 months to 6 months’, $7 million in ‘6 months to 9 months’,
$6 million in ‘9 months to 1 year’, $24 million in ‘over 1 to 2 years’, $29 million
in ‘over 2 to 5 years’, and $22 million in ‘over 5 years’.
7 Includes $133 million in commitments to extend credit to private equity investments.
8 Commitments to extend credit exclude personal lines of credit and credit card lines,
which are unconditionally cancellable at the Bank’s discretion at any time.
101
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
Capital Adequacy Risk
Capital adequacy risk is the risk of insufficient capital being
available in relation to the amount of capital required to carry
out the Bank’s strategy and/or satisfy regulatory and internal
capital adequacy requirements.
Capital is held to protect the viability of the Bank in the event
of unexpected financial losses. Capital represents the loss-absorbing
funding required to provide a cushion to protect depositors and
other creditors from unexpected losses.
Managing capital levels of a financial institution requires that
TD holds sufficient capital under all conditions to avoid the risk
of breaching minimum capital levels prescribed by regulators.
WHO MANAGES CAPITAL ADEQUACY RISK
The Board has the ultimate responsibility for overseeing adequacy of
capital and capital management. The Board reviews the adherence to
capital targets and approves the annual capital plan and the Global
Capital Management Policy. The Risk Committee reviews and approves
the Capital Adequacy Risk Management Framework and oversees
management’s actions to maintain an appropriate ICAAP framework,
commensurate with the Bank’s risk profile. The CRO ensures the
Bank’s ICAAP is effective in meeting capital adequacy requirements.
The ALCO recommends and maintains the Capital Adequacy
Risk Management Framework and the Global Capital Management
Policy for effective and prudent management of the Bank’s capital
position and supports maintenance of adequate capital. It oversees
the allocation of capital limits for business segments and reviews
adherence to capital targets.
Enterprise Capital Management within TBSM is responsible for
forecasting and monitoring compliance with capital targets, on a
consolidated basis. Enterprise Capital Management updates the capital
forecast and makes recommendations to the ALCO regarding capital
issuance, repurchase and redemption. Risk Capital Assessment, within
Risk Management, leads the ICAAP and EWST processes. Business
segments are responsible for managing to allocated capital limits.
Additionally, regulated subsidiaries of the Bank, including certain
insurance subsidiaries and subsidiaries in the U.S. and other jurisdictions,
manage their capital adequacy risk in accordance with applicable
regulatory requirements. Capital management policies and procedures
of these subsidiaries are also required to conform with those of the
Bank. U.S.-regulated subsidiaries of the Bank are required to follow
several regulatory guidelines, rules and expectations related to capital
planning and stress testing including the U.S. Federal Reserve Board’s
Regulation YY establishing Enhanced Prudential Standards for Foreign
Bank Organizations and the stress test rule and capital plan rule both
applicable to U.S. Bank Holding Companies. Refer to the sections on
“Future Regulatory Capital Developments”, “EWST” and “Top and
Emerging Risks That May Affect the Bank and Future Results” for
further details.
HOW TD MANAGES CAPITAL ADEQUACY RISK
Capital resources are managed to ensure the Bank’s capital position
can support business strategies under both current and future business
operating environments. The Bank manages its operations within the
capital constraints defined by both internal and regulatory capital
requirements, ensuring that it meets the higher of these requirements.
Regulatory capital requirements represent minimum capital levels.
The Board approves capital targets that provide a sufficient buffer
under stress conditions so that the Bank exceeds minimum capital
requirements. The purpose of these capital targets is to reduce the risk
of a breach of minimum capital requirements, due to an unexpected
stress event, allowing management the opportunity to react to declining
capital levels before minimum capital requirements are breached.
Capital targets are defined in the Global Capital Management Policy.
The Bank also determines its internal capital requirements through
the ICAAP process using models to measure the risk-based capital
required based on its own tolerance for the risk of unexpected losses.
This risk tolerance is calibrated to the required confidence level so that
the Bank will be able to meet its obligations, even after absorbing
worst case unexpected losses over a one-year period, associated with
management’s target debt rating.
102
In addition, the Bank has a Capital Contingency Plan that is
designed to prepare management to ensure capital adequacy through
periods of Bank-specific or systemic market stress. The Capital
Contingency Plan determines the governance and procedures to be
followed if the Bank’s consolidated capital levels are forecast to fall
below capital targets. It outlines potential management actions that
may be taken to prevent such a breach from occurring.
A comprehensive periodic monitoring process is undertaken to
plan and forecast capital requirements. As part of the annual planning
process, business segments are allocated individual capital limits.
Capital usage is monitored and reported to the ALCO.
The Bank assesses the sensitivity of its forecast capital requirements
and new capital formations to various economic conditions through
its EWST process. The impacts of the EWST are applied to the capital
forecast and are considered in the determination of capital targets.
Legal and Regulatory Compliance Risk
Legal and regulatory compliance (LRC) risk is the risk associated with
the failure to meet the Bank’s legal obligations from legislative,
regulatory or contractual perspectives. This includes risks associated
with the failure to identify, communicate and comply with current and
changing laws, regulations, rules, regulatory guidance, self-regulatory
organization standards and codes of conduct, including the prudent
risk management of Money Laundering or Terrorist Financing Risk
(“LRC requirements”). It also includes the risks associated with the
failure to meet material contractual obligations or similarly binding
legal commitments, by either the Bank or other parties contracting
with the Bank. Potential consequences of failing to mitigate LRC risk
include financial loss, regulatory sanctions and loss of reputation,
which could be material to the Bank.
The Bank is exposed to LRC risk in virtually all of our activities. Failure
to meet regulatory and legal requirements poses a risk of censure or
penalty, may lead to litigation, and puts our reputation at risk. Financial
penalties, reputational damage and other costs associated with legal
proceedings, and unfavourable judicial or regulatory judgments or
actions may also adversely affect TD’s business, results of operations
and financial condition. LRC risk differs from other banking risks, such
as credit risk or market risk, in that it is typically not a risk actively or
deliberately assumed by management in expectation of a return. LRC
risk can occur as part of the normal course of operating TD’s businesses.
WHO MANAGES LEGAL AND REGULATORY COMPLIANCE RISK
The proactive and effective management of LRC risk is complex given
the breadth and pervasiveness of exposure. The Legal and Regulatory
Compliance Risk Management Framework applies enterprise-wide
to TD and to all of TD’s business segments, and governance, risk and
oversight functions. Each of the Bank’s businesses is responsible for
compliance with LRC requirements applicable to their jurisdiction and
specific business requirements, and for adhering to LRC requirements
in their business operations, including setting the appropriate tone for
legal and regulatory compliance. This accountability involves assessing
the risk, designing and implementing controls, and monitoring and
reporting their ongoing effectiveness to safeguard the businesses from
operating outside of TD’s risk appetite. The Legal, Compliance, and
AML departments, together with the Regulatory Risk (including
Regulatory Relationships and Government Affairs) group, provide
objective guidance, advice and oversight with respect to managing
LRC risk. Representatives of these groups participate, as required, in
senior operating committees of the Bank’s businesses. Also, the senior
management of the Legal, Compliance, and AML departments
have established regular meetings with and reporting to the Audit
Committee, which oversees the establishment and maintenance of
processes and policies that ensure the Bank is in compliance with
applicable laws and regulations (as well as its own policies).
HOW TD MANAGES LEGAL AND REGULATORY COMPLIANCE RISK
Effective management of LRC risk is a result of enterprise-wide
collaboration and requires (a) independent and objective identification
and assessment of LRC risk, (b) objective guidance and advisory services
to identify, assess, control and monitor LRC risk, and (c) an approved set
of frameworks, policies, procedures, guidelines and practices. Each of
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS the Legal, Compliance, and AML departments plays a critical role in the
management of LRC risk at the Bank. Depending on the circumstances,
they play different roles at different times: ‘trusted advisor’, provider of
objective guidance, independent challenge, and oversight and control
(including ‘gatekeeper’ or approver).
In particular, the Compliance department: acts as an independent
regulatory compliance and risk management function; assesses the
adequacy of, adherence to and effectiveness of the Bank’s regulatory
compliance management controls; and provides an opinion to the Board,
as to whether the regulatory compliance management controls are
sufficiently robust in achieving compliance with applicable regulatory
requirements. The AML department (1) acts as an independent regulatory
compliance and risk management oversight function, is responsible for
regulatory compliance and the broader prudential risk management
components of AML programs; (2) monitors, evaluates and reports on
AML program controls, design and execution; and (3) reports on the
overall adequacy and effectiveness of the AML programs. In addition, the
Compliance, and AML departments have developed methodologies and
processes to measure and aggregate LRC risks on an ongoing basis as a
critical baseline to assess whether TD’s internal controls are effective in
adequately mitigating LRC risk.
The Legal department acts as an independent provider of legal
services and advice, and protects TD from unacceptable legal risk.
The Legal department has also developed methodologies for measuring
litigation risk for adherence to our Risk Appetite.
Controls employed by the Legal, Compliance and AML departments
(including policies, frameworks, training and education) support the
responsibility of each business to adhere to LRC requirements.
Finally, the Bank’s Regulatory Risk groups also create and facilitate
communication with elected officials and regulators, monitor legislation
and regulations, support business relationships with governments,
coordinate regulatory examinations, facilitate regulatory approvals of
new products, and advance the public policy objectives of the Bank.
Reputational Risk
Reputational risk is the potential that stakeholder impressions, whether
true or not, regarding the Bank’s business practices, actions or inactions,
will or may cause a significant decline in TD’s value, brand, liquidity or
customer base, or require costly measures to address.
A company’s reputation is a valuable business asset that is essential
to optimizing shareholder value and therefore, is constantly at risk.
Reputational risk can arise as a consequence of negative impressions
about TD’s business practices and may involve any aspect of the Bank’s
operations, but usually involves concerns about business ethics and
integrity, competence, or the quality or suitability of products and
services. As such, reputational risk is not managed in isolation from TD’s
other major risk categories, as all risk categories can have an impact on
reputation, which in turn can impact TD’s brand, earnings, and capital.
WHO MANAGES REPUTATIONAL RISK
Responsibility for managing risks to the Bank’s reputation ultimately lies
with the SET and the executive committees that examine reputational
risk as part of their regular mandate. The RRC is the most senior
executive committee for the review of reputational risk matters at TD.
The mandate of the RRC is to oversee the management of reputational
risk within the Bank’s risk appetite. Its main accountability is to review
and assess business and corporate initiatives and activities across TD
where significant reputational risk profiles have been identified and
escalated. The RRC ensures that escalated initiatives and activities have
received adequate senior management and subject matter expert
review for reputational risk implications prior to implementation.
At the same time, every employee and representative of the
Bank has a responsibility to contribute in a positive way to the Bank’s
reputation and the management of reputational risk. This means
following ethical practices at all times, complying with applicable
policies, legislation, and regulations and supporting positive
interactions with the Bank’s stakeholders. Reputational risk is most
effectively managed when everyone at the Bank works continuously
to protect and enhance TD’s reputation.
HOW TD MANAGES REPUTATIONAL RISK
TD’s approach to the management of reputational risk combines
the experience and knowledge of individual business segments, and
governance, risk and oversight functions. It is based on enabling
TD’s businesses to understand their risks and developing the policies,
processes, and controls required to manage these risks appropriately
in line with the Bank’s strategy and reputational risk appetite. TD’s
Reputational Risk Management Framework provides a comprehensive
overview of the Bank’s approach to the management of this risk.
Amongst other significant policies, TD’s Enterprise Reputational Risk
Management Policy is approved by the Group Head and CRO. This Policy
sets out the requirements under which business segments and corporate
shared services are required to manage reputational risk. These include
implementing procedures and designating a business-level committee
to review reputational risks and escalating as appropriate to the RRC.
The Bank also has an enterprise-wide New Business and Product
Approval Policy that is approved by the Risk Committee and establishes
standard practices to be used across TD to support consistent processes
for approving new businesses, products and services. The policy
is supported by business segment specific processes, which involve
independent review from oversight functions, and includes consideration
of all aspects of a new product, including reputational risk.
Environmental Risk
Environmental risk is the possibility of loss of strategic, financial,
operational or reputational value resulting from the impact of
environmental issues or concerns and related social risk within
the scope of short-term and long-term cycles.
Management of environmental risk is an enterprise-wide priority.
Key environmental risks include: (1) direct risks associated with the
ownership and operation of the Bank’s business, which include
management and operation of company-owned or managed real
estate, fleet, business operations, and associated services; (2) indirect
risks associated with environmental performance or environmental
events, such as changing climate patterns that may impact the Bank’s
retail customers and clients to whom TD provides financing or in which
TD invests; (3) identification and management of new or emerging
environmental regulatory issues; and (4) failure to understand and
appropriately leverage environment-related trends to meet customer
and consumer demands for products and services.
WHO MANAGES ENVIRONMENTAL RISK
The Executive Vice President and Chief Marketing Officer holds senior
executive accountability for environmental management. The Executive
Vice President is supported by the Chief Environment Officer who leads
the Corporate Environmental Affairs team. The Corporate Environmental
Affairs team is responsible for developing environmental strategy, setting
environmental performance standards and targets, and reporting on
performance. There is also an enterprise-wide Environmental Steering
Committee (ESC) composed of senior executives from TD’s main
business segments and corporate functions. The ESC is responsible for
approving environmental strategy and performance standards, and
communicating these throughout the business. TD’s business segments
are responsible for implementing the environmental strategy and
managing associated risks within their units.
HOW TD MANAGES ENVIRONMENTAL RISK
TD manages environmental risks within the Environmental Management
System (EMS) which consist of two components: an Environmental
Policy, and Environmental Procedures and Processes. The Bank’s EMS is
consistent with the ISO 14001 international standard, which represents
industry best practice. The Bank’s Environmental Policy reflects the
global scope of its environmental activities.
Within the Bank’s Environmental Management System, it has
identified a number of priority areas and has made voluntary
commitments relating to these.
The Bank’s environmental metrics, targets, and performance are
publicly reported within its annual Corporate Responsibility Report.
Performance is reported according to the Global Reporting Initiative
(GRI) and is independently assured.
103
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS TD applies its Environmental and Social Credit Risk Management
Procedures to credit and lending in the wholesale and commercial
businesses. These procedures include assessment of TD’s clients’
policies, procedures, and performance on material environmental
and related social issues, such as air, land, and water risk, climate
risk, biodiversity, stakeholder engagement, and free prior and
informed consent (FPIC) of Aboriginal peoples. Within Wholesale and
Commercial Banking, sector-specific guidelines have been developed
for environmentally-sensitive sectors. The Bank has been a signatory
to the Equator Principles since 2007 and reports on Equator Principle
projects within its annual Corporate Responsibility Report.
TDAM is a signatory to the United Nations Principles for Responsible
Investment (UNPRI). Under the UNPRI, investors commit to incorporate
environmental and social issues into investment analysis and decision-
making. TDAM applies its Sustainable Investing Policy across its
operations. The Policy provides information on how TDAM is
implementing the UNPRI. In 2015, TD Insurance became a signatory
to the United Nations Environment Program Finance Initiative Principles
for Sustainable Insurance (UNEP FI-PSI) which provides a global
framework for managing environmental, social and governance risks
within the insurance industry.
The Bank proactively monitors and assesses policy and legislative
developments, and maintains an ‘open door’ approach with
environmental and community organizations, industry associations,
and responsible investment organizations.
For more information on TD’s environmental policy,
management and performance, please refer to the Corporate
Responsibility Report, which is available at the Bank’s website:
http://www.td.com/corporateresponsibility/.
TD Ameritrade
HOW RISK IS MANAGED AT TD AMERITRADE
TD Ameritrade’s management is primarily responsible for managing
risk at TD Ameritrade under the oversight of TD Ameritrade’s Board,
particularly through the latter’s Risk and Audit Committees. TD
monitors the risk management process at TD Ameritrade through
management governance and protocols and also participates in
TD Ameritrade’s Board.
The terms of the Stockholders Agreement provide for certain
information sharing rights in favour of TD to the extent the Bank
requires such information from TD Ameritrade to appropriately
manage and evaluate its investment and to comply with its legal
and regulatory obligations. Accordingly, management processes
and protocols are aligned between the Bank and TD Ameritrade to
coordinate necessary intercompany information flow. The Bank has
designated the Group Head and CFO to have responsibility for the
TD Ameritrade investment, including regular meetings with the
TD Ameritrade Chief Executive Officer and Chief Financial Officer.
In addition to regular communication at the Chief Executive Officer
and Chief Financial Officer level, regular operating reviews with
TD Ameritrade permit TD to examine and discuss TD Ameritrade’s
operating results and key risks. In addition, certain functions including
Internal Audit, Treasury, Finance, and Compliance have relationship
protocols that allow for access to and the sharing of information
on risk and control issues. TD evaluates risk factors, vendor matters,
and business issues as part of TD’s oversight of its investment in
TD Ameritrade. As with other material risk issues, where required,
material risk issues associated with TD Ameritrade are reported up
to TD’s Board or an appropriate Board committee.
Pursuant to the Stockholders Agreement in relation to the Bank’s
equity investment in TD Ameritrade, the Bank has the right to designate
five of twelve members of TD Ameritrade’s Board of Directors. The
Bank’s designated directors currently include the Bank’s Group
President and Chief Executive Officer and four independent directors
of TD or TD’s U.S. subsidiaries. TD Ameritrade’s bylaws, which state
that the Chief Executive Officer’s appointment requires approval of
two-thirds of the Board, ensure the selection of TD Ameritrade’s Chief
Executive Officer attains the broad support of the TD Ameritrade
Board which currently would require the approval of at least one
director designated by TD. The Stockholders Agreement stipulates
that the Board committees of TD Ameritrade must include at least
two TD designated directors, subject to TD’s percentage ownership
in TD Ameritrade and certain other exceptions. Currently, the directors
the Bank designates serve as members on a number of TD Ameritrade
Board committees, including chairing the Audit Committee and the
Human Resources and Compensation Committee, as well as serving
on the Risk Committee and Corporate Governance Committee.
ACCOUNTING STANDARDS AND POLICIES
Critical Accounting Estimates
The Bank’s accounting policies and estimates are essential to
understanding its results of operations and financial condition.
A summary of the Bank’s significant accounting policies and estimates
are presented in the Notes of the 2016 Consolidated Financial
Statements. Some of the Bank’s policies require subjective, complex
judgments and estimates as they relate to matters that are inherently
uncertain. Changes in these judgments or estimates and changes to
accounting standards and policies could have a materially adverse
impact on the Bank’s Consolidated Financial Statements. The Bank has
established procedures to ensure that accounting policies are applied
consistently and that the processes for changing methodologies,
determining estimates, and adopting new accounting standards are
well controlled and occur in an appropriate and systematic manner.
In addition, the Bank’s critical accounting policies are reviewed with
the Audit Committee on a periodic basis. Critical accounting policies
that require management’s judgment and estimates include
accounting for impairments of financial assets, the determination of
fair value of financial instruments, accounting for derecognition, the
valuation of goodwill and other intangibles, accounting for employee
benefits, accounting for income taxes, accounting for provisions,
accounting for insurance, and the consolidation of structured entities.
104
ACCOUNTING POLICIES AND ESTIMATES
The Bank’s 2016 Consolidated Financial Statements have been
prepared in accordance with IFRS. For details of the Bank’s accounting
policies and significant judgments, estimates, and assumptions
under IFRS, refer to Notes 2 and 3 of the Bank’s 2016 Consolidated
Financial Statements.
ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS
The estimates used in the Bank’s accounting policies are essential to
understanding its results of operations and financial condition. Some
of the Bank’s policies require subjective, complex judgments and
estimates as they relate to matters that are inherently uncertain.
Changes in these judgments or estimates and changes to accounting
standards and policies could have a materially adverse impact on the
Bank’s Consolidated Financial Statements. The Bank has established
procedures to ensure that accounting policies are applied consistently
and that the processes for changing methodologies, determining
estimates and adopting new accounting standards are well controlled
and occur in an appropriate and systematic manner.
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS IMPAIRMENT OF FINANCIAL ASSETS
Available-for-Sale Securities
Impairment losses are recognized on available-for-sale securities if
there is objective evidence of impairment as a result of one or more
events that have occurred after initial recognition and the loss event(s)
results in a decrease in the estimated cash flows of the instrument.
The Bank individually reviews these securities at least quarterly for the
presence of these conditions. For available-for-sale equity securities,
a significant or prolonged decline in fair value below cost is considered
objective evidence of impairment. For available-for-sale debt securities,
a deterioration of credit quality is considered objective evidence of
impairment. Other factors considered in the impairment assessment
include financial position and key financial indicators of the issuer
of the instrument, significant past and continued losses of the issuer,
as well as breaches of contract, including default or delinquency in
interest payments and loan covenant violations.
Held-to-Maturity Securities
Impairment losses are recognized on held-to-maturity securities if
there is objective evidence of impairment as a result of one or more
events that have occurred after initial recognition and the loss event(s)
results in a decrease in the estimated cash flows of the instrument.
The Bank reviews these securities at least quarterly for impairment
at the counterparty-specific level. If there is no objective evidence
of impairment at the counterparty-specific level then the security
is grouped with other held-to-maturity securities with similar credit
risk characteristics and collectively assessed for impairment, which
considers losses incurred but not identified. A deterioration of credit
quality is considered objective evidence of impairment. Other factors
considered in the impairment assessment include the financial position
and key financial indicators of the issuer, significant past and
continued losses of the issuer, as well as breaches of contract,
including default or delinquency in interest payments and loan
covenant violations.
Loans
A loan, including a debt security classified as a loan, is considered
impaired when there is objective evidence that there has been a
deterioration of credit quality subsequent to the initial recognition
of the loan to the extent the Bank no longer has reasonable assurance
as to the timely collection of the full amount of principal and interest.
The Bank assesses loans for objective evidence of impairment individually
for loans that are individually significant, and collectively for loans
that are not individually significant. The allowance for credit losses
represents management’s best estimate of impairment incurred in the
lending portfolios, including any off-balance sheet exposures, at the
balance sheet date. Management exercises judgment as to the timing
of designating a loan as impaired, the amount of the allowance
required, and the amount that will be recovered once the borrower
defaults. Changes in the amount that management expects to recover
would have a direct impact on the provision for credit losses and may
result in a change in the allowance for credit losses.
If there is no objective evidence of impairment for an individual
loan, whether significant or not, the loan is included in a group of
assets with similar credit risk characteristics and collectively assessed
for impairment for losses incurred but not identified. In calculating
the probable range of allowance for incurred but not identified credit
losses, the Bank employs internally developed models that utilize
parameters for probability of default, loss given default and exposure
at default. Management’s judgment is used to determine the point
within the range that is the best estimate of losses, based on an
assessment of business and economic conditions, historical loss
experience, loan portfolio composition, and other relevant indicators
that are not fully incorporated into the model calculation. Changes
in these assumptions would have a direct impact on the provision
for credit losses and may result in a change in the incurred but not
identified allowance for credit losses.
FAIR VALUE MEASUREMENTS
The fair value of financial instruments traded in active markets at
the balance sheet date is based on their quoted market prices. For
all other financial instruments not traded in an active market, fair
value may be based on other observable current market transactions
involving the same or similar instrument, without modification or
repackaging, or is based on a valuation technique which maximizes
the use of observable market inputs. Observable market inputs may
include interest rate yield curves, foreign exchange rates, and option
volatilities. Valuation techniques include comparisons with similar
instruments where observable market prices exist, discounted cash
flow analysis, option pricing models, and other valuation techniques
commonly used by market participants.
For certain complex or illiquid financial instruments, fair value
is determined using valuation techniques in which current market
transactions or observable market inputs are not available. Determining
which valuation technique to apply requires judgment. The valuation
techniques themselves also involve some level of estimation and
judgment. The judgments include liquidity considerations and model
inputs such as volatilities, correlations, spreads, discount rates,
pre-payment rates, and prices of underlying instruments. Any
imprecision in these estimates can affect the resulting fair value.
The inherent nature of private equity investing is that the Bank’s
valuation may change over time due to developments in the business
underlying the investment. Such fluctuations may be significant
depending on the nature of the factors going into the valuation
methodology and the extent of change in those factors.
Judgment is also used in recording fair value adjustments to model
valuations to account for measurement uncertainty when valuing complex
and less actively traded financial instruments. If the market for a complex
financial instrument develops, the pricing for this instrument may become
more transparent, resulting in refinement of valuation models.
An analysis of fair value of financial instruments and further details
as to how they are measured are provided in Note 5 of the Bank’s
2016 Consolidated Financial Statements.
DERECOGNITION
Certain assets transferred may qualify for derecognition from the
Bank’s Consolidated Balance Sheet. To qualify for derecognition
certain key determinations must be made. A decision must be made
as to whether the rights to receive cash flows from the financial assets
have been retained or transferred and the extent to which the risks
and rewards of ownership of the financial asset have been retained
or transferred. If the Bank neither transfers nor retains substantially all
of the risks and rewards of ownership of the financial asset, a decision
must be made as to whether the Bank has retained control of the
financial asset. Upon derecognition, the Bank will record a gain or loss
on sale of those assets which is calculated as the difference between
the carrying amount of the asset transferred and the sum of any cash
proceeds received, including any financial asset received or financial
liability assumed, and any cumulative gain or loss allocated to the
transferred asset that had been recognized in other comprehensive
income. In determining the fair value of any financial asset received,
the Bank estimates future cash flows by relying on estimates of the
amount of interest that will be collected on the securitized assets, the
yield to be paid to investors, the portion of the securitized assets that
will be prepaid before their scheduled maturity, expected credit losses,
the cost of servicing the assets and the rate at which to discount these
expected future cash flows. Actual cash flows may differ significantly
from those estimated by the Bank. Retained interests are classified as
trading securities and are initially recognized at relative fair value on the
Bank’s Consolidated Balance Sheet. Subsequently, the fair value of
retained interests recognized by the Bank is determined by estimating
the present value of future expected cash flows using management’s
best estimates of key assumptions including credit losses, prepayment
rates, forward yield curves and discount rates, that are commensurate
with the risks involved. Differences between the actual cash flows and
the Bank’s estimate of future cash flows are recognized in trading
income. These assumptions are subject to periodic review and may
change due to significant changes in the economic environment.
105
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS GOODWILL AND OTHER INTANGIBLES
The fair value of the Bank’s cash-generating units (CGU) is determined
from internally developed valuation models that consider various
factors and assumptions such as forecasted earnings, growth rates,
price-earnings multiples, discount rates, and terminal multiples.
Management is required to use judgment in estimating the fair value
of CGUs, and the use of different assumptions and estimates in
the fair value calculations could influence the determination of the
existence of impairment and the valuation of goodwill. Management
believes that the assumptions and estimates used are reasonable and
supportable. Where possible, fair values generated internally are
compared to relevant market information. The carrying amounts of
the Bank’s CGUs are determined by management using risk based
capital models to adjust net assets and liabilities by CGU. These
models consider various factors including market risk, credit risk, and
operational risk, including investment capital (comprised of goodwill
and other intangibles). Any unallocated capital not directly attributable
to the CGUs is held within the Corporate segment. The Bank’s
capital oversight committees provide oversight to the Bank’s capital
allocation methodologies.
EMPLOYEE BENEFITS
The projected benefit obligation and expense related to the Bank’s
pension and non-pension post-retirement benefit plans are determined
using multiple assumptions that may significantly influence the value
of these amounts. Actuarial assumptions including discount rates,
compensation increases, health care cost trend rates, and mortality
rates are management’s best estimates and are reviewed annually
with the Bank’s actuaries. The Bank develops each assumption using
relevant historical experience of the Bank in conjunction with market-
related data and considers if the market-related data indicates there is
any prolonged or significant impact on the assumptions. The discount
rate used to value liabilities reflects long-term corporate AA bond
yields as of the measurement date. The other assumptions are
also long-term estimates. All assumptions are subject to a degree
of uncertainty. Differences between actual experiences and the
assumptions, as well as changes in the assumptions resulting from
changes in future expectations, result in actuarial gains and losses
which are recognized in other comprehensive income during the year
and also impact expenses in future periods.
INCOME TAXES
The Bank is subject to taxation in numerous jurisdictions. There are
many transactions and calculations in the ordinary course of business for
which the ultimate tax determination is uncertain. The Bank maintains
provisions for uncertain tax positions that it believes appropriately
reflect the risk of tax positions under discussion, audit, dispute, or
appeal with tax authorities, or which are otherwise considered to
involve uncertainty. These provisions are made using the Bank’s best
estimate of the amount expected to be paid based on an assessment
of all relevant factors, which are reviewed at the end of each reporting
period. However, it is possible that at some future date, an additional
liability could result from audits by the relevant taxing authorities.
Deferred tax assets are recognized only when it is probable that
sufficient taxable profit will be available in future periods against
which deductible temporary differences may be utilized. The amount
of the deferred tax asset recognized and considered realizable could,
however, be reduced if projected income is not achieved due to
various factors, such as unfavourable business conditions. If projected
income is not expected to be achieved, the Bank would decrease its
deferred tax assets to the amount that it believes can be realized.
The magnitude of the decrease is significantly influenced by the Bank’s
forecast of future profit generation, which determines the extent to
which it will be able to utilize the deferred tax assets.
PROVISIONS
Provisions arise when there is some uncertainty in the timing or
amount of a loss in the future. Provisions are based on the Bank’s
best estimate of all expenditures required to settle its present
obligations, considering all relevant risks and uncertainties, as well
as, when material, the effect of the time value of money.
Many of the Bank’s provisions relate to various legal actions that
the Bank is involved in during the ordinary course of business. Legal
provisions require the involvement of both the Bank’s management
and legal counsel when assessing the probability of a loss and
estimating any monetary impact. Throughout the life of a provision,
the Bank’s management or legal counsel may learn of additional
information that may impact its assessments about the probability
of loss or about the estimates of amounts involved. Changes in
these assessments may lead to changes in the amount recorded
for provisions. In addition, the actual costs of resolving these claims
may be substantially higher or lower than the amounts recognized.
The Bank reviews its legal provisions on a case-by-case basis after
considering, among other factors, the progress of each case, the
Bank’s experience, the experience of others in similar cases, and the
opinions and views of legal counsel.
Certain of the Bank’s provisions relate to restructuring initiatives
initiated by the Bank. Restructuring provisions require management’s
best estimate, including forecasts of economic conditions. Throughout
the life of a provision, the Bank may become aware of additional
information that may impact the assessment of amounts to be
incurred. Changes in these assessments may lead to changes in the
amount recorded for provisions.
INSURANCE
The assumptions used in establishing the Bank’s insurance claims and
policy benefit liabilities are based on best estimates of possible outcomes.
For property and casualty insurance, the ultimate cost of claims
liabilities is estimated using a range of standard actuarial claims
projection techniques in accordance with Canadian accepted actuarial
practices. Additional qualitative judgment is used to assess the extent
to which past trends may or may not apply in the future, in order to
arrive at the estimated ultimate claims cost that present the most likely
outcome taking account of all the uncertainties involved.
For life and health insurance, actuarial liabilities consider all future
policy cash flows, including premiums, claims, and expenses required to
administer the policies. Critical assumptions used in the measurement
of life and health insurance contract liabilities are determined by the
Appointed Actuary.
Further information on insurance risk assumptions is provided
in Note 23.
106
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS ACCOUNTING STANDARDS AND POLICIES
Current and Future Changes in Accounting Policies
FUTURE CHANGES IN ACCOUNTING POLICIES
The following standards have been issued, but are not yet effective on
the date of issuance of the Bank’s Consolidated Financial Statements.
The Bank is currently assessing the impact of the application of these
standards on the Consolidated Financial Statements and will adopt
these standards when they become effective.
Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9, Financial
Instruments (IFRS 9), which replaces the guidance in IAS 39. This final
version includes requirements on: (1) Classification and measurement
of financial assets and liabilities; (2) Impairment of financial assets;
and (3) General hedge accounting. IFRS 9 is effective for annual
periods beginning on or after January 1, 2018, and is to be applied
retrospectively with certain exceptions. IFRS 9 does not require
restatement of comparative period financial statements except in
limited circumstances related to aspects of hedge accounting. Entities
are permitted to restate comparatives as long as hindsight is not
applied. The Bank has made the decision not to restate comparative
period financial information and will recognize any measurement
difference between the previous carrying amount and the new carrying
amount on November 1, 2017, through an adjustment to opening
retained earnings. In January 2015, OSFI issued the final version of
the Advisory titled “Early adoption of IFRS 9 Financial Instruments
for Domestic Systemically Important Banks”. All D-SIBs, including
the Bank, are required to early adopt IFRS 9 for the annual period
beginning on November 1, 2017. Consequential amendments were
made to IFRS 7, Financial Instruments: Disclosures (IFRS 7) introducing
expanded qualitative and quantitative disclosures related to IFRS 9,
which are required to be adopted for the annual period beginning
on November 1, 2017, when the Bank first applies IFRS 9. In
December 2015, the BCBS issued “Guidance on credit risk and
accounting for expected credit losses” which sets out supervisory
guidance on sound credit risk practices associated with the
implementation and ongoing application of expected credit loss
accounting frameworks. In June 2016, OSFI issued the guideline
“IFRS 9 Financial Instruments and Disclosures”, which provides
guidance to Federally Regulated Entities on the application of IFRS 9
that is consistent with the BCBS guidance. This guideline, which
is effective for the Bank upon adoption of IFRS 9, replaces certain
guidelines that were in effect under IAS 39.
The adoption of IFRS 9 is a significant initiative for the Bank supported
by a formal governance framework and a robust implementation plan.
An Executive Steering Committee has been formed with joint leadership
from Finance and Risk and with representation from Technology, Internal
Audit, and project management teams. A communication plan including
progress reporting protocols has been established with regular updates
provided to the Executive Steering Committee on key decisions. IFRS 9
overview sessions have been held at various levels within the Bank,
including the Audit and Risk Committees of the Board.
The Bank has enhanced its governance framework and has
established a dedicated committee to review, challenge, and approve
key areas of judgment and assumptions used in forecasting multiple
economic scenarios and associated probabilities upon adoption
of IFRS 9. The committee will include representation from Risk,
Finance and Economics.
The key responsibilities of the project include defining IFRS 9 risk
methodology and accounting policy, identifying data and system
requirements, and developing an appropriate operating model and
governance framework. The Bank’s implementation plan includes the
following phases: (a) Initiation and Planning; (b) Detailed Assessment;
(c) Design and Solution Development; and (d) Implementation, with
work streams focused on each of the three required sections of IFRS 9
noted above as well as Reporting and Disclosures. The Bank is on track
with its project timelines. The Detailed Assessment and Design phase
has been completed and the Solution Development phase is in progress.
The following is a summary of the new accounting concepts and
project status under IFRS 9:
Classification and Measurement
Financial assets will be classified based on the Bank’s business model
for managing its financial assets and the contractual cash flow
characteristics of the financial asset. Financial assets are classified
into one of the following three categories, which determine how it is
measured subsequent to initial recognition: amortized cost, fair value
through other comprehensive income (FVOCI), and fair value through
profit or loss. An election may be made to hold certain equity securities
at FVOCI, with no subsequent recycling of gains and losses into net
income. In addition to the classification tests described above, IFRS 9
also includes an option to irrevocably designate a financial asset
as measured at fair value through profit or loss if doing so eliminates
or significantly reduces an accounting mismatch.
The classification and measurement of financial liabilities remain
largely unchanged under IFRS 9, except for financial liabilities
measured at fair value through profit or loss when classified as held
for trading or designated using the fair value option. When the fair
value option is elected, the Bank will be required to recognize the
change in the fair value of the financial liability arising from changes
in the Bank’s own credit risk in other comprehensive income.
The Bank has defined its significant business models and is in the
process of assessing the cash flow characteristics for all financial assets
under the scope of IFRS 9. Potential classification and measurement
changes include the reclassification of certain debt securities that
are currently measured at FVOCI to an amortized cost category under
IFRS 9 as a result of the business model assessment.
Impairment
IFRS 9 introduces a new impairment model based on expected credit
losses (ECL) which will replace the existing incurred loss model under
IAS 39. Currently, impairment losses are recognized when there is
objective evidence of credit quality deterioration to the extent that the
Bank no longer has reasonable assurance as to the timely collection
of the full amount of principal and interest. If there is no objective
evidence of impairment for an individual loan, the loan is included in
a group of assets with similar credit risk characteristics and collectively
assessed for impairment losses incurred but not identified. Under
IFRS 9, ECLs will be recognized in profit or loss before a loss event
has occurred, which could result in earlier recognition of credit losses
compared to the current model.
107
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS The expected credit loss model requires the recognition
of impairment at an amount equal to the probability-weighted
12-month ECLs or lifetime ECLs depending on whether there has
been a significant increase in credit risk since initial recognition
of the financial instrument. If a significant increase in credit risk has
occurred since initial recognition, then impairment is measured
as lifetime ECLs otherwise 12-month ECLs are measured, which
represent the portion of lifetime ECLs that are expected to occur
based on default events that are possible within 12 months after the
reporting date. If credit quality improves in a subsequent period such
that the increase in credit risk since initial recognition is no longer
considered significant, the loss allowance will revert back to being
measured based on 12-month ECLs. The IFRS 9 model breaks
down into three stages: Stage 1 – 12-month ECLs for performing
instruments, Stage 2 – Lifetime ECLs for performing instruments
that have experienced a significant increase in credit risk, and
Stage 3 – Lifetime ECLs for non-performing financial assets. The
Stage 3 population is expected to largely align with the impaired
population under IAS 39.
ECLs will be measured as the probability-weighted present value
of expected cash shortfalls over the remaining expected life of the
financial instrument and will consider reasonable and supportable
information about past events, current conditions and forecasts of
future events and economic conditions that impact our credit risk
assessment. Probability-weighted multiple scenarios will be considered
when determining stage allocation and measuring ECLs.
IFRS 9 requires ECLs to be recognized in a way that reflects an
unbiased and probability-weighted amount determined by evaluating
a range of possible outcomes. While entities are not expected to
consider every possible scenario, the scenarios considered should
reflect a representative sample of possible outcomes. When there
is a non-linear relationship between the different forward-looking
scenarios and the associated change in ECLs, using a single forward-
looking scenario will not meet the objectives of IFRS 9. Economic
forecasts must consider internal and external information and be
consistent with the forward-looking information used for other
purposes such as budgeting and forecasting. The scenarios must
be representative and not biased to extreme scenarios. Parameter
coherence is considered in each scenario so that it is realistic. The
scenarios considered must take into account key drivers of ECLs,
particularly non-linearity and asymmetric sensitivities within portfolios
to estimate effects of changes in parameters on ECLs.
For retail exposures, significant increase in credit risk will be assessed
based on changes in the probability of default (PD) since initial
recognition, using a combination of individual and collective information
that incorporates borrower and account specific attributes and relevant
forward-looking macroeconomic variables. ECLs will be calculated as
the product of PD, loss given default (LGD), and exposure at default
(EAD) at each time step over the remaining expected life of the
financial instrument and discounted to the reporting date.
For non-retail exposures, significant increase in credit risk will
be assessed based on changes in the internal risk rating since initial
recognition, incorporating relevant forward-looking macroeconomic
information. ECLs will be calculated based on the present value of
cash shortfalls determined as the difference between contractual cash
flows and expected cash flows over the remaining expected life of the
financial instrument. Similar to IAS 39, ECLs for significant non-retail
impaired exposures will be measured individually.
The IFRS 9 expected credit loss calculation will leverage where
appropriate the Bank’s existing expected loss model parameters
used for regulatory capital purposes including PD, LGD and EAD
with adjustments as required to comply with the IFRS 9 requirements.
The main differences are summarized in the following chart:
PD
LGD
EAD
Other
Regulatory Capital
IFRS 9
Through-the-cycle 12-month PD based on the long run
average of a full economic cycle. The default backstop
is generally 90 days past due.
Point-in-time 12-month or lifetime PD based on historical experience,
current conditions and relevant forward looking expectations. The
default backstop will generally be 90 days past due.
Downturn LGD based on losses that would be expected
in an economic downturn and subject to certain
regulatory floors. Both direct and indirect collection
costs are considered.
Based on the drawn balance plus expected utilization
of any undrawn portion prior to default, and cannot be
lower than the drawn balance.
Expected LGD based on historical charge-off events and recovery
payments, current information about attributes specific to borrower,
and direct costs. Macroeconomic variables and expected cash flows
from credit enhancements will be incorporated as appropriate and
excludes undue conservatism and floors.
EAD represents the expected balance at default across the lifetime
horizon and conditional on forward looking expectations.
Expected credit losses are discounted from the default date to the
reporting date.
Based on the current regulatory requirements, the negative impact
from potential increases in the balance sheet allowances under IFRS 9
on CET1 capital could be partially mitigated by reductions in negative
regulatory capital adjustments related to any shortfall of allowances
to regulatory expected losses in the CET1 calculation. In October 2016,
the BCBS issued a consultative document, “Regulatory treatment
of accounting provisions – interim approach and transitional
arrangements” and a discussion paper, “Regulatory treatment of
accounting provisions”. The consultative document sets out the BCBS’
proposal to retain, for an interim period, the current regulatory
treatment of accounting provisions under the standardized and
internal ratings-based approaches and also provides potential
transitional arrangements. The discussion paper provides policy
options for long-term regulatory treatment of provisions.
The new impairment model will apply to all financial assets measured
at amortized cost or fair value through other comprehensive income
with the most significant impact expected to be on loan assets. The
model will also apply to loan commitments and financial guarantees
that are not measured at fair value through profit or loss.
The Bank has defined the functional requirements for the
calculation of ECLs and is currently developing and integrating the
end-to-end technology solution for tracking credit migration under
the new ECL model as well as the impact to forecasting economic
variables, risk parameters, and credit risk modelling processes. The
Bank will continue to focus on the development and validation of
the new impairment models and related processes and controls in
the upcoming year and assess the quantitative impact of applying
an ECL approach by the end of 2017.
108
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS General Hedge Accounting
IFRS 9 introduces a new general hedge accounting model which better
aligns accounting with risk management activities. The new standard
permits a wider range of qualifying hedged items and hedged risks as
well as types of hedging instruments. Effectiveness testing will have
an increased focus on establishing an economic relationship, achieving
a target hedge ratio and monitoring credit risk exposures. Voluntary
discontinuation of hedging relationships is no longer permitted except
in limited circumstances based on the risk management objectives of
hedge strategies. The Bank has an accounting policy choice to adopt
the new general hedge accounting model under IFRS 9 or continue to
apply the hedge accounting requirements under IAS 39. The Bank has
made the decision to continue applying the IAS 39 hedge accounting
requirements at this time and will comply with the revised hedge
accounting disclosures as required by the related amendments to IFRS 7.
Leases
In January 2016, the IASB issued IFRS 16, Leases (IFRS 16), which will
replace IAS 17, introducing a single lessee accounting model for all
leases by eliminating the distinction between operating and financing
leases. IFRS 16 requires lessees to recognize right-of-use assets and
lease liabilities for most leases. Lessees will also recognize depreciation
expense on the right-of-use asset and interest expense on the lease
liability in the statement of income. Short-term leases, which are
defined as those that have a lease term of 12 months or less; and leases
of low-value assets are exempt. Lessor accounting remains substantially
unchanged. IFRS 16 is effective for annual periods beginning on or after
January 1, 2019, which will be November 1, 2019 for the Bank, and is
to be applied retrospectively. Early adoption is permitted only if aligned
with or after the adoption of IFRS 15. The Bank is currently assessing
the impact of adopting IFRS 16.
Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15, Revenue from Contracts with
Customers (IFRS 15), which establishes the principles for recognizing
revenue and cash flows arising from contracts with customers and
prescribes the application of a five-step recognition and measurement
model. The standard excludes from its scope revenue arising from
items such as financial instruments, insurance contracts, and leases.
The standard also requires additional qualitative and quantitative
disclosures. In July 2015, the IASB confirmed a one-year deferral of the
effective date to annual periods beginning on or after January 1, 2018,
which will be November 1, 2018 for the Bank, and is to be applied
retrospectively. In April 2016, the IASB issued amendments to IFRS 15,
which provided additional guidance on the identification of performance
obligations, on assessing principal versus agent considerations and
on licensing revenue. The amendments also provided additional
transitional relief upon initial adoption of IFRS 15 and have the same
effective date as the IFRS 15 standard. The Bank is currently assessing
the impact of adopting this standard.
Share-based Payment
In June 2016, the IASB published amendments to IFRS 2, Share-based
Payment, which provide additional guidance on the classification and
measurement of share-based payment transactions. The amendments
clarify the accounting for cash-settled share-based payment
transactions that include a performance condition, the classification
of share-based payment transactions with net settlement features for
withholding tax obligations, and the accounting for modifications of
share-based payment transactions from cash-settled to equity-settled.
The amendments to IFRS 2 are effective for annual periods beginning
on or after January 1, 2018, which will be November 1, 2018 for
the Bank, and is to be applied prospectively; however, retrospective
application is permitted in certain instances. Early adoption is
permitted. The amendments to IFRS 2 are not expected to have
a material impact on the Bank.
ACCOUNTING STANDARDS AND POLICIES
Controls and Procedures
DISCLOSURE CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of the Bank’s management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the Bank’s
disclosure controls and procedures, as defined in the rules of the SEC and
Canadian Securities Administrators, as of October 31, 2016. Based on
that evaluation, the Bank’s management, including the Chief Executive
Officer and Chief Financial Officer, concluded that the Bank’s disclosure
controls and procedures were effective as of October 31, 2016.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
The Bank’s management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Bank. The
Bank’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records, that,
in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Bank; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation
of financial statements in accordance with IFRS, and that receipts
and expenditures of the Bank are being made only in accordance
with authorizations of the Bank’s management and directors; and
(3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Bank’s
assets that could have a material effect on the financial statements.
The Bank’s management has used the criteria established in
the 2013 Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
to assess, with the participation of the Chief Executive Officer and
Chief Financial Officer, the effectiveness of the Bank’s internal control
over financial reporting. Based on this assessment management has
concluded that as at October 31, 2016, the Bank’s internal control
over financial reporting was effective based on the applicable criteria.
The effectiveness of the Bank’s internal control over financial reporting
has been audited by the independent auditors, Ernst & Young LLP,
a registered public accounting firm that has also audited the
Consolidated Financial Statements of the Bank as of and for the year
ended October 31, 2016. Their Report on Internal Controls under
Standards of the Public Company Accounting Oversight Board
(United States), included in the Consolidated Financial Statements,
expresses an unqualified opinion on the effectiveness of the Bank’s
internal control over financial reporting as of October 31, 2016.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the year and quarter ended October 31, 2016, there have been
no changes in the Bank’s policies and procedures and other processes
that comprise its internal control over financial reporting, that have
materially affected, or are reasonably likely to materially affect, the
Bank’s internal control over financial reporting.
109
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS ADDITIONAL FINANCIAL INFORMATION
Unless otherwise indicated, all amounts are expressed in Canadian
dollars and have been primarily derived from the Bank’s annual
Consolidated Financial Statements, prepared in accordance with IFRS
as issued by the IASB.
T A B L E 6 5
INVESTMENT PORTFOLIO – Securities Maturity Schedule1,2
(millions of Canadian dollars)
As at
Within
1 year
Over 1
year to
3 years
Over 3
years to
5 years
Over 5
years to
10 years
Over 10
With no
specific
years maturity
Remaining terms to maturities3
Total
Total
October 31 October 31 October 31
2014
2016
2015
Available-for-sale securities
Government and government-related securities
Canadian government debt
Federal
Fair value
Amortized cost
Yield
Provinces
Fair value
Amortized cost
Yield
U.S. federal government debt
Fair value
Amortized cost
Yield
U.S. states, municipalities and agencies
Fair value
Amortized cost
Yield
Other OECD government-guaranteed debt
Fair value
Amortized cost
Yield
Canadian mortgage-backed securities
Fair value
Amortized cost
Yield
Other debt securities
Asset-backed securities
Fair value
Amortized cost
Yield
Non-agency CMO
Fair value
Amortized cost
Yield
Corporate and other debt
Fair value
Amortized cost
Yield
Equity securities
Common shares
Fair value
Amortized cost
Yield
Preferred shares
Fair value
Amortized cost
Yield
Debt securities reclassified from trading
Fair value
Amortized cost
Yield
Total available-for-sale securities
Fair value
Amortized cost
Yield
$ 659 $ 6,975 $ 5,781 $ 1,296 $
657
1.86%
6,950
5,769
1,289
1.66% 1.76%
2.54%
6 $
6
1.66%
– $ 14,717 $ 14,431 $ 8,404
14,450 8,355
–
1.48%
–%
14,671
1.79%
1.82%
538
537
2.45%
2,028
2,015
1,471
1,468
3,797
3,836
2.46% 2.40%
3.04%
17
15
3.59%
– 7,851
– 7,871
–%
2.73%
7,185
7,233
1.98%
4,545
4,518
–
–
–%
2,382
2,375
9,964
9,956
11,546
11,598
0.96%
1.35%
1.88%
–
–
–%
– 23,892
– 23,929
–%
1.57%
10,636
10,711
1.81%
676
675
1.86%
436
432
2.33% 1.86%
2,987
2,885
1,516
1,518
4,966
4,938
1.76%
1.68%
– 10,581
– 10,448
–%
1.78%
11,949 11,978
11,815 11,798
1.73%
1.81%
2.08%
152
152
0.12%
1,656
1,657
0.77%
3,989
3,990
5,267
5,272
4,597
4,655
1.34% 1.64%
1.65%
81
81
0.99%
2,141
2,111
2,692
2,689
2.06% 1.48%
35
35
1.62%
–
–
–%
–
–
–%
1,076
1,076
0.49%
3,088
3,084
3,414
3,406
5,314
5,293
5,701
5,806
1.37% 1.21%
2.04%
1.40%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
625
624
1.63%
–
–
–%
1,716
1,708
2.78%
3,950
3,919
2,396
2,379
2.91% 2.44%
109
106
3.63%
114
116
5.26%
8,286
8,229
1
1
1.23%
2.80%
–
–
–%
–
–
–%
15,509
15,574
1.48%
4,949
4,916
1.72%
18,593
18,665
–
–
–%
1.49%
625
624
1.63%
11,655 3,322
11,713 3,313
1.26%
1.67%
4,060
4,021
2.01%
3,306
3,256
2.24%
16,762 18,903
16,921 18,831
1.28%
1.06%
916
921
2.13%
1,722
1,713
2.77%
8,765
8,770
2.96%
8,099
8,008
2.91%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
49
48
8.76%
1
1
7.92%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
2,054
1,934
2,054
1,934
1.94%
1.94%
1,858
1,770
5.42%
1,760
1,642
–
–
–%
186
168
4.37%
186
168
4.37%
114
112
4.33%
204
183
5.72%
74
69
4.84%
–
–
–%
328
301
6.01%
451
420
6.84%
4.74%
171
153
1.26%
646
596
4.61%
$ 6,451 $ 24,990 $ 33,972 $ 28,414 $ 11,503
11,574
33,824
6,439 24,877
28,513
$ 2,241 $ 107,571 $ 88,782 $ 63,008
2,103
62,335
107,330
1.62%
1.81% 1.63%
2.05%
1.57%
2.13%
1.78%
88,857
1.89%
1.89%
1 Yields represent the weighted-average yield of each security owned at the end of
the period. The effective yield includes the contractual interest or stated dividend
rate and is adjusted for the amortization of premiums and discounts; the effect
of related hedging activities is excluded.
2 As at October 31, 2016, includes securities issued by Federal Republic of Germany
of $9.8 billion (as at October 31, 2015, includes securities issued by Government of
Japan of $8.9 billion and Federal Republic of Germany of $8.6 billion), where the
book value was greater than 10% of the shareholders’ equity.
3 Represents contractual maturities. Actual maturities may differ due to prepayment
privileges in the applicable contract.
110
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 6 5
INVESTMENT PORTFOLIO – Securities Maturity Schedule (continued)1,2
(millions of Canadian dollars)
As at
Within
1 year
Over 1
year to
3 years
Over 3
years to
5 years
Over 5
years to
10 years
Over 10
With no
specific
years maturity
Remaining terms to maturities3
Total
Total
October 31 October 31 October 31
2014
2016
2015
Held-to-maturity securities
Government and government-related securities
Canadian government debt
Federal
Fair value
Amortized cost
Yield
U.S. federal government and agencies debt
Fair value
Amortized cost
Yield
U.S. states, municipalities and agencies
Fair value
Amortized cost
Yield
Other OECD government-guaranteed debt
Fair value
Amortized cost
Yield
Other debt securities
Other issuers
Fair value
Amortized cost
Yield
Total held-to-maturity schedules
Fair value
Amortized cost
Yield
$
– $
–
–%
320 $
316
1.86% 1.83%
492 $
486
–
–
–%
–
–
–%
–
–
–%
– $
–
–%
–
–
–%
–
–
–%
–
–
–%
$ – $
–
–%
–
–
–%
812 $
802
1.84%
983 $
974
1.78%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
89
89
1.45%
5,038
4,995
6,382
6,240
7,230
7,144
3,380
3,377
1.78% 2.12%
2.03%
2.25%
10,347 13,205
10,326 13,028
4,739
4,664
0.18%
0.41%
0.14%
632
625
0.50%
–
–
–%
1,458
1,462
3.17%
7,352
7,311
8,543
8,503
1,991
2,009
13,789
13,820
1.48%
0.99%
1.26%
2.44%
$ 11,894 $ 25,915 $ 20,156
19,893
25,650
11,877
$ 9,853 $ 17,169
17,197
9,778
0.56%
1.00%
1.17%
1.78%
2.40%
22,119
21,845
–
–
–%
2.03%
18,847
18,648
2.03%
18,879
18,792
2.04%
28,923
28,643
24,265 15,492
24,045 15,327
0.29%
0.57%
1.00%
33,133
33,105
30,647
30,783
22,955
22,858
1.81%
1.50%
1.08%
$ – $ 84,987 $ 74,742 $ 57,326
56,977
84,395
74,450
1.35%
1.33%
1.38%
–
–
–%
–
–
–%
–
–%
1 Yields represent the weighted-average yield of each security owned at the end of
the period. The effective yield includes the contractual interest or stated dividend
rate and is adjusted for the amortization of premiums and discounts; the effect
of related hedging activities is excluded.
2 As at October 31, 2016, includes securities issued by Federal Republic of Germany
of $9.8 billion (as at October 31, 2015, includes securities issued by Government of
Japan of $8.9 billion and Federal Republic of Germany of $8.6 billion), where the
book value was greater than 10% of the shareholders’ equity.
3 Represents contractual maturities. Actual maturities may differ due to prepayment
privileges in the applicable contract.
111
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 6 6
LOAN PORTFOLIO – Maturity Schedule
(millions of Canadian dollars)
Remaining terms to maturities
Under
1 year
1 to 5
years
Over
5 years
Total
As at
Total
October 31 October 31 October 31 October 31 October 31
2012
2016
2014
2015
2013
Canada
Residential mortgages
Consumer instalment and other personal
HELOC
Indirect Auto
Other
Credit card
Total personal
Real estate
Residential
Non-residential
Total real estate
Total business and government
(including real estate)
Total loans – Canada
United States
Residential mortgages
Consumer instalment and other personal
HELOC
Indirect Auto
Other
Credit card
Total personal
Real estate
Residential
Non-residential
Total real estate
Total business and government
(including real estate)
Total loans – United States
Other International
Personal
Business and government
Total loans – Other international
Other loans
Debt securities classified as loans
Acquired credit-impaired loans
Total other loans
Total loans
$ 25,379 $ 160,304 $ 3,616 $ 189,299 $ 185,009 $ 175,125 $ 164,389 $ 154,247
43,329 21,732
271 10,423
989
15,015
18,226
–
102,220 193,448
7 65,068 61,317 59,568 61,581 64,753
9,883 20,577 19,038 16,475 14,666 13,965
452 16,456 16,075 16,116 15,193 14,574
– 18,226 17,941 17,927 15,288 14,236
13,958 309,626 299,380 285,211 271,117 261,775
6,043
5,376
4,468
4,619
9,844 10,662
4,582 16,001 14,862 14,604 13,685 12,477
3,693 12,780 11,330
7,252
8,275 28,781 26,192 24,372 21,838 19,729
8,153
9,768
46,984 30,739
149,204 224,187
13,331 91,054 84,155 71,814 64,272 55,797
27,289 400,680 383,535 357,025 335,389 317,572
511
101
27,050 27,662 26,922 23,335 20,945 17,362
11,027
211
298 16,852
451
255
13,680
–
25,771 17,615
1,408
2,759
2,379 10,460
3,787 13,219
1,970 13,208 13,334 11,665 10,607 10,122
11,220 28,370 24,862 18,782 16,323 13,466
490
1,097
40,279 83,665 78,085 62,034 55,308 42,537
693
– 13,680 12,274
615
7,637
533
6,900
745
39
6,852
3,015
2,685
8,836 21,675 18,317 14,037 12,084 10,831
11,521 28,527 24,008 18,331 15,554 13,846
4,294
3,470
5,691
14,762 54,232
40,533 71,847
47,719 116,713 97,217 69,417 55,000 47,181
87,998 200,378 175,302 131,451 110,308 89,718
16
657
673
–
856
856
–
–
–
16
1,513
1,529
5
1,978
1,983
9
2,124
2,133
10
2,240
2,250
11
2,653
2,664
121
541
662
4,994
3,767
8,761
$ 191,072 $ 297,396 $ 116,767 $ 605,235 $ 564,421 $ 495,017 $ 454,176 $ 418,715
1,409
71
1,480
2,695
1,713
4,408
3,744
2,485
6,229
2,187
1,414
3,601
1,674
974
2,648
144
362
506
T A B L E 6 7
LOAN PORTFOLIO – Rate Sensitivity
(millions of Canadian dollars)
As at
October 31, 2016
October 31, 2015
October 31, 2014
October 31, 2013
October 31, 2012
1 to
5 years
Over
5 years
1 to
5 years
Over 5
years
1 to
5 years
Over 5
years
1 to
5 years
Over 5
years
1 to
5 years
Over 5
years
$ 212,257 $ 82,507 $ 176,316 $ 66,949 $ 155,614 $ 59,555 $ 158,435 $ 45,395 $ 133,730 $ 37,781
85,139
20,867
$ 297,396 $ 116,767 $ 248,979 $ 99,157 $ 229,286 $ 84,546 $ 218,836 $ 68,460 $ 191,929 $ 58,648
23,065 58,199
24,991 60,401
34,260 72,663
32,208 73,672
Fixed rate
Variable rate
Total
112
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
The change in the Bank’s allowance for credit losses for the years
ended October 31 are shown in the following table.
T A B L E 6 8
ALLOWANCE FOR CREDIT LOSSES
(millions of Canadian dollars, except as noted)
Allowance for loan losses – Balance at beginning of year
Provision for credit losses
Write-offs
Canada
Residential mortgages
Consumer instalment and other personal
HELOC
Indirect Auto
Other
Credit card
Total personal
Real estate
Residential
Non-residential
Total real estate
Total business and government (including real estate)
Total Canada
United States
Residential mortgages
Consumer instalment and other personal
HELOC
Indirect Auto
Other
Credit card
Total personal
Real estate
Residential
Non-residential
Total real estate
Total business and government (including real estate)
Total United States
Other International
Personal
Business and government
Total other international
Other loans
Debt securities classified as loans
Acquired credit-impaired loans1,2
Total other loans
Total write-offs against portfolio
Recoveries
Canada
Residential mortgages
Consumer instalment and other personal
HELOC
Indirect Auto
Other
Credit card
Total personal
Real estate
Residential
Non-residential
Total real estate
Total business and government (including real estate)
Total Canada
1 Includes all FDIC covered loans and other ACI loans.
2 Other adjustments are required as a result of the accounting for FDIC covered
loans. For additional information, refer to the “FDIC Covered Loans” section
in Note 8 of the Bank’s 2016 Consolidated Financial Statements.
2016
$ 3,434
2,330
2015
$ 3,028
1,683
2014
$ 2,855
1,557
2013
$ 2,644
1,631
2012
$ 2,314
1,795
18
23
21
20
18
11
334
221
623
1,207
3
2
5
107
1,314
22
38
232
121
530
943
3
11
14
76
1,019
–
–
–
13
224
218
638
1,116
4
3
7
74
1,190
16
47
206
101
454
824
5
22
27
124
948
–
–
–
13
207
234
582
1,057
1
3
4
109
1,166
17
43
232
79
288
659
12
18
30
117
776
–
–
–
18
160
274
543
1,015
2
3
5
104
1,119
33
65
231
74
56
459
16
59
75
191
650
–
–
–
14
4
18
2,351
13
6
19
2,157
5
20
25
1,967
11
38
49
1,818
1
–
91
52
118
262
1
2
78
58
124
263
5
5
138
60
109
317
1
3
4
27
$ 289
1
1
2
33
$ 296
1
2
3
29
$ 346
3
2
35
55
101
196
1
1
2
28
$ 224
16
155
310
335
834
3
4
7
108
942
42
101
145
67
50
405
91
84
175
385
790
–
–
–
–
112
112
1,844
4
3
20
51
46
124
1
1
2
25
$ 149
113
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 6 8
ALLOWANCE FOR CREDIT LOSSES (continued)
(millions of Canadian dollars, except as noted)
United States
Residential mortgages
Consumer instalment and other personal
HELOC
Indirect Auto
Other
Credit card
Total personal
Real estate
Residential
Non-residential
Total real estate
Total business and government (including real estate)
Total United States
Other International
Personal
Business and government
Total other international
Other loans
Debt securities classified as loans
Acquired credit-impaired loans1,2
Total other loans
Total recoveries on portfolio
Net write-offs
Disposals
Foreign exchange and other adjustments
Total allowance for credit losses
Less: Allowance for off-balance sheet positions3
Allowance for loan losses – Balance at end of year
Ratio of net write-offs in the period to average loans outstanding
2016
2015
2014
2013
2012
$
9
$
11
$
10
$
17
$
15
5
85
26
114
239
4
4
8
54
293
–
–
–
5
83
23
113
235
9
9
18
50
285
–
1
1
–
20
20
602
(1,749)
(2)
47
4,060
187
$ 3,873
–
19
19
601
(1,556)
(3)
321
3,473
39
$ 3,434
5
12
20
60
107
14
15
29
73
180
–
–
–
–
7
7
533
(1,434)
–
112
3,090
62
$ 3,028
4
64
22
5
112
8
10
18
49
161
–
–
–
–
9
9
394
(1,424)
(41)
46
2,856
1
$ 2,855
0.30%
0.30%
0.31%
0.33%
6
35
19
5
80
8
13
21
57
137
–
–
–
–
1
1
287
(1,557)
–
20
2,572
(72)
$ 2,644
0.39%
1 Includes all FDIC covered loans and other ACI loans.
2 Other adjustments are required as a result of the accounting for FDIC covered
loans. For additional information, refer to the “FDIC Covered Loans” section in
Note 8 of the Bank’s 2016 Consolidated Financial Statements.
3 The allowance for credit losses for off-balance sheet instruments is recorded in
Other liabilities on the Consolidated Balance Sheet.
T A B L E 6 9
AVERAGE DEPOSITS
(millions of Canadian dollars, except as noted)
Deposits booked in Canada1
Non-interest bearing demand deposits
Interest bearing demand deposits
Notice deposits
Term deposits
Total deposits booked in Canada
Deposits booked in the United States
Non-interest bearing demand deposits
Interest bearing demand deposits
Notice deposits
Term deposits
Total deposits booked in the United States
Deposits booked in the other international
Non-interest bearing demand deposits
Interest bearing demand deposits
Notice deposits
Term deposits
Total deposits booked in other international
October 31, 2016
October 31, 2015
Average
balance
Total
interest
expense
Average
rate paid
Average
balance
Total
interest
expense
Average
rate paid
Average
balance
For the years ended
October 31, 2014
Total
interest
expense
Average
rate paid
3,674 $
$
58,124
189,018
168,393
419,209
–
521
249
2,359
3,129
–% $ 6,685
45,081
172,124
146,714
370,604
0.90
0.13
1.40
0.75
$
–
570
306
2,112
2,988
–% $
5,405 $
1.26
0.18
1.44
0.81
38,443
159,687
120,493
324,028
–
597
421
1,934
2,952
9,969
3,945
277,744
70,290
361,948
–
7
921
522
1,450
54
1,918
–
27,132
29,104
–
4
–
175
179
–
0.18
0.33
0.74
0.40
–
0.21
–
0.64
0.62
8,723
2,812
239,078
94,016
344,629
–
4
842
313
1,159
–
0.14
0.35
0.33
0.34
6,961
1,387
196,735
74,999
280,082
–
3
1,059
216
1,278
55
1,874
2
17,042
18,973
–
5
–
90
95
–
0.27
–
0.53
0.50
20
1,803
27
17,951
19,801
–
2
–
81
83
–%
1.55
0.26
1.61
0.91
–
0.22
0.54
0.29
0.46
–
0.11
–
0.45
0.42
Total average deposits
$ 810,261 $ 4,758
0.59% $ 734,206 $ 4,242
0.58% $ 623,911 $ 4,313
0.69%
1 As at October 31, 2016, deposits by foreign depositors in TD’s Canadian
bank offices amounted to $17 billion (October 31, 2015 – $13 billion,
October 31, 2014 – $8 billion).
114
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 7 0
DEPOSITS – Denominations of $100,000 or greater1
(millions of Canadian dollars)
Canada
United States
Other international
Total
Canada
United States
Other international
Total
Canada
United States
Other international
Total
1 Deposits in Canada, U.S., and Other international include wholesale and
retail deposits.
T A B L E 7 1
SHORT-TERM BORROWINGS
(millions of Canadian dollars, except as noted)
Obligations related to securities sold under repurchase agreements
Balance at year-end
Average balance during the year
Maximum month-end balance
Weighted-average rate at October 31
Weighted-average rate during the year
Within 3
months
3 months to
6 months
6 months to
12 months
Over 12
months
Remaining term to maturity
As at
Total
$ 32,237
23,027
16,033
$ 71,297
$ 10,607
13,450
10,582
$ 34,639
$ 13,721
17,760
7,297
$ 38,778
$ 31,147
28,018
10,222
$ 69,387
$ 4,234
27,687
4,976
$ 36,897
$ 20,715
14,672
4,168
$ 39,555
$ 23,860
32,950
12,131
$ 68,941
$ 3,411
13,359
1,985
$ 18,755
$ 13,461
28,012
1,446
$ 42,919
October 31, 2016
$ 83,304
2,547
10
$ 85,861
$ 139,869
56,784
33,922
$ 230,575
October 31, 2015
$ 64,989
2,545
–
$ 67,534
$ 121,085
72,922
19,366
$ 213,373
October 31, 2014
$ 54,743
2,380
–
$ 57,123
$ 95,475
76,701
15,562
$ 187,738
October 31
2016
October 31
2015
As at
October 31
2014
$ 48,973
65,511
70,415
0.38%
0.51
$ 67,156
75,082
74,669
0.25%
0.37
$ 53,112
62,025
55,944
0.39%
0.38
115
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL RESULTS
Consolidated Financial Statements
MANAGEMENT’S RESPONSIBILITY FOR
FINANCIAL INFORMATION
The management of The Toronto-Dominion Bank and its subsidiaries
(the “Bank”) is responsible for the integrity, consistency, objectivity
and reliability of the Consolidated Financial Statements of the Bank
and related financial information as presented. International Financial
Reporting Standards as issued by the International Accounting Standards
Board, as well as the requirements of the Bank Act (Canada) and related
regulations have been applied and management has exercised its
judgment and made best estimates where appropriate.
The Bank’s accounting system and related internal controls are
designed, and supporting procedures maintained, to provide reasonable
assurance that financial records are complete and accurate and
that assets are safeguarded against loss from unauthorized use or
disposition. These supporting procedures include the careful selection
and training of qualified staff, the establishment of organizational
structures providing a well-defined division of responsibilities and
accountability for performance, and the communication of policies
and guidelines of business conduct throughout the Bank.
Management has assessed the effectiveness of the Bank’s internal
control over financial reporting as at October 31, 2016, using
the framework found in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission 2013 Framework. Based upon this assessment,
management has concluded that as at October 31, 2016, the Bank’s
internal control over financial reporting is effective.
The Bank’s Board of Directors, acting through the Audit Committee
which is composed entirely of independent directors, oversees
management’s responsibilities for financial reporting. The Audit
Committee reviews the Consolidated Financial Statements and
recommends them to the Board for approval. Other responsibilities
of the Audit Committee include monitoring the Bank’s system of
internal control over the financial reporting process and making
recommendations to the Board and shareholders regarding the
appointment of the external auditor.
The Bank’s Chief Auditor, who has full and free access to the
Audit Committee, conducts an extensive program of audits. This
program supports the system of internal control and is carried out
by a professional staff of auditors.
The Office of the Superintendent of Financial Institutions Canada,
makes such examination and enquiry into the affairs of the Bank as
deemed necessary to ensure that the provisions of the Bank Act, having
reference to the safety of the depositors, are being duly observed and
that the Bank is in sound financial condition.
Ernst & Young LLP, the independent auditors appointed by the
shareholders of the Bank, have audited the effectiveness of the Bank’s
internal control over financial reporting as at October 31, 2016, in
addition to auditing the Bank’s Consolidated Financial Statements as of
the same date. Their reports, which expressed an unqualified opinion,
can be found on the following pages of the Consolidated Financial
Statements. Ernst & Young LLP have full and free access to, and meet
periodically with, the Audit Committee to discuss their audit and
matters arising there from, such as, comments they may have on the
fairness of financial reporting and the adequacy of internal controls.
Bharat B. Masrani
Group President and
Chief Executive Officer
Riaz Ahmed
Group Head and
Chief Financial Officer
Toronto, Canada
November 30, 2016
116
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
INDEPENDENT AUDITORS’ REPORT OF REGISTERED PUBLIC
ACCOUNTING FIRM TO SHAREHOLDERS
Report on Financial Statements
We have audited the accompanying consolidated financial statements
of The Toronto-Dominion Bank, which comprise the Consolidated
Balance Sheet as at October 31, 2016 and 2015, and the Consolidated
Statements of Income, Comprehensive Income, Changes in Equity,
and Cash Flows for each of the years in the three-year period ended
October 31, 2016, and a summary of significant accounting policies
and other explanatory information.
Management’s responsibility for the consolidated
financial statements
Management is responsible for the preparation and fair presentation
of these consolidated financial statements in accordance with
International Financial Reporting Standards as issued by the
International Accounting Standards Board, and for such internal
control as management determines is necessary to enable the
preparation of consolidated financial statements that are free
from material misstatement, whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits
in accordance with Canadian generally accepted auditing standards
and the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are
free from material misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditors’ judgment,
including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error.
In making those risk assessments, the auditors consider internal control
relevant to the entity’s preparation and fair presentation of the
consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, evaluating the
appropriateness of accounting policies used and the reasonableness
of accounting estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits
is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly,
in all material respects, the financial position of The Toronto-Dominion
Bank as at October 31, 2016 and 2015, and its financial performance
and its cash flows for each of the years in the three-year period ended
October 31, 2016, in accordance with International Financial Reporting
Standards as issued by the International Accounting Standards Board.
Other matter
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
The Toronto-Dominion Bank’s internal control over financial reporting
as of October 31, 2016, based on the criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 Framework) and our
report dated November 30, 2016, expressed an unqualified opinion on
The Toronto-Dominion Bank’s internal control over financial reporting.
Ernst & Young LLP
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
November 30, 2016
117
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
INDEPENDENT AUDITORS’ REPORT OF REGISTERED PUBLIC
ACCOUNTING FIRM TO SHAREHOLDERS
Report on Internal Control under Standards of the Public
Company Accounting Oversight Board (United States)
We have audited The Toronto-Dominion Bank’s internal control
over financial reporting as of October 31, 2016, based on criteria
established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(2013 Framework) (the COSO criteria). The Toronto-Dominion Bank’s
management is responsible for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying
Management’s Report on Internal Control over Financial Reporting
contained in the accompanying Management’s Discussion and
Analysis. Our responsibility is to express an opinion on The
Toronto-Dominion Bank’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal
control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with International Financial
Reporting Standards as issued by the International Accounting
Standards Board (IFRS). A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements
in accordance with IFRS, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, The Toronto-Dominion Bank maintained, in all
material respects, effective internal control over financial reporting
as of October 31, 2016, based on the COSO criteria.
We also have audited, in accordance with Canadian generally
accepted auditing standards and the standards of the Public Company
Accounting Oversight Board (United States), the Consolidated Balance
Sheet of The Toronto-Dominion Bank as at October 31, 2016 and 2015,
and the Consolidated Statements of Income, Comprehensive Income,
Changes in Equity, and Cash Flows for each of the years in the three-
year period ended October 31, 2016, of The Toronto-Dominion Bank
and our report dated November 30, 2016, expressed an unqualified
opinion thereon.
Ernst & Young LLP
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
November 30, 2016
118
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
Consolidated Balance Sheet
(millions of Canadian dollars)
ASSETS
Cash and due from banks
Interest-bearing deposits with banks
Trading loans, securities, and other (Notes 5, 7)
Derivatives (Notes 5, 11)
Financial assets designated at fair value through profit or loss (Note 5)
Available-for-sale securities (Notes 5, 7)
Held-to-maturity securities (Note 7)
Securities purchased under reverse repurchase agreements
Loans (Note 8)
Residential mortgages
Consumer instalment and other personal
Credit card
Business and government
Debt securities classified as loans
Allowance for loan losses (Note 8)
Loans, net of allowance for loan losses
Other
Customers’ liability under acceptances
Investment in TD Ameritrade (Note 12)
Goodwill (Note 14)
Other intangibles (Note 14)
Land, buildings, equipment, and other depreciable assets (Note 15)
Deferred tax assets (Note 26)
Amounts receivable from brokers, dealers, and clients
Other assets (Note 16)
Total assets
LIABILITIES
Trading deposits (Notes 5, 17)
Derivatives (Notes 5, 11)
Securitization liabilities at fair value (Notes 5, 9)
Other financial liabilities designated at fair value through profit or loss (Note 5)
Deposits (Note 17)
Personal
Banks
Business and government
Other
Acceptances
Obligations related to securities sold short (Note 5)
Obligations related to securities sold under repurchase agreements (Note 5)
Securitization liabilities at amortized cost (Note 9)
Amounts payable to brokers, dealers, and clients
Insurance-related liabilities
Other liabilities (Note 18)
Subordinated notes and debentures (Note 19)
Total liabilities
EQUITY
Common shares (Note 21)
Preferred shares (Note 21)
Treasury shares – common (Note 21)
Treasury shares – preferred (Note 21)
Contributed surplus
Retained earnings
Accumulated other comprehensive income (loss)
Non-controlling interests in subsidiaries (Note 21)
Total equity
Total liabilities and equity
The accompanying Notes are an integral part of these Consolidated Financial Statements.
October 31
2016
As at
October 31
2015
$
3,907
53,714
57,621
99,257
72,242
4,283
107,571
283,353
84,395
86,052
217,336
144,531
31,914
194,074
1,674
589,529
(3,873)
585,656
15,706
7,091
16,662
2,639
5,482
2,084
17,436
12,790
79,890
$ 1,176,967
$
79,786
65,425
12,490
190
157,891
439,232
17,201
317,227
773,660
15,706
33,115
48,973
17,918
17,857
7,046
19,696
160,311
10,891
1,102,753
20,711
4,400
(31)
(5)
203
35,452
11,834
72,564
1,650
74,214
$ 1,176,967
$
3,154
42,483
45,637
95,157
69,438
4,378
88,782
257,755
74,450
97,364
212,373
135,471
30,215
167,529
2,187
547,775
(3,434)
544,341
16,646
6,683
16,337
2,671
5,314
1,931
21,996
13,248
84,826
$ 1,104,373
$
74,759
57,218
10,986
1,415
144,378
395,818
17,080
282,678
695,576
16,646
38,803
67,156
22,743
22,664
6,519
14,223
188,754
8,637
1,037,345
20,294
2,700
(49)
(3)
214
32,053
10,209
65,418
1,610
67,028
$ 1,104,373
Bharat B. Masrani
Group President and
Chief Executive Officer
Alan N. MacGibbon
Chair, Audit Committee
119
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
Consolidated Statement of Income
(millions of Canadian dollars, except as noted)
Interest income
Loans
Securities
Interest
Dividends
Deposits with banks
Interest expense
Deposits
Securitization liabilities
Subordinated notes and debentures
Other
Net interest income
Non-interest income
Investment and securities services
Credit fees
Net securities gain (loss) (Note 7)
Trading income (loss) (Note 22)
Service charges
Card services
Insurance revenue (Note 23)
Other income (loss)
Total revenue
Provision for credit losses (Note 8)
Insurance claims and related expenses (Note 23)
Non-interest expenses
Salaries and employee benefits (Note 25)
Occupancy, including depreciation
Equipment, including depreciation
Amortization of other intangibles
Marketing and business development
Restructuring charges
Brokerage-related fees
Professional and advisory services
Other
Income before income taxes and equity in net income of an investment in TD Ameritrade
Provision for (recovery of) income taxes (Note 26)
Equity in net income of an investment in TD Ameritrade (Note 12)
Net income
Preferred dividends
Net income available to common shareholders and non-controlling interests in subsidiaries
Attributable to:
Common shareholders
Non-controlling interests in subsidiaries
Earnings per share (dollars) (Note 27)
Basic
Diluted
Dividends per share (dollars)
Certain comparative amounts have been reclassified to conform with the presentation
adopted in the current period.
The accompanying Notes are an integral part of these Consolidated Financial Statements.
For the years ended October 31
2016
2015
2014
$ 21,751
$ 20,319
$ 19,716
3,672
912
225
26,560
4,758
452
395
1,032
6,637
19,923
4,143
1,048
54
395
2,571
2,313
3,796
72
14,392
34,315
2,330
2,462
9,298
1,825
944
708
743
(18)
316
1,232
3,829
18,877
10,646
2,143
433
8,936
141
$ 8,795
3,155
1,214
142
24,830
4,242
593
390
881
6,106
18,724
3,833
925
79
(223)
2,376
1,766
3,758
188
12,702
31,426
1,683
2,500
9,043
1,719
892
662
728
686
324
1,032
2,987
18,073
9,170
1,523
377
8,024
99
$ 7,925
$ 8,680
115
$ 7,813
112
$
4.68
4.67
2.16
$
4.22
4.21
2.00
2,913
1,173
126
23,928
4,313
777
412
842
6,344
17,584
3,496
845
173
(349)
2,152
1,552
3,883
625
12,377
29,961
1,557
2,833
8,451
1,549
810
598
756
29
321
991
2,991
16,496
9,075
1,512
320
7,883
143
$ 7,740
$ 7,633
107
$
4.15
4.14
1.84
120
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
Consolidated Statement of Comprehensive Income
(millions of Canadian dollars)
Net income
Other comprehensive income (loss), net of income taxes
Items that will be subsequently reclassified to net income
Change in unrealized gains (losses) on available-for-sale securities1
Reclassification to earnings of net losses (gains) in respect of available-for-sale securities2
Net change in unrealized foreign currency translation gains (losses) on investments in foreign operations
Reclassification to earnings of net losses (gains) on investments in foreign operations3
Net foreign currency translation gains (losses) from hedging activities4
Reclassification to earnings of net losses (gains) on hedges of investments in foreign operations5
Change in net gains (losses) on derivatives designated as cash flow hedges6
Reclassification to earnings of net losses (gains) on cash flow hedges7
Items that will not be subsequently reclassified to net income
Actuarial gains (losses) on employee benefit plans8
Comprehensive income (loss) for the year
Attributable to:
Common shareholders
Preferred shareholders
Non-controlling interests in subsidiaries
For the years ended October 31
2016
$ 8,936
2015
$ 8,024
2014
$ 7,883
274
(56)
1,290
–
34
–
835
(752)
(882)
743
$ 9,679
$ 9,423
141
115
(464)
(93)
8,090
–
(2,764)
–
4,805
(4,301)
400
5,673
$ 13,697
$ 13,486
99
112
69
(163)
3,697
(13)
(1,390)
13
2,439
(2,875)
(458)
1,319
$ 9,202
$ 8,952
143
107
1 Net of income tax provision in 2016 of $125 million (2015 – income tax recovery
5 Net of income tax provision in 2016 of nil million (2015 – income tax provision
of $210 million; 2014 – income tax provision of $67 million).
of nil; 2014 – income tax recovery of $4 million).
2 Net of income tax provision in 2016 of $32 million (2015 – income tax provision
6 Net of income tax provision in 2016 of $599 million (2015 – income tax provision
of $78 million; 2014 – income tax provision of $81 million).
of $2,926 million; 2014 – income tax provision of $1,394 million).
3 Net of income tax provision in 2016 of nil million (2015 – income tax provision
7 Net of income tax provision in 2016 of $533 million (2015 – income tax provision
of nil; 2014 – income tax provision of nil).
of $2,744 million; 2014 – income tax provision of $1,617 million).
4 Net of income tax provision in 2016 of $9 million (2015 – income tax recovery
8 Net of income tax recovery in 2016 of $340 million (2015 – income tax provision
of $985 million; 2014 – income tax recovery of $488 million).
of $147 million; 2014 – income tax recovery of $210 million).
The accompanying Notes are an integral part of these Consolidated Financial Statements.
121
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
Consolidated Statement of Changes in Equity
(millions of Canadian dollars)
Common shares (Note 21)
Balance at beginning of year
Proceeds from shares issued on exercise of stock options
Shares issued as a result of dividend reinvestment plan
Purchase of shares for cancellation
Balance at end of year
Preferred shares (Note 21)
Balance at beginning of year
Issue of shares
Redemption of shares
Balance at end of year
Treasury shares – common (Note 21)
Balance at beginning of year
Purchase of shares
Sale of shares
Balance at end of year
Treasury shares – preferred (Note 21)
Balance at beginning of year
Purchase of shares
Sale of shares
Balance at end of year
Contributed surplus
Balance at beginning of year
Net premium (discount) on sale of treasury shares
Issuance of stock options, net of options exercised (Note 24)
Other
Balance at end of year
Retained earnings
Balance at beginning of year
Net income attributable to shareholders
Common dividends
Preferred dividends
Share issue expenses and others
Net premium on repurchase of common shares and redemption of preferred shares
Actuarial gains (losses) on employee benefit plans
Balance at end of year
Accumulated other comprehensive income (loss)
Net unrealized gain (loss) on available-for-sale securities:
Balance at beginning of year
Other comprehensive income (loss)
Balance at end of year
Net unrealized foreign currency translation gain (loss) on investments in foreign operations,
net of hedging activities:
Balance at beginning of year
Other comprehensive income (loss)
Balance at end of year
Net gain (loss) on derivatives designated as cash flow hedges:
Balance at beginning of year
Other comprehensive income (loss)
Balance at end of year
Total
Non-controlling interests in subsidiaries
Balance at beginning of year
Net income attributable to non-controlling interests in subsidiaries
Other
Balance at end of year
Total equity
The accompanying Notes are an integral part of these Consolidated Financial Statements.
For the years ended October 31
2016
2015
2014
$ 20,294
186
335
(104)
20,711
$ 19,811
128
355
–
20,294
$ 19,316
199
339
(43)
19,811
2,700
1,700
–
4,400
(49)
(5,769)
5,787
(31)
(3)
(115)
113
(5)
214
26
(28)
(9)
203
32,053
8,821
(4,002)
(141)
(14)
(383)
(882)
35,452
81
218
299
8,355
1,324
9,679
1,773
83
1,856
11,834
2,200
1,200
(700)
2,700
(54)
(5,269)
5,274
(49)
(1)
(244)
242
(3)
205
25
–
(16)
214
27,585
7,912
(3,700)
(99)
(28)
(17)
400
32,053
638
(557)
81
3,029
5,326
8,355
1,269
504
1,773
10,209
3,395
1,000
(2,195)
2,200
(145)
(4,197)
4,288
(54)
(2)
(154)
155
(1)
170
48
(5)
(8)
205
23,982
7,776
(3,384)
(143)
(11)
(177)
(458)
27,585
732
(94)
638
722
2,307
3,029
1,705
(436)
1,269
4,936
1,610
115
(75)
1,650
$ 74,214
1,549
112
(51)
1,610
$ 67,028
1,508
107
(66)
1,549
$ 56,231
122
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
Consolidated Statement of Cash Flows
(millions of Canadian dollars)
Cash flows from (used in) operating activities
Net income before income taxes
Adjustments to determine net cash flows from (used in) operating activities
Provision for credit losses (Note 8)
Depreciation (Note 15)
Amortization of other intangibles
Net securities losses (gains) (Note 7)
Equity in net income of an investment in TD Ameritrade (Note 12)
Deferred taxes (Note 26)
Changes in operating assets and liabilities
Interest receivable and payable (Notes 16, 18)
Securities sold short
Trading loans and securities
Loans net of securitization and sales
Deposits
Derivatives
Financial assets and liabilities designated at fair value through profit or loss
Securitization liabilities
Other
Net cash from (used in) operating activities
Cash flows from (used in) financing activities
Change in securities sold under repurchase agreements
Issuance of subordinated notes and debentures (Note 19)
Redemption of subordinated notes and debentures (Note 19)
Common shares issued (Note 21)
Preferred shares issued (Note 21)
Repurchase of common shares (Note 21)
Redemption of preferred shares (Note 21)
Sale of treasury shares (Note 21)
Purchase of treasury shares (Note 21)
Dividends paid
Distributions to non-controlling interests in subsidiaries
Net cash from (used in) financing activities
Cash flows from (used in) investing activities
Interest-bearing deposits with banks
Activities in available-for-sale securities (Note 7)
Purchases
Proceeds from maturities
Proceeds from sales
Activities in held-to-maturity securities (Note 7)
Purchases
Proceeds from maturities
Activities in debt securities classified as loans
Purchases
Proceeds from maturities
Proceeds from sales
Net purchases of land, buildings, equipment, and other depreciable assets
Changes in securities purchased under reverse repurchase agreements
Net cash acquired from (paid for) divestitures, acquisitions, and the sale of
TD Ameritrade shares (Notes 12, 13)
Net cash from (used in) investing activities
Effect of exchange rate changes on cash and due from banks
Net increase (decrease) in cash and due from banks
Cash and due from banks at beginning of year
Cash and due from banks at end of year
Supplementary disclosure of cash flows from operating activities
Amount of income taxes paid (refunded) during the year
Amount of interest paid during the year
Amount of interest received during the year
Amount of dividends received during the year
The accompanying Notes are an integral part of these Consolidated Financial Statements.
For the years ended October 31
2016
2015
2014
$ 11,079
$ 9,547
$ 9,395
2,330
629
708
(54)
(433)
103
7
(5,688)
(4,100)
(44,351)
81,885
5,403
96
(3,321)
(168)
44,125
(18,183)
3,262
(1,000)
152
1,686
(487)
–
5,926
(5,884)
(3,808)
(115)
(18,451)
1,683
588
662
(79)
(377)
(352)
(294)
(662)
6,016
(63,947)
108,446
(7,633)
371
(2,429)
(16,267)
35,273
14,044
2,500
(1,675)
108
1,184
–
(717)
5,541
(5,513)
(3,444)
(112)
11,916
1,557
533
598
(173)
(320)
31
(204)
(2,364)
767
(33,717)
72,059
(4,597)
1,783
(11,394)
(8,041)
25,913
13,494
–
(150)
168
989
(220)
(2,195)
4,491
(4,351)
(3,188)
(107)
8,931
(11,231)
1,290
(15,190)
(53,145)
28,661
4,665
(20,575)
15,557
(41)
621
1
(797)
11,312
–
(24,972)
51
753
3,154
$ 3,907
$ 1,182
6,559
25,577
921
(58,775)
27,055
6,631
(15,120)
9,688
(23)
875
–
(972)
(14,808)
(2,918)
(47,077)
261
373
2,781
$ 3,154
$
554
6,167
23,483
1,216
(38,887)
30,032
6,403
(9,258)
6,542
(37)
1,263
10
(828)
(13,069)
(2,768)
(35,787)
143
(800)
3,581
$ 2,781
$ 1,241
6,478
22,685
1,179
123
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
Notes to Consolidated Financial Statements
To facilitate a better understanding of the Bank’s Consolidated Financial Statements, significant accounting
policies, and related disclosures, a listing of all the notes is provided below.
NOTE TOPIC
1
2
3
PAGE
124
124
Nature of Operations
Summary of Significant Accounting Policies
Significant Accounting Judgments,
133
Estimates, and Assumptions
135
Current and Future Changes in Accounting Policies
136
Fair Value Measurements
147
Offsetting Financial Assets and Financial Liabilities
148
Securities
152
Loans, Impaired Loans, and Allowance for Credit Losses
155
Transfers of Financial Assets
157
Structured Entities
160
Derivatives
167
Investment in Associates and Joint Ventures
168
Significant Acquisitions and Disposals
Goodwill and Other Intangibles
168
Land, Buildings, Equipment, and Other Depreciable Assets 170
170
Other Assets
171
Deposits
172
Other Liabilities
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
NOTE TOPIC
19
20
21
22
23
24
25
26
27
28
Subordinated Notes and Debentures
Capital Trust Securities
Equity
Trading-Related Income
Insurance
Share-Based Compensation
Employee Benefits
Income Taxes
Earnings Per Share
Provisions, Contingent Liabilities, Commitments,
Guarantees, Pledged Assets, and Collateral
Related Party Transactions
Segmented Information
Interest Rate Risk
Credit Risk
Regulatory Capital
Risk Management
Information on Subsidiaries
29
30
31
32
33
34
35
PAGE
172
173
173
175
176
178
179
184
186
186
189
190
192
194
198
199
199
N O T E 1
NATURE OF OPERATIONS
CORPORATE INFORMATION
The Toronto-Dominion Bank is a bank chartered under the Bank Act.
The shareholders of a bank are not, as shareholders, liable for any
liability, act, or default of the bank except as otherwise provided under
the Bank Act. The Toronto-Dominion Bank and its subsidiaries are
collectively known as TD Bank Group (“TD” or the “Bank”). The Bank
was formed through the amalgamation on February 1, 1955, of The
Bank of Toronto (chartered in 1855) and The Dominion Bank (chartered
in 1869). The Bank is incorporated and domiciled in Canada with its
registered and principal business offices located at 66 Wellington
Street West, Toronto, Ontario. TD serves customers in three business
segments operating in a number of locations in key financial centres
around the globe: Canadian Retail, U.S. Retail, and Wholesale Banking.
BASIS OF PREPARATION
The accompanying Consolidated Financial Statements and accounting
principles followed by the Bank have been prepared in accordance
with International Financial Reporting Standards (IFRS), as issued by
the International Accounting Standards Board (IASB), including the
accounting requirements of the Office of the Superintendent of Financial
Institutions Canada (OSFI). The Consolidated Financial Statements are
presented in Canadian dollars, unless otherwise indicated.
These Consolidated Financial Statements were prepared using the
accounting policies as described in Note 2. Certain comparative amounts
have been restated/reclassified to conform with the presentation
adopted in the current period.
The preparation of the Consolidated Financial Statements requires
that management make estimates, assumptions, and judgments
regarding the reported amount of assets, liabilities, revenue and
expenses, and disclosure of contingent assets and liabilities, as further
described in Note 3. Accordingly, actual results may differ from
estimated amounts as future confirming events occur.
The accompanying Consolidated Financial Statements of the Bank
were approved and authorized for issue by the Bank’s Board of Directors,
in accordance with a recommendation of the Audit Committee, on
November 30, 2016.
Certain disclosures are included in the shaded sections of the
“Managing Risk” section of the accompanying 2016 Management’s
Discussion and Analysis (MD&A), as permitted by IFRS, and form
an integral part of the Consolidated Financial Statements. The
Consolidated Financial Statements were prepared under a historical
cost basis, except for certain items carried at fair value as discussed
in Note 2.
N O T E 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The Consolidated Financial Statements include the assets, liabilities,
results of operations, and cash flows of the Bank and its subsidiaries
including certain structured entities which it controls. The Bank
controls an entity when (1) it has the power to direct the activities
of the entity which have the most significant impact on the entity’s
risks and/or returns; (2) it is exposed to significant risks and/or returns
arising from the entity; and (3) it is able to use its power to affect the
risks and/or returns to which it is exposed.
The Bank’s Consolidated Financial Statements have been prepared
using uniform accounting policies for like transactions and events
in similar circumstances. All intercompany transactions, balances,
and unrealized gains and losses on transactions are eliminated on
consolidation.
Subsidiaries
Subsidiaries are corporations or other legal entities controlled by the
Bank, generally through directly holding more than half of the voting
power of the entity. Control of subsidiaries is determined based on the
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TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
power exercisable through ownership of voting rights and is generally
aligned with the risks and/or returns (collectively referred to as “variable
returns”) absorbed from subsidiaries through those voting rights.
As a result, the Bank controls and consolidates subsidiaries when it
holds the majority of the voting rights of the subsidiary, unless there
is evidence that another investor has control over the subsidiary.
The existence and effect of potential voting rights that are currently
exercisable or convertible are considered in assessing whether the
Bank controls an entity. Subsidiaries are consolidated from the date
the Bank obtains control and continue to be consolidated until the
date when control ceases to exist.
The Bank may consolidate certain subsidiaries where it owns 50%
or less of the voting rights. Most of those subsidiaries are structured
entities as described in the following section.
Structured Entities
Structured entities, including special purpose entities (SPEs), are
entities that are created to accomplish a narrow and well-defined
objective. Structured entities may take the form of a corporation, trust,
partnership, or unincorporated entity. They are often created with
legal arrangements that impose limits on the decision-making powers
of their governing board, trustee, or management over the operations
of the entity. Typically, structured entities may not be controlled
directly through holding more than half of the voting power of the
entity as the ownership of voting rights may not be aligned with
the variable returns absorbed from the entity. As a result, structured
entities are consolidated when the substance of the relationship
between the Bank and the structured entity indicates that the entity
is controlled by the Bank. When assessing whether the Bank has
to consolidate a structured entity, the Bank evaluates three primary
criteria in order to conclude whether, in substance:
• The Bank has the power to direct the activities of the structured
entity that have the most significant impact on the entity’s risks
and/or returns;
• The Bank is exposed to significant variable returns arising from the
entity; and
• The Bank has the ability to use its power to affect the risks and/or
returns to which it is exposed.
Consolidation conclusions are reassessed at the end of each financial
reporting period. The Bank’s policy is to consider the impact on
consolidation of all significant changes in circumstances, focusing
on the following:
• Substantive changes in ownership, such as the purchase or disposal
of more than an insignificant additional interest in an entity;
• Changes in contractual or governance arrangements of an entity;
• Additional activities undertaken, such as providing a liquidity
facility beyond the original terms or entering into a transaction
not originally contemplated; or
• Changes in the financing structure of an entity.
Investments in Associates and Joint Ventures
Entities over which the Bank has significant influence are associates
and entities over which the Bank has joint control are joint ventures.
Significant influence is the power to participate in the financial
and operating policy decisions of an investee, but is not control or
joint control over these entities. Associates and joint ventures are
accounted for using the equity method of accounting. Investments
in associates and joint ventures are carried on the Consolidated
Balance Sheet initially at cost and increased or decreased to recognize
the Bank’s share of the profit or loss of the associate or joint venture,
capital transactions, including the receipt of any dividends, and
write-downs to reflect any impairment in the value of such entities.
These increases or decreases, together with any gains and losses
realized on disposition, are reported on the Consolidated Statement
of Income.
At each balance sheet date, the Bank assesses whether there is any
objective evidence that the investment in an associate or joint venture
is impaired. The Bank calculates the amount of impairment as the
difference between the higher of fair value or value-in-use and its
carrying value.
Non-controlling Interests
When the Bank does not own all of the equity of a consolidated entity,
the minority shareholders’ interest is presented on the Consolidated
Balance Sheet as Non-controlling interests in subsidiaries as a
component of total equity, separate from the equity of the Bank’s
shareholders. The income attributable to the minority interest holders,
net of tax, is presented as a separate line item on the Consolidated
Statement of Income.
CASH AND DUE FROM BANKS
Cash and due from banks consist of cash and amounts due from
banks which are issued by investment grade financial institutions.
These amounts are due on demand or have an original maturity of
three months or less.
REVENUE RECOGNITION
Revenue is recognized to the extent that it is probable that the economic
benefits will flow to the Bank and the revenue can be reliably measured.
Revenue associated with the rendering of services is recognized by
reference to the stage of completion of the transaction at the end
of the reporting period.
Interest from interest-bearing assets and liabilities is recognized
as net interest income using the effective interest rate (EIR). EIR is the
rate that discounts expected future cash flows for the expected life
of the financial instrument to its carrying value. The calculation takes
into account the contractual interest rate, along with any fees or
incremental costs that are directly attributable to the instrument and
all other premiums or discounts.
Investment and securities services income include asset management
fees, administration and commission fees, and investment banking
fees. Asset management fees and administration and commission fees
include income from investment management and related services,
custody and institutional trust services, and brokerage services, which
are recognized as income over the period in which the related service
is rendered. Investment management fees are primarily calculated
based on average daily or point in time assets under management
(AUM) or by assets under administration (AUA) by investment mandate.
Administration fees earned may either be a fixed amount per client
account, or calculated based on a percentage of daily, monthly,
or annual AUM for institutional accounts. Investment banking fees,
including advisory fees, are recognized as income when earned,
and underwriting fees are recognized as income when the Bank has
rendered all services to the issuer and is entitled to collect the fee.
Credit fees include commissions, liquidity fees, restructuring fees,
and loan syndication fees and are recognized as earned.
Card services income, including interchange income from credit
and debit cards and annual fees, is recognized as earned, except for
annual fees, which are recognized over a twelve-month period. Service
charges, trust, and other fee income is recognized as earned.
Revenue recognition policies related to financial instruments and
insurance are described in the following accounting policies.
FINANCIAL INSTRUMENTS OTHER THAN DERIVATIVES
Trading Assets and Trading Liabilities
Financial instruments are included within the trading portfolio if they
have been originated, acquired, or incurred principally for the purpose
of selling or repurchasing in the near term, or they form part of a
portfolio of identified financial instruments that are managed together
and for which there is evidence of a recent actual pattern of short-
term profit-taking.
Included within the trading portfolio are trading securities, trading
loans, trading deposits, securitization liabilities at fair value, obligations
related to securities sold short, and physical commodities, as well as
certain financing-type physical commodities transactions that are
recorded on the Consolidated Balance Sheet as securities purchased
under reverse repurchase agreements and obligations related to
securities sold under repurchase agreements, respectively.
Trading portfolio assets and liabilities are recognized on a trade date
basis and are accounted for at fair value, with changes in fair value as
well as any gains or losses realized on disposal recognized in trading
income. Physical commodities are measured at fair value less costs to sell.
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TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS Transaction costs are expensed as incurred. Dividends are recognized on
the ex-dividend date and interest is recognized on an accrual basis using
the effective interest rate method (EIRM). Both dividends and interest are
included in interest income or interest expense.
Designated at Fair Value through Profit or Loss
Certain financial assets and liabilities that do not meet the definition
of trading may be designated at fair value through profit or loss. To
be designated at fair value through profit or loss, financial assets or
liabilities must meet one of the following criteria: (1) the designation
eliminates or significantly reduces a measurement or recognition
inconsistency; (2) a group of financial assets or liabilities, or both,
is managed and its performance is evaluated on a fair value basis in
accordance with a documented risk management or investment strategy;
or (3) the instrument contains one or more embedded derivatives
unless a) the embedded derivative does not significantly modify
the cash flows that otherwise would be required by the contract, or
b) it is clear with little or no analysis that separation of the embedded
derivative from the financial instrument is prohibited. In addition, the
fair value through profit or loss designation is available only for those
financial instruments for which a reliable estimate of fair value can
be obtained. Once financial assets and liabilities are designated at fair
value through profit or loss, the designation is irrevocable.
Assets and liabilities designated at fair value through profit or loss
are carried at fair value on the Consolidated Balance Sheet, with
changes in fair value as well as any gains or losses realized on disposal
recognized in other income. Interest is recognized on an accrual basis
using the EIRM and is included in interest income or interest expense.
Available-for-Sale Securities
Financial assets not classified as trading, designated at fair value through
profit or loss, held-to-maturity or loans, are classified as available-for-sale
and include equity securities and debt securities.
Available-for-sale securities are recognized on a trade date basis
and are carried at fair value on the Consolidated Balance Sheet with
changes in fair value recognized in other comprehensive income.
Gains and losses realized on disposal of financial assets classified as
available-for-sale are calculated on a weighted-average cost basis and
are recognized in net securities gains (losses) in non-interest income.
Dividends are recognized on the ex-dividend date and interest income
is recognized on an accrual basis using the EIRM. Both dividends and
interest are included in Interest income on the Consolidated Statement
of Income.
Impairment losses are recognized if there is objective evidence
of impairment as a result of one or more events that have occurred
(a ‘loss event’) and the loss event(s) results in a decrease in the estimated
future cash flows of the instrument. A significant or prolonged decline
in fair value below cost is considered objective evidence of impairment
for available-for-sale equity securities. A deterioration in credit quality
is considered objective evidence of impairment for available-for-sale
debt securities. Qualitative factors are also considered when assessing
impairment for available-for-sale securities. When impairment is
identified, the cumulative net loss previously recognized in other
comprehensive income, less any impairment loss previously recognized
on the Consolidated Statement of Income, is removed from other
comprehensive income and recognized in Net securities gains (losses)
in Non-interest income on the Consolidated Statement of Income.
If the fair value of a previously impaired equity security subsequently
increases, the impairment loss is not reversed through the Consolidated
Statement of Income. Subsequent increases in fair value are recognized
in other comprehensive income. If the fair value of a previously
impaired debt security subsequently increases and the increase can
be objectively related to an event occurring after the impairment
was recognized on the Consolidated Statement of Income, then the
impairment loss is reversed through the Consolidated Statement of
Income. An increase in fair value in excess of impairment recognized
previously on the Consolidated Statement of Income is recognized
in other comprehensive income.
Held-to-Maturity Securities
Debt securities with fixed or determinable payments and fixed maturity
dates, that do not meet the definition of loans and receivables,
and that the Bank intends and has the ability to hold to maturity are
classified as held-to-maturity and are carried at amortized cost, net of
impairment losses. Securities classified as held-to-maturity are assessed
for objective evidence of impairment at the counterparty-specific level.
If there is no objective evidence of impairment at the counterparty-
specific level then the security is grouped with other held-to-maturity
securities with similar credit risk characteristics and collectively assessed
for impairment, which considers losses incurred but not identified.
Interest income is recognized using the EIRM and is included in Interest
income on the Consolidated Statement of Income.
Loans and Allowance for Loan Losses
Loans
Loans are non-derivative financial assets with fixed or determinable
payments that the Bank does not intend to sell immediately or in the
near term and that are not quoted in an active market. Loans are
carried at amortized cost on the Consolidated Balance Sheet, net of
an allowance for loan losses, write-offs and unearned income, which
includes prepaid interest, loan origination fees and costs, commitment
fees, loan syndication fees, and unamortized discounts or premiums.
Interest income is recognized using the EIRM. Loan origination fees
and costs are considered to be adjustments to the loan yield and are
recognized in interest income over the term of the loan.
Commitment fees are recognized in credit fees over the
commitment period when it is unlikely that the commitment will
be called upon; otherwise, they are recognized in interest income over
the term of the resulting loan. Loan syndication fees are recognized
in credit fees upon completion of the financing placement unless the
yield on any loan retained by the Bank is less than that of other
comparable lenders involved in the financing syndicate. In such cases,
an appropriate portion of the fee is recognized as a yield adjustment
to interest income over the term of the loan.
Loan Impairment, Excluding Acquired Credit-Impaired Loans
A loan, including a debt security classified as a loan, is considered
impaired when there is objective evidence that there has been
a deterioration of credit quality subsequent to the initial recognition
of the loan (a ‘loss event’) to the extent the Bank no longer has
reasonable assurance as to the timely collection of the full amount
of principal and interest. Indicators of impairment could include,
but are not limited to, one or more of the following:
• Significant financial difficulty of the issuer or obligor;
• A breach of contract, such as a default or delinquency in interest
or principal payments;
• Increased probability that the borrower will enter bankruptcy
or other financial reorganization; or
• The disappearance of an active market for that financial asset.
A loan will be reclassified back to performing status when it has been
determined that there is reasonable assurance of full and timely
repayment of interest and principal in accordance with the original
or revised contractual conditions of the loan and all criteria for the
impaired classification have been remedied. For gross impaired debt
securities classified as loans, subsequent to any recorded impairment,
interest income continues to be recognized using the EIRM which was
used to discount the future cash flows for the purpose of measuring
the credit loss.
Renegotiated Loans
In cases where a borrower experiences financial difficulties the Bank may
grant certain concessionary modifications to the terms and conditions
of a loan. Modifications may include payment deferrals, extension
of amortization periods, rate reductions, principal forgiveness, debt
consolidation, forbearance and other modifications intended to minimize
the economic loss and to avoid foreclosure or repossession of collateral.
The Bank has policies in place to determine the appropriate remediation
strategy based on the individual borrower. Once modified, additional
impairment is recorded where the Bank identifies a decrease in the
126
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS modified loan’s estimated realizable value as a result of the modification.
Modified loans are assessed for impairment, consistent with the Bank’s
existing policies for impairment.
of measuring the collectively assessed allowance for incurred but
not identified credit losses, default is defined as delinquency levels
in interest or principal payments that would indicate impairment.
Allowance for Credit Losses, Excluding Acquired Credit-Impaired Loans
The allowance for credit losses represents management’s best estimate
of impairment incurred in the lending portfolios, including any
off-balance sheet exposures, at the balance sheet date. The allowance
for loan losses, which includes credit-related allowances for residential
mortgages, consumer instalment and other personal, credit card,
business and government loans, and debt securities classified as loans,
is deducted from Loans on the Consolidated Balance Sheet. The
allowance for credit losses for off-balance sheet instruments, which
relates to certain guarantees, letters of credit, and undrawn lines of
credit, is recognized in Other liabilities on the Consolidated Balance
Sheet. Allowances for lending portfolios reported on the balance
sheet and off-balance sheet exposures are calculated using the same
methodology. The allowance is increased by the provision for credit
losses and decreased by write-offs net of recoveries and disposals.
The Bank maintains both counterparty-specific and collectively
assessed allowances. Each quarter, allowances are reassessed and
adjusted based on any changes in management’s estimate of the
future cash flows estimated to be recovered. Credit losses on impaired
loans continue to be recognized by means of an allowance for credit
losses until a loan is written off.
A loan is written off against the related allowance for credit losses
when there is no realistic prospect of recovery. Non-retail loans are
generally written off when all reasonable collection efforts have been
exhausted, such as when a loan is sold, when all security has been
realized, or when all security has been resolved with the receiver or
bankruptcy court. Non-real estate secured retail loans are generally
written off when contractual payments are 180 days past due, or when
a loan is sold. Real-estate secured retail loans are generally written off
when the security is realized.
Counterparty-Specific Allowance
Individually significant loans, such as the Bank’s medium-sized business
and government loans and debt securities classified as loans, are
assessed for impairment at the counterparty-specific level. The
impairment assessment is based on the counterparty’s credit ratings,
overall financial condition, and where applicable, the realizable value
of the collateral. Collateral is reviewed at least annually and when
conditions arise indicating an earlier review is necessary. An allowance,
if applicable, is measured as the difference between the carrying
amount of the loan and the estimated recoverable amount. The
estimated recoverable amount is the present value of the estimated
future cash flows, discounted using the loan’s original EIR.
Collectively Assessed Allowance for Individually Insignificant
Impaired Loans
Individually insignificant impaired loans, such as the Bank’s personal
and small business loans and credit cards, are collectively assessed for
impairment. Allowances are calculated using a formula that incorporates
recent loss experience, historical default rates which are delinquency
levels in interest or principal payments that indicate impairment, other
applicable currently observable data, and the type of collateral pledged.
Collectively Assessed Allowance for Incurred but Not Identified
Credit Losses
If there is no objective evidence of impairment for an individual loan,
whether significant or not, the loan is included in a group of assets
with similar credit risk characteristics and collectively assessed for
impairment for losses incurred but not identified. This allowance is
referred to as the allowance for incurred but not identified credit
losses. The level of the allowance for each group depends upon
an assessment of business and economic conditions, historical loss
experience, loan portfolio composition, and other relevant indicators.
Historical loss experience is adjusted based on current observable
data to reflect the effects of current conditions. The allowance for
incurred but not identified credit losses is calculated using credit risk
models that consider probability of default (loss frequency), loss given
credit default (loss severity), and exposure at default. For purposes
Acquired Loans
Acquired loans are initially measured at fair value which considers
incurred and expected future credit losses estimated at the acquisition
date and also reflects adjustments based on the acquired loan’s interest
rate in comparison to the current market rates. As a result, no allowance
for credit losses is recorded on the date of acquisition. When loans are
acquired with evidence of incurred credit loss where it is probable at the
purchase date that the Bank will be unable to collect all contractually
required principal and interest payments, they are generally considered
to be acquired credit-impaired (ACI) loans.
Acquired performing loans are subsequently accounted for at
amortized cost based on their contractual cash flows and any acquisition
related discount or premium is considered to be an adjustment to the
loan yield and is recognized in interest income using the EIRM over the
term of the loan, or the expected life of the loan for acquired loans
with revolving terms. Credit related discounts relating to incurred
losses for acquired loans are not accreted. Acquired loans are subject
to impairment assessments under the Bank’s credit loss framework
similar to the Bank’s originated loan portfolio.
Acquired Credit-Impaired Loans
ACI loans are identified as impaired at acquisition based on specific risk
characteristics of the loans, including past due status, performance
history and recent borrower credit scores.
ACI loans are accounted for based on the present value of expected
cash flows as opposed to their contractual cash flows. The Bank
determines the fair value of these loans at the acquisition date by
discounting expected cash flows at a discount rate that reflects factors
a market participant would use when determining fair value including
management assumptions relating to default rates, loss severities,
the amount and timing of prepayments, and other factors that
are reflective of current market conditions. With respect to certain
individually significant ACI loans, accounting is applied individually at
the loan level. The remaining ACI loans are aggregated provided that
they are acquired in the same fiscal quarter and have common risk
characteristics. Aggregated loans are accounted for as a single asset
with aggregated cash flows and a single composite interest rate.
Subsequent to acquisition, the Bank regularly reassesses and
updates its cash flow estimates for changes to assumptions relating
to default rates, loss severities, the amount and timing of prepayments,
and other factors that are reflective of current market conditions.
Probable decreases in expected cash flows trigger the recognition of
additional impairment, which is measured based on the present value
of the revised expected cash flows discounted at the loan’s EIR as
compared to the carrying value of the loan. Impairment is recorded
through the provision for credit losses.
Probable and significant increases in expected cash flows would first
reverse any previously taken impairment with any remaining increase
recognized in income immediately as interest income. In addition, for
fixed-rate ACI loans the timing of expected cash flows may increase or
decrease which may result in adjustments through interest income to the
carrying value in order to maintain the inception yield of the ACI loan.
If the timing and/or amounts of expected cash flows on ACI loans were
determined not to be reasonably estimable, no interest is recognized.
Federal Deposit Insurance Corporation Covered Loans
Loans subject to loss share agreements with the Federal Deposit
Insurance Corporation (FDIC) are considered FDIC covered loans.
The amounts expected to be reimbursed by the FDIC are considered
separately as indemnification assets and are initially measured at fair
value. If losses on the portfolio are greater than amounts expected
at the acquisition date, an impairment loss is taken by establishing
an allowance for credit losses, which is determined on a gross basis,
exclusive of any adjustments to the indemnification assets.
Indemnification assets are subsequently adjusted for any changes
in estimates related to the overall collectability of the underlying loan
portfolio. Any additional impairment of the underlying loan portfolio
generally results in an increase of the indemnification asset through
127
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS the provision for credit losses. Alternatively, decreases in the expectation
of losses of the underlying loan portfolio generally results in a decrease
of the indemnification asset through net interest income (or through
the provision for credit losses if impairment was previously taken). The
indemnification asset is drawn down as payments are received from
the FDIC pertaining to the loss share agreements.
FDIC covered loans are recorded in Loans on the Consolidated
Balance Sheet. The indemnification assets are recorded in Other assets
on the Consolidated Balance Sheet.
At the end of each loss share period, the Bank may be required
to make a payment to the FDIC if actual losses incurred are less than
the intrinsic loss estimate as defined in the loss share agreements.
The payment is determined as 20% of the excess between the intrinsic
loss estimate and actual covered losses determined in accordance with
the loss sharing agreement, net of specified servicing costs. The fair
value of the estimated payment is included in part of the indemnification
asset at the date of acquisition. Subsequent changes to the estimated
payment are considered in determining the adjustment to the
indemnification asset as described above.
Customers’ Liability under Acceptances
Acceptances represent a form of negotiable short-term debt issued by
customers, which the Bank guarantees for a fee. Revenue is recognized
on an accrual basis. The potential obligation of the Bank is reported
as a liability under Acceptances on the Consolidated Balance Sheet.
The Bank’s recourse against the customer in the event of a call on any
of these commitments is reported as an asset of the same amount.
Financial Liabilities Carried at Amortized Cost
Deposits
Deposits, other than deposits included in a trading portfolio,
are accounted for at amortized cost. Accrued interest on deposits,
calculated using the EIRM, is included in Other liabilities on the
Consolidated Balance Sheet.
Subordinated Notes and Debentures
Subordinated notes and debentures are initially recognized at fair
value and subsequently accounted for at amortized cost. Interest
expense, including capitalized transaction costs, is recognized on
an accrual basis using the EIRM.
Guarantees
The Bank issues guarantee contracts that require payments to be made
to guaranteed parties based on: (1) changes in the underlying economic
characteristics relating to an asset or liability of the guaranteed party;
(2) failure of another party to perform under an obligating agreement;
or (3) failure of another third party to pay its indebtedness when due.
Financial standby letters of credit are financial guarantees that represent
irrevocable assurances that the Bank will make payments in the event
that a customer cannot meet its obligations to third parties and they
carry the same credit risk, recourse, and collateral security requirements
as loans extended to customers. Performance standby letters of credit
are considered non-financial guarantees as payment does not depend
on the occurrence of a credit event and is generally related to a non-
financial trigger event. Guarantees, including financial and performance
standby letters of credit, are initially measured and recorded at their
fair value. The fair value of a guarantee liability at initial recognition
is normally equal to the present value of the guarantee fees received
over the life of contract. The Bank’s release from risk is recognized
over the term of the guarantee using a systematic and rational
amortization method.
If a guarantee meets the definition of a derivative, it is carried at fair
value on the Consolidated Balance Sheet and reported as a derivative
asset or derivative liability at fair value. Guarantees that are considered
derivatives are a type of credit derivative which are over-the-counter
(OTC) contracts designed to transfer the credit risk in an underlying
financial instrument from one counterparty to another.
SHARE CAPITAL
The Bank classifies financial instruments that it issues as either financial
liabilities, equity instruments, or compound instruments.
Issued instruments that are mandatorily redeemable or convertible
into a variable number of the Bank’s common shares at the holder’s
option are classified as liabilities on the Consolidated Balance Sheet.
Dividend or interest payments on these instruments are recognized
in interest expense in the Consolidated Statement of Income.
Issued instruments are classified as equity when there is no contractual
obligation to transfer cash or other financial assets. Further, issued
instruments that are not mandatorily redeemable or that are not
convertible into a variable number of the Bank’s common shares at
the holder’s option, are classified as equity and presented in share
capital. Incremental costs directly attributable to the issue of equity
instruments are included in equity as a deduction from the proceeds,
net of tax. Dividend payments on these instruments are recognized
as a reduction in equity.
Compound instruments are comprised of both liability and equity
components in accordance with the substance of the contractual
arrangement. At inception, the fair value of the liability component
is initially measured with any residual amount assigned to the equity
component. Transaction costs are allocated proportionately to the
liability and equity components.
Common or preferred shares held by the Bank are classified as
treasury shares in equity, and the cost of these shares is recorded as
a reduction in equity. Upon the sale of treasury shares, the difference
between the sale proceeds and the cost of the shares is recorded in
or against contributed surplus.
DERIVATIVES
Derivatives are instruments that derive their value from changes
in underlying interest rates, foreign exchange rates, credit spreads,
commodity prices, equities, or other financial or non-financial
measures. Such instruments include interest rate, foreign exchange,
equity, commodity, and credit derivative contracts. The Bank uses
these instruments for trading and non-trading purposes. Derivatives
are carried at their fair value on the Consolidated Balance Sheet.
Derivatives Held for Trading Purposes
The Bank enters into trading derivative contracts to meet the needs of
its customers, to provide liquidity and market-making related activities,
and in certain cases, to manage risks related to its trading portfolio.
The realized and unrealized gains or losses on trading derivatives are
recognized immediately in trading income (losses).
Derivatives Held for Non-trading Purposes
Non-trading derivatives are primarily used to manage interest rate,
foreign exchange, and other market risks of the Bank’s traditional
banking activities. When derivatives are held for non-trading purposes
and when the transactions meet the hedge accounting requirements
of IAS 39, Financial Instruments: Recognition and Measurement
(IAS 39), they are classified by the Bank as non-trading derivatives and
receive hedge accounting treatment, as appropriate. Certain derivative
instruments that are held for economic hedging purposes, and do
not meet the hedge accounting requirements of IAS 39, are also
classified as non-trading derivatives with the change in fair value of
these derivatives recognized in non-interest income.
Hedging Relationships
Hedge Accounting
At the inception of a hedging relationship, the Bank documents the
relationship between the hedging instrument and the hedged item, its
risk management objective, and its strategy for undertaking the hedge.
The Bank also requires a documented assessment, both at hedge
inception and on an ongoing basis, of whether or not the derivatives
that are used in hedging relationships are highly effective in offsetting
the changes attributable to the hedged risks in the fair values or cash
flows of the hedged items. In order to be considered effective, the
hedging instrument and the hedged item must be highly and inversely
correlated such that the changes in the fair value of the hedging
instrument will substantially offset the effects of the hedged exposure
to the Bank throughout the term of the hedging relationship. If a
hedging relationship becomes ineffective, it no longer qualifies for
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TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS hedge accounting and any subsequent change in the fair value of the
hedging instrument is recognized in Non-interest income on the
Consolidated Statement of Income.
Changes in fair value relating to the derivative component excluded
from the assessment of hedge effectiveness, is recognized immediately
in Non-interest income on the Consolidated Statement of Income.
When derivatives are designated as hedges, the Bank classifies them
either as: (1) hedges of the changes in fair value of recognized assets
or liabilities or firm commitments (fair value hedges); (2) hedges of
the variability in highly probable future cash flows attributable to
a recognized asset or liability, or a forecasted transaction (cash flow
hedges); or (3) hedges of net investments in a foreign operation
(net investment hedges).
Fair Value Hedges
The Bank’s fair value hedges principally consist of interest rate swaps
that are used to protect against changes in the fair value of fixed-
rate long-term financial instruments due to movements in market
interest rates.
Changes in the fair value of derivatives that are designated and
qualify as fair value hedging instruments are recognized in Non-interest
income on the Consolidated Statement of Income, along with changes
in the fair value of the assets, liabilities, or group thereof that are
attributable to the hedged risk. Any change in fair value relating to the
ineffective portion of the hedging relationship is recognized immediately
in non-interest income.
The cumulative adjustment to the carrying amount of the hedged
item (the basis adjustment) is amortized to the Consolidated Statement
of Income in Net interest income based on a recalculated EIR over
the remaining expected life of the hedged item, with amortization
beginning no later than when the hedged item ceases to be adjusted
for changes in its fair value attributable to the hedged risk. Where
the hedged item has been derecognized, the basis adjustment is
immediately released to Net interest income or Non-interest income,
as applicable, on the Consolidated Statement of Income.
Cash Flow Hedges
The Bank is exposed to variability in future cash flows that are
denominated in foreign currencies, as well as the variability in future
cash flows on non-trading assets and liabilities that bear interest at
variable rates, or are expected to be reinvested in the future. The
amounts and timing of future cash flows are projected for each
hedged exposure on the basis of their contractual terms and other
relevant factors, including estimates of prepayments and defaults.
The effective portion of the change in the fair value of the derivative
that is designated and qualifies as a cash flow hedge is recognized in
other comprehensive income. The change in fair value of the derivative
relating to the ineffective portion is recognized immediately in non-
interest income.
Amounts accumulated in other comprehensive income are reclassified
to Net interest income or Non-interest income, as applicable, on the
Consolidated Statement of Income in the period in which the hedged
item affects income, and are reported in the same income statement
line as the hedged item.
When a hedging instrument expires or is sold, or when a hedge
no longer meets the criteria for hedge accounting, any cumulative gain
or loss existing in other comprehensive income at that time remains in
other comprehensive income until the forecasted transaction impacts
the Consolidated Statement of Income. When a forecasted transaction
is no longer expected to occur, the cumulative gain or loss that was
reported in other comprehensive income is immediately reclassified
to Net interest income or Non-interest income, as applicable, on the
Consolidated Statement of Income.
Net Investment Hedges
Hedges of net investments in foreign operations are accounted
for similar to cash flow hedges. The change in fair value on the
hedging instrument relating to the effective portion is recognized
in other comprehensive income. The change in fair value of the
hedging instrument relating to the ineffective portion is recognized
immediately on the Consolidated Statement of Income. Gains and
losses accumulated in other comprehensive income are reclassified
to the Consolidated Statement of Income upon the disposal or
partial disposal of the investment in the foreign operation. The Bank
designates derivatives and non-derivatives (such as foreign currency
deposit liabilities) as hedging instruments in net investment hedges.
Embedded Derivatives
Derivatives may be embedded in other financial instruments (the host
instrument). Embedded derivatives are treated as separate derivatives
when their economic characteristics and risks are not closely related to
those of the host instrument, a separate instrument with the same terms
as the embedded derivative would meet the definition of a derivative,
and the combined contract is not held for trading or designated at fair
value through profit or loss. These embedded derivatives, which are
bifurcated from the host contract, are recognized on the Consolidated
Balance Sheet as Derivatives and measured at fair value with subsequent
changes recognized in Non-interest income on the Consolidated
Statement of Income.
TRANSLATION OF FOREIGN CURRENCIES
The Bank’s Consolidated Financial Statements are presented in Canadian
dollars, which is the presentation currency of the Bank. Items included
in the financial statements of each of the Bank’s entities are measured
using their functional currency, which is the currency of the primary
economic environment in which they operate.
Monetary assets and liabilities denominated in a currency that differs
from an entity’s functional currency are translated into the functional
currency of the entity at exchange rates prevailing at the balance sheet
date. Non-monetary assets and liabilities are translated at historical
exchange rates. Income and expenses are translated into an entity’s
functional currency at average exchange rates prevailing throughout
the year. Translation gains and losses are included in non-interest
income except for available-for-sale equity securities where unrealized
translation gains and losses are recorded in other comprehensive
income until the asset is sold or becomes impaired.
Foreign-currency denominated subsidiaries are those with a
functional currency other than Canadian dollars. For the purpose of
translation into the Bank’s functional currency, all assets and liabilities
are translated at exchange rates in effect at the balance sheet date
and all income and expenses are translated at average exchange rates
for the period. Unrealized translation gains and losses relating to these
operations, net of gains or losses arising from net investment hedges
of these positions and applicable income taxes, are included in other
comprehensive income. Translation gains and losses accumulated in
other comprehensive income are recognized on the Consolidated
Statement of Income upon the disposal or partial disposal of the
investment in the foreign operation. The investment balance of foreign
entities accounted for by the equity method, including TD Ameritrade,
is translated into Canadian dollars using the closing rate at the end
of the period with exchange gains or losses recognized in other
comprehensive income.
OFFSETTING OF FINANCIAL INSTRUMENTS
Financial assets and liabilities are offset, with the net amount presented
on the Consolidated Balance Sheet, only if the Bank currently has a
legally enforceable right to set off the recognized amounts, and intends
either to settle on a net basis or to realize the asset and settle the
liability simultaneously. In all other situations, assets and liabilities are
presented on a gross basis.
DETERMINATION OF FAIR VALUE
The fair value of a financial instrument on initial recognition is normally
the transaction price, such as the fair value of the consideration
given or received. The best evidence of fair value is quoted prices in
active markets. When financial assets and liabilities have offsetting
market risks or credit risks, the Bank applies the portfolio exception,
as described in Note 5, and uses mid-market prices as a basis for
establishing fair values for the offsetting risk positions and applies the
most representative price within the bid-ask spread to the net open
position, as appropriate. When there is no active market for the
instrument, the fair value may be based on other observable current
market transactions involving the same or similar instrument, without
modification or repackaging, or is based on a valuation technique
which maximizes the use of observable market inputs.
129
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS The Bank recognizes various types of valuation adjustments to
account for factors that market participants would use in determining
fair value which are not included in valuation techniques due to system
limitations or measurement uncertainty. Valuation adjustments reflect
the Bank’s assessment of factors that market participants would use in
pricing the asset or liability. These include, but are not limited to, the
unobservability of inputs used in the pricing model, or assumptions
about risk, such as creditworthiness of each counterparty and risk
premiums that market participants would require given the inherent
risk in the pricing model.
If there is a difference between the initial transaction price and
the value based on a valuation technique, the difference is referred
to as inception profit or loss. Inception profit or loss is recognized
in income upon initial recognition of the instrument only if the fair
value is based on observable inputs. When an instrument is measured
using a valuation technique that utilizes significant non-observable
inputs, it is initially valued at the transaction price, which is considered
the best estimate of fair value. Subsequent to initial recognition, any
difference between the transaction price and the value determined by
the valuation technique at initial recognition is recognized in income
as non-observable inputs become observable.
If the fair value of a financial asset measured at fair value becomes
negative, it is recognized as a financial liability until either its fair value
becomes positive, at which time it is recognized as a financial asset,
or until it is extinguished.
DERECOGNITION OF FINANCIAL INSTRUMENTS
Financial Assets
The Bank derecognizes a financial asset when the contractual rights to
that asset have expired. Derecognition may also be appropriate where
the contractual right to receive future cash flows from the asset have
been transferred, or where the Bank retains the rights to future cash
flows from the asset, but assumes an obligation to pay those cash
flows to a third party subject to certain criteria.
When the Bank transfers a financial asset, it is necessary to assess
the extent to which the Bank has retained the risks and rewards of
ownership of the transferred asset. If substantially all the risks and
rewards of ownership of the financial asset have been retained, the
Bank continues to recognize the financial asset and also recognizes
a financial liability for the consideration received. Certain transaction
costs incurred are also capitalized and amortized using EIRM. If
substantially all the risks and rewards of ownership of the financial
asset have been transferred, the Bank will derecognize the financial
asset and recognize separately as assets or liabilities any rights and
obligations created or retained in the transfer. The Bank determines
whether substantially all the risk and rewards have been transferred
by quantitatively comparing the variability in cash flows before
and after the transfer. If the variability in cash flows does not change
significantly as a result of the transfer, the Bank has retained
substantially all of the risks and rewards of ownership.
If the Bank neither transfers nor retains substantially all the risks and
rewards of ownership of the financial asset, the Bank derecognizes the
financial asset where it has relinquished control of the financial asset.
The Bank is considered to have relinquished control of the financial
asset where the transferee has the practical ability to sell the transferred
financial asset. Where the Bank has retained control of the financial
asset, it continues to recognize the financial asset to the extent of its
continuing involvement in the financial asset. Under these circumstances,
the Bank usually retains the rights to future cash flows relating to the
asset through a residual interest and is exposed to some degree of risk
associated with the financial asset.
The derecognition criteria are also applied to the transfer of part
of an asset, rather than the asset as a whole, or to a group of similar
financial assets in their entirety, when applicable. If transferring a
part of an asset, it must be a specifically identified cash flow, a fully
proportionate share of the asset, or a fully proportionate share of
a specifically identified cash flow.
Securitization
Securitization is the process by which financial assets are transformed
into securities. The Bank securitizes financial assets by transferring
those financial assets to a third party and as part of the securitization,
130
certain financial assets may be retained and may consist of an interest-
only strip and, in some cases, a cash reserve account (collectively
referred to as “retained interests”). If the transfer qualifies for
derecognition, a gain or loss is recognized immediately in other income
after the effects of hedges on the assets sold, if applicable. The amount
of the gain or loss is calculated as the difference between the carrying
amount of the asset transferred and the sum of any cash proceeds
received, including any financial asset received or financial liability
assumed, and any cumulative gain or loss allocated to the transferred
asset that had been recognized in other comprehensive income.
To determine the value of the retained interest initially recorded, the
previous carrying value of the transferred asset is allocated between
the amount derecognized from the balance sheet and the retained
interest recorded, in proportion to their relative fair values on the date
of transfer. Subsequent to initial recognition, as market prices are
generally not available for retained interests, fair value is determined
by estimating the present value of future expected cash flows using
management’s best estimates of key assumptions that market
participants would use in determining fair value. Refer to Note 3 for
assumptions used by management in determining the fair value of
retained interests. Retained interest is classified as trading securities
with subsequent changes in fair value recorded in trading income.
Where the Bank retains the servicing rights, the benefits of servicing
are assessed against market expectations. When the benefits of servicing
are more than adequate, a servicing asset is recognized. Similarly, when
the benefits of servicing are less than adequate, a servicing liability
is recognized. Servicing assets and servicing liabilities are initially
recognized at fair value and subsequently carried at amortized cost.
Financial Liabilities
The Bank derecognizes a financial liability when the obligation under
the liability is discharged, cancelled, or expires. If an existing financial
liability is replaced by another financial liability from the same lender
on substantially different terms or where the terms of the existing
liability are substantially modified, the original liability is derecognized
and a new liability is recognized with the difference in the respective
carrying amounts recognized on the Consolidated Statement of Income.
Securities Purchased Under Reverse Repurchase Agreements,
Securities Sold Under Repurchase Agreements, and Securities
Borrowing and Lending
Securities purchased under reverse repurchase agreements involve
the purchase of securities by the Bank under agreements to resell
the securities at a future date. These agreements are treated as
collateralized lending transactions whereby the Bank takes possession
of the purchased securities, but does not acquire the risks and rewards
of ownership. The Bank monitors the market value of the purchased
securities relative to the amounts due under the reverse repurchase
agreements, and when necessary, requires transfer of additional
collateral. In the event of counterparty default, the agreements provide
the Bank with the right to liquidate the collateral held and offset the
proceeds against the amount owing from the counterparty.
Obligations related to securities sold under repurchase agreements
involve the sale of securities by the Bank to counterparties under
agreements to repurchase the securities at a future date. These
agreements do not result in the risks and rewards of ownership
being relinquished and are treated as collateralized borrowing
transactions. The Bank monitors the market value of the securities
sold relative to the amounts due under the repurchase agreements,
and when necessary, transfers additional collateral and may require
counterparties to return collateral pledged. Certain transactions that
do not meet derecognition criteria under IFRS are also included in
obligations related to securities sold under repurchase agreements.
Refer to Note 9 for further details.
Securities purchased under reverse repurchase agreements and
obligations related to securities sold under repurchase agreements are
initially recorded on the Consolidated Balance Sheet at the respective
prices at which the securities were originally acquired or sold,
plus accrued interest. Subsequently, the agreements are measured
at amortized cost on the Consolidated Balance Sheet, plus accrued
interest. Interest earned on reverse repurchase agreements and
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS interest incurred on repurchase agreements is determined using
the EIRM and is included in Interest income and Interest expense,
respectively, on the Consolidated Statement of Income.
In security lending transactions, the Bank lends securities to a
counter party and receives collateral in the form of cash or securities.
If cash collateral is received, the Bank records the cash along with
an obligation to return the cash as an obligation related to Securities
sold under repurchase agreements on the Consolidated Balance Sheet.
Where securities are received as collateral, the Bank does not record
the collateral on the Consolidated Balance Sheet.
In securities borrowing transactions, the Bank borrows securities
from a counterparty and pledges either cash or securities as collateral.
If cash is pledged as collateral, the Bank records the transaction as
securities purchased under reverse repurchase agreements on the
Consolidated Balance Sheet. Securities pledged as collateral remain
on the Bank’s Consolidated Balance Sheet.
Where securities are pledged or received as collateral, security
borrowing fees and security lending income are recorded in Non-interest
expenses and Non-interest income, respectively, on the Consolidated
Statement of Income over the term of the transaction. Where cash
is pledged or received as collateral, interest received or incurred
is determined using the EIRM and is included in Interest income and
Interest expense, respectively, on the Consolidated Statement of Income.
Physical commodities purchased or sold with an agreement to sell
or repurchase the physical commodities at a later date at a fixed price,
are also included in securities purchased under reverse repurchase
agreements and obligations related to securities sold under repurchase
agreements, respectively, if the derecognition criteria under IFRS are
not met. These instruments are measured at fair value.
GOODWILL
Goodwill represents the excess purchase price paid over the net
fair value of identifiable assets and liabilities acquired in a business
combination. Goodwill is carried at its initial cost less accumulated
impairment losses.
Goodwill is allocated to a cash-generating unit (CGU) or a group
of CGUs that is expected to benefit from the synergies of the business
combination, regardless of whether any assets acquired and liabilities
assumed are assigned to the CGU or group of CGUs. A CGU is the
smallest identifiable group of assets that generates cash flows largely
independent of the cash inflows from other assets or groups of
assets. Each CGU or group of CGUs, to which goodwill is allocated,
represents the lowest level within the Bank at which the goodwill
is monitored for internal management purposes and is not larger than
an operating segment.
Goodwill is assessed for impairment at least annually and when
an event or change in circumstances indicates that the carrying
amount may be impaired. When impairment indicators are present,
the recoverable amount of the CGU or group of CGUs, which is the
higher of its estimated fair value less costs to sell and its value-in-use,
is determined. If the carrying amount of the CGU or group of CGUs
is higher than its recoverable amount, an impairment loss exists.
The impairment loss is recognized on the Consolidated Statement
of Income and is applied to the goodwill balance. An impairment loss
cannot be reversed in future periods.
INTANGIBLE ASSETS
Intangible assets represent identifiable non-monetary assets and are
acquired either separately or through a business combination, or
internally generated software. The Bank’s intangible assets consist
primarily of core deposit intangibles, credit card related intangibles,
and software intangibles. Intangible assets are initially recognized
at fair value and are amortized over their estimated useful lives (3 to
20 years) proportionate to their expected economic benefits, except
for software which is amortized over its estimated useful life (3 to
7 years) on a straight-line basis.
The Bank assesses its intangible assets for impairment on a quarterly
basis. When impairment indicators are present, the recoverable amount
of the asset, which is the higher of its estimated fair value less costs
to sell and its value-in-use, is determined. If the carrying amount of the
asset is higher than its recoverable amount, the asset is written down
to its recoverable amount. An impairment loss is recognized on the
Consolidated Statement of Income in the period in which the impairment
is identified. Impairment losses recognized previously are assessed and
reversed if the circumstances leading to the impairment are no longer
present. Reversal of any impairment loss will not exceed the carrying
amount of the intangible asset that would have been determined had
no impairment loss been recognized for the asset in prior periods.
LAND, BUILDINGS, EQUIPMENT, AND OTHER
DEPRECIABLE ASSETS
Land is recognized at cost. Buildings, computer equipment, furniture
and fixtures, other equipment, and leasehold improvements are
recognized at cost less accumulated depreciation and provisions
for impairment, if any. Gains and losses on disposal are included in
Non-interest income on the Consolidated Statement of Income.
Assets leased under a finance lease are capitalized as assets and
depreciated on a straight-line basis over the lesser of the lease
term and the estimated useful life of the asset.
The Bank records the obligation associated with the retirement
of a long-lived asset at fair value in the period in which it is incurred
and can be reasonably estimated, and records a corresponding
increase to the carrying amount of the asset. The asset is depreciated
on a straight-line basis over its remaining useful life while the liability
is accreted to reflect the passage of time until the eventual settlement
of the obligation.
Depreciation is recognized on a straight-line basis over the useful
lives of the assets estimated by asset category, as follows:
Asset
Buildings
Computer equipment
Furniture and fixtures
Other equipment
Leasehold improvements
Useful Life
15 to 40 years
2 to 8 years
3 to 15 years
5 to 15 years
Lesser of the remaining lease term and
the remaining useful life of the asset
The Bank assesses its depreciable assets for impairment on a quarterly
basis. When impairment indicators are present, the recoverable amount
of the asset, which is the higher of its estimated fair value less costs
to sell and its value-in-use, is determined. If the carrying value of
the asset is higher than its recoverable amount, the asset is written
down to its recoverable amount. An impairment loss is recognized
on the Consolidated Statement of Income in the period in which the
impairment is identified. Impairment losses previously recognized are
assessed and reversed if the circumstances leading to their impairment
are no longer present. Reversal of any impairment loss will not exceed
the carrying amount of the depreciable asset that would have been
determined had no impairment loss been recognized for the asset
in prior periods.
NON-CURRENT ASSETS HELD FOR SALE
Individual non-current assets (and disposal groups) are classified as
held for sale if they are available for immediate sale in their present
condition subject only to terms that are usual and customary for sales
of such assets (or disposal groups), and their sale must be highly
probable to occur within one year. For a sale to be highly probable,
management must be committed to a sales plan and initiate an active
program to market the sale of the non-current assets (disposal groups).
Non-current assets (and disposal groups) classified as held for sale are
measured at the lower of their carrying amount and fair value less
costs to sell on the Consolidated Balance Sheet. Subsequent to its
initial classification as held for sale, a non-current asset (and disposal
group) is no longer depreciated or amortized, and any subsequent
write-downs in fair value less costs to sell or such increases not in
excess of cumulative write-downs, are recognized in Other income
on the Consolidated Statement of Income.
SHARE-BASED COMPENSATION
The Bank grants share options to certain employees as compensation
for services provided to the Bank. The Bank uses a binomial tree-based
valuation option pricing model to estimate fair value for all share
option compensation awards. The cost of the share options is based
on the fair value estimated at the grant date and is recognized as
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TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
compensation expense and contributed surplus over the service period
required for employees to become fully entitled to the awards. This
period is generally equal to the vesting period in addition to a period
prior to the grant date. For the Bank’s share options, this period is
generally equal to five years. When options are exercised, the amount
initially recognized in the contributed surplus balance is reduced, with
a corresponding increase in common shares.
The Bank has various other share-based compensation plans where
certain employees are awarded share units equivalent to the Bank’s
common shares as compensation for services provided to the Bank.
The obligation related to share units is included in other liabilities.
Compensation expense is recognized based on the fair value of
the share units at the grant date adjusted for changes in fair value
between the grant date and the vesting date, net of the effects
of hedges, over the service period required for employees to become
fully entitled to the awards. This period is generally equal to the
vesting period, in addition to a period prior to the grant date. For
the Bank’s share units, this period is generally equal to four years.
EMPLOYEE BENEFITS
Defined Benefit Plans
Actuarial valuations are prepared at least every three years to determine
the present value of the projected benefit obligation related to the
Bank’s principal pension and non-pension post-retirement benefit plans.
In periods between actuarial valuations, an extrapolation is performed
based on the most recent valuation completed. All actuarial gains and
losses are recognized immediately in other comprehensive income, with
cumulative gains and losses reclassified to retained earnings. Pension
and non-pension post-retirement benefit expenses are determined based
upon separate actuarial valuations using the projected benefit method
pro-rated on service and management’s best estimates of discount rate,
compensation increases, health care cost trend rate, and mortality rates,
which are reviewed annually with the Bank’s actuaries. The discount
rate used to value liabilities reflects long-term corporate AA bond yields
as of the measurement date. The expense recognized includes the cost
of benefits for employee service provided in the current year, net interest
expense or income on the net defined benefit liability or asset, past
service costs related to plan amendments, curtailments or settlements,
and administrative costs. Plan amendment costs are recognized in
the period of a plan amendment, irrespective of its vested status.
Curtailments and settlements are recognized by the Bank when the
curtailment or settlement occurs. A curtailment occurs when there
is a significant reduction in the number of employees covered by the
plan. A settlement occurs when the Bank enters into a transaction
that eliminates all further legal or constructive obligation for part or
all of the benefits provided under a defined benefit plan.
The fair value of plan assets and the present value of the projected
benefit obligation are measured as at October 31. The net defined
benefit asset or liability represents the difference between the
cumulative actuarial gains and losses, expenses, and recognized
contributions and is reported in other assets or other liabilities.
Net defined benefit assets recognized by the Bank are subject
to a ceiling which limits the asset recognized on the Consolidated
Balance Sheet to the amount that is recoverable through refunds of
contributions or future contribution holidays. In addition, where a
regulatory funding deficit exists related to a defined benefit plan, the
Bank is required to record a liability equal to the present value of all
future cash payments required to eliminate that deficit.
Defined Contribution Plans
For defined contribution plans, annual pension expense is equal to the
Bank’s contributions to those plans.
INSURANCE
Premiums for short-duration insurance contracts are deferred as
unearned premiums and reported in non-interest income on a straight
line basis over the contractual term of the underlying policies, usually
12 months. Such premiums are recognized net of amounts ceded for
reinsurance and apply primarily to property and casualty contracts.
Unearned premiums are reported in insurance-related liabilities, gross
132
of premiums ceded to reinsurers which are recognized in other assets.
Premiums from life and health insurance policies are recognized as
income when earned.
For property and casualty insurance, insurance claims and policy
benefit liabilities represent current claims and estimates for future
claims related to insurable events occurring at or before the balance
sheet date. These are determined by the appointed actuary in
accordance with accepted actuarial practices and are reported as other
liabilities. Expected claims and policy benefit liabilities are determined
on a case-by-case basis and consider such variables as past loss
experience, current claims trends and changes in the prevailing social,
economic and legal environment. These liabilities are continually
reviewed and, as experience develops and new information becomes
known, the liabilities are adjusted as necessary. In addition to reported
claims information, the liabilities recognized by the Bank include a
provision to account for the future development of insurance claims,
including insurance claims incurred but not reported by policyholders
(IBNR). IBNR liabilities are evaluated based on historical development
trends and actuarial methodologies for groups of claims with similar
attributes. For life and health insurance, actuarial liabilities represent
the present values of future policy cash flows as determined using
standard actuarial valuation practices. Actuarial liabilities are reported
in insurance-related liabilities with changes reported in insurance
claims and related expenses.
PROVISIONS
Provisions are recognized when the Bank has a present obligation
(legal or constructive) as a result of a past event, the amount of
which can be reliably estimated, and it is probable that an outflow
of resources will be required to settle the obligation.
Provisions are measured based on management’s best estimate
of the consideration required to settle the obligation at the end of
the reporting period, taking into account the risks and uncertainties
surrounding the obligation. If the effect of the time value of money
is material, provisions are measured at the present value of the
expenditure expected to be required to settle the obligation, using
a discount rate that reflects the current market assessment of the time
value of money and the risks specific to the obligation. The increase in
provisions due to the passage of time is recognized as interest expense.
INCOME TAXES
Income tax is comprised of current and deferred tax. Income tax
is recognized on the Consolidated Statement of Income, except to
the extent that it relates to items recognized in other comprehensive
income or directly in equity, in which case the related taxes are
also recognized in other comprehensive income or directly in
equity, respectively.
Deferred tax is recognized on temporary differences between the
carrying amounts of assets and liabilities on the Consolidated Balance
Sheet and the amounts attributed to such assets and liabilities for tax
purposes. Deferred tax assets and liabilities are determined based on
the tax rates that are expected to apply when the assets or liabilities
are reported for tax purposes. Deferred tax assets are recognized
only when it is probable that sufficient taxable profit will be available
in future periods against which deductible temporary differences may
be utilized. Deferred tax liabilities are not recognized on temporary
differences arising on investments in subsidiaries, branches and
associates, and interests in joint ventures if the Bank controls the
timing of the reversal of the temporary difference and it is probable
that the temporary difference will not reverse in the foreseeable future.
The Bank records a provision for uncertain tax positions if it is
probable that the Bank will have to make a payment to tax authorities
upon their examination of a tax position. This provision is measured at
the Bank’s best estimate of the amount expected to be paid. Provisions
are reversed to income in the period in which management determines
they are no longer required or as determined by statute.
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS N O T E 3
SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES, AND ASSUMPTIONS
The estimates used in the Bank’s accounting policies are essential
to understanding its results of operations and financial condition.
Some of the Bank’s policies require subjective, complex judgments
and estimates as they relate to matters that are inherently uncertain.
Changes in these judgments or estimates and changes to accounting
standards and policies could have a materially adverse impact on the
Bank’s Consolidated Financial Statements. The Bank has established
procedures to ensure that accounting policies are applied consistently
and that the processes for changing methodologies, determining
estimates and adopting new accounting standards are well controlled
and occur in an appropriate and systematic manner.
IMPAIRMENT OF FINANCIAL ASSETS
Available-for-Sale Securities
Impairment losses are recognized on available-for-sale securities if
there is objective evidence of impairment as a result of one or more
events that have occurred after initial recognition and the loss event(s)
results in a decrease in the estimated cash flows of the instrument.
The Bank individually reviews these securities at least quarterly for the
presence of these conditions. For available-for-sale equity securities,
a significant or prolonged decline in fair value below cost is considered
objective evidence of impairment. For available-for-sale debt securities,
a deterioration of credit quality is considered objective evidence of
impairment. Other factors considered in the impairment assessment
include financial position and key financial indicators of the issuer
of the instrument, significant past and continued losses of the issuer,
as well as breaches of contract, including default or delinquency in
interest payments and loan covenant violations.
Held-to-Maturity Securities
Impairment losses are recognized on held-to-maturity securities if
there is objective evidence of impairment as a result of one or more
events that have occurred after initial recognition and the loss event(s)
results in a decrease in the estimated cash flows of the instrument.
The Bank reviews these securities at least quarterly for impairment at
the counterparty-specific level. If there is no objective evidence of
impairment at the counterparty-specific level then the security is
grouped with other held-to-maturity securities with similar credit risk
characteristics and collectively assessed for impairment, which considers
losses incurred but not identified. A deterioration of credit quality is
considered objective evidence of impairment. Other factors considered
in the impairment assessment include the financial position and key
financial indicators of the issuer, significant past and continued losses
of the issuer, as well as breaches of contract, including default or
delinquency in interest payments and loan covenant violations.
Loans
A loan, including a debt security classified as a loan, is considered
impaired when there is objective evidence that there has been a
deterioration of credit quality subsequent to the initial recognition
of the loan to the extent the Bank no longer has reasonable assurance
as to the timely collection of the full amount of principal and interest.
The Bank assesses loans for objective evidence of impairment
individually for loans that are individually significant, and collectively
for loans that are not individually significant. The allowance for credit
losses represents management’s best estimate of impairment incurred
in the lending portfolios, including any off-balance sheet exposures,
at the balance sheet date. Management exercises judgment as to the
timing of designating a loan as impaired, the amount of the allowance
required, and the amount that will be recovered once the borrower
defaults. Changes in the amount that management expects to recover
would have a direct impact on the provision for credit losses and may
result in a change in the allowance for credit losses.
If there is no objective evidence of impairment for an individual
loan, whether significant or not, the loan is included in a group of
assets with similar credit risk characteristics and collectively assessed
for impairment for losses incurred but not identified. In calculating
the probable range of allowance for incurred but not identified credit
losses, the Bank employs internally developed models that utilize
parameters for probability of default, loss given default and exposure
at default. Management’s judgment is used to determine the point
within the range that is the best estimate of losses, based on an
assessment of business and economic conditions, historical loss
experience, loan portfolio composition, and other relevant indicators
that are not fully incorporated into the model calculation. Changes
in these assumptions would have a direct impact on the provision
for credit losses and may result in a change in the incurred but not
identified allowance for credit losses.
FAIR VALUE MEASUREMENTS
The fair value of financial instruments traded in active markets at the
balance sheet date is based on their quoted market prices. For all other
financial instruments not traded in an active market, fair value may be
based on other observable current market transactions involving the
same or similar instrument, without modification or repackaging, or is
based on a valuation technique which maximizes the use of observable
market inputs. Observable market inputs may include interest rate
yield curves, foreign exchange rates, and option volatilities. Valuation
techniques include comparisons with similar instruments where
observable market prices exist, discounted cash flow analysis, option
pricing models, and other valuation techniques commonly used by
market participants.
For certain complex or illiquid financial instruments, fair value
is determined using valuation techniques in which current market
transactions or observable market inputs are not available. Determining
which valuation technique to apply requires judgment. The valuation
techniques themselves also involve some level of estimation and
judgment. The judgments include liquidity considerations and model
inputs such as volatilities, correlations, spreads, discount rates,
pre-payment rates, and prices of underlying instruments. Any
imprecision in these estimates can affect the resulting fair value.
The inherent nature of private equity investing is that the Bank’s
valuation may change over time due to developments in the business
underlying the investment. Such fluctuations may be significant
depending on the nature of the factors going into the valuation
methodology and the extent of change in those factors.
Judgment is also used in recording fair value adjustments to model
valuations to account for measurement uncertainty when valuing
complex and less actively traded financial instruments. If the market
for a complex financial instrument develops, the pricing for this
instrument may become more transparent, resulting in refinement
of valuation models.
An analysis of fair values of financial instruments and further details
as to how they are measured are provided in Note 5.
DERECOGNITION
Certain assets transferred may qualify for derecognition from the
Bank’s Consolidated Balance Sheet. To qualify for derecognition
certain key determinations must be made. A decision must be made
as to whether the rights to receive cash flows from the financial assets
have been retained or transferred and the extent to which the risks
and rewards of ownership of the financial asset have been retained
or transferred. If the Bank neither transfers nor retains substantially all
of the risks and rewards of ownership of the financial asset, a decision
must be made as to whether the Bank has retained control of the
financial asset. Upon derecognition, the Bank will record a gain or loss
on sale of those assets which is calculated as the difference between
the carrying amount of the asset transferred and the sum of any cash
proceeds received, including any financial asset received or financial
liability assumed, and any cumulative gain or loss allocated to the
transferred asset that had been recognized in other comprehensive
income. In determining the fair value of any financial asset received,
the Bank estimates future cash flows by relying on estimates of the
amount of interest that will be collected on the securitized assets, the
yield to be paid to investors, the portion of the securitized assets that
will be prepaid before their scheduled maturity, expected credit losses,
the cost of servicing the assets and the rate at which to discount these
expected future cash flows. Actual cash flows may differ significantly
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TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS from those estimated by the Bank. Retained interests are classified as
trading securities and are initially recognized at relative fair value on
the Bank’s Consolidated Balance Sheet. Subsequently, the fair value of
retained interests recognized by the Bank is determined by estimating
the present value of future expected cash flows using management’s
best estimates of key assumptions including credit losses, prepayment
rates, forward yield curves and discount rates, that are commensurate
with the risks involved. Differences between the actual cash flows
and the Bank’s estimate of future cash flows are recognized in trading
income. These assumptions are subject to periodic review and may
change due to significant changes in the economic environment.
GOODWILL AND OTHER INTANGIBLES
The fair value of the Bank’s cash-generating units (CGU) is determined
from internally developed valuation models that consider various
factors and assumptions such as forecasted earnings, growth rates,
price-earnings multiples, discount rates, and terminal multiples.
Management is required to use judgment in estimating the fair value
of CGUs, and the use of different assumptions and estimates in the
fair value calculations could influence the determination of the existence
of impairment and the valuation of goodwill. Management believes that
the assumptions and estimates used are reasonable and supportable.
Where possible, fair values generated internally are compared to
relevant market information. The carrying amounts of the Bank’s CGUs
are determined by management using risk based capital models to
adjust net assets and liabilities by CGU. These models consider various
factors including market risk, credit risk, and operational risk, including
investment capital (comprised of goodwill and other intangibles). Any
unallocated capital not directly attributable to the CGUs is held within
the Corporate segment. The Bank’s capital oversight committees
provide oversight to the Bank’s capital allocation methodologies.
EMPLOYEE BENEFITS
The projected benefit obligation and expense related to the Bank’s
pension and non-pension post-retirement benefit plans are determined
using multiple assumptions that may significantly influence the value
of these amounts. Actuarial assumptions including discount rates,
compensation increases, health care cost trend rates, and mortality
rates are management’s best estimates and are reviewed annually with
the Bank’s actuaries. The Bank develops each assumption using relevant
historical experience of the Bank in conjunction with market-related
data and considers if the market-related data indicates there is any
prolonged or significant impact on the assumptions. The discount rate
used to value liabilities reflects long-term corporate AA bond yields
as of the measurement date. The other assumptions are also long-term
estimates. All assumptions are subject to a degree of uncertainty.
Differences between actual experiences and the assumptions, as
well as changes in the assumptions resulting from changes in future
expectations, result in actuarial gains and losses which are recognized
in other comprehensive income during the year and also impact
expenses in future periods.
INCOME TAXES
The Bank is subject to taxation in numerous jurisdictions. There are
many transactions and calculations in the ordinary course of business for
which the ultimate tax determination is uncertain. The Bank maintains
provisions for uncertain tax positions that it believes appropriately reflect
the risk of tax positions under discussion, audit, dispute, or appeal with
tax authorities, or which are otherwise considered to involve uncertainty.
These provisions are made using the Bank’s best estimate of the amount
expected to be paid based on an assessment of all relevant factors, which
are reviewed at the end of each reporting period. However, it is possible
that at some future date, an additional liability could result from audits
by the relevant taxing authorities.
Deferred tax assets are recognized only when it is probable that
sufficient taxable profit will be available in future periods against
which deductible temporary differences may be utilized. The amount
of the deferred tax asset recognized and considered realizable could,
however, be reduced if projected income is not achieved due to
various factors, such as unfavourable business conditions. If projected
income is not expected to be achieved, the Bank would decrease its
134
deferred tax assets to the amount that it believes can be realized.
The magnitude of the decrease is significantly influenced by the Bank’s
forecast of future profit generation, which determines the extent to
which it will be able to utilize the deferred tax assets.
PROVISIONS
Provisions arise when there is some uncertainty in the timing or
amount of a loss in the future. Provisions are based on the Bank’s best
estimate of all expenditures required to settle its present obligations,
considering all relevant risks and uncertainties, as well as, when
material, the effect of the time value of money.
Many of the Bank’s provisions relate to various legal actions that
the Bank is involved in during the ordinary course of business. Legal
provisions require the involvement of both the Bank’s management
and legal counsel when assessing the probability of a loss and
estimating any monetary impact. Throughout the life of a provision,
the Bank’s management or legal counsel may learn of additional
information that may impact its assessments about the probability
of loss or about the estimates of amounts involved. Changes in
these assessments may ead to changes in the amount recorded
for provisions. In addition, the actual costs of resolving these claims
may be substantially higher or lower than the amounts recognized.
The Bank reviews its legal provisions on a case-by-case basis after
considering, among other factors, the progress of each case, the
Bank’s experience, the experience of others in similar cases, and the
opinions and views of legal counsel.
Certain of the Bank’s provisions relate to restructuring initiatives
initiated by the Bank. Restructuring provisions require management’s
best estimate, including forecasts of economic conditions. Throughout
the life of a provision, the Bank may become aware of additional
information that may impact the assessment of amounts to be incurred.
Changes in these assessments may lead to changes in the amount
recorded for provisions.
INSURANCE
The assumptions used in establishing the Bank’s insurance claims and
policy benefit liabilities are based on best estimates of possible outcomes.
For property and casualty insurance, the ultimate cost of claims
liabilities is estimated using a range of standard actuarial claims
projection techniques in accordance with Canadian accepted actuarial
practices. Additional qualitative judgment is used to assess the extent
to which past trends may or may not apply in the future, in order to
arrive at the estimated ultimate claims cost that present the most likely
outcome taking account of all the uncertainties involved.
For life and health insurance, actuarial liabilities consider all future
policy cash flows, including premiums, claims, and expenses required to
administer the policies. Critical assumptions used in the measurement
of life and health insurance contract liabilities are determined by the
Appointed Actuary.
Further information on insurance risk assumptions is provided in
Note 23.
CONSOLIDATION OF STRUCTURED ENTITIES
Management judgment is required when assessing whether the Bank
should consolidate an entity, particularly complex entities. For instance,
it may not be feasible to determine if the Bank controls an entity solely
through an assessment of voting rights for certain structured entities.
In this case, judgment is required to establish whether the Bank has
decision-making power over the key relevant activities of the entity
and whether the Bank has the ability to use that power to absorb
significant variable returns from the entity. If it is determined that the
Bank has both decision-making power and significant variable returns
from the entity, judgment is also used to determine whether any such
power is exercised by the Bank as principal, on its own behalf, or as
agent, on behalf of another counterparty.
Assessing whether the Bank has decision-making power includes
understanding the purpose and design of the entity in order to
determine its key economic activities. In this context, an entity’s key
economic activities are those which predominantly impact the
economic performance of the entity. When the Bank has the current
ability to direct the entity’s key economic activities, it is considered
to have decision-making power over the entity.
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS The Bank also evaluates its exposure to the variable returns of
a structured entity in order to determine if it absorbs a significant
proportion of the variable returns the entity is designed to create.
As part of this evaluation, the Bank considers the purpose and design
of the entity in order to determine whether it absorbs variable returns
from the structured entity through its contractual holdings, which
may take the form of securities issued by the entity, derivatives with
the entity, or other arrangements such as guarantees, liquidity facilities,
or lending commitments.
factors considered include the scope of its decision-making powers;
the rights of other parties involved with the entity, including any rights
to remove the Bank as decision-maker or rights to participate in key
decisions; whether the rights of other parties are exercisable in
practice; and the variable returns absorbed by the Bank and by other
parties involved with the entity. When assessing consolidation, a
presumption exists that the Bank exercises decision-making power as
principal if it is also exposed to significant variable returns, unless an
analysis of the factors above indicates otherwise.
If the Bank has decision-making power over and absorbs significant
The decisions above are made with reference to the specific facts
variable returns from the entity it then determines if it is acting as
principal or agent when exercising its decision-making power. Key
and circumstances relevant for the structured entity and related
transaction(s) under consideration.
N O T E 4
CURRENT AND FUTURE CHANGES IN ACCOUNTING POLICIES
FUTURE CHANGES IN ACCOUNTING POLICIES
The following standards have been issued, but are not yet effective on
the date of issuance of the Bank’s Consolidated Financial Statements.
The Bank is currently assessing the impact of the application of these
standards on the Consolidated Financial Statements and will adopt
these standards when they become effective.
Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9, Financial
Instruments (IFRS 9), which replaces the guidance in IAS 39. This final
version includes requirements on: (1) Classification and measurement
of financial assets and liabilities; (2) Impairment of financial assets; and
(3) General hedge accounting. Accounting for macro hedging has
been decoupled from IFRS 9. The Bank has an accounting policy choice
to apply the hedge accounting requirements of IFRS 9 or IAS 39. The
Bank has made the decision to continue applying the IAS 39 hedge
accounting requirements at this time and will comply with the revised
hedge accounting disclosures as required by the related amendments
to IFRS 7.
IFRS 9 is effective for annual periods beginning on or after
January 1, 2018, and is to be applied retrospectively with certain
exceptions. IFRS 9 does not require restatement of comparative period
financial statements except in limited circumstances related to aspects
of hedge accounting. Entities are permitted to restate comparatives as
long as hindsight is not applied. The Bank has made the decision not
to restate comparative period financial information and will recognize
any measurement difference between the previous carrying amount
and the new carrying amount on November 1, 2017, through an
adjustment to opening retained earnings. In January 2015, OSFI
issued the final version of the Advisory titled “Early adoption of IFRS 9
Financial Instruments for Domestic Systemically Important Banks”.
All domestic systemically important banks (D-SIBs), including the Bank,
are required to early adopt IFRS 9 for the annual period beginning on
November 1, 2017. Consequential amendments were made to IFRS 7,
Financial Instruments: Disclosures (IFRS 7) introducing expanded
qualitative and quantitative disclosures related to IFRS 9, which
are required to be adopted for the annual period beginning on
November 1, 2017, when the Bank first applies IFRS 9.
In December 2015, the Basel Committee on Banking Supervision
(BCBS) issued “Guidance on credit risk and accounting for expected
credit losses” which sets out supervisory guidance on sound credit
risk practices associated with the implementation and ongoing
application of expected credit loss accounting frameworks. In
June 2016, OSFI issued the guideline, “IFRS 9 Financial Instruments
and Disclosures”, which provides guidance to Federally Regulated
Entities on the application of IFRS 9 that is consistent with the
BCBS guidance. This guideline, which is effective for the Bank upon
adoption of IFRS 9, replaces certain guidelines that were in effect
under IAS 39. The adoption of IFRS 9 is a significant initiative for the
Bank supported by a formal governance framework and a robust
implementation plan.
Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15, Revenue from Contracts with
Customers (IFRS 15), which establishes the principles for recognizing
revenue and cash flows arising from contracts with customers and
prescribes the application of a five-step recognition and measurement
model. The standard excludes from its scope revenue arising from
items such as financial instruments, insurance contracts, and leases.
The standard also requires additional qualitative and quantitative
disclosures. In July 2015, the IASB confirmed a one-year deferral of the
effective date to annual periods beginning on or after January 1, 2018,
which will be November 1, 2018 for the Bank, and is to be applied
retrospectively. In April 2016, the IASB issued amendments to
IFRS 15, which provided additional guidance on the identification
of performance obligations, on assessing principal versus agent
considerations and on licensing revenue. The amendments also
provided additional transitional relief upon initial adoption of IFRS 15
and have the same effective date as the IFRS 15 standard. The Bank
is currently assessing the impact of adopting this standard.
Leases
In January 2016, the IASB issued IFRS 16, Leases (IFRS 16), which will
replace IAS 17, introducing a single lessee accounting model for all
leases by eliminating the distinction between operating and financing
leases. IFRS 16 requires lessees to recognize right-of-use assets and
lease liabilities for most leases. Lessees will also recognize depreciation
expense on the right-of-use asset and interest expense on the lease
liability in the statement of income. Short-term leases, which are
defined as those that have a lease term of 12 months or less; and leases
of low-value assets are exempt. Lessor accounting remains substantially
unchanged. IFRS 16 is effective for annual periods beginning on or after
January 1, 2019, which will be November 1, 2019 for the Bank, and is
to be applied retrospectively. Early adoption is permitted only if aligned
with or after the adoption of IFRS 15. The Bank is currently assessing
the impact of adopting IFRS 16.
Share-based Payment
In June 2016, the IASB published amendments to IFRS 2, Share-based
Payment, which provide additional guidance on the classification and
measurement of share-based payment transactions. The amendments
clarify the accounting for cash-settled share-based payment transactions
that include a performance condition, the classification of share-based
payment transactions with net settlement features for withholding
tax obligations, and the accounting for modifications of share-based
payment transactions from cash-settled to equity-settled. The
amendments to IFRS 2 are effective for annual periods beginning
on or after January 1, 2018, which will be November 1, 2018 for
the Bank, and is to be applied prospectively; however, retrospective
application is permitted in certain instances. Early adoption is
permitted. The amendments to IFRS 2 are not expected to have
a material impact on the Bank.
135
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS N O T E 5
FAIR VALUE MEASUREMENTS
Certain assets and liabilities, primarily financial instruments, are carried
on the balance sheet at their fair value on a recurring basis. These
financial instruments include trading loans and securities, assets and
liabilities designated at fair value through profit or loss, instruments
classified as available-for-sale, derivatives, certain securities purchased
under reverse repurchase agreements, certain deposits classified as
trading, securitization liabilities at fair value, obligations related to
securities sold short, and certain obligations related to securities sold
under repurchase agreements. All other financial assets and financial
liabilities are carried at amortized cost.
VALUATION GOVERNANCE
Valuation processes are guided by policies and procedures that are
approved by senior management and subject matter experts. Senior
Executive oversight over the valuation process is provided through
various valuation-related committees. Further, the Bank has a number
of additional controls in place, including an independent price
verification process to ensure the accuracy of fair value measurements
reported in the financial statements. The sources used for independent
pricing comply with the standards set out in the approved valuation-
related policies, which includes consideration of the reliability,
relevancy, and timeliness of data.
METHODS AND ASSUMPTIONS
The Bank calculates fair values for measurement and disclosure purposes
based on the following methods of valuation and assumptions:
Government and Government-Related Securities
The fair value of Canadian government debt securities is based on
quoted prices in active markets, where available. Where quoted prices
are not available, valuation techniques such as discounted cash flow
models may be used, which maximize the use of observable inputs
such as government bond yield curves.
The fair value of U.S. federal and state government, as well as
agency debt securities, is determined by reference to recent transaction
prices, broker quotes, or third-party vendor prices. Brokers or third-
party vendors may use a pool-specific valuation model to value these
securities. Observable market inputs to the model include to-be-
announced (TBA) market prices, the applicable indices, and metrics
such as the coupon, maturity, and weighted-average maturity of the
pool. Market inputs used in the valuation model include, but are not
limited to, indexed yield curves and trading spreads.
The fair value of residential mortgage-backed securities is primarily
based on broker quotes, third-party vendor prices, or other valuation
techniques, such as the use of option-adjusted spread (OAS) models
which include inputs such as prepayment rate assumptions related to
the underlying collateral. Observable inputs include, but are not limited
to, indexed yield curves and bid-ask spreads. Other inputs may include
volatility assumptions derived using Monte Carlo simulations and take
into account factors such as counterparty credit quality and liquidity.
Other Debt Securities
The fair value of corporate and other debt securities, including debt
securities reclassified from trading to available-for-sale, is primarily
based on broker quotes, third-party vendor prices, or other valuation
techniques, such as discounted cash flow techniques. Market inputs
used in the valuation techniques or underlying third-party vendor
prices or broker quotes include benchmark and government bond
yield curves, credit spreads, and trade execution data.
Asset-backed securities are primarily fair valued using third-party
vendor prices. The third-party vendor employs a valuation model which
maximizes the use of observable inputs such as benchmark yield curves
and bid-ask spreads. The model also takes into account relevant data
about the underlying collateral, such as weighted-average terms to
maturity and prepayment rate assumptions.
136
Equity Securities
The fair value of equity securities is based on quoted prices in active
markets, where available. Where quoted prices in active markets are not
readily available, such as for private equity securities, or where there is a
wide bid-offer spread, fair value is determined based on quoted market
prices for similar securities or through valuation techniques, including
discounted cash flow analysis, and multiples of earnings before taxes,
depreciation and amortization, and other relevant valuation techniques.
If there are trading restrictions on the equity security held, a valuation
adjustment is recognized against available prices to reflect the nature
of the restriction. However, restrictions that are not part of the security
held and represent a separate contractual arrangement that has been
entered into by the Bank and a third-party do not impact the fair value
of the original instrument.
Retained Interests
Retained interests are classified as trading securities and are initially
recognized at relative fair value. Subsequently, the fair value of
retained interests recognized by the Bank is determined by estimating
the present value of future expected cash flows using management’s
best estimates of key assumptions including credit losses, prepayment
rates, forward yield curves, and discount rates, that are commensurate
with the risks involved. Differences between the actual cash flows and
the Bank’s estimate of future cash flows are recognized in income.
These assumptions are subject to periodic review and may change due
to significant changes in the economic environment.
Loans
The estimated fair value of loans carried at amortized cost, other than
debt securities classified as loans, reflects changes in market price
that have occurred since the loans were originated or purchased.
For fixed-rate performing loans, estimated fair value is determined
by discounting the expected future cash flows related to these loans
at current market interest rates for loans with similar credit risks. For
floating-rate performing loans, changes in interest rates have minimal
impact on fair value since loans reprice to market frequently. On that
basis, fair value is assumed to approximate carrying value. The fair
value of loans is not adjusted for the value of any credit protection
the Bank has purchased to mitigate credit risk.
At initial recognition, debt securities classified as loans do not
include securities with quoted prices in active markets. When quoted
market prices are not readily available, fair value is based on quoted
market prices of similar securities, other third-party evidence or by
using a valuation technique that maximizes the use of observable
market inputs. If quoted prices in active markets subsequently become
available, these are used to determine fair value for debt securities
classified as loans.
The fair value of loans carried at fair value through profit or loss,
which includes trading loans and loans designated at fair value through
profit or loss, is determined using observable market prices, where
available. Where the Bank is a market maker for loans traded in the
secondary market, fair value is determined using executed prices, or
prices for comparable trades. For those loans where the Bank is not a
market maker, the Bank obtains broker quotes from other reputable
dealers, and corroborates this information using valuation techniques
or by obtaining consensus or composite prices from pricing services.
Commodities
The fair value of physical commodities is based on quoted prices in
active markets, where available. The Bank also transacts in commodity
derivative contracts which can be traded on an exchange or in
OTC markets.
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS Derivative Financial Instruments
The fair value of exchange-traded derivative financial instruments
is based on quoted market prices. The fair value of OTC derivative
financial instruments is estimated using well established valuation
techniques, such as discounted cash flow techniques, the Black-Scholes
model, and Monte Carlo simulation. The valuation models incorporate
inputs that are observable in the market or can be derived from
observable market data.
Prices derived by using models are recognized net of valuation
adjustments. The inputs used in the valuation models depend on the
type of derivative and the nature of the underlying instrument and are
specific to the instrument being valued. Inputs can include, but are not
limited to, interest rate yield curves, foreign exchange rates, dividend
yield projections, commodity spot and forward prices, recovery rates,
volatilities, spot prices, and correlation.
A credit risk valuation adjustment (CRVA) is recognized against the
model value of OTC derivatives to account for the uncertainty that
either counterparty in a derivative transaction may not be able to fulfill
its obligations under the transaction. In determining CRVA, the Bank
takes into account master netting agreements and collateral, and
considers the creditworthiness of the counterparty and the Bank itself,
in assessing potential future amounts owed to, or by the Bank.
In the case of defaulted counterparties, a specific provision is
established to recognize the estimated realizable value, net of
collateral held, based on market pricing in effect at the time the
default is recognized. In these instances, the estimated realizable
value is measured by discounting the expected future cash flows at
an appropriate EIR immediately prior to impairment, after adjusting
for the value of collateral. The fair value of non-trading derivatives
is determined on the same basis as for trading derivatives.
The fair value of a derivative is partly a function of collateralization.
The Bank uses the relevant overnight index swap curve to discount the
cash flows for collateralized derivatives as most collateral is posted in
cash and can be funded at the overnight rate.
A funding valuation adjustment (FVA) is recognized against the
model value of OTC derivatives in response to growing evidence that
market implied funding costs and benefits are considered in the pricing
and fair valuation of uncollateralized derivatives. Some of the key
drivers of FVA include the market implied cost of funding spread over
the London Interbank Offered Rate (LIBOR) and the expected average
exposure by counterparty. FVA is further adjusted to account for the
extent to which the funding cost is incorporated into observed traded
levels and to calibrate to the expected term of the trade.
The FVA applies to both assets and liabilities, but largely relates to
uncollateralized derivative assets given the impact of the Bank’s own
credit risk, which is a significant component of the funding costs, is
already incorporated in the valuation of uncollateralized derivative
liabilities through the application of CRVA. The Bank will continue to
monitor industry practice, and may refine the methodology and the
products to which FVA applies to as market practices evolve.
Deposits
The estimated fair value of term deposits is determined by discounting
the contractual cash flows using interest rates currently offered for
deposits with similar terms.
For deposits with no defined maturities, the Bank considers fair
value to equal carrying value, which is equivalent to the amount
payable on the balance sheet date.
For trading deposits, fair value is determined using discounted cash
flow valuation techniques which maximize the use of observable
market inputs such as benchmark yield curves and foreign exchange
rates. The Bank considers the impact of its own creditworthiness in the
valuation of these deposits by reference to observable market inputs.
Securitization Liabilities
The fair value of securitization liabilities is based on quoted market
prices or quoted market prices for similar financial instruments, where
available. Where quoted prices are not available, fair value is determined
using valuation techniques, which maximize the use of observable
inputs, such as Canada Mortgage Bond (CMB) curves.
Obligations Related to Securities Sold Short
The fair value of these obligations is based on the fair value of the
underlying securities, which can include equity or debt securities. As
these obligations are fully collateralized, the method used to determine
fair value would be the same as that of the relevant underlying equity
or debt securities.
Securities Purchased Under Reverse Repurchase Agreements
and Obligations Related to Securities Sold under
Repurchase Agreements
Commodities purchased or sold with an agreement to sell or repurchase
them at a later date at a fixed price are carried at fair value. The fair value
of these agreements is based on valuation techniques such as discounted
cash flow models which maximize the use of observable market inputs
such as interest rate swap curves and commodity forward prices.
Subordinated Notes and Debentures
The fair value of subordinated notes and debentures are based on
quoted market prices for similar issues or current rates offered to the
Bank for debt of equivalent credit quality and remaining maturity.
Other Financial Liabilities Designated at Fair Value
For deposits designated at fair value through profit or loss, fair value
is determined using discounted cash flow valuation techniques which
maximize the use of observable market inputs such as benchmark yield
curves. The Bank considers the impact of its own creditworthiness
in the valuation of these deposits by reference to observable market
inputs. The Bank currently issues mortgage loan commitments to
its customers which allow them to lock in a fixed mortgage rate prior
to their expected funding date. The Bank values loan commitments
through the use of an option pricing model and with adjustments
calculated using an expected funding ratio to arrive at the most
representative fair value. The expected funding ratio represents the
Bank’s best estimate, based on historical analysis, as to the amount
of loan commitments that will actually fund. If commitment extensions
are exercised by the borrower, the Bank will remeasure the written
option at fair value.
Portfolio Exception
IFRS 13 provides a measurement exception that allows an entity to
determine the fair value of a group of financial assets and liabilities
with offsetting risks based on the sale or transfer of its net exposure
to a particular risk or risks. The Bank manages certain financial assets
and financial liabilities, such as derivative assets and derivative liabilities
on the basis of net exposure and applies the portfolio exception when
determining the fair value of these financial assets and financial liabilities.
Fair Value of Assets and Liabilities not measured at Fair Value
The fair value of assets and liabilities subsequently not measured
at fair value include loans, deposits, certain securitization liabilities,
certain securities purchased under reverse repurchase agreements,
obligations relating to securities sold under repurchase agreements,
and subordinated notes and debentures. For these instruments, fair
values are calculated for disclosure purposes only, and the valuation
techniques are disclosed above. In addition, the Bank has determined
that the carrying value approximates the fair value for the following
assets and liabilities as they are usually liquid floating rate financial
instruments and are generally short term in nature: cash and due
from banks, interest-bearing deposits with banks, customers’ liability
under acceptances, and acceptances.
137
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS Carrying Value and Fair Value of Financial Instruments not
carried at Fair Value
The fair values in the following table exclude the value of assets that
are not financial instruments, such as land, buildings and equipment,
as well as goodwill and other intangible assets, including customer
relationships, which are of significant value to the Bank.
Financial Assets and Liabilities not carried at Fair Value1
(millions of Canadian dollars)
FINANCIAL ASSETS
Cash and due from banks
Interest-bearing deposits with banks
Held-to-maturity securities2
Government and government-related securities
Other debt securities
Total held-to-maturity securities
Securities purchased under reverse repurchase agreements
Loans
Debt securities classified as loans
Total loans
Other
Customers’ liability under acceptances
Amounts receivable from brokers, dealers and clients
Other assets
Total assets not carried at fair value
FINANCIAL LIABILITIES
Deposits
Acceptances
Obligations related to securities sold under repurchase agreements
Securitization liabilities at amortized cost
Amounts payable to brokers, dealers and clients
Other liabilities
Subordinated notes and debentures
Total liabilities not carried at fair value
October 31, 2016
October 31, 2015
Carrying value
Fair value
Carrying value
Fair value
As at
$
3,907
53,714
$
3,907
53,714
$
3,154
42,483
$
3,154
42,483
51,290
33,105
84,395
84,324
584,243
1,413
585,656
51,855
33,135
84,990
84,324
589,080
1,678
590,758
43,667
30,783
74,450
84,163
542,418
1,923
544,341
44,095
30,647
74,742
84,163
544,862
2,166
547,028
15,706
17,436
4,352
$ 849,490
15,706
17,436
4,352
$ 855,187
16,646
21,996
4,247
$ 791,480
16,646
21,996
4,247
$ 794,459
$ 773,660
15,706
45,316
17,918
17,857
9,229
10,891
$ 890,577
$ 776,161
15,706
45,316
18,276
17,857
9,288
11,331
$ 893,935
$ 695,576
16,646
54,780
22,743
22,664
7,788
8,637
$ 828,834
$ 697,376
16,646
54,780
23,156
22,664
7,826
8,992
$ 831,440
1 Certain comparative amounts have been restated to conform with the presentation
2 Includes debt securities reclassified from available-for-sale to held-to-maturity.
adopted in the current period.
Refer to Note 7 for carrying value and fair value of the reclassified debt securities.
Fair Value Hierarchy
IFRS requires disclosure of a three-level hierarchy for fair value
measurements based upon the observability of inputs to the valuation
of an asset or liability as of the measurement date. The three levels
are defined as follows:
Level 1: Fair value is based on quoted market prices in active markets
for identical assets or liabilities. Level 1 assets and liabilities generally
include debt and equity securities and derivative contracts that are
traded in an active exchange market, as well as certain Canadian and
U.S. Treasury bills and Government bonds that are highly liquid and
are actively traded in OTC markets.
Level 2: Fair value is based on observable inputs other than Level 1
prices, such as quoted market prices for similar (but not identical)
assets or liabilities in active markets, quoted market prices for identical
assets or liabilities in markets that are not active, and other inputs that
are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities. Level 2 assets and
liabilities include debt securities with quoted prices that are traded less
frequently than exchange-traded instruments and derivative contracts
whose value is determined using valuation techniques with inputs
that are observable in the market or can be derived principally from
or corroborated by observable market data. This category generally
includes Canadian and U.S. Government securities, Canadian and U.S.
agency mortgage-backed debt securities, corporate debt securities,
certain derivative contracts, certain securitization liabilities, and certain
trading deposits.
Level 3: Fair value is based on non-observable inputs that are supported
by little or no market activity and that are significant to the fair value
of the assets or liabilities. Financial instruments classified within Level 3
of the fair value hierarchy are initially fair valued at their transaction
price, which is considered the best estimate of fair value. After initial
measurement, the fair value of Level 3 assets and liabilities is determined
using valuation models, discounted cash flow methodologies, or similar
techniques. This category generally includes retained interests in certain
loan securitizations and certain derivative contracts.
The following table presents the levels within the fair value hierarchy
for each of the assets and liabilities measured at fair value on a recurring
basis as at October 31.
138
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
Fair Value Hierarchy for Assets and Liabilities Measured at Fair Value on a Recurring Basis1
(millions of Canadian dollars)
Level 1
Level 2
October 31, 2016
Total2
Level 3
Level 1
Level 2
As at
October 31, 2015
Total2
Level 3
FINANCIAL ASSETS AND COMMODITIES
Trading loans, securities, and other3
Government and government-related securities
Canadian government debt
Federal
Provinces
U.S. federal, state, municipal governments,
and agencies debt
Other OECD government guaranteed debt
Mortgage-backed securities
Other debt securities
Canadian issuers
Other issuers
Equity securities
Common shares
Preferred shares
Trading loans
Commodities
Retained interests
Derivatives
Interest rate contracts
Foreign exchange contracts
Credit contracts
Equity contracts
Commodity contracts
Financial assets designated at
fair value through profit or loss
Securities3
Available-for-sale securities
Government and government-related securities
Canadian government debt
Federal
Provinces
U.S. federal, state, municipal governments,
and agencies debt
Other OECD government guaranteed debt
Mortgage-backed securities
Other debt securities
Asset-backed securities
Non-agency collateralized mortgage obligation portfolio
Corporate and other debt
Equity securities
Common shares4,5
Preferred shares
Debt securities reclassified from trading
Securities purchased under reverse
repurchase agreements
FINANCIAL LIABILITIES
Trading deposits
Derivatives
Interest rate contracts
Foreign exchange contracts
Credit contracts
Equity contracts
Commodity contracts
Securitization liabilities at fair value
Other financial liabilities designated
at fair value through profit or loss
Obligations related to securities sold short3
Obligations related to securities sold
under repurchase agreements
$
70 $ 9,978
5,678
–
$
34 $ 10,082 $
5,678
–
493 $ 11,560
6,121
–
$
– $ 12,053
6,145
24
724
–
–
17,246
4,424
1,472
– 17,970
4,497
1,472
73
–
1
–
–
15,719
4,194
1,019
–
5
–
15,720
4,199
1,019
–
–
2,697
7,572
15
148
2,712
7,720
–
–
2,558
7,442
57
108
2,615
7,550
29,054
27
–
8,071
–
37,946
96
–
11,606
176
–
60,945
–
27
– 11,606
–
31
65 29,215 28,933
33
–
8,247 5,410
–
366 99,257 34,870
31
447
–
10,650
154
–
59,864
186
5
–
–
38
423
29,566
38
10,650
5,564
38
95,157
4
44
–
–
51
99
27,364
41,828
–
1,391
816
71,399
– 27,368
9 41,881
–
–
2,120
729
873
6
744 72,242
2
45
–
–
32
79
27,968
38,692
59
1,376
691
68,786
–
6
4
560
3
573
27,970
38,743
63
1,936
726
69,438
80
80
4,046
4,046
157
157
4,283
4,283
106
106
4,189
4,189
83
83
4,378
4,378
–
–
14,717
7,851
–
–
–
–
–
–
34,473
15,503
4,949
18,593
625
8,266
– 14,717
7,851
–
– 34,473
6 15,509
4,949
–
– 18,593
625
–
8,286
20
–
–
–
–
–
–
–
–
14,431
7,185
22,585
11,648
4,060
–
–
14,431
7,185
–
7
–
22,585
11,655
4,060
16,261
916
8,618
501
–
147
16,762
916
8,765
231
88
–
319
223
–
49
105,249
1,594
98
279
2,048
186
328
1,997 107,565
177
20
–
197
100
–
169
85,973
1,575
94
282
2,606
1,852
114
451
88,776
–
1,728
–
1,728
–
13,201
–
13,201
$
– $ 76,568
$ 3,218 $ 79,786 $
– $ 72,879
$ 1,880 $ 74,759
3
16
–
–
75
94
–
22,092
39,535
257
1,351
587
63,822
12,490
95 22,190
5 39,556
257
–
2,759
1,408
663
1
1,509 65,425
– 12,490
34
25
–
2
49
110
–
22,959
30,588
290
1,316
899
56,052
10,986
88
5
–
957
6
1,056
–
23,081
30,618
290
2,275
954
57,218
10,986
–
1,396
177
31,705
–
190
13
14 33,115 8,783
1,402
29,961
13
59
1,415
38,803
–
3,657
–
3,657
–
12,376
–
12,376
1 Certain comparative amounts have been reclassified to conform with the
5 As at October 31, 2016, common shares include the fair value of Federal Reserve
presentation adopted in the current period.
2 Fair value is the same as carrying value.
3 Balances reflect the reduction of securities owned (long positions) by the amount
of identical securities sold but not yet purchased (short positions).
4 As at October 31, 2016, the carrying values of certain available-for-sale equity
securities of $6 million (October 31, 2015 – $6 million) are carried at cost in the
absence of quoted market prices in an active market and are excluded from the
table above.
Stock and Federal Home Loan Bank stock of $1.3 billion (October 31, 2015 –
$1.3 billion) which are redeemable by the issuer at cost for which cost approxi-
mates fair value. These securities cannot be traded in the market; hence, these
securities have not been subject to sensitivity analysis of Level 3 financial assets
and liabilities.
139
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
Due to the unobservable nature of the inputs used to value Level 3
financial instruments there may be uncertainty about the valuation of
these instruments. The fair value of Level 3 instruments may be drawn
from a range of reasonably possible alternatives. In determining the
appropriate levels for these unobservable inputs, parameters are
chosen so that they are consistent with prevailing market evidence
and management judgment.
The Bank’s policy is to record transfers of assets and liabilities between
the different levels of the fair value hierarchy using the fair values as
at the end of each reporting period. Assets are transferred between
Level 1 and Level 2 depending on if there is sufficient frequency and
volume in an active market.
There were no significant transfers between Level 1 and Level 2 during
the year ended October 31, 2016 and October 31, 2015.
Movements of Level 3 instruments
Significant transfers into and out of Level 3 occur mainly due to the
following reasons:
• Transfers from Level 3 to Level 2 occur when techniques used
for valuing the instrument incorporate significant observable
market inputs or broker-dealer quotes which were previously
not observable.
• Transfers from Level 2 to Level 3 occur when an instrument’s fair
value, which was previously determined using valuation techniques
with significant observable market inputs, is now determined using
valuation techniques with significant non-observable inputs.
140
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS The following tables reconcile changes in fair value of all assets and
liabilities measured at fair value using significant Level 3 non-observable
inputs for the years ended October 31.
Reconciliation of Changes in Fair Value for Level 3 Assets and Liabilities
(millions of Canadian dollars)
Total realized and
unrealized gains (losses)
Movements
Transfers
Included
in income1
Included
in OCI2 Purchases
Issuances
Other3
Into
Level 3
Out of
Level 3
Fair value
as at
Change in
unrealized
gains
(losses) on
Oct. 31, instruments
still held4
2016
Fair value
as at
Nov. 1,
2015
$
–
24
5
57
108
186
5
–
–
38
423
83
–
83
–
7
501
147
FINANCIAL ASSETS
Trading loans, securities, and other
Government and government-
related securities
Canadian government debt
Federal
Provinces
Other OECD government
guaranteed debt
Other debt securities
Canadian issuers
Other issuers
Equity securities
Common shares
Preferred shares
Trading loans
Commodities
Retained interests
Financial assets designated at fair
value through profit or loss
Securities
Loans
Available-for-sale securities
Government and government-
related securities
Canadian government debt
Federal
Provinces
Other OECD government
guaranteed debt
Other debt securities
Asset-backed securities
Corporate and other debt
Equity securities
Common shares
Preferred shares
Debt securities reclassified
from trading
$
$
–
3
–
(1)
17
–
–
–
–
2
21
2
–
2
–
–
–
5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(3)
$
$
–
39
1
23
129
77
32
–
–
–
301
101
–
101
–
–
–
–
71
11
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
–
(67)
$ 34
3
$
–
73
$
–
(2)
(6)
(66)
(201)
(198)
(37)
–
–
(9)
(578)
3
340
–
–
–
–
–
453
(1)
(245)
–
–
–
–
–
(254)
(62)
–
(62)
53
–
53
(20)
–
(20)
34
–
73
15
148
65
–
–
–
31
366
157
–
157
–
6
–
20
$
–
–
–
(1)
9
–
–
–
–
2
10
1
–
1
–
–
–
(1)
(23)
11
–
$ (13)
–
(1)
(501)
(5)
(73)
–
–
–
–
3
–
–
–
–
–
(127)
–
–
1,594
98
1,575
94
53
(18)
(32)
11
282
$ 2,606
36
$ 76
–
$ (24)
–
$ 82
$
(4)
$ (584)
–
$ 3
(35)
279
$ (162) $ 1,997
Total realized and
unrealized losses (gains)
Movements
Transfers
Fair value
as at
Nov. 1,
2015
Included
in income1
Included
in OCI2 Purchases
Issuances
Other3
Into
Level 3
Out of
Level 3
Fair value
as at
Change in
unrealized
losses
(gains) on
Oct. 31, instruments
still held4
2016
FINANCIAL LIABILITIES
Trading deposits5
Derivatives6
Interest rate contracts
Foreign exchange contracts
Credit contracts
Equity contracts
Commodity contracts
Other financial liabilities designated
at fair value through profit or loss
Obligations related to securities
sold short
$ 1,880
$ 130
$ –
$ (480) $ 2,032
$ (343)
$ 11
$ (12) $ 3,218
$ 151
88
(1)
(4)
397
3
483
11
(3)
4
258
3
273
13
(64)
–
–
–
–
–
–
–
–
–
–
(80)
–
(80)
–
–
–
209
–
209
(4)
(1)
–
(105)
(8)
(118)
–
130
(66)
–
–
–
1
(3)
(2)
–
–
1
–
(1)
–
–
–
95
(4)
–
679
(5)
765
9
(2)
4
258
(2)
267
13
(41)
$
59
$
–
$ –
$ (103) $
–
$ 58
$
–
$
–
$
14
$
–
1 Gains (losses) on financial assets and liabilities are recognized in Net securities
5 Beginning February 1, 2016, issuances and repurchases of trading deposits are
gains (losses), Trading income (loss), and Other income (loss) on the Consolidated
Statement of Income.
2 Other comprehensive income (OCI).
3 Consists of sales, settlements, and foreign exchange.
4 Changes in unrealized gains (losses) on available-for-sale securities are recognized
in accumulated other comprehensive income (AOCI).
reported on a gross basis.
6 As at October 31, 2016, consists of derivative assets of $0.7 billion (November 1,
2015 – $0.6 billion) and derivative liabilities of $1.5 billion (November 1, 2015 –
$1.1 billion), which have been netted on this table for presentation purposes only.
141
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
Reconciliation of Changes in Fair Value for Level 3 Assets and Liabilities1
(millions of Canadian dollars)
Total realized and
unrealized gains (losses)
Movements
Transfers
Included
in income2
Included
in OCI
Purchases
Issuances
Other3
Into
Level 3
Out of
Level 3
Change in
unrealized
gains
(losses) on
instruments
still held4
Fair value
as at
Oct. 31,
2015
FINANCIAL ASSETS
Trading loans, securities, and other
Government and government-
related securities
Canadian government debt
Provinces
Other OECD government
guaranteed debt
Other debt securities
Canadian issuers
Other issuers
Equity securities
Common shares
Preferred shares
Retained interests
Financial assets designated
at fair value through
profit or loss
Securities
Loans
Available-for-sale securities
Government and government-
related securities
Canadian government debt
Provinces
Other OECD government
guaranteed debt
Other debt securities
Asset-backed securities
Corporate and other debt
Equity securities
Common shares
Preferred shares
Debt securities reclassified
from trading
FINANCIAL LIABILITIES
Trading deposits
Derivatives5
Interest rate contracts
Foreign exchange contracts
Credit contracts
Equity contracts
Commodity contracts
Other financial liabilities
designated at fair value
through profit or loss
Obligations related to
securities sold short
$ –
$
–
$
$
–
$
(9)
$ 33
$
–
$
24
$
–
Fair value
as at
Nov. 1,
2014
$
–
–
20
66
4
–
48
138
–
5
5
51
5
–
19
–
–
63
61
–
–
–
–
–
–
–
276
31
–
431
–
–
–
–
–
(44)
5
–
–
–
–
–
–
–
–
–
(11)
–
–
3
(8)
–
1
1
1
–
–
3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5
–
5
(96)
(167)
72
184
(2)
(25)
(94)
(26)
(13)
(405)
–
–
–
294
–
(6)
(6)
83
–
83
–
–
–
(27)
–
–
–
57
108
186
5
38
423
83
–
83
–
2
–
–
(52)
–
–
7
43
(3)
502
242
–
(119)
501
147
(225)
(1)
–
–
–
–
1,575
94
(68)
$ (252)
38
$ 782
(54)
$ (225)
282
$ 2,606
–
(1)
–
–
–
2
1
–
2
2
1
–
(44)
5
40
(12)
28
$ 18
1,303
141
91
(34)
2
(12)
404
–
309
$ 1,828
29
$ 90
28
$ (21)
–
$ 404
$
Total realized and
unrealized losses (gains)
Movements
Transfers
Fair value
as at
Nov. 1,
2014
Included
in income2
Included
in OCI
Purchases
Issuances
Other3
Into
Level 3
Out of
Level 3
Change in
unrealized
losses
(gains) on
instruments
still held4
Fair value
as at
Oct. 31,
2015
$ 1,631
$ 6
$ –
$
–
$ 834
$ (591)
$
–
$
–
$ 1,880
$ (13)
81
(2)
–
504
4
587
2
(2)
(4)
(63)
26
(41)
8
(40)
–
–
–
–
–
–
–
–
–
–
(96)
–
(96)
–
–
–
194
–
194
5
–
–
(124)
(25)
(144)
–
(3)
–
–
(2)
(5)
–
6
–
(18)
–
(12)
88
(1)
(4)
397
3
483
4
1
(4)
(66)
7
(58)
–
90
(45)
–
–
13
(46)
$
34
$ –
$ –
$ (78)
$
–
$ 105
$
–
$
(2)
$
59
$ –
1 Certain comparative amounts have been reclassified to conform with the
4 Changes in unrealized gains (losses) on available-for-sale securities are recognized
presentation adopted in the current period.
in AOCI.
2 Gains (losses) on financial assets and liabilities are recognized in Net securities
gains (losses), Trading income (loss), and Other income (loss) on the Consolidated
Statement of Income.
5 As at October 31, 2015, consists of derivative assets of $0.6 billion (November 1,
2014 – $1.1 billion) and derivative liabilities of $1.1 billion (November 1, 2014 –
$1.6 billion), which have been netted on this table for presentation purposes only.
3 Consists of sales, settlements, and foreign exchange.
142
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
VALUATION OF ASSETS AND LIABILITIES CLASSIFIED AS LEVEL 3
Significant unobservable inputs in Level 3 positions
The following section discusses the significant unobservable inputs
for Level 3 positions and assesses the potential effect that a change
in each unobservable input may have on the fair value measurement.
Price Equivalent
Certain financial instruments, mainly debt and equity securities, are
valued using price equivalents when market prices are not available,
with fair value measured by comparison with observable pricing data
from instruments with similar characteristics. For debt securities, the
price equivalent is expressed in ‘points’, and represents a percentage
of the par amount, and prices at the lower end of the range are
generally a result of securities that are written down. For equity
securities, the price equivalent is based on a percentage of a proxy
price. There may be wide ranges depending on the liquidity of the
securities. New issuances of debt and equity securities are priced
at 100% of the issue price.
Credit Spread
Credit spread is a significant input used in the valuation of many
derivatives. It is the primary reflection of the creditworthiness of a
counterparty and represents the premium or yield return above the
benchmark reference that a bond holder would require in order to
allow for the credit quality difference between the entity and the
reference benchmark. An increase/(decrease) in credit spread will
(decrease)/increase the value of financial instrument. Credit spread
may be negative where the counterparty is more credit worthy than
the benchmark against which the spread is calculated. A wider
credit spread represents decreasing creditworthiness.
Prepayment Rate and Liquidation Rate
Expected future prepayment and liquidation rates are significant
inputs for retained interests and represent the amount of unscheduled
principal repayment. The prepayment rate and liquidation rate will
be obtained from prepayment forecasts which are based on a number
of factors such as historical prepayment rates for similar pool loans
and the future economic outlook, considering factors including, but
not limited to, future interest rates.
Correlation
The movements of inputs are not necessarily independent from other
inputs. Such relationships, where material to the fair value of a given
instrument, are captured via correlation inputs into the pricing models.
The Bank includes correlation between the asset class, as well as across
asset classes. For example, price correlation is the relationship between
prices of equity securities in equity basket derivatives, and quanto
correlation is the relationship between instruments which settle in
one currency and the underlying securities which are denominated
in another currency.
Implied Volatility
Implied volatility is the value of the volatility of the underlying instrument
which, when input in an option pricing model, such as Black-Scholes,
will return a theoretical value equal to the current market price of the
option. Implied volatility is a forward-looking and subjective measure,
and differs from historical volatility because the latter is calculated
from known past returns of a security.
Funding ratio
The funding ratio is a significant unobservable input required to value
mortgage commitments issued by the Bank. The funding ratio represents
an estimate of percentage of commitments that are ultimately funded
by the Bank. The funding ratio is based on a number of factors such
as observed historical funding percentages within the various lending
channels and the future economic outlook, considering factors including,
but not limited to, competitive pricing and fixed/variable mortgage rate
gap. An increase/(decrease) in funding ratio will increase/(decrease)
the value of the lending commitment in relationship to prevailing
interest rates.
Earnings Multiple, Discount Rate, and Liquidity Discount
Earnings multiple, discount rate, and liquidity discount are significant
inputs used when valuing certain equity securities and certain retained
interests. Earnings multiples are selected based on comparable entities
and a higher multiple will result in a higher fair value. Discount rates
are applied to cash flow forecasts to reflect time value of money
and the risks associated with the cash flows. A higher discount rate
will result in a lower fair value. Liquidity discounts may be applied
as a result of the difference in liquidity between the comparable entity
and the equity securities being valued.
Net Asset Value
The fair value of certain private funds are based on the net asset value
(NAV) provided by fund managers as there are no observable prices
for these instruments.
Currency Specific Swap Curve
The fair value of foreign exchange contracts is determined using inputs
such as foreign exchange spot rates and swap curves. Generally swap
curves are observable, but there may be certain durations or currency
specific foreign exchange spot and currency specific swap curves that
are not observable.
Dividend Yield
Dividend yield is a key input for valuing equity contracts and is generally
expressed as a percentage of the current price of the stock. Dividend
yields can be derived from the repo or forward price of the actual
stock being fair valued. Spot dividend yields can also be obtained from
pricing sources, if it can be demonstrated that spot yields are a good
indication of future dividends.
Inflation Rate Swap Curve
The fair value of inflation rate swap contracts is a swap between the
interest rate curve and the inflation Index. The inflation rate swap
spread is not observable and is determined using proxy inputs such
as inflation index rates and Consumer Price Index (CPI) bond yields.
Generally swap curves are observable; however, there may be
instances where certain specific swap curves are not observable.
143
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS Valuation techniques and inputs used in the fair value
measurement of Level 3 assets and liabilities
The following tables present the Bank’s assets and liabilities recognized
at fair value and classified as Level 3, together with the valuation
techniques used to measure fair value, the significant inputs used in
the valuation technique that are considered unobservable, and a range
of values for those unobservable inputs. The range of values represents
the highest and lowest inputs used in calculating the fair value.
Valuation Techniques and Inputs Used in the Fair Value Measurement of Level 3 Assets and Liabilities1
Valuation
technique
Significant
unobservable
inputs (Level 3)
October 31, 2016
October 31, 2015
As at
Lower
range
Upper
range
Lower
range
Upper
range
Unit
Government and government-
related securities
Market comparable
Bond price equivalent
61
131
55
136
points
Other debt securities
Market comparable
Bond price equivalent
–
109
–
128
points
Equity securities2
Market comparable
Discounted cash flow
EBITDA multiple
Market comparable
Retained interests
Discounted cash flow
New issue price
Discount rate
Earnings multiple
Price equivalent
Prepayment and
liquidation rates
Discount rates
100
7
4.5
54
100
18
20.5
117
–
287
–
324
100
8
4.6
52
–
280
100
20
22
117
–
360
%
%
times
%
%
bps3
Net asset value
Market comparable
Net asset value
Bond price equivalent
n/a4
99
n/a4
100
n/a4
100
n/a4
101
points
Other financial assets
designated at fair value
through profit or loss
Derivatives
Interest rate contracts
Swaption model
Discounted cash flow
Option model
Currency specific volatility
Inflation rate swap curve
Funding ratio
Foreign exchange contracts
Option model
Currency specific volatility
Credit contracts
Discounted cash flow
Credit spread
Equity contracts
Option model
Commodity contracts
Option model
Trading deposits
Option model
Swaption model
Price correlation
Quanto correlation
Dividend yield
Equity volatility
Quanto correlation
Swaption correlation
Price correlation
Quanto correlation
Dividend yield
Equity volatility
Currency specific volatility
28
1
55
9
7
3
(38)
–
2
(66)
29
3
(38)
–
7
28
264
2
75
14
40
95
17
10
116
(46)
41
95
17
10
116
264
17
1
75
8
7
10
(38)
–
6
(45)
24
(23)
(38)
–
6
17
292
2
75
12
55
90
17
12
94
(25)
36
98
17
14
116
292
%
%
%
%
bps3
%
%
%
%
%
%
%
%
%
%
%
%
%
Other financial liabilities
designated at fair value
through profit or loss
Obligations related to
securities sold short
Option model
Funding ratio
2
72
1
72
Market comparable
New issue price
100
100
100
100
1 Certain comparative amounts have been reclassified to conform with the
presentation adopted in the current period.
2 As at October 31, 2016, common shares exclude the fair value of Federal Reserve
stock and Federal Home Loan Bank stock of $1.3 billion (October 31, 2015 –
$1.3 billion) which are redeemable by the issuer at cost which approximates fair
value. These securities cannot be traded in the market, hence, these securities
have not been subjected to the sensitivity analysis.
3 Basis points.
4 Not applicable.
144
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
The following table summarizes the potential effect of using reasonably
possible alternative assumptions for financial assets and financial
liabilities held, that are classified in Level 3 of the fair value hierarchy
as at October 31. For interest rate derivatives, the Bank performed
a sensitivity analysis on the unobservable implied volatility. For credit
derivatives, sensitivity was calculated on unobservable credit spreads
using assumptions derived from the underlying bond position credit
spreads. For equity derivatives, the sensitivity was calculated by
using reasonably possible alternative assumptions by shocking
dividends, correlation, or the price and volatility of the underlying
equity instrument. For available-for-sale equity securities, the
sensitivity was calculated based on an upward and downward shock
of the fair value reported. For trading deposits, the sensitivity was
calculated by varying unobservable inputs which may include volatility,
credit spreads, and correlation.
Sensitivity Analysis of Level 3 Financial Assets and Liabilities
(millions of Canadian dollars)
FINANCIAL ASSETS
Trading loans, securities, and other
Government and government-related securities
Canadian government debt
Federal
Equity securities
Common shares
Retained interests
Derivatives
Equity contracts
Financial assets designated at fair value through profit or loss
Securities
Available-for-sale securities
Other debt securities
Corporate and other debt
Equity securities
Common shares
Preferred shares
Debt securities reclassified from trading
FINANCIAL LIABILITIES
Trading deposits
Derivatives
Interest rate contracts
Equity contracts
Other financial liabilities designated at fair value through profit or loss
Obligations related to securities sold short
Total
October 31, 2016
Impact to net assets
As at
October 31, 2015
Impact to net assets
Decrease in
fair value
Increase in
fair value
Decrease in
fair value
Increase in
fair value
$ 1
$
1
$
–
$
–
–
2
3
–
–
1
14
14
16
16
5
5
2
42
16
–
60
5
5
2
12
5
–
19
6
2
8
24
24
–
–
3
52
5
4
64
6
–
6
33
33
–
–
3
16
5
4
28
15
23
13
17
27
31
58
1
–
$ 156
18
27
45
1
–
$ 110
29
54
83
2
1
$ 195
14
40
54
2
1
$ 141
The best evidence of a financial instrument’s fair value at initial
recognition is its transaction price unless the fair value of the
instrument is evidenced by comparison with other observable
current market transactions in the same instrument (that is,
without modification or repackaging) or based on a valuation
technique whose variables include only data from observable
markets. Consequently, the difference between the fair value
using other observable current market transactions or a valuation
technique and the transaction price results in an unrealized gain
or loss at initial recognition.
The difference between the transaction price at initial recognition
and the value determined at that date using a valuation technique
is not recognized in income until the significant non-observable
inputs in the valuation technique used to value the instruments
become observable. The following table summarizes the aggregate
difference yet to be recog nized in net income due to the difference
between the transaction price and the amount determined using
valuation techniques with significant non-observable market inputs
at initial recognition.
(millions of Canadian dollars)
For the years ended October 31
Balance as at beginning of year
New transactions
Recognized in the Consolidated Statement
of Income during the year
Balance as at end of year
2016
$ 30
69
(58)
$ 41
2015
$ 33
57
(60)
$ 30
145
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
FINANCIAL ASSETS AND LIABILITIES DESIGNATED
AT FAIR VALUE
Securities Designated at Fair Value through Profit or Loss
Certain securities supporting insurance reserves within the Bank’s
insurance underwriting subsidiaries have been designated at fair value
through profit or loss. The actuarial valuation of the insurance reserve
is measured using a discount factor which is based on the yield of the
supporting invested assets, with changes in the discount factor being
recognized on the Consolidated Statement of Income. The unrealized
gain or loss on securities designated at fair value through profit or loss
is recognized on the Consolidated Statement of Income in the same
period as gains or losses resulting from changes to the discount rate
used to value the insurance liabilities.
In addition, certain debt securities are managed on a fair value basis,
or are economically hedged with derivatives as doing so eliminates or
significantly reduces an accounting mismatch. As a result, these debt
securities have been designated at fair value through profit or loss.
The derivatives are carried at fair value, with the change in fair value
recognized in non-interest income.
Other Liabilities Designated at Fair Value through Profit or Loss
Certain deposits and loan commitments issued to customers to provide
a mortgage at a fixed rate have been designated at fair value through
profit or loss. These deposits and commitments are economically hedged
with derivatives and other financial instruments where the changes
in fair value are recognized in non-interest income. The designation
of these deposits and loan commitments at fair value through profit
or loss eliminates an accounting mismatch that would otherwise arise.
The contractual maturity amounts for the deposits designated at
fair value through profit or loss were $0 million less than the carrying
amount as at October 31, 2016 (October 31, 2015 – $4 million less
than the carrying amount). As at October 31, 2016, the fair value of
deposits designated at fair value through profit or loss includes zero
of the Bank’s own credit risk (October 31, 2015 – $1 million). Due to
the short-term nature of the loan commitments, changes in the Bank’s
own credit do not have a significant impact on the determination of
fair value.
Income (Loss) from Changes in Fair Value of Financial Assets
and Liabilities Designated at Fair Value through Profit or Loss
During the year ended October 31, 2016, the income (loss)
representing net changes in the fair value of financial assets and
liabilities designated at fair value through profit or loss was
$(20) million (2015 – $(16) million).
Fair Value Hierarchy for Assets and Liabilities not carried
at Fair Value
The following table presents the levels within the fair value hierarchy
for each of the assets and liabilities not carried at fair value as at
October 31, but for which fair value is disclosed.
Fair Value Hierarchy for Assets and Liabilities not carried at Fair Value1
(millions of Canadian dollars)
October 31, 2016
As at
October 31, 2015
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
ASSETS
Cash and due from banks
Interest-bearing deposits with banks
Held-to-maturity securities
Government and government-related securities
Other debt securities
Total held-to-maturity securities
Securities purchased under reverse repurchase
agreements
Loans
Debt securities classified as loans
Total Loans
Other
Customers’ liability under acceptances
Amounts receivables from brokers, dealers, and clients
Other assets
Total assets with fair value disclosures
LIABILITIES
Deposits
Acceptances
Obligations related to securities sold under
repurchase agreements
Securitization liabilities at amortized cost
Amounts payable to brokers, dealers, and clients
Other liabilities
Subordinated notes and debentures
Total liabilities with fair value disclosures
– $ 3,154
– 42,483
– 44,095
– 30,647
– 74,742
$ 3,907 $
– $
– 53,714
– $
3,907
– 53,714
$ 3,154 $
– $
–
42,483
– 51,855
– 33,135
– 84,990
– 51,855
– 33,135
– 84,990
– 84,324
– 84,324
– 205,455 383,625 589,080
–
1,678
– 205,759 384,999 590,758
1,374
304
–
–
–
–
–
–
–
44,095
30,647
74,742
84,163
197,568
528
198,096
– 84,163
347,294 544,862
2,166
348,932 547,028
1,638
– 15,706
– 17,436
4,259
–
– 15,706
– 17,436
4,352
$ 3,907 $ 466,188 $ 385,092 $ 855,187
93
–
–
–
– 16,646
– 21,996
4,247
$ 3,154 $ 442,234 $ 349,071 $ 794,459
16,646
21,996
4,108
139
$
– $ 776,161 $
– 15,706
– $ 776,161
– 15,706
$
– $ 697,376 $
16,646
–
– $ 697,376
– 16,646
– 45,316
– 18,276
– 17,857
8,314
–
–
11,331
– $ 892,961 $
– 45,316
– 18,276
– 17,857
9,288
974
– 11,331
974 $ 893,935
$
54,780
23,156
22,664
7,001
8,992
–
–
–
–
–
– $ 830,615 $
– 54,780
– 23,156
– 22,664
7,826
8,992
825 $ 831,440
825
–
$
1 Certain comparative amounts have been reclassified to conform with the
presentation adopted in the current period.
146
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
N O T E 6
OFFSETTING FINANCIAL ASSETS AND FINANCIAL LIABILITIES
The Bank enters into netting agreements with counterparties (such
as clearing houses) to manage the credit risks associated primarily with
repurchase and reverse repurchase transactions, securities borrowing
and lending, and OTC and exchange-traded derivatives. These netting
agreements and similar arrangements generally allow the counter parties
to set-off liabilities against available assets received. The right to set-off
is a legal right to settle or otherwise eliminate all or a portion of an
amount due by applying against that amount an amount receivable
from the other party. These agreements effectively reduce the Bank’s
credit exposure by what it would have been if those same counterparties
were liable for the gross exposure on the same underlying contracts.
Netting arrangements are typically constituted by a master netting
agreement which specifies the general terms of the agreement between
the counterparties, including information on the basis of the netting
calculation, types of collateral, and the definition of default and other
termination events for transactions executed under the agreement.
The master netting agreements contain the terms and conditions
by which all (or as many as possible) relevant transactions between
the counterparties are governed. Multiple individual transactions are
subsumed under this general master netting agreement, forming
a single legal contract under which the counterparties conduct their
relevant mutual business. In addition to the mitigation of credit risk,
placing individual transactions under a single master netting agreement
that provides for netting of transactions in scope also helps to mitigate
settlement risks associated with transacting in multiple jurisdictions
or across multiple contracts. These arrangements include clearing
agreements, global master repurchase agreements, and global master
securities lending agreements.
In the normal course of business, the Bank enters into numerous
contracts to buy and sell goods and services from various suppliers.
Some of these contracts may have netting provisions that allow for the
offset of various trade payables and receivables in the event of default
of one of the parties. While these are not disclosed in the following
table, the gross amount of all payables and receivables to and from
the Bank’s vendors is disclosed in the Other assets note in accounts
receivable and other items and in the Other liabilities note in accounts
payable, accrued expenses, and other items.
The Bank also enters into regular way purchases and sales of stocks
and bonds. Some of these transactions may have netting provisions
that allow for the offset of broker payables and broker receivables
related to these purchases and sales. While these are not disclosed
in the following table, the amount of receivables are disclosed in
Amounts receivable from brokers, dealers, and clients and payables
are disclosed in Amounts payable to brokers, dealers, and clients.
The following table provides a summary of the financial assets and
liabilities which are subject to enforceable master netting agreements
and similar arrangements, including amounts not otherwise set off in
the balance sheet, as well as financial collateral received to mitigate
credit exposures for these financial assets and liabilities. The gross
financial assets and liabilities are reconciled to the net amounts
presented within the associated balance sheet line, after giving effect
to transactions with the same counterparties that have been offset
in the balance sheet. Related amounts and collateral received that are
not offset on the balance sheet, but are otherwise subject to the same
enforceable netting agreements and similar arrangements, are then
presented to arrive at a net amount.
Offsetting Financial Assets and Financial Liabilities
(millions of Canadian dollars)
As at
October 31, 2016
Amounts subject to an enforceable
master netting arrangement or similar
agreement that are not set-off in
the Consolidated Balance Sheet1,2
Gross amounts
of recognized
financial
instruments
before
balance sheet
netting
Gross amounts
of recognized
financial
instruments
set-off in the
Consolidated
Balance Sheet
Net amount
of financial
instruments
presented in the
Consolidated
Balance Sheet
Amounts
subject to an
enforceable
master netting
agreement
FINANCIAL ASSETS
Derivatives
Securities purchased under
reverse repurchase agreements
Total
Financial Liabilities
Derivatives
Obligations related to securities sold
under repurchase agreements
Total
$ 105,511
$ 33,269
$ 72,242
102,053
207,564
16,001
49,270
86,052
158,294
98,694
33,269
65,425
64,974
$ 163,668
16,001
$ 49,270
48,973
$ 114,398
FINANCIAL ASSETS
Derivatives
Securities purchased under
reverse repurchase agreements
Total
Financial Liabilities
Derivatives
Obligations related to securities sold
under repurchase agreements
Total
$ 96,632
$ 27,194
$ 69,438
113,007
209,639
15,643
42,837
97,364
166,802
84,412
27,194
57,218
82,799
$ 167,211
15,643
$ 42,837
67,156
$ 124,374
$ 45,646
309
45,955
45,646
309
$ 45,955
$ 39,962
6,705
46,667
39,962
6,705
$ 46,667
Collateral
Net Amount
$ 14,688
$ 11,908
83,902
98,590
1,841
13,749
14,911
4,868
48,663
$ 63,574
1
$ 4,869
October 31, 2015
$ 18,602
$ 10,874
90,538
109,140
121
10,995
11,966
5,290
60,445
$ 72,411
6
$ 5,296
1 Excess collateral as a result of overcollateralization has not been reflected in
2 Includes amounts where the contractual set-off rights are subject to uncertainty
the table.
under the laws of the relevant jurisdiction.
147
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
N O T E 7
SECURITIES
RECLASSIFICATION OF CERTAIN DEBT SECURITIES –
TRADING TO AVAILABLE-FOR-SALE
During 2008, the Bank changed its trading strategy with respect
to certain debt securities as a result of deterioration in markets and
severe dislocation in the credit market. These debt securities were
initially recorded as trading securities measured at fair value with any
changes in fair value as well as any gains or losses realized on disposal
recognized in trading income. Since the Bank no longer intended to
actively trade in these debt securities, the Bank reclassified these debt
securities from trading to available-for-sale effective August 1, 2008.
The fair value of the reclassified debt securities was $328 million
as at October 31, 2016 (October 31, 2015 – $451 million). For the
year ended October 31, 2016, net interest income of $19 million after
tax (October 31, 2015 – $27 million after tax) was recorded relating
to the reclassified debt securities. There was no significant increase
in fair value recorded in OCI during the year ended October 31, 2016
(October 31, 2015 – decrease of $4 million after tax). Had the Bank
not reclassified these debt securities, the change in the fair value of
these debt securities would have been included as part of trading
income, the impact of which would have resulted in no significant
increase for the year ended October 31, 2016 (October 31, 2015 –
decrease of $4 million after tax). During the year ended
October 31, 2016, reclassified debt securities with a fair value
of $155 million (October 31, 2015 – $312 million) were sold or
matured, and $7 million after tax (October 31, 2015 – $13 million
after tax) was recorded in net securities gains during the year
ended October 31, 2016.
RECLASSIFICATIONS OF CERTAIN DEBT SECURITIES –
AVAILABLE-FOR-SALE TO HELD-TO-MATURITY
The Bank has reclassified certain debt securities from available-for-sale
to held-to-maturity. For these debt securities, the Bank’s strategy is
to earn the yield to maturity to aid in prudent capital management
under Basel III. These debt securities were previously recorded at fair
value, with changes in fair value recognized in OCI. Subsequent to
the date of reclassification, the net unrealized gain or loss recognized
in AOCI is amortized to interest income over the remaining life of
the reclassified debt securities using the EIRM. The reclassifications
are non-cash transactions that are excluded from the Consolidated
Statement of Cash Flows.
The Bank has completed the following reclassifications.
Reclassifications from Available-for-Sale to Held-to-Maturity Securities
(millions of Canadian dollars, except as noted)
October 31, 2016
October 31, 2015
As at the reclassification date
Reclassification Date
March 1, 2013
September 23, 2013
November 1, 2013
Other reclassifications1
Amount
reclassified
$ 11,084
9,854
21,597
8,342
Fair
value
$ 1,618
7,022
20,339
8,607
Carrying
value
$ 1,605
6,934
20,401
8,577
Fair
value
$ 4,248
8,995
22,532
5,085
Carrying
value
$ 4,219
8,916
22,637
5,121
Weighted-average
effective interest
rate
1.8%
1.9
1.1
2.5
Undiscounted
recoverable
cash flows
$ 11,341
10,742
24,519
9,490
1 Represent reclassifications completed during the years ended October 31, 2016
and October 31, 2015.
Had the Bank not reclassified these debt securities, the change
in the fair value recognized in OCI for these debt securities would
have been an increase of $156 million during the year ended
October 31, 2016 (October 31, 2015 – a decrease of $275 million).
After the reclassification, the debt securities contributed the
following amounts to net income.
(millions of Canadian dollars)
Net interest income1
Provision for (recovery of) income taxes
Net income
For the years ended
October 31 October 31
2015
2016
$ 593
226
$ 367
$ 540
199
$ 341
1 Includes amortization of net unrealized gains of $20 million during the year
ended October 31, 2016 (October 31, 2015 – $46 million), associated with
these reclassified held-to-maturity securities that is presented as Reclassification
to earnings of net losses (gains) in respect of available-for-sale securities
on the Consolidated Statement of Comprehensive Income. The impact of
this amortization on net interest income is offset by the amortization of the
corresponding net reclassification premium on these debt securities.
148
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
Remaining Terms to Maturities of Securities
The remaining terms to contractual maturities of the securities held
by the Bank are shown on the following table.
Securities Maturity Schedule
(millions of Canadian dollars)
Trading securities
Government and government-related securities
Canadian government debt
Federal
Provinces
U.S. federal, state, municipal governments, and
agencies debt
Other OECD government-guaranteed debt
Mortgage-backed securities
Residential
Commercial
Other debt securities
Canadian issuers
Other issuers
Equity securities
Common shares
Preferred shares
Retained interests
Total trading securities
Within
1 year
Over 1
year to
3 years
Over 3
years to
5 years
Remaining terms to maturities1
With no
Over 5
specific
years maturity
years to Over 10
10 years
Total
Total
As at
October 31 October 31
2015
2016
$ 5,726 $ 1,737 $
1,552
689
788 $ 1,154 $
567
1,102
1,768
677 $
– $ 10,082 $ 12,053
6,145
–
5,678
3,971
2,266
3,717
1,036
3,325
500
6,922
540
35
155
– 17,970
– 4,497
15,720
4,199
170
9
13,694
468
51
7,698
681
12
5,873
–
76
9,794
–
5
2,640
– 1,319
–
153
– 39,699
899
120
39,136
609
2,498
3,107
669
3,111
3,780
592
1,351
1,943
498
671
1,169
344
89
433
– 2,712
– 7,720
– 10,432
2,615
7,550
10,165
–
–
–
–
29,566
38
29,604
38
$ 16,801 $ 11,479 $ 7,819 $ 10,983 $ 3,080 $ 29,242 $ 79,404 $ 78,943
29,215 29,215
27
29,242 29,242
31
–
–
–
–
20
–
–
–
7
–
–
–
3
–
–
–
1
27
Securities designated at fair value through profit or loss (FVO securities)
Government and government-related securities
Canadian government debt
Federal
Provinces
Other OECD government-guaranteed debt
$
533 $
–
527
1,060
Other debt securities
Canadian issuers
Other issuers
Equity securities
Common shares
25
340
365
–
–
48
332
380
246
428
674
–
–
Total FVO securities
$ 1,425 $ 1,054 $
– $
– $
– $
27 $
118
–
118
528
51
579
286
–
286
308
–
308
256
–
283
31
–
31
560 $
– $
708
–
–
859
– 2,127
884
569
940
2,393
– 1,138
103
922
103 2,060
944
864
1,808
–
–
697 $
–
–
594 $
–
–
314 $
96
96
177
96
177
96
199 $ 4,283 $ 4,378
Available-for-sale securities
Government and government-related securities
Canadian government debt
Federal
Provinces
U.S. federal, state, municipal governments, and
agencies debt
Other OECD government-guaranteed debt
Mortgage-backed securities
Other debt securities
Asset-backed securities
Non-agency collateralized mortgage obligation portfolio
Corporate and other debt
Equity securities
Common shares
Preferred shares
Debt securities reclassified from trading
Total available-for-sale securities
$
659 $ 6,975 $ 5,781 $ 1,296 $
538
2,028
1,471
3,797
6 $
17
– $ 14,717 $ 14,431
7,185
– 7,851
676
1,656
81
3,610
2,818
3,989
2,141
17,951
12,951
5,267
2,692
28,162
13,062
4,597
35
22,787
4,966
–
–
4,989
1,076
–
1,716
2,792
3,088
–
3,950
7,038
3,414
–
2,396
5,810
5,314
–
109
5,423
5,701
625
114
6,440
– 34,473
– 15,509
– 4,949
– 77,499
22,585
11,655
4,060
59,916
– 18,593
625
–
1 8,286
1 27,504
16,762
916
8,765
26,443
–
–
–
49
1,858
114
1,972
451
$ 6,451 $ 24,990 $ 33,972 $ 28,414 $ 11,503 $ 2,241 $ 107,571 $ 88,782
2,054 2,054
186
2,240 2,240
328
–
–
–
–
204
–
–
–
74
–
–
–
1
–
–
–
–
186
1 Represents contractual maturities. Actual maturities may differ due to prepayment
privileges in the applicable contract.
149
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
Securities Maturity Schedule (continued)
(millions of Canadian dollars)
Held-to-maturity securities
Government and government-related securities
Canadian government debt
Federal
U.S. federal, state, municipal governments, and
agencies debt
Other OECD government guaranteed debt
Other debt securities
Asset-backed securities
Non-agency collateralized mortgage obligation portfolio
Other issuers
Total held-to-maturity securities
Total securities
Within
1 year
Over 1
year to
3 years
Over 3
years to
5 years
Remaining terms to maturities1
With no
Over 5
specific
years maturity
years to Over 10
10 years
Total
Total
As at
October 31 October 31
2015
2016
$
– $
316 $
486 $
– $
– $
– $
802 $
974
89
10,326
10,415
4,995
13,028
18,339
6,240
4,664
11,390
7,144
625
7,769
3,377
–
3,377
– 21,845
– 28,643
– 51,290
18,648
24,045
43,667
19,014
–
6,158
–
5,611
1,462
30,783
1,462
11,877
74,450
$ 36,554 $ 63,173 $ 62,381 $ 49,769 $ 32,094 $ 31,682 $ 275,653 $ 246,553
– 17,295
– 9,436
– 6,374
– 33,105
– 84,395
4,142
–
3,169
7,311
25,650
4,384
9,436
–
13,820
17,197
7,247
–
1,256
8,503
19,893
1,522
–
487
2,009
9,778
1 Represents contractual maturities. Actual maturities may differ due to prepayment
privileges in the applicable contract.
Unrealized Securities Gains (Losses)
The following table summarizes the unrealized gains and losses
as at October 31.
Unrealized Securities Gains (Losses) for Available-for-Sale Securities
(millions of Canadian dollars)
October 31, 2016
As at
October 31, 2015
Cost/
Gross
amortized unrealized unrealized
(losses)
Gross
cost1
gains
Cost/
Gross
Fair amortized unrealized unrealized
(losses)
cost1
Gross
gains
value2
Fair
value2
Available-for-sale securities
Government and government-related securities
Canadian government debt
Federal
Provinces
U.S. federal, state, municipal governments, and
agencies debt
Other OECD government guaranteed debt
Mortgage-backed securities
Other debt securities
Asset-backed securities
Non-agency collateralized mortgage obligation portfolio
Corporate and other debt
Equity securities
Common shares
Preferred shares
Debt securities reclassified from trading
Total available-for-sale securities
$ 14,671
7,871
$ 62
29
$ (16) $ 14,717 $ 14,450
7,233
7,851
(49)
$ 42
19
$ (61) $ 14,431
(67) 7,185
34,377
15,574
4,916
77,409
18,665
624
8,229
27,518
1,934
168
2,102
301
$ 107,330
176
13
37
317
57
1
83
141
134
18
152
27
$ 637
(80) 34,473 22,526
(78) 15,509 11,713
4,021
4,949
(227) 77,499 59,943
(4)
(129) 18,593 16,921
921
8,770
625
8,286
–
(26)
(155) 27,504 26,612
(14)
–
(14)
–
2,054
186
2,240
328
1,770
112
1,882
420
$ (396) $ 107,571 $ 88,857
169
4
49
283
15
2
75
92
118
6
124
33
$ 532
(110) 22,585
(62) 11,655
(10) 4,060
(310) 59,916
(7)
(174) 16,762
916
(80) 8,765
(261) 26,443
(4)
(30) 1,858
114
(34) 1,972
451
$ (607) $ 88,782
(2)
1 Includes the foreign exchange translation of amortized cost balances at the
period-end spot rate.
2 As at October 31, 2016, the carrying values of certain available-for-sale equity
securities of $6 million (October 31, 2015 – $6 million) are carried at cost in the
absence of quoted market prices in an active market and are included in the
table above.
150
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
In the following table, unrealized losses for available-for-sale
securities are categorized as “12 months or longer” if for each
of the consecutive twelve months preceding October 31, 2016,
and October 31, 2015, the fair value of the securities was less
than the amortized cost. If not, they have been categorized as
“less than 12 months”.
Unrealized Loss Positions for Available-for-Sale Securities
(millions of Canadian dollars)
Available-for-sale securities
Government and government-related securities
Canadian government debt
Federal
Provinces
U.S. federal, state and municipal governments, and
agencies debt
Other OECD government-guaranteed debt
Mortgage-backed securities
Residential
Other debt securities
Asset-backed securities
Corporate and other debt
Equity securities
Common shares
Preferred shares
Debt securities reclassified from trading
Total
Available-for-sale securities
Government and government-related securities
Canadian government debt
Federal
Provinces
U.S. federal, state and municipal governments, and
agencies debt
Other OECD government-guaranteed debt
Mortgage-backed securities
Residential
Other debt securities
Asset-backed securities
Corporate and other debt
Equity securities
Common shares
Preferred shares
Debt securities reclassified from trading
Total
As at
October 31, 2016
Less than 12 months
12 months or longer
Total
Gross
Fair unrealized
losses
value
Gross
Fair unrealized
losses
value
Gross
Fair unrealized
losses
value
$
61
124
$
– $ 4,471
3,552
–
$ 16 $ 4,532
3,676
49
$ 16
49
5,058
4,528
8 12,772
6,771
12
72 17,830
66 11,299
80
78
395
10,166
1
21
827
28,393
3
206
1,222
38,559
2,376
751
3,127
1
6
7
6,901
2,098
8,999
128
20
148
9,277
2,849
12,126
–
–
–
–
$ 13,293
–
–
–
–
18
9
27
–
$ 28 $ 37,419
14
–
14
–
18
9
27
–
$ 368 $ 50,712
4
227
129
26
155
14
–
14
–
$ 396
October 31, 2015
$ 13,618
6,800
$ 61 $
67
131
–
$
– $ 13,749
6,800
–
$ 61
67
12,848
8,973
95
62
1,056
–
15 13,904
8,973
–
110
62
1,348
43,587
10
295
–
1,187
–
15
1,348
44,774
11,038
4,497
15,535
130
57
187
2,165
659
2,824
51 13,203
5,156
18,359
23
74
171
21
192
74
$ 59,388
30
4
34
2
–
–
–
–
$ 518 $ 4,011
–
–
–
–
171
21
192
74
$ 89 $ 63,399
10
310
181
80
261
30
4
34
2
$ 607
Securities Gains (Losses)
During the year ended October 31, 2016, the net realized gains
(losses) on available-for-sale securities were $81 million (2015 –
$124 million; 2014 – $183 million). Impairment losses on available-
for-sale securities for the year ended October 31, 2016, were
$27 million (2015 – $45 million; 2014 – $10 million). None of these
impairment losses related to debt securities in the reclassified portfolio
as described in the Reclassification of Certain Debt Securities – Trading
to Available-For-Sale section of the Note.
151
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
N O T E 8
LOANS, IMPAIRED LOANS, AND ALLOWANCE FOR CREDIT LOSSES
The following table presents the Bank’s loans, impaired loans, and
related allowance for loan losses as at October 31.
Loans, Impaired Loans, and Allowance for Loan Losses
(millions of Canadian dollars)
Gross Loans
Neither
past due
nor
impaired
Past due
but not
impaired
$ 213,586 $ 2,523
6,390
136,650
1,825
29,715
191,229
1,454
$ 571,180 $ 12,192
Residential mortgages3,4,5
Consumer instalment and other personal6
Credit card
Business and government3,4,5
Debt securities classified as loans
Acquired credit-impaired loans
Total
Total
Impaired2
$ 852 $ 216,961
1,392 144,432
374 31,914
891 193,574
$ 3,509 $ 586,881
1,674
974
$ 589,529
Residential mortgages3,4,5
Consumer instalment and other personal6
Credit card
Business and government3,4,5
Debt securities classified as loans
Acquired credit-impaired loans
Total
$ 208,802 $ 2,343
5,923
128,123
1,761
28,148
163,840
1,990
$ 528,913 $ 12,017
$ 786 $ 211,931
1,278 135,324
306 30,215
874 166,704
$ 3,244 $ 544,174
2,187
1,414
$ 547,775
As at
October 31, 2016
Individually
Counter- insignificant
impaired
loans
party
specific
Allowance for loan losses1
Incurred
Total
but not allowance
for loan
losses
identified
loan losses
Net
loans
$
–
–
–
189
$ 189
206
4
$ 399
$
–
–
–
156
$ 156
207
6
$ 369
$ 49
166
290
30
$ 535
–
58
$ 593
$ 47
136
217
28
$ 428
–
77
$ 505
$
48 $
97 $ 216,864
822 143,610
656
1,214 30,700
924
1,198
1,417 192,157
$ 2,826 $ 3,550 $ 583,331
1,413
912
$ 2,881 $ 3,873 $ 585,656
261
62
55
–
$
58
632
897
916
$ 2,503
57
–
$ 2,560
October 31, 2015
$ 105 $ 211,826
768 134,556
1,114 29,101
1,100 165,604
$ 3,087 $ 541,087
1,923
1,331
$ 3,434 $ 544,341
264
83
1 Excludes allowance for off-balance sheet positions.
2 As at October 31, 2016, impaired loans exclude $1.1 billion (October 31, 2015 –
$1.2 billion) of gross impaired debt securities classified as loans.
3 Excludes trading loans with a fair value of $12 billion as at October 31, 2016
(October 31, 2015 – $11 billion), and amortized cost of $11 billion as at
October 31, 2016 (October 31, 2015 – $10 billion).
5 As at October 31, 2016, impaired loans with a balance of $448 million did not
have a related allowance for loan losses (October 31, 2015 – $419 million).
An allowance was not required for these loans as the balance relates to loans
that are insured or loans where the realizable value of the collateral exceeded
the loan amount.
6 Includes Canadian government-insured real estate personal loans of $18 billion
4 Includes insured mortgages of $118 billion as at October 31, 2016
as at October 31, 2016 (October 31, 2015 – $21 billion).
(October 31, 2015 – $126 billion).
FORECLOSED ASSETS
Foreclosed assets are repossessed non-financial assets where the Bank
gains title, ownership, or possession of individual properties, such as real
estate properties, which are managed for sale in an orderly manner with
the proceeds used to reduce or repay any outstanding debt. The Bank
does not generally occupy foreclosed properties for its business use. The
Bank predominantly relies on third-party appraisals to determine the
carrying value of foreclosed assets. Foreclosed assets held for sale were
$106 million as at October 31, 2016 (October 31, 2015 – $134 million),
and were recorded in Other assets on the Consolidated Balance Sheet.
The following table presents information related to the Bank’s
impaired loans as at October 31.
Impaired Loans1
(millions of Canadian dollars)
Residential mortgages
Consumer instalment and
other personal
Credit card
Business and government
Total
Unpaid
principal
balance2
$ 909
1,557
374
984
$ 3,824
Carrying
value
$ 852
1,392
374
891
$ 3,509
October 31, 2016
Related
allowance
for credit
losses
Average
gross
impaired
loans
$ 49
$ 844
166
290
219
$ 724
1,492
345
883
$ 3,564
Unpaid
principal
balance2
$ 844
1,437
306
978
$ 3,565
Carrying
value
$ 786
1,278
306
874
$ 3,244
As at
October 31, 2015
Related
allowance
for credit
losses
$ 47
136
217
184
$ 584
Average
gross
impaired
loans
$ 790
1,045
294
866
$ 2,995
1 Excludes ACI loans and debt securities classified as loans.
2 Represents contractual amount of principal owed.
152
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
The changes to the Bank’s allowance for credit losses, as at and for the
years ended October 31, are shown in the following tables.
Allowance for Credit Losses
(millions of Canadian dollars)
Counterparty-specific allowance
Business and government
Debt securities classified as loans
Total counterparty-specific allowance excluding
acquired credit-impaired loans
Acquired credit-impaired loans1,2
Total counterparty-specific allowance
Collectively assessed allowance for
individually insignificant impaired loans
Residential mortgages
Consumer instalment and other personal
Credit card
Business and government
Total collectively assessed allowance for individually
insignificant impaired loans excluding acquired
credit-impaired loans
Acquired credit-impaired loans1,2
Total collectively assessed allowance for
individually insignificant impaired loans
Collectively assessed allowance for incurred
but not identified credit losses
Residential mortgages
Consumer instalment and other personal
Credit card
Business and government
Debt securities classified as loans
Total collectively assessed allowance for
incurred but not identified credit losses
Allowance for credit losses
Residential mortgages
Consumer instalment and other personal
Credit card
Business and government
Debt securities classified as loans
Total allowance for credit losses excluding
acquired credit-impaired loans
Acquired credit-impaired loans1,2
Total allowance for credit losses
Less: Allowance for off-balance sheet positions3
Allowance for loan losses
Balance
as at
November 1
2015
Provision
for credit
losses
Write-offs
Recoveries
Disposals
Foreign
exchange
and other
adjustments
Balance
as at
October 31
2016
$ 44
–
$ (1)
–
$ 156
207
$
363
6
369
47
136
217
28
79
8
87
(6)
81
31
727
994
63
$
(85)
(14)
(99)
–
(99)
(40)
(957)
(1,153)
(98)
44
14
58
10
259
232
37
428
77
1,815
(25)
(2,248)
(4)
538
6
505
1,790
(2,252)
544
58
657
1,029
1,072
57
2,873
105
793
1,246
1,256
264
3,664
83
3,747
313
$ 3,434
(11)
20
121
333
(4)
459
20
747
1,115
475
4
2,361
(31)
2,330
183
$ 2,147
–
–
–
–
–
–
(40)
(957)
(1,153)
(183)
(14)
(2,347)
(4)
(2,351)
–
$ (2,351)
–
–
–
–
–
–
10
259
232
81
–
582
20
602
–
$ 602
$ (4)
5
1
(10)
(9)
1
2
–
–
3
4
7
$ 189
206
395
4
399
49
166
290
30
535
58
593
1
8
19
19
2
48
685
1,169
1,424
55
49
3,381
2
10
19
15
7
53
(6)
47
4
$ 43
97
851
1,459
1,643
261
4,311
62
4,373
500
$ 3,873
(1)
–
(1)
–
(1)
–
–
(1)
–
(1)
–
–
–
–
–
–
–
(1)
–
(1)
–
(2)
–
(2)
–
$ (2)
1 Includes all FDIC covered loans and other ACI loans.
2 Other adjustments are required as a result of the accounting for FDIC covered
loans. For additional information, refer to the “FDIC Covered Loans” section
in this Note.
3 The allowance for credit losses for off-balance sheet positions is recorded in
Other liabilities on the Consolidated Balance Sheet.
153
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
Allowance for Credit Losses
(millions of Canadian dollars)
Counterparty-specific allowance
Business and government
Debt securities classified as loans
Total counterparty-specific allowance excluding
acquired credit-impaired loans
Acquired credit-impaired loans1,2
Total counterparty-specific allowance
Collectively assessed allowance for
individually insignificant impaired loans
Residential mortgages
Consumer instalment and other personal
Credit card
Business and government
Total collectively assessed allowance for individually
insignificant impaired loans excluding acquired
credit-impaired loans
Acquired credit-impaired loans1,2
Total collectively assessed allowance for
individually insignificant impaired loans
Collectively assessed allowance for incurred
but not identified credit losses
Residential mortgages
Consumer instalment and other personal
Credit card
Business and government
Debt securities classified as loans
Total collectively assessed allowance for
incurred but not identified credit losses
Allowance for credit losses
Residential mortgages
Consumer instalment and other personal
Credit card
Business and government
Debt securities classified as loans
Total allowance for credit losses excluding
acquired credit-impaired loans
Acquired credit-impaired loans1,2
Total allowance for credit losses
Less: Allowance for off-balance sheet positions3
Allowance for loan losses
Balance
as at
November 1
2014
Provision
for credit
losses
Write-offs
Recoveries
Disposals
Foreign
exchange
and other
adjustments
Balance
as at
October 31
2015
$ 134
213
$
57
(27)
$
(73)
(13)
$ 42
–
347
8
355
22
110
199
22
30
(6)
24
49
577
832
85
(86)
(1)
(87)
(39)
(809)
(1,092)
(125)
42
10
52
12
249
237
42
353
89
1,543
(30)
(2,065)
(5)
540
9
$ (3)
–
(3)
–
(3)
–
–
–
–
–
–
$
(1)
34
33
(5)
28
3
9
41
4
57
14
442
1,513
(2,070)
549
–
71
$ 156
207
363
6
369
47
136
217
28
428
77
505
48
602
924
872
59
2,505
70
712
1,123
1,028
272
3,205
97
3,302
274
$ 3,028
4
3
40
110
(11)
146
53
580
872
252
(38)
1,719
(36)
1,683
19
$ 1,664
–
–
–
–
–
–
(39)
(809)
(1,092)
(198)
(13)
(2,151)
(6)
(2,157)
–
$ (2,157)
–
–
–
–
–
–
12
249
237
84
–
582
19
601
–
$ 601
–
–
–
–
–
6
52
65
90
9
58
657
1,029
1,072
57
–
222
2,873
–
–
–
(3)
–
(3)
–
(3)
–
$ (3)
9
61
106
93
43
312
9
321
20
$ 301
105
793
1,246
1,256
264
3,664
83
3,747
313
$ 3,434
1 Includes all FDIC covered loans and other ACI loans.
2 Other adjustments are required as a result of the accounting for FDIC covered loans.
For additional information, refer to the “FDIC Covered Loans” section in this Note.
3 The allowance for credit losses for off-balance sheet positions is recorded in
Other liabilities on the Consolidated Balance Sheet.
LOANS PAST DUE BUT NOT IMPAIRED
A loan is classified as past due when a borrower has failed to make a
payment by the contractual due date. The following table summarizes
loans that are contractually past due but not impaired as at October 31.
Loans Past Due but not Impaired1
(millions of Canadian dollars)
Residential mortgages
Consumer instalment and other personal
Credit card
Business and government
Total
1 Excludes all ACI loans and debt securities classified as loans.
1-30
days
$ 1,876
5,364
1,340
1,270
$ 9,850
31-60
days
$ 486
812
303
138
$ 1,739
October 31, 2016
61-89
days
Total
1-30
days
$ 161 $ 2,523 $ 1,511
5,023
214
1,317
182
46
1,829
$ 603 $ 12,192 $ 9,680
6,390
1,825
1,454
31-60
days
$ 729
702
287
123
$ 1,841
As at
October 31, 2015
61-89
days
Total
$ 103 $ 2,343
5,923
198
1,761
157
38
1,990
$ 496 $ 12,017
154
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
COLLATERAL
As at October 31, 2016, the fair value of financial collateral held
against loans that were past due but not impaired was $455 million
(October 31, 2015 – $279 million). In addition, the Bank also holds
non-financial collateral as security for loans. The fair value of non-
financial collateral is determined at the origination date of the loan.
A revaluation of non-financial collateral is performed if there has been
a significant change in the terms and conditions of the loan and/or the
loan is considered impaired. Management considers the nature of the
collateral, seniority ranking of the debt, and loan structure in assessing
the value of collateral. These estimated cash flows are reviewed at
least annually, or more frequently when new information indicates
a change in the timing or amount expected to be received.
ACQUIRED CREDIT-IMPAIRED LOANS
ACI loans are comprised of commercial, retail, and FDIC covered loans,
from the acquisitions of South Financial, FDIC-assisted, Chrysler Financial,
and a credit card portfolio within the U.S. strategic cards portfolio, and
had outstanding unpaid principal balances of $6.3 billion, $2.1 billion,
$874 million, and $41 million, respectively, and fair values of $5.6 billion,
$1.9 billion, $794 million, and nil, respectively, at the acquisition dates.
Acquired Credit-Impaired Loans
(millions of Canadian dollars)
As at
October 31 October 31
2015
2016
FDIC-assisted acquisitions
Unpaid principal balance1
Credit related fair value adjustments2
Interest rate and other related premium/(discount)
Carrying value
Counterparty-specific allowance3
Allowance for individually insignificant impaired loans3
Carrying value net of related allowance –
FDIC-assisted acquisitions4
South Financial
Unpaid principal balance1
Credit related fair value adjustments2
Interest rate and other related premium/(discount)
Carrying value
Counterparty-specific allowance3
Allowance for individually insignificant impaired loans3
Carrying value net of related allowance – South Financial
Other5
Unpaid principal balance1
Credit related fair value adjustments2
Carrying value – Other
Total carrying value net of related allowance –
$ 508
(11)
(17)
480
(1)
(35)
$ 636
(12)
(23)
601
(1)
(45)
444
555
529
(15)
(20)
494
(3)
(23)
468
2
(2)
–
853
(18)
(22)
813
(5)
(32)
776
40
(40)
–
Acquired credit-impaired loans
$ 912
$ 1,331
1 Represents contractual amount owed net of charge-offs since the acquisition
of the loan.
2 Credit related fair value adjustments include incurred credit losses on acquisition
and are not accreted to interest income.
3 Management concluded as part of the Bank’s assessment of the ACI loans
that it was probable that higher than estimated principal credit losses
would result in a decrease in expected cash flows subsequent to acquisition.
As a result, counterparty-specific and individually insignificant allowances
have been recognized.
4 Carrying value does not include the effect of the FDIC loss sharing agreement.
5 Includes Chrysler Financial and an acquired credit card portfolio within the U.S.
strategic cards portfolio.
FDIC COVERED LOANS
As at October 31, 2016, the balance of FDIC covered loans was
$480 million (October 31, 2015 – $601 million) and was recorded in
Loans on the Consolidated Balance Sheet. As at October 31, 2016, the
balance of indemnification assets was $22 million (October 31, 2015 –
$39 million) and was recorded in Other assets on the Consolidated
Balance Sheet.
N O T E 9
TRANSFERS OF FINANCIAL ASSETS
LOAN SECURITIZATIONS
The Bank securitizes loans through structured entity or non-structured
entity third parties. Most loan securitizations do not qualify for
derecog nition since in certain circumstances, the Bank continues to
be exposed to substantially all of the prepayment, interest rate, and/or
credit risk associated with the securitized financial assets and has not
transferred substantially all of the risk and rewards of ownership of
the securitized assets. Where loans do not qualify for derecognition,
they are not derecognized from the balance sheet, retained interests
are not recognized, and a securitization liability is recognized for the
cash proceeds received. Certain transaction costs incurred are also
capitalized and amortized using the EIRM.
The Bank securitizes insured residential mortgages under the
National Housing Act Mortgage-Backed Securities (NHA MBS) program
sponsored by the Canada Mortgage and Housing Corporation (CMHC).
The MBS that are created through the NHA MBS program are sold
to the Canada Housing Trust (CHT) as part of the CMB program, sold
to third-party investors, or are held by the Bank. The CHT issues
CMB to third-party investors and uses resulting proceeds to purchase
NHA MBS from the Bank and other mortgage issuers in the Canadian
market. Assets purchased by the CHT are comingled in a single trust
from which CMB are issued. The Bank continues to be exposed to
substantially all of the risks of the underlying mortgages, through
the retention of a seller swap which transfers principal and interest
payment risk on the NHA MBS back to the Bank in return for coupon
paid on the CMB issuance and as such, the sales do not qualify
for derecognition.
The Bank securitizes U.S. originated residential mortgages with
U.S. government agencies which qualify for derecognition from the
Bank’s Consolidated Balance Sheet. As part of the securitization,
the Bank retains the right to service the transferred mortgage loans.
The MBS that are created through the securitization are typically
sold to third-party investors.
The Bank also securitizes personal loans and business and government
loans to entities which may be structured entities. These securitizations
may give rise to derecognition of the financial assets depending on
the individual arrangement of each transaction.
In addition, the Bank transfers credit card receivables, consumer
instalment and other personal loans to structured entities that the
Bank consolidates. Refer to Note 10 for further details.
155
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
The following table summarizes the securitized asset types that did not
qualify for derecognition, along with their associated securitization
liabilities as at October 31.
Financial Assets Not Qualifying for Derecognition Treatment as Part of the Bank’s Securitization Programs
(millions of Canadian dollars)
As at
Nature of transaction
Securitization of residential mortgage loans
Other financial assets transferred related to securitization1
Total
Associated liabilities2
October 31, 2016
October 31, 2015
Fair
value
Carrying
amount
Fair
value
Carrying
amount
$ 26,930
3,342
30,272
$ (30,766)
$ 26,742
3,342
30,084
$ (30,407)
$ 30,355
3,173
33,528
$ (34,142)
$ 30,211
3,170
33,381
$ (33,729)
1 Includes asset-backed securities, asset-backed commercial paper, cash, repurchase
2 Includes securitization liabilities carried at amortized cost of $18 billion as at
agreements, and Government of Canada securities used to fulfill funding
requirements of the Bank’s securitization structures after the initial securitization
of mortgage loans.
October 31, 2016 (October 31, 2015 – $23 billion), and securitization liabilities
carried at fair value of $12 billion as at October 31, 2016 (October 31, 2015 –
$11 billion).
Other Financial Assets Not Qualifying for Derecognition
The Bank enters into certain transactions where it transfers previously
recognized commodities and financial assets, such as, debt and equity
securities, but retains substantially all of the risks and rewards of those
assets. These transferred assets are not derecognized and the transfers
are accounted for as financing transactions. The most common
transactions of this nature are repurchase agreements and securities
lending agreements, in which the Bank retains substantially all of the
associated credit, price, interest rate, and foreign exchange risks and
rewards associated with the assets.
The following table summarizes the carrying amount of financial assets
and the associated transactions that did not qualify for derecognition,
as well as their associated financial liabilities as at October 31.
Other Financial Assets Not Qualifying for Derecognition1
(millions of Canadian dollars)
As at
Carrying amount of assets
Nature of transaction
Repurchase agreements2,3
Securities lending agreements
Total
Carrying amount of
associated liabilities3
October 31 October 31
2016
2015
$ 9,676 $ 24,007
13,967
37,974
14,023
23,699
$ 9,474 $ 23,954
1 Certain comparative amounts have been restated to conform with the presentation
adopted in the current period.
2 Includes $3.7 billion, as at October 31, 2016, of assets related to repurchase
agreements or swaps that are collateralized by physical precious metals
(October 31, 2015 – $4.9 billion).
3 Associated liabilities are all related to repurchase agreements.
TRANSFERS OF FINANCIAL ASSETS QUALIFYING
FOR DERECOGNITION
Transferred financial assets that are derecognized in their
entirety where the Bank has a continuing involvement
Continuing involvement may arise if the Bank retains any contractual
rights or obligations subsequent to the transfer of financial assets.
Certain business and government loans securitized by the Bank are
derecognized from the Bank’s Consolidated Balance Sheet. In instances
where the Bank fully derecognizes business and government loans, the
Bank may be exposed to the risks of transferred loans through a retained
interest. As at October 31, 2016, the fair value of retained interests was
$31 million (October 31, 2015 – $38 million). There are no expected
credit losses on the retained interests of the securitized business and
government loans as the underlying mortgages are all government
insured. A gain or loss on sale of the loans is recognized immediately in
other income after considering the effect of hedge accounting on the
assets sold, if applicable. The amount of the gain or loss recognized
depends on the previous carrying values of the loans involved in the
transfer, allocated between the assets sold and the retained interests
based on their relative fair values at the date of transfer. For the year
ended October 31, 2016, the trading income recognized on the retained
interest was $2 million (October 31, 2015 – $3 million).
Certain portfolios of U.S. residential mortgages originated by the
Bank are sold and derecognized from the Bank’s Consolidated Balance
Sheet. In certain instances, the Bank has a continuing involvement to
service those loans. As at October 31, 2016, the carrying value of
these servicing rights was $25 million (October 31, 2015 – $20 million)
and the fair value was $28 million (October 31, 2015 – $26 million).
A gain or loss on sale of the loans is recognized immediately in
other income. The gain (loss) on sale of the loans for the year ended
October 31, 2016, was $24 million (October 31, 2015 – $12 million).
156
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
N O T E 1 0
STRUCTURED ENTITIES
The Bank uses structured entities for a variety of purposes including:
(1) to facilitate the transfer of specified risks to clients; (2) as financing
vehicles for itself or for clients; or (3) to segregate assets on behalf
of investors. The Bank is typically restricted from accessing the assets
of the structured entity under the relevant arrangements.
The Bank is involved with structured entities that it sponsors, as
well as entities sponsored by third-parties. Factors assessed when
determining if the Bank is the sponsor of a structured entity include
whether the Bank is the predominant user of the entity; whether the
entity’s branding or marketing identity is linked with the Bank; and
whether the Bank provides an implicit or explicit guarantee of the
entity’s performance to investors or other third parties. The Bank
is not considered to be the sponsor of a structured entity if it only
provides arm’s-length services to the entity, for example, by acting
as administrator, distributor, custodian, or loan servicer. Sponsorship
of a structured entity may indicate that the Bank had power over the
entity at inception; however, this is not sufficient to determine if the
Bank consolidates the entity. Regardless of whether or not the Bank
sponsors an entity, consolidation is determined on a case-by-case basis.
SPONSORED STRUCTURED ENTITIES
The following section outlines the Bank’s involvement with key
sponsored structured entities.
Securitizations
The Bank securitizes its own assets and facilitates the securitization
of client assets through structured entities, such as conduits, which
issue asset-backed commercial paper (ABCP) or other securitization
entities which issue longer-dated term securities. Securitizations are
an important source of liquidity for the Bank, allowing it to diversify
its funding sources and to optimize its balance sheet management
approach. The Bank has no rights to the assets as they are owned by
the securitization entity.
The Bank sponsors both single-seller and multi-seller securitization
conduits. Depending on the specifics of the entity, the variable returns
absorbed through ABCP may be significantly mitigated by variable
returns retained by the sellers. The Bank provides liquidity facilities to
certain single-seller and multi-seller conduits for the benefit of ABCP
investors which are structured as loan facilities between the Bank, as
the sole liquidity lender, and the Bank-sponsored trusts. If a trust
experiences difficulty issuing ABCP due to illiquidity in the commercial
market, the trust may draw on the loan facility, and use the proceeds
to pay maturing ABCP. The liquidity facilities can only be drawn if
preconditions are met ensuring that the Bank does not provide credit
enhancement through the loan facilities to the conduit. The Bank’s
exposure to the variable returns of these conduits from its provision
of liquidity facilities and any related commitments is mitigated by the
sellers’ continued exposure to variable returns, as described below.
The Bank provides administration and securities distribution services
to its sponsored securitization conduits, which may result in it holding
an investment in the ABCP issued by these entities. In some cases, the
Bank may also provide credit enhancements or may transact derivatives
with securitization conduits. The Bank earns fees from the conduits
which are recognized when earned.
The Bank sells assets to single-seller conduits which it controls and
consolidates. Control results from the Bank’s power over the entity’s
key economic decisions, predominantly, the mix of assets sold into the
conduit and exposure to the variable returns of the transferred assets,
usually through a derivative or the provision of credit mitigation in the
form of cash reserves, over-collateralization, or guarantees over the
performance of the entity’s portfolio of assets.
Multi-seller conduits provide customers with alternate sources of
financing through the securitization of their assets. These conduits
are similar to single-seller conduits except that assets are received from
more than one seller and comingled into a single portfolio of assets.
The Bank is typically deemed to have power over the entity’s key
economic decisions, namely, the selection of sellers and related assets
sold as well as other decisions related to the management of risk in
the vehicle. Sellers of assets in multi-seller conduits typically continue
to be exposed to the variable returns of their portion of transferred
assets, through derivatives or the provision of credit mitigation.
The Bank’s exposure to the variable returns of multi-seller conduits
from its provision of liquidity facilities and any related commitments
is mitigated by the sellers’ continued exposure to variable returns
from the entity. While the Bank may have power over multi-seller
conduits, it is not exposed to significant variable returns and does
not consolidate such entities.
Investment Funds and Other Asset Management Entities
As part of its asset management business, the Bank creates investment
funds and trusts (including mutual funds), enabling it to provide its
clients with a broad range of diversified exposure to different risk
profiles, in accordance with the client’s risk appetite. Such entities
may be actively managed or may be passively directed, for example,
through the tracking of a specified index, depending on the entity’s
investment strategy. Financing for these entities is obtained through
the issuance of securities to investors, typically in the form of fund units.
Based on each entity’s specific strategy and risk profile, the proceeds
from this issuance are used by the entity to purchase a portfolio of
assets. An entity’s portfolio may contain investments in securities,
derivatives, or other assets, including cash. At the inception of a new
investment fund or trust, the Bank will typically invest an amount of
seed capital in the entity, allowing it to establish a performance history
in the market. Over time, the Bank sells its seed capital holdings to third-
party investors, as the entity’s AUM increases. As a result, the Bank’s
holding of seed capital investment in its own sponsored investment
funds and trusts is typically not significant to the Consolidated Financial
Statements. Aside from any seed capital investments, the Bank’s interest
in these entities is generally limited to fees earned for the provision of
asset management services. The Bank does not typically provide
guarantees over the performance of these funds.
The Bank also sponsors the TD Mortgage Fund (the “Fund”),
which is a mutual fund containing a portfolio of Canadian residential
mortgages sold by the Bank into the Fund. The Bank has a put option
with the Fund under which it is required to repurchase defaulted
mortgage loans at their carrying amount from the Fund. The Bank’s
exposure under this put option is mitigated as the mortgages in the
Fund are collateralized and government guaranteed. In addition to the
put option, the Bank provides a liquidity facility to the Fund for the
benefit of fund unit investors. Under the liquidity facility, the Bank is
obligated to repurchase mortgages at their fair value to enable the
Fund to honour unit-holder redemptions in the event that the Fund
experiences a liquidity event.
As disclosed in Note 28, on April 22, 2016, the Fund was discontinued
and merged with another mutual fund managed by the Bank. The
mortgages held by the Fund were not merged into the other mutual
fund and as a result of the Fund’s discontinuation, the mortgages were
repurchased from the Fund at a fair value of $155 million. Prior to the
discontinuation of the Fund, during the year ended October 31, 2016,
the fair value of the mortgages repurchased from the Fund as a result of
a liquidity event was $21 million (twelve months ended October 31, 2015
– $29 million). Although the Bank had power over the Fund, the Fund
was not consolidated by the Bank prior to its discontinuation as the Bank
did not absorb a significant proportion of variable returns. The variability
related primarily to the credit risk of the underlying mortgages which are
government guaranteed.
The Bank is typically considered to have power over the key
economic decisions of sponsored asset management entities; however,
it does not consolidate an entity unless it is also exposed to significant
variable returns of the entity. This determination is made on a case-by-
case basis, in accordance with the Bank’s consolidation policy.
157
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS Financing Vehicles
The Bank may use structured entities to provide a cost-effective
means of financing its operations, including raising capital or obtaining
funding. These structured entities include: (1) TD Capital Trust III and
TD Capital Trust IV (together the “CaTS Entities”); and (2) TD Covered
Bond Guarantor Limited Partnership and TD Covered Bond (Legislative)
Guarantor Limited Partnership (together the “Covered Bond Entities”).
The CaTS Entities issued innovative capital securities which currently
count as Tier 1 Capital of the Bank, but, under Basel III, are considered
non-qualifying capital instruments and are subject to the Basel III
phase-out rules. The proceeds from these issuances were invested in
assets purchased from the Bank which generate income for distribution
to investors. The Bank is considered to have decision-making power
over the key economic activities of the CaTS Entities; however, it does
not consolidate an entity unless it is also exposed to significant variable
returns of the entity. The Bank is exposed to the risks and returns
from certain CaTS Entities as it holds the residual risks in those entities,
typically through retaining all the voting securities of the entity.
Where the entity’s portfolio of assets are exposed to risks which are
not related to the Bank’s own credit risk, the Bank is considered to be
exposed to significant variable returns of the entity and consolidates
the entity. However, certain CaTS Entities hold assets which are only
exposed to the Bank’s own credit risk. In this case, the Bank does not
absorb significant variable returns of the entity as it is ultimately
exposed only to its own credit risk, and does not consolidate. Refer
to Note 20 for further details.
The Bank issues, or has issued, debt under its covered bond programs
where the principal and interest payments of the notes are guaranteed
by a covered bond entity, with such guarantee secured by a portfolio
of assets held by the entity. Investors in the Bank’s covered bonds
may have recourse to the Bank should the assets of the covered bond
entity be insufficient to satisfy the covered bond liabilities. The Bank
consolidates the Covered Bond Entities as it has power over the key
economic activities and retains all the variable returns in these entities.
THIRD-PARTY SPONSORED STRUCTURED ENTITIES
In addition to structured entities sponsored by the Bank, the Bank is
also involved with structured entities sponsored by third parties. Key
involvement with third-party sponsored structured entities is described
in the following section.
Third-party Sponsored Securitization Programs
The Bank participates in the securitization program of government-
sponsored structured entities, including the CMHC, a Crown corporation
of the Government of Canada, and similar U.S. government-sponsored
entities. The CMHC guarantees CMB issued through the CHT.
The Bank is exposed to the variable returns in the CHT, through
its retention of seller swaps resulting from its participation in the CHT
program. The Bank does not have power over the CHT as its key
economic activities are controlled by the Government of Canada.
The Bank’s exposure to the CHT is included in the balance of
residential mortgage loans as noted in Note 9, and is not disclosed
in the table accompanying this Note.
The Bank participates in the securitization programs sponsored
by U.S. government agencies. The Bank is not exposed to significant
variable returns from these agencies and does not have power over
the key economic activities of the agencies, which are controlled
by the U.S. government.
Investment Holdings and Derivatives
The Bank may hold interests in third-party structured entities,
predominantly in the form of direct investments in securities or
partnership interests issued by those structured entities, or through
derivatives transacted with counterparties which are structured
entities. Investments in, and derivatives with, structured entities
are recognized on the Bank’s Consolidated Balance Sheet. The Bank
does not typically consolidate third-party structured entities where
its involvement is limited to investment holdings and/or derivatives
as the Bank would not generally have power over the key economic
decisions of these entities.
158
Financing Transactions
In the normal course of business, the Bank may enter into financing
transactions with third-party structured entities including commercial
loans, reverse repurchase agreements, prime brokerage margin lending,
and similar collateralized lending transactions. While such transactions
expose the Bank to the structured entities’ counterparty credit risk,
this exposure is mitigated by the collateral related to these transactions.
The Bank typically has neither power nor significant variable returns
due to financing transactions with structured entities and would
not generally consolidate such entities. Financing transactions with
third party-sponsored structured entities are included on the Bank’s
Consolidated Financial Statements and have not been included in the
table accompanying this Note.
Arm’s-length Servicing Relationships
In addition to the involvement outlined above, the Bank may also
provide services to structured entities on an arm’s-length basis, for
example as sub-advisor to an investment fund or asset servicer. Similarly,
the Bank’s asset management services provided to institutional investors
may include transactions with structured entities. As a consequence
of providing these services, the Bank may be exposed to variable
returns from these structured entities, for example, through the receipt
of fees or short-term exposure to the structured entity’s securities.
Any such exposure is typically mitigated by collateral or some other
contractual arrangement with the structured entity or its sponsor.
The Bank generally has neither power nor significant variable returns
from the provision of arm’s-length services to a structured entity and,
consequently does not consolidate such entities. Fees and other
exposures through servicing relationships are included on the Bank’s
Consolidated Financial Statements and have not been included in
the table accompanying this Note.
INVOLVEMENT WITH CONSOLIDATED STRUCTURED ENTITIES
Securitizations
The Bank securitizes consumer instalment, and other personal loans
through securitization entities, predominantly single-seller conduits.
These conduits are consolidated by the Bank based on the factors
described above. Aside from the exposure resulting from its involvement
as seller and sponsor of consolidated securitization conduits described
above, including the liquidity facilities provided, the Bank has no
contractual or non-contractual arrangements to provide financial
support to consolidated securitization conduits. The Bank’s interests
in securitization conduits generally rank senior to interests held by other
parties, in accordance with the Bank’s investment and risk policies.
As a result, the Bank has no significant obligations to absorb losses
before other holders of securitization issuances.
Other Structured Consolidated Structured Entities
Depending on the specific facts and circumstances of the Bank’s
involvement with structured entities, the Bank may consolidate asset
management entities, financing vehicles, or third party-sponsored
structured entities, based on the factors described above. Aside from
its exposure resulting from its involvement as sponsor or investor in the
structured entities as previously discussed, the Bank does not typically
have other contractual or non-contractual arrangements to provide
financial support to these consolidated structured entities.
INVOLVEMENT WITH UNCONSOLIDATED STRUCTURED ENTITIES
The following table presents information related to the Bank’s
unconsolidated structured entities. Unconsolidated structured entities
include both TD and third-party sponsored entities. Securitizations
include holdings in TD-sponsored multi-seller conduits, as well as third-
party sponsored mortgage and asset-backed securitizations, including
government-sponsored agency securities such as CMBs, and U.S.
government agency issuances. Investment Funds and Trusts include
holdings in third party funds and trusts, as well as holdings in
TD-sponsored asset management funds and trusts. Amounts in Other
are predominantly related to investments in community-based U.S.
tax-advantage entities described in Note 12 as well as commitments
to certain U.S. municipal funds. These holdings do not result in
the consolidation of these entities as TD does not have power over
these entities.
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS Carrying Amount and Maximum Exposure to Unconsolidated Structured Entities1
(millions of Canadian dollars)
Securitizations
Investment
funds and
trusts
Other
Total
Securitizations
October 31, 2016
Investment
funds and
trusts
As at
October 31, 2015
Other
Total
FINANCIAL ASSETS
Trading loans, securities,
and other
Derivatives2
Financial assets designated at
fair value through profit or loss
Available-for-sale securities
Held-to-maturity securities
Loans
Other
Total assets
FINANCIAL LIABILITIES
Derivatives2
Obligations related to securities
sold short
Total liabilities
Off-balance sheet exposure3
Maximum exposure to loss from
involvement with unconsolidated
structured entities
Size of sponsored unconsolidated
structured entities4
$ 5,793
–
$ 642
30
$
–
–
$ 6,435
30
$ 6,148
–
$ 1,123
156
$
–
–
$ 7,271
156
16
42,083
48,575
2,891
9
99,367
–
3,002
3,002
16,274
172
509
–
–
–
1,353
346
265
611
131
26
95
–
–
2,903
3,024
214
42,687
48,575
2,891
2,912
103,744
12
42,415
43,820
3,081
7
95,483
–
–
–
346
3,267
3,613
–
3,023
3,023
3,776
20,181
11,869
108
388
–
–
–
1,775
195
232
427
353
39
122
–
–
2,717
2,878
159
42,925
43,820
3,081
2,724
100,136
–
–
–
195
3,255
3,450
1,832
14,054
112,639
873
6,800
120,312
104,329
1,701
4,710
110,740
$ 14,215
$ 1,005
$ 1,750
$ 16,970
$ 10,404
$ 252
$ 1,750
$ 12,406
1 Certain comparative amounts have been restated to conform with the presentation
adopted in the current period.
2 Derivatives primarily subject to vanilla interest rate or foreign exchange risk are not
included in these amounts as those derivatives are designed to align the structured
entity’s cash flows with risks absorbed by investors and are not predominantly
designed to expose the Bank to variable returns created by the entity.
3 For the purposes of this disclosure, off balance-sheet exposure represents the notional
value of liquidity facilities, guarantees, or other off-balance sheet commitments
without considering the effect of collateral or other credit enhancements.
4 The size of sponsored unconsolidated structured entities is provided based on the
most appropriate measure of size for the type of entity: (1) The par value of notes
issued by securitization conduits and similar liability issuers; (2) the total AUM of
investment funds and trusts; and (3) the total fair value of partnership or equity
shares in issue for partnerships and similar equity issuers.
Sponsored Unconsolidated Structured Entities in which the Bank
has no Significant Investment at the End of the Period
Sponsored unconsolidated structured entities in which the Bank has
no significant investment at the end of the period are predominantly
investment funds and trusts created for the asset management business.
The Bank would not typically hold investments, with the exception of
seed capital, in these structured entities. However, the Bank continues
to earn fees from asset management services provided to these entities,
some of which could be based on the performance of the fund. Fees
payable are generally senior in the entity’s priority of payment and would
also be backed by collateral, limiting the Bank’s exposure to loss
from these entities. The Bank’s non-interest income received from its
involvement with these asset management entities was $1.7 billion
(October 31, 2015 − $1.6 billion) for the year ended October 31, 2016.
The total AUM in these entities as at October 31, 2016, was
$191.6 billion (October 31, 2015 − $178.9 billion). Any assets
transferred by the Bank during the period are co-mingled
with assets obtained from third parties in the market. Except as
previously disclosed, the Bank has no contractual or non-contractual
arrangements to provide financial support to unconsolidated
structured entities.
159
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
N O T E 1 1
DERIVATIVES
DERIVATIVE PRODUCT TYPES AND RISK EXPOSURES
The majority of the Bank’s derivative contracts are OTC transactions
that are privately negotiated between the Bank and the counterparty
to the contract. The remainder are exchange-traded contracts
transacted through organized and regulated exchanges and consist
primarily of options and futures.
Interest Rate Derivatives
The Bank uses interest rate derivatives, such as interest rate futures
and forwards, swaps, and options in managing interest rate risks.
Interest rate risk is the impact that changes in interest rates could
have on the Bank’s margins, earnings, and economic value. Changes
in interest rate can impact the market value of fixed rate assets and
liabilities. Further, certain assets and liabilities repayment rates vary
depending on interest rates.
Forward rate agreements are OTC contracts that effectively fix
a future interest rate for a period of time. A typical forward rate
agreement provides that at a pre-determined future date, a cash
settlement will be made between the counterparties based upon
the difference between a contracted rate and a market rate to be
determined in the future, calculated on a specified notional amount.
No exchange of principal amount takes place.
Interest rate swaps are OTC contracts in which two counterparties
agree to exchange cash flows over a period of time based on rates
applied to a specified notional amount. A typical interest rate swap
would require one counterparty to pay a fixed market interest rate
in exchange for a variable market interest rate determined from time
to time, with both calculated on a specified notional amount. No
exchange of principal amount takes place. Certain interest rate swaps
are transacted and settled through a clearing house which acts as
a central counterparty.
Interest rate options are contracts in which one party (the purchaser
of an option) acquires from another party (the writer of an option),
in exchange for a premium, the right, but not the obligation, either
to buy or sell, on a specified future date or series of future dates or
within a specified time, a specified financial instrument at a contracted
price. The underlying financial instrument will have a market price
which varies in response to changes in interest rates. In managing
the Bank’s interest rate exposure, the Bank acts as both a writer and
purchaser of these options. Options are transacted both OTC and
through exchanges. Interest rate futures are standardized contracts
transacted on an exchange. They are based upon an agreement to
buy or sell a specified quantity of a financial instrument on a specified
future date, at a contracted price. These contracts differ from forward
rate agreements in that they are in standard amounts with standard
settlement dates and are transacted on an exchange.
Foreign Exchange Derivatives
The Bank uses foreign exchange derivatives, such as futures, forwards,
and swaps in managing foreign exchange risks. Foreign exchange risk
refers to losses that could result from changes in foreign currency
exchange rates. Assets and liabilities that are denominated in foreign
currencies have foreign exchange risk. The Bank is exposed to non-
trading foreign exchange risk from its investments in foreign operations
when the Bank’s foreign currency assets are greater or less than the
liabilities in that currency; they create foreign currency open positions.
Foreign exchange forwards are OTC contracts in which one
counterparty contracts with another to exchange a specified amount
of one currency for a specified amount of a second currency,
at a future date or range of dates.
Swap contracts comprise foreign exchange swaps and cross-currency
interest rate swaps. Foreign exchange swaps are transactions in which
a foreign currency is simultaneously purchased in the spot market and
sold in the forward market, or vice-versa. Cross-currency interest rate
swaps are transactions in which counterparties exchange principal and
interest cash flows in different currencies over a period of time. These
contracts are used to manage currency and/or interest rate exposures.
Foreign exchange futures contracts are similar to foreign exchange
forward contracts but differ in that they are in standard currency amounts
with standard settlement dates and are transacted on an exchange.
Credit Derivatives
The Bank uses credit derivatives such as credit default swaps (CDS)
and total return swaps in managing risks of the Bank’s corporate loan
portfolio and other cash instruments. Credit risk is the risk of loss
if a borrower or counterparty in a transaction fails to meet its agreed
payment obligations. The Bank uses credit derivatives to mitigate
industry concentration and borrower-specific exposure as part of the
Bank’s portfolio risk management techniques. The credit, legal, and
other risks associated with these transactions are controlled through
well established procedures. The Bank’s policy is to enter into these
transactions with investment grade financial institutions. Credit risk
to these counterparties is managed through the same approval, limit,
and monitoring processes that is used for all counterparties to which
the Bank has credit exposure.
Credit derivatives are OTC contracts designed to transfer the credit
risk in an underlying financial instrument (usually termed as a reference
asset) from one counterparty to another. The most common credit
derivatives are CDS (referred to as option contracts) and total return
swaps (referred to as swap contracts). In option contracts, an option
purchaser acquires credit protection on a reference asset or group of
assets from an option writer in exchange for a premium. The option
purchaser may pay the agreed premium at inception or over a period
of time. The credit protection compensates the option purchaser for
deterioration in value of the reference asset or group of assets upon
the occurrence of certain credit events such as bankruptcy, or changes
in specified credit ratings or credit index. Settlement may be cash
based or physical, requiring the delivery of the reference asset to the
option writer. In swap contracts, one counterparty agrees to pay or
receive from the other cash amounts based on changes in the value
of a reference asset or group of assets, including any returns such
as interest earned on these assets in exchange for amounts that are
based on prevailing market funding rates. These cash settlements
are made regardless of whether there is a credit event.
Other Derivatives
The Bank also transacts in equity and commodity derivatives in both
the exchange and OTC markets.
Equity swaps are OTC contracts in which one counterparty agrees
to pay, or receive from the other, cash amounts based on changes in
the value of a stock index, a basket of stocks or a single stock. These
contracts sometimes include a payment in respect of dividends.
160
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS Equity options give the purchaser of the option, for a premium,
the right, but not the obligation, to buy from or sell to the writer
of an option, an underlying stock index, basket of stocks or single
stock at a contracted price. Options are transacted both OTC and
through exchanges.
Equity index futures are standardized contracts transacted on an
exchange. They are based on an agreement to pay or receive a cash
amount based on the difference between the contracted price level
of an underlying stock index and its corresponding market price level
at a specified future date. There is no actual delivery of stocks that
comprise the underlying index. These contracts are in standard
amounts with standard settlement dates.
Commodity contracts include commodity forwards, futures, swaps,
and options, such as precious metals and energy-related products in
both OTC and exchange markets.
Fair Value of Derivatives – Held or Issued for Trading Purposes
(millions of Canadian dollars)
Average fair value
for the year1
Negative
Positive
October 31, 2016
Fair value as at
balance sheet date
October 31, 2015
Fair value as at
balance sheet date
Positive
Negative
Positive
Negative
Interest rate contracts
Futures
Forward rate agreements
Swaps
Options written
Options purchased
Total interest rate contracts
Foreign exchange contracts
Futures
Forward contracts
Swaps
Cross-currency interest rate swaps
Options written
Options purchased
Total foreign exchange contracts
Credit derivatives
Credit default swaps – protection purchased
Credit default swaps – protection sold
Total credit derivative contracts
Other contracts
Equity contracts
Commodity contracts
Total other contracts
Fair value – trading
$
–
101
26,086
–
516
26,703
–
13,511
–
20,046
–
477
34,034
12
11
23
$
12
44
22,225
466
–
22,747
–
14,296
–
19,883
476
–
34,655
66
11
77
$
1
122
24,069
–
452
24,644
–
16,087
–
17,470
–
542
34,099
–
–
–
$
–
49
20,232
414
–
20,695
–
16,743
–
18,613
568
–
35,924
101
2
103
$
–
3
23,520
–
609
24,132
–
8,783
–
19,630
–
404
28,817
9
11
20
$
32
26
19,983
495
–
20,536
–
9,724
–
18,224
427
–
28,375
55
8
63
816
748
1,564
$ 62,324
1,340
852
2,192
$ 59,671
798
873
1,671
$ 60,414
1,413
663
2,076
$ 58,798
890
726
1,616
$ 54,585
1,317
954
2,271
$ 51,245
1 The average fair value of trading derivatives over a 12-month period had a positive
fair value and a negative fair value of $56.6 billion and $55.4 billion, respectively,
for the year ended October 31, 2015.
Fair Value of Derivatives – Held or Issued for Non-Trading Purposes
(millions of Canadian dollars)
Interest rate contracts
Forward rate agreements
Swaps
Options written
Options purchased
Total interest rate contracts
Foreign exchange contracts
Forward contracts
Swaps
Cross-currency interest rate swaps
Total foreign exchange contracts
Credit derivatives
Credit default swaps – protection purchased
Total credit derivative contracts
Other contracts
Equity contracts
Total other contracts
Fair value – non-trading
October 31, 2016
Fair value as at
balance sheet date
October 31, 2015
Fair value as at
balance sheet date
Positive
Negative
Positive
Negative
$
1
2,676
–
47
2,724
1,870
–
5,912
7,782
–
–
$
–
1,492
3
–
1,495
393
–
3,239
3,632
154
154
$
–
3,806
–
32
3,838
3,408
–
6,518
9,926
43
43
1,322
1,322
$ 11,828
1,346
1,346
$ 6,627
1,046
1,046
$ 14,853
$
–
2,543
2
–
2,545
455
–
1,788
2,243
227
227
958
958
$ 5,973
161
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
The following table distinguishes the derivatives held or issued for
non-trading purposes between those that have been designated
in qualifying hedge accounting relationships and those which have
not been designated in qualifying hedge accounting relationships
as at October 31.
Fair Value of Non-Trading Derivatives
(millions of Canadian dollars)
Derivative Assets
Derivatives in
qualifying
hedging
relationships
Fair
value
Cash
flow
Net
investment
Derivatives
not in
qualifying
hedging
relationships
Derivatives in
qualifying
hedging
relationships
Total
Fair
value
Net
Cash
flow1 investment
Derivatives held or issued for
non-trading purposes
Interest rate contracts
Foreign exchange contracts
Credit derivatives
Other contracts
Fair value – non-trading
Derivatives held or issued for
non-trading purposes
Interest rate contracts
Foreign exchange contracts
Credit derivatives
Other contracts
Fair value – non-trading
$ 495 $
–
–
–
529
7,676
–
525
$ 495 $ 8,730
$ 448 $
–
–
–
596
9,881
–
410
$ 448 $ 10,887
$ –
66
–
–
$ 66
$ –
13
–
–
$ 13
$ 1,700 $ 2,724
7,782
–
1,322
$ 2,537 $ 11,828
40
–
797
$ 869
–
–
–
$ 869
$ (170)
2,847
–
5
$ 2,682
$ 48
643
–
–
$ 691
$ 2,794 $ 3,838
9,926
43
1,046
$ 3,505 $ 14,853
32
43
636
$ 837
–
–
–
$ 837
$ 403
1,650
–
–
$ 2,053
$ 51
537
–
–
$ 588
$ 1,254
56
227
958
$ 2,495
$ 2,545
2,243
227
958
$ 5,973
As at
October 31, 2016
Derivative Liabilities
Derivatives
not in
qualifying
hedging
relationships
Total
$ 748
142
154
1,341
$ 2,385
$ 1,495
3,632
154
1,346
$ 6,627
October 31, 2015
1 These derivatives assets qualify to be offset with certain derivative liabilities on the
Consolidated Balance Sheet. Refer to Note 6 for further details.
The following table discloses the impact of derivatives and non-
derivative instruments designated in hedge accounting relationships
and the related hedged items, where appropriate, in the Consolidated
Statement of Income and in OCI for the years ended October 31.
Results of Hedge Activities Recorded in Net Income and Other Comprehensive Income
(millions of Canadian dollars)
For the years ended October 31
2016
2015
2014
$
23
(4)
19
$
(773)
776
3
$
(142)
113
(29)
1,448
1,285
(11)
36
–
–
7,725
7,047
(4)
(3,732)
–
–
3,849
4,494
1
(1,878)
17
–
2 Amounts are recorded in non-interest income.
3 OCI is presented on a pre-tax basis.
4 Amounts are recorded in net interest income or non-interest income, as applicable.
Fair value hedges
Gains (losses) recognized in income on derivatives1,2
Gains (losses) recognized in income on hedged items attributable to the hedged risk2
Hedge ineffectiveness2
Cash flow hedges
Gains (losses) recognized in OCI on derivatives3
Gains (losses) reclassified from OCI into income4
Hedge ineffectiveness2
Net investment hedges
Gains (losses) recognized in OCI on derivatives1,3
Gains (losses) reclassified from OCI into income hedges4
Hedge ineffectiveness2
1 Includes non-derivative financial instruments such as foreign currency deposit
liabilities. The fair value attributable to the foreign exchange risk of these
non-derivative financial instruments was $21 billion as at October 31, 2016
(October 31, 2015 – $22 billion).
162
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
The following table indicates the periods when hedged cash flows in
designated cash flow hedge accounting relationships are expected to
occur as at October 31.
Hedged Cash Flows
(millions of Canadian dollars)
Cash flow hedges
Cash inflows
Cash outflows
Net cash flows
Cash flow hedges
Cash inflows
Cash outflows
Net cash flows
As at
October 31, 2016
Within
1 year
Over 1 year Over 3 years
to 5 years
to 3 years
Over 5 years
to 10 years
Over 10
years
Total
$ 20,119
(10,311)
$ 9,808
$ 19,364
(26,491)
$ (7,127)
$ 7,514
(15,765)
$ (8,251)
$ 1,988
(6,075)
$ (4,087)
$ 168
–
$ 168
$ 49,153
(58,642)
$ (9,489)
$ 18,125
(10,055)
$ 8,070
$ 19,630
(23,030)
(3,400)
$
$ 12,223
(14,754)
$ (2,531)
$ 3,061
(8,994)
$ (5,933)
$ 517
–
$ 517
$ 53,556
(56,833)
(3,277)
$
October 31, 2015
Income related to interest cash flows is recognized using the EIRM
over the life of the underlying instrument. Foreign currency translation
gains and losses related to future cash flows on hedged items are
recognized as incurred.
During the years ended October 31, 2016, and October 31, 2015,
there were no significant instances where forecasted hedged
transactions failed to occur.
The following table presents gains (losses) on non-trading derivatives
that have not been designated in qualifying hedge accounting
relationships. These gains (losses) are partially offset by gains (losses)
recorded on the Consolidated Statement of Income and on the
Consolidated Statement of Other Comprehensive Income on related
non-derivative instruments.
Gains (Losses) on Non-Trading Derivatives not Designated
in Qualifying Hedge Accounting Relationships1
(millions of Canadian dollars)
For the years ended October 31
Interest rate contracts
Foreign exchange contracts
Credit derivatives
Equity
Other contracts
Total
1 Amounts are recorded in non-interest income.
2016
2015
$ (147)
7
(70)
2
–
$ (208)
$ (108)
(23)
(35)
2
–
$ (164)
2014
$
(66)
13
(100)
10
–
$ (143)
NOTIONAL AMOUNTS
The notional amounts are not recorded as assets or liabilities as
they represent the face amount of the contract to which a rate
or price is applied to determine the amount of cash flows to be
exchanged. Notional amounts do not represent the potential gain
or loss associated with the market risk nor indicative of the credit
risk associated with derivative financial instruments.
163
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
The following table discloses the notional amount of over-the-counter
and exchange-traded derivatives.
Over-the-Counter and Exchange-Traded Derivatives
(millions of Canadian dollars)
October 31
2016
As at
October 31
2015
Trading
Over-the-Counter1
Non
clearing
house
Clearing
house2
Exchange-
traded
Total
Non-
trading3
Total
Total
Notional
Interest rate contracts
Futures
Forward rate agreements
Swaps
Options written
Options purchased
Total interest rate contracts
Foreign exchange contracts
Futures
Forward contracts
Swaps
Cross-currency interest rate swaps
Options written
Options purchased
Total foreign exchange contracts
Credit derivatives
Credit default swaps – protection purchased
Credit default swaps – protection sold
Total credit derivative contracts
Other contracts
Equity contracts
Commodity contracts
Total other contracts
Total
$
– $
388,754
4,430,548
–
–
4,819,302
–
118,517
560,316
14,841
16,717
710,391
$ 438,709
–
–
42,543
68,989
550,241
214
$ 438,709 $
507,271
4,990,864
57,384
85,706
6,079,934
507,485
1,072,602 6,063,466
57,724
87,787
1,075,237 7,155,171
– $ 438,709 $ 261,425
372,891
4,636,437
29,235
34,445
5,334,433
340
2,081
–
–
– 1,127,778
–
–
556,542
–
–
32,097
32,683
–
– 1,749,100
4,039
439
4,478
1,541
419
1,960
–
246
246
47,371
22,627
69,998
$ 4,824,026 $ 2,531,449
7
–
–
–
–
–
7
–
–
–
7
1,127,778
–
556,542
32,097
32,683
1,749,107
–
7
32,875 1,160,653
–
645,783
32,097
32,683
122,116 1,871,223
–
89,241
–
–
37
713,690
–
548,953
23,973
23,286
1,309,939
5,580
858
6,438
3,853
–
3,853
9,433
858
10,291
8,333
904
9,237
112,335
40,678
25,834
23,414
64,092
138,169
$ 614,340 $ 7,969,815 $ 1,234,041 $ 9,203,856 $ 6,791,778
32,835
–
32,835
120,884
46,287
167,171
88,049
46,287
134,336
1 Collateral held under a Credit Support Annex to help reduce counterparty credit
risk is in the form of high quality and liquid assets such as cash and high quality
government securities. Acceptable collateral is governed by the Collateralized
Trading Policy.
2 Derivatives executed through a central clearing house reduces settlement risk due
to the ability to net settle offsetting positions for capital purposes and therefore
receive preferential capital treatment compared to those settled with non-central
clearing house counterparties.
3 Includes $894 billion of over-the-counter derivatives that are transacted with
clearing houses (October 31, 2015 – $912 billion) and $340 billion of over-the-
counter derivatives that are transacted with non-clearing houses (October 31,
2015 – $374 billion) as at October 31, 2016. There were no exchange-traded
derivatives both as at October 31, 2016 and October 31, 2015.
164
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
The following table discloses the notional principal amount of over-
the-counter derivatives and exchange-traded derivatives based on
their contractual terms to maturity.
Derivatives by Term to Maturity
(millions of Canadian dollars)
Notional Principal
Interest rate contracts
Futures
Forward rate agreements
Swaps
Options written
Options purchased
Total interest rate contracts
Foreign exchange contracts
Futures
Forward contracts
Swaps
Cross-currency interest rate swaps
Options written
Options purchased
Total foreign exchange contracts
Credit derivatives
Credit default swaps – protection purchased
Credit default swaps – protection sold
Total credit derivative contracts
Other contracts
Equity contracts
Commodity contracts
Total other contracts
Total
October 31
2016
As at
October 31
2015
Remaining term to maturity
Within
1 year
$ 383,979
463,517
2,199,711
48,875
79,371
3,175,453
7
1,106,174
–
143,382
30,123
30,973
1,310,659
2,243
180
2,423
Over
1 year to
5 years
$
54,730
43,968
2,941,286
6,456
5,568
3,052,008
–
53,191
–
373,138
1,942
1,669
429,940
4,019
510
4,529
$
Over
5 years
–
–
922,469
2,393
2,848
927,710
–
1,288
–
129,263
32
41
130,624
3,171
168
3,339
Total
Total
$ 438,709
507,485
6,063,466
57,724
87,787
7,155,171
7
1,160,653
–
645,783
32,097
32,683
1,871,223
9,433
858
10,291
$ 261,425
372,891
4,636,437
29,235
34,445
5,334,433
37
713,690
–
548,953
23,973
23,286
1,309,939
8,333
904
9,237
63,738
36,564
100,302
$ 4,588,837
56,719
9,234
65,953
$ 3,552,430
427
489
916
$ 1,062,589
120,884
46,287
167,171
$ 9,203,856
112,335
25,834
138,169
$ 6,791,778
DERIVATIVE-RELATED RISKS
Market Risk
Derivatives, in the absence of any compensating upfront cash
payments, generally have no market value at inception. They obtain
value, positive or negative, as relevant interest rates, foreign exchange
rates, equity, commodity or credit prices or indices change, such that
the previously contracted terms of the derivative transactions have
become more or less favourable than what can be negotiated under
current market conditions for contracts with the same terms and the
same remaining period to expiry.
The potential for derivatives to increase or decrease in value as a
result of the foregoing factors is generally referred to as market risk.
This market risk is managed by senior officers responsible for the
Bank’s trading business and is monitored independently by the Bank’s
risk management group.
Credit Risk
Credit risk on derivatives, also known as counterparty credit risk,
is the risk of a financial loss occurring as a result of the failure of
a counterparty to meet its obligation to the Bank. The Capital Markets
Risk Management area within Wholesale Banking is responsible for
implementing and ensuring compliance with credit policies established
by the Bank for the management of derivative credit exposures.
Derivative-related credit risks are subject to the same credit approval,
limit and monitoring standards that are used for managing other
transactions that create credit exposure. This includes evaluating the
creditworthiness of counterparties, and managing the size, diversification
and maturity structure of the portfolios. The Bank actively engages in risk
mitigation strategies through the use of multi-product derivative master
netting agreements, collateral and other risk mitigation techniques.
Master netting agreements reduce risk to the Bank by allowing the Bank
to close out and net transactions with counterparties subject to such
agreements upon the occurrence of certain events. The effect of these
master netting agreements is shown in the following table. Also shown
in this table, is the current replacement cost, which is the positive fair
value of all outstanding derivatives. The credit equivalent amount is the
sum of the current replacement cost and the potential future exposure,
which is calculated by applying factors supplied by OSFI to the notional
principal amount of the derivatives. The risk-weighted amount is
determined by applying standard measures of counterparty credit risk
to the credit equivalent amount.
165
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
Credit Exposure of Derivatives
(millions of Canadian dollars)
Interest rate contracts
Forward rate agreements
Swaps
Options purchased
Total interest rate contracts
Foreign exchange contracts
Forward contracts
Cross-currency interest rate swaps
Options purchased
Total foreign exchange contracts
Other contracts
Credit derivatives
Equity contracts
Commodity contracts
Total other contracts
Total derivatives
Less: impact of master netting agreements
Total derivatives after netting
Less: impact of collateral
Net derivatives
Qualifying Central Counterparty (QCCP) Contracts
Total
Current Replacement Cost of Derivatives
(millions of Canadian dollars,
except as noted)
October 31
2016
$ 38,574
9,198
2,336
$ 50,108
By sector
Financial
Government
Other
Current replacement cost
Less: impact of master netting
agreements and collateral
Total current replacement cost
By location of risk2
Canada
United States
Other international
United Kingdom
Europe – other
Other
Total Other international
Total current replacement cost
October 31, 2016
As at
October 31, 2015
Current
replacement
cost
Credit
equivalent
amount
Risk-
weighted
amount
Current
replacement
cost
Credit
equivalent
amount
$
26
$
$
132
21,542
495
22,169
$
256
26,041
569
26,866
$
64
11,577
278
11,919
17,756
23,382
542
41,680
3
1,285
777
2,065
65,914
45,646
20,268
8,533
11,735
2,106
$ 13,841
32,874
40,645
954
74,473
291
4,963
1,925
7,179
108,518
63,176
45,342
8,881
36,461
15,917
$ 52,378
5,652
9,315
198
15,165
109
1,087
516
1,712
28,796
19,856
8,940
2,146
6,794
3,234
$ 10,028
21,908
638
22,572
11,976
26,148
404
38,528
17
1,079
582
1,678
62,778
39,962
22,816
11,820
10,996
1,937
$ 12,933
67
26,915
727
27,709
20,750
52,070
688
73,508
287
4,185
1,431
5,903
107,120
58,659
48,461
12,173
36,288
14,735
$ 51,023
Canada1
October 31
2015
$ 35,352
9,107
2,111
$ 46,570
October 31
2016
$ 4,374
80
1,128
$ 5,582
United States1
October 31
2015
Other International1
October 31
2015
October 31
2016
$ 4,373
38
837
$ 5,248
$ 6,420
2,193
1,611
$ 10,224
$ 6,405
2,830
1,725
$ 10,960
October 31
2016
$ 49,368
11,471
5,075
$ 65,914
Risk-
weighted
amount
$
21
13,869
359
14,249
4,866
16,645
166
21,677
118
954
365
1,437
37,363
24,957
12,406
3,649
8,757
2,070
$ 10,827
As at
Total
October 31
2015
$ 46,130
11,975
4,673
$ 62,778
54,179
$ 11,735
51,782
$ 10,996
October 31
2016
% mix
October 31
2015
% mix
41.9%
34.2
7.7
8.5
7.7
23.9
100.0%
38.8%
39.8
2.3
13.6
5.5
21.4
100.0%
October 31
2016
$ 4,913
4,009
903
1,002
908
2,813
$ 11,735
October 31
2015
$ 4,268
4,379
256
1,496
597
2,349
$ 10,996
1 Based on geographic location of unit responsible for recording revenue.
2 After impact of master netting agreements and collateral.
Certain of the Bank’s derivative contracts are governed by master
derivative agreements having provisions that may permit the Bank’s
counterparties to require, upon the occurrence of a certain contingent
event: (1) the posting of collateral or other acceptable remedy such
as assignment of the affected contracts to an acceptable counterparty;
or (2) settlement of outstanding derivative contracts. Most often,
these contingent events are in the form of a downgrade of the senior
debt ratings of the Bank, either as counterparty or as guarantor of
one of the Bank’s subsidiaries. At October 31, 2016, the aggregate
net liability position of those contracts would require: (1) the posting
of collateral or other acceptable remedy totalling $233 million
(October 31, 2015 – $97 million) in the event of a one-notch or
two-notch downgrade in the Bank’s senior debt ratings; and (2) funding
totalling nil (October 31, 2015 – nil) following the termination and
settlement of outstanding derivative contracts in the event of a
one-notch or two-notch downgrade in the Bank’s senior debt ratings.
166
Certain of the Bank’s derivative contracts are governed by master
derivative agreements having credit support provisions that permit the
Bank’s counterparties to call for collateral depending on the net mark-
to-market exposure position of all derivative contracts governed by
that master derivative agreement. Some of these agreements may
permit the Bank’s counterparties to require, upon the downgrade of
the senior debt ratings of the Bank, to post additional collateral. As at
October 31, 2016, the fair value of all derivative instruments with credit
risk related contingent features in a net liability position was $15 billion
(October 31, 2015 – $14 billion). The Bank has posted $18 billion
(October 31, 2015 – $16 billion) of collateral for this exposure in the
normal course of business. As at October 31, 2016, the impact of a
one-notch downgrade in the Bank’s senior debt ratings would require the
Bank to post an additional $111 million (October 31, 2015 – $194 million)
of collateral to that posted in the normal course of business. A two-notch
down grade in the Bank’s senior debt ratings would require the Bank to
post an additional $123 million (October 31, 2015 – $228 million) of
collateral to that posted in the normal course of business.
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
N O T E 1 2
INVESTMENT IN ASSOCIATES AND JOINT VENTURES
INVESTMENT IN TD AMERITRADE HOLDING CORPORATION
The Bank has significant influence over TD Ameritrade Holding
Corporation (TD Ameritrade) and accounts for its investment in
TD Ameritrade using the equity method. The Bank’s equity share
in TD Ameritrade’s earnings, excluding dividends, is reported on
a one-month lag basis. The Bank takes into account changes in the
subsequent period that would significantly affect the results.
As at October 31, 2016, the Bank’s reported investment in
TD Ameritrade was 42.38% (October 31, 2015 – 41.54%) of the
outstanding shares of TD Ameritrade with a fair value of $10 billion
(US$8 billion) (October 31, 2015 – $10 billion (US$8 billion)) based
on the closing price of US$34.21 (October 31, 2015 – US$34.47)
on the New York Stock Exchange.
During the year ended October 31, 2016, TD Ameritrade repurchased
12.0 million shares (for the year ended October 31, 2015 – 8.4 million
shares). Pursuant to the Stockholders Agreement in relation to the
Bank’s equity investment in TD Ameritrade, if stock repurchases by
TD Ameritrade cause the Bank’s ownership percentage to exceed 45%,
the Bank is required to use reasonable efforts to sell or dispose of such
excess stock, subject to the Bank’s commercial judgment as to the
optimal timing, amount, and method of sales with a view to maximizing
proceeds from such sales. However, in the event that stock repurchases
by TD Ameritrade cause the Bank’s ownership percentage to exceed
45%, the Bank has no absolute obligation to reduce its ownership
percentage to 45%. In addition, stock repurchases by TD Ameritrade
cannot result in the Bank’s ownership percentage exceeding 47%.
Pursuant to the Stockholders Agreement in relation to the Bank’s
equity investment in TD Ameritrade, the Bank has the right to
designate five of twelve members of TD Ameritrade’s Board of
Directors. The Bank’s designated directors currently include the Bank’s
Group President and Chief Executive Officer and four independent
directors of TD or TD’s U.S. subsidiaries.
TD Ameritrade has no significant contingent liabilities to which
the Bank is exposed. During the years ended October 31, 2016,
and October 31, 2015, TD Ameritrade did not experience any
significant restrictions to transfer funds in the form of cash dividends,
or repayment of loans or advances.
Pursuant to its pre-emptive rights and subject to any required
regulatory approval, the Bank intends to purchase US$400 million
in new common equity from TD Ameritrade in connection with
TD Ameritrade’s acquisition of Scottrade Financial Services, Inc.
(Scottrade). As a result, the Bank’s anticipated pro forma common
stock ownership in TD Ameritrade is expected to be approximately
41.4%. Refer to the “Financial Results Overview – Significant Events
in 2016” section of the MD&A for a discussion of the announced
acquisition of Scottrade Bank.
The condensed financial statements of TD Ameritrade, based on its
consolidated financial statements, are included in the following tables.
Condensed Consolidated Balance Sheets1
(millions of Canadian dollars)
Assets
Receivables from brokers, dealers, and clearing organizations
Receivables from clients, net
Other assets, net
Total assets
Liabilities
Payable to brokers, dealers, and clearing organizations
Payable to clients
Other liabilities
Total liabilities
Stockholders’ equity2
Total liabilities and stockholders’ equity
1 Customers’ securities are reported on a settlement date basis whereas the Bank
reports customers’ securities on a trade date basis.
2 The difference between the carrying value of the Bank’s investment in TD Ameritrade
and the Bank’s share of TD Ameritrade’s stockholders’ equity is comprised of
goodwill, other intangibles, and the cumulative translation adjustment.
Condensed Consolidated Statements of Income
(millions of Canadian dollars, except as noted)
Revenues
Net interest revenue
Fee-based and other revenue
Total revenues
Operating expenses
Employee compensation and benefits
Other
Total operating expenses
Other expense (income)
Pre-tax income
Provision for income taxes
Net income1
Earnings per share – basic (dollars)
Earning per share – diluted (dollars)
1 The Bank’s equity share of net income of TD Ameritrade is subject to adjustments
relating to amortization of intangibles, which are not included.
September 30
2016
September 30
2015
As at
$ 1,596
16,014
21,038
$ 38,648
$ 2,736
25,555
3,583
31,874
6,774
$ 38,648
$ 1,127
16,697
16,661
$ 34,485
$ 3,539
20,966
3,570
28,075
6,410
$ 34,485
For the years ended September 30
2016
2015
2014
$ 789
3,623
4,412
1,111
1,553
2,664
70
1,678
563
$ 1,115
$ 2.10
2.09
$ 764
3,227
3,991
991
1,370
2,361
45
1,585
585
$ 1,000
$ 1.84
1.83
$ 629
2,756
3,385
823
1,168
1,991
17
1,377
524
$ 853
$ 1.55
1.54
167
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
INVESTMENT IN IMMATERIAL ASSOCIATES OR JOINT VENTURES
Except for TD Ameritrade as disclosed above, no associate or joint
venture was individually material to the Bank as of October 31, 2016,
or October 31, 2015. The carrying amount of the Bank’s investment in
individually immaterial associates and joint ventures during the period
was $3.0 billion (October 31, 2015 – $2.8 billion).
Individually immaterial associates and joint ventures consisted
predominantly of investments in private funds or partnerships that
make equity investments, provide debt financing or support
community-based tax-advantaged investments. The investments
in these entities generate a return primarily through the realization
of U.S. federal and state income tax credits, including Low Income
Housing Tax Credits, New Markets Tax Credits and Historic Tax Credits.
N O T E 1 3
SIGNIFICANT ACQUISITIONS AND DISPOSALS
Acquisition of Nordstrom Inc.’s U.S. Credit Card Portfolio
On October 1, 2015, the Bank, through its subsidiary, TD Bank USA,
National Association (TD Bank USA, N.A.), acquired substantially all
of Nordstrom Inc.’s (Nordstrom) existing U.S. Visa and private label
consumer credit card portfolio, with a gross outstanding balance
of $2.9 billion (US$2.2 billion). In addition, the Bank and Nordstrom
entered into a long-term agreement under which the Bank became
the exclusive U.S. issuer of Nordstrom-branded Visa and private label
consumer credit cards to Nordstrom customers.
At the date of acquisition the Bank recorded the credit card
receivables at their fair value of $2.9 billion. The transaction was
treated as an asset acquisition and the pre-tax difference of $73 million
on the date of acquisition of the transaction price over the fair value
of assets acquired has been recorded in non-interest income. The gross
amounts of revenue and credit losses have been recorded on the
Consolidated Statement of Income in the U.S. Retail segment since
that date. Nordstrom shares in a fixed percentage of the revenue and
credit losses incurred. Nordstrom’s share of revenue and credit losses
is recorded in Non-interest expenses on the Consolidated Statement
of Income and related receivables from, or payables to Nordstrom
are recorded in Other assets or Other liabilities, respectively, on the
Consolidated Balance Sheet.
Acquisition of certain CIBC Aeroplan Credit Card Accounts
On December 27, 2013, the Bank, Aimia Inc. (Aimia), and the Canadian
Imperial Bank of Commerce (CIBC) closed a transaction under which
the Bank acquired approximately 50% of CIBC’s existing Aeroplan
credit card portfolio, which primarily included accounts held by
customers who did not have an existing retail banking relationship
with CIBC. The Bank accounted for the purchase as an asset acquisition.
The results of the acquisition have been recorded in the Canadian
Retail segment.
The Bank acquired approximately 540,000 cardholder accounts
with an outstanding balance of $3.3 billion at a price of par plus
$50 million less certain adjustments for total cash consideration of
$3.3 billion. At the date of acquisition, the fair value of credit card
receivables acquired was $3.2 billion and the fair value of an intangible
asset for the purchased credit card relationships was $146 million.
In connection with the purchase agreement, the Bank agreed to
pay CIBC a further $127 million under a commercial subsidy agreement.
This payment was recognized as a non-interest expense in 2014.
Disposal of TD Waterhouse Institutional Services
On November 12, 2013, TD Waterhouse Canada Inc., a subsidiary
of the Bank, completed the sale of the Bank’s institutional services
business, known as TD Waterhouse Institutional Services, to a subsidiary
of National Bank of Canada. The transaction price was $250 million
in cash, subject to certain price adjustment mechanisms. A pre-tax
gain of $231 million was recorded in the Corporate segment in other
income in the first quarter of 2014. An additional pre-tax gain of
$13 million was recorded in the Corporate segment subsequently,
upon the settlement of price adjustment mechanisms.
N O T E 1 4
GOODWILL AND OTHER INTANGIBLES
The fair value of the Bank’s CGUs is determined from internally
developed valuation models that consider various factors and
assumptions such as forecasted earnings, growth rates, price-earnings
multiples, discount rates and terminal multiples. Management is
required to use judgment in estimating the fair value of CGUs, and the
use of different assumptions and estimates in the fair value calculations
could influence the determination of the existence of impairment and
the valuation of goodwill. Management believes that the assumptions
and estimates used are reasonable and supportable. Where possible,
fair values generated internally are compared to relevant market
information. The carrying amounts of the Bank’s CGUs are determined
by management using risk-based capital models to adjust net assets
and liabilities by CGU. These models consider various factors including
market risk, credit risk and operational risk, including investment capital
(comprised of goodwill and other intangibles). Any capital not directly
attributable to the CGUs is held within the Corporate segment. As at the
date of the last impairment test, the amount of capital was approximately
$11 billion and primarily related to treasury assets managed within the
Corporate segment. The Bank’s capital oversight committees provide
oversight to the Bank’s capital allocation methodologies.
Key Assumptions
The recoverable amount of each CGU or group of CGUs has been
determined based on its estimated fair value less costs to sell or
its value-in-use. In assessing value-in-use, estimated future cash
flows based on the Bank’s internal forecast are discounted using
an appropriate pre-tax discount rate.
168
The following were the key assumptions applied in the goodwill
impairment testing:
Discount Rate
The pre-tax discount rates used reflect current market assessments
of the risks specific to each group of CGUs and are dependent on the
risk profile and capital requirements of each group of CGUs.
Terminal Multiple
The earnings included in the goodwill impairment testing for each
operating segment were based on the Bank’s internal forecast, which
projects expected cash flows over the next five years. The pre-tax
terminal multiple for the period after the Bank’s internal forecast was
derived from observable terminal multiples of comparable financial
institutions and ranged from 11 times to 14 times.
In considering the sensitivity of the key assumptions discussed
above, management determined that a reasonable change in any of
the above would not result in the recoverable amount of any of the
groups of CGUs to be less than its carrying amount.
During fiscal 2016, the Bank recorded impairment losses of $98.9 million
on goodwill, which is reflected in the Canadian Retail segment, and
certain intangibles relating to a business that has been experiencing
continued losses. The impairment losses on intangibles are reported in
the Corporate segment as other non-interest expenses.
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS Goodwill by Segment
(millions of Canadian dollars)
Carrying amount of goodwill as at November 1, 2014
Impairment losses2
Foreign currency translation adjustments and other
Carrying amount of goodwill as at October 31, 2015
Impairment losses2
Foreign currency translation adjustments and other
Carrying amount of goodwill as at October 31, 2016
Pre-tax discount rates
2015
2016
1 Goodwill predominantly relates to U.S. personal and commercial banking.
2 Accumulated impairment as at October 31, 2016, was $52 million
(October 31, 2015 – nil).
OTHER INTANGIBLES
The following table presents details of other intangibles as at October 31.
Canadian
Retail
$ 2,249
–
120
2,369
(52)
20
$ 2,337
U.S. Retail1
$ 11,834
–
1,984
13,818
–
357
$ 14,175
Wholesale
Banking
$ 150
–
–
150
–
–
$ 150
Total
$ 14,233
–
2,104
16,337
(52)
377
$ 16,662
9.1–12.4%
9.1–10.7
9.7–10.5%
9.9–10.5
12.4%
12.4
Other Intangibles
(millions of Canadian dollars)
Cost
As at November 1, 2014
Additions
Disposals
Fully amortized intangibles
Foreign currency translation adjustments and other
As at October 31, 2015
Additions
Disposals
Fully amortized intangibles
Foreign currency translation adjustments and other
At October 31, 2016
Amortization and impairment
As at November 1, 2014
Disposals
Impairment losses
Amortization charge for the year
Fully amortized intangibles
Foreign currency translation adjustments and other
As at October 31, 2015
Disposals
Impairment losses
Amortization charge for the year
Fully amortized intangibles
Foreign currency translation adjustments and other
As at October 31, 2016
Net Book Value:
As at October 31, 2015
As at October 31, 2016
Core deposit
intangibles
Credit card
related
intangibles
Internally
generated
software
Other
software
Other
intangibles
$ 2,204
–
–
–
353
2,557
–
–
–
66
$ 2,623
$ 1,598
–
–
162
–
264
2,024
–
–
147
–
54
$ 2,225
$ 738
–
–
–
20
758
–
–
–
4
$ 762
$ 181
–
–
83
–
6
270
–
–
85
–
1
$ 356
$ 1,677
394
(31)
(178)
76
1,938
598
(42)
(226)
(2)
$ 2,266
$ 530
(16)
5
295
(178)
47
683
(37)
36
333
(226)
(3)
$ 786
$ 227
74
(3)
(12)
15
301
64
(7)
(3)
32
$ 387
$ 130
(1)
–
63
(12)
7
187
(6)
3
82
(3)
(2)
$ 261
$ 572
6
–
–
82
660
9
–
–
6
$ 675
$ 299
–
–
50
–
30
379
–
22
44
–
1
$ 446
Total
$ 5,418
474
(34)
(190)
546
6,214
671
(49)
(229)
106
$ 6,713
$ 2,738
(17)
5
653
(190)
354
3,543
(43)
61
691
(229)
51
$ 4,074
$ 533
398
$ 488
406
$ 1,255
1,480
$ 114
126
$ 281
229
$ 2,671
2,639
169
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
N O T E 1 5
LAND, BUILDINGS, EQUIPMENT, AND OTHER DEPRECIABLE ASSETS
The following table presents details of the Bank’s land, buildings,
equipment, and other depreciable assets as at October 31.
Land, Buildings, Equipment, and Other Depreciable Assets
(millions of Canadian dollars)
Land
Buildings
Computer
equipment
Furniture,
fixtures, and
other
depreciable
Leasehold
assets improvements
Total
$ 909
–
(2)
–
111
1,018
–
–
–
(6)
$ 1,012
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
$ 2,897
174
(21)
(62)
268
3,256
175
(72)
(68)
58
$ 3,349
$ 940
134
(18)
–
(62)
141
1,135
148
(42)
–
(68)
(26)
$ 1,147
$ 874
113
(111)
(116)
30
790
265
(4)
(195)
3
$ 859
$ 409
183
(73)
–
(116)
16
419
172
(4)
2
(195)
12
$ 406
$ 1,283
211
(23)
(104)
76
1,443
163
(34)
(241)
(11)
$ 1,320
$ 632
137
(22)
–
(104)
38
681
154
(32)
–
(241)
4
$ 566
$ 1,561
134
(19)
(66)
144
1,754
143
(27)
(47)
35
$ 1,858
$ 613
134
(19)
–
(66)
50
712
147
(27)
6
(47)
6
$ 797
$ 7,524
632
(176)
(348)
629
8,261
746
(137)
(551)
79
$ 8,398
$ 2,594
588
(132)
–
(348)
245
2,947
621
(105)
8
(551)
(4)
$ 2,916
$ 1,018
1,012
$ 2,121
2,202
$ 371
453
$ 762
754
$ 1,042
1,061
$ 5,314
5,482
October 31
2016
$ 8,092
1,634
–
389
11
1,758
906
$ 12,790
As at
October 31
2015
$ 7,810
1,563
216
1,245
104
1,441
869
$ 13,248
Cost
As at November 1, 2014
Additions
Disposals
Fully depreciated assets
Foreign currency translation adjustments and other
As at October 31, 2015
Additions
Disposals
Fully depreciated assets
Foreign currency translation adjustments and other
As at October 31, 2016
Accumulated depreciation and impairment/losses
As at November 1, 2014
Depreciation charge for the year
Disposals
Impairment losses
Fully depreciated assets
Foreign currency translation adjustments and other
As at October 31, 2015
Depreciation charge for the year
Disposals
Impairment losses
Fully depreciated assets
Foreign currency translation adjustments and other
As at October 31, 2016
Net Book Value:
As at October 31, 2015
As at October 31, 2016
N O T E 1 6
OTHER ASSETS
Other Assets
(millions of Canadian dollars)
Accounts receivable and other items
Accrued interest
Cheques and other items in transit
Current income tax receivable
Defined benefit asset
Insurance-related assets, excluding investments
Prepaid expenses
Total
170
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
N O T E 1 7
DEPOSITS
Demand deposits are those for which the Bank does not have the right
to require notice prior to withdrawal. These deposits are in general
chequing accounts.
Notice deposits are those for which the Bank can legally require notice
prior to withdrawal. These deposits are in general savings accounts.
Term deposits are those payable on a fixed date of maturity
Balance Sheet. The deposits are generally term deposits, guaranteed
investment certificates, senior debt, and similar instruments. The
aggregate amount of term deposits in denominations of $100,000 or
more as at October 31, 2016, was $231 billion (October 31, 2015 –
$213 billion).
Certain deposit liabilities are classified as Trading deposits on the
purchased by customers to earn interest over a fixed period. The terms
are from one day to ten years. Accrued interest on deposits, calculated
using the EIRM, is included in Other liabilities on the Consolidated
Consolidated Balance Sheet and accounted for at fair value with
the change in fair value recognized on the Consolidated Statement
of Income.
Deposits
(millions of Canadian dollars)
Personal
Banks1
Business and government2
Designated at fair value through profit or loss3
Trading1
Total
Non-interest-bearing deposits included above
In domestic offices4
In foreign offices
Interest-bearing deposits included above
In domestic offices4
In foreign offices
U.S. federal funds deposited1
Total2,5
By Type
By Country
October 31 October 31
2015
2016
As at
Demand
Notice
Term
Canada United States
International
Total
Total
$ 14,531
8,025
73,011
–
–
$ 203,608
12,745
221,300
176
7,229
$ 95,567 $ 491,198 $ 266,857 $ 445,058
$ 50,180
9,133
127,582
176
79,786
$ 374,521
43
116,634
–
–
$ 234,380
472
93,916
–
44,045
$ 372,813
$ 1,244 $ 439,232 $ 395,818
17,080
3,984
282,678
2,011
1,402
–
28,512
74,759
$ 35,751 $ 853,622 $ 771,737
17,201
317,227
176
79,786
$ 35,401 $ 27,661
47,485
53,089
369,622
409,657
326,885
355,456
84
19
$ 853,622 $ 771,737
1 Includes deposits and advances with the Federal Home Loan Bank.
2 As at October 31, 2016, includes $29 billion in Deposits on the Consolidated
4 Certain comparative amounts have been reclassified to conform with the
presentation adopted in the current period.
Balance Sheet relating to covered bondholders (October 31, 2015 – $24 billion)
and $2 billion (October 31, 2015 – $2 billion) due to TD Capital Trust IV.
3 Included in Other financial liabilities designated at fair value through profit or
5 As at October 31, 2016, includes deposits of $474 billion (October 31, 2015 –
$438 billion) denominated in U.S. dollars and $48 billion (October 31, 2015 –
$36 billion) denominated in other foreign currencies.
loss on the Consolidated Balance Sheet.
Term Deposits
(millions of Canadian dollars)
Within
1 year
Personal
Banks
Business and government
Designated at fair value through profit or loss1
Trading
Total
$ 28,897
9,115
48,211
176
76,677
$ 163,076
Over
1 year to
2 years
$ 9,236
3
19,927
–
1,103
$ 30,269
Over
2 years to
3 years
Over
3 years to
4 years
$ 6,379
3
13,854
–
354
$ 20,590
$ 2,730
–
12,687
–
390
$ 15,807
Over
4 years to
5 years
$ 2,806
–
20,411
–
482
$ 23,699
1 Included in Other financial liabilities designated at fair value through profit or
loss on the Consolidated Balance Sheet.
As at
October 31 October 31
2015
2016
Over
5 years
Total
Total
$
12
12,492
–
780
132 $ 50,180 $ 50,415
10,078
9,133
114,227
127,582
1,402
176
79,786
74,759
$ 13,416 $ 266,857 $ 250,881
Term Deposits due within a Year
(millions of Canadian dollars)
Personal
Banks
Business and government
Designated at fair value through profit or loss1
Trading
Total
1 Included in Other financial liabilities designated at fair value through profit or
loss on the Consolidated Balance Sheet.
October 31
2016
As at
October 31
2015
Within
3 months
$ 9,870
8,797
29,961
102
27,606
$ 76,336
Over 3
months to
6 months
Over 6
months to
12 months
Total
Total
$ 7,794
231
8,064
12
23,930
$ 40,031
$ 11,233
87
10,186
62
25,141
$ 46,709
$ 28,897
9,115
48,211
176
76,677
$ 163,076
$ 28,539
10,058
52,800
1,226
72,408
$ 165,031
171
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
N O T E 1 8
OTHER LIABILITIES
Other Liabilities
(millions of Canadian dollars)
Accounts payable, accrued expenses, and other items
Accrued interest
Accrued salaries and employee benefits
Cheques and other items in transit
Current income tax payable
Deferred tax liabilities
Defined benefit liability
Liabilities related to structured entities
Provisions
Total
October 31
2016
$ 4,401
960
2,829
1,598
58
345
3,011
5,469
1,025
$ 19,696
As at
October 31
2015
$ 3,901
882
2,601
–
69
323
1,947
3,400
1,100
$ 14,223
N O T E 1 9
SUBORDINATED NOTES AND DEBENTURES
Subordinated notes and debentures are direct unsecured obligations
of the Bank or its subsidiaries and are subordinated in right of payment
to the claims of depositors and certain other creditors. Redemptions,
cancellations, exchanges, and modifications of subordinated debentures
qualifying as regulatory capital are subject to the consent and approval
of OSFI.
Subordinated Notes and Debentures
(millions of Canadian dollars, except as noted)
Maturity date
November 2, 20201
September 20, 20223
July 9, 2023
May 26, 2025
June 24, 20255
September 30, 20255
March 4, 20315
September 15, 20315
December 14, 2105
December 18, 2106
Total
Interest
rate (%)
3.3672
4.6442
5.8282
9.150
2.6922
2.9822
4.8592
3.6256
4.7797
5.7637
Earliest par
redemption
date
Reset
spread (%)
1.2502
November 2, 2015
1.0002 September 20, 2017
2.5502
July 9, 2018
n/a4
–
1.2102
June 24, 2020
1.8302 September 30, 2020
3.4902
March 4, 2026
2.2056 September 15, 2026
1.7407 December 14, 20168
1.9907 December 18, 2017
As at
October 31
2016
October 31
2015
$
–
260
650
200
1,517
1,004
1,242
1,968
2,250
1,800
$ 10,891
$
998
267
650
199
1,489
1,000
–
–
2,235
1,799
$ 8,637
1 On November 2, 2015 (“Redemption Date”), the Bank redeemed all of its
outstanding $1 billion 3.367% subordinated debentures due November 2, 2020,
at a redemption price of 100% of the principal amount. Interest on the debentures
ceased to accrue on and after the Redemption Date.
2 Interest rate is for the period to but excluding the earliest par redemption date,
and thereafter, it will be reset at a rate of 3-month Bankers’ Acceptance rate plus
the reset spread noted.
3 Obligation of a subsidiary.
4 Not applicable.
5 Non-viability contingent capital (NVCC). The subordinated notes and debentures
qualify as regulatory capital under OSFI’s Capital Adequacy Requirements (CAR)
guideline. If a NVCC conversion were to occur in accordance with the NVCC
Provisions, the maximum number of common shares that could be issued based on
the formula for conversion set out in the respective prospectus supplements,
assuming there are no declared and unpaid interest on the respective subordinated
notes, as applicable, would be 450 million for the 2.692% subordinated debentures
due June 24, 2025, 300 million for the 2.982% subordinated debentures due
September 30, 2025, 375 million for the 4.859% subordinated debentures due
March 4, 2031 and assuming a Canadian to U.S. dollar exchange rate of 1.00,
450 million for the 3.625% subordinated debentures due September 15, 2031.
6 Interest rate is for the period to but excluding the earliest par redemption date,
and thereafter, it will be reset at a rate of 5-year Mid-Swap Rate plus the reset
spread noted.
7 Interest rate is for the period to but excluding the earliest par redemption date,
and thereafter, it will be reset every 5 years at a rate of 5-year Government of
Canada yield plus the reset spread noted.
8 On October 27, 2016, the Bank announced its intention to exercise its right to
redeem on December 14, 2016 (the “Redemption Date”), all of its outstanding
$2.25 billion 4.779% subordinated debentures due December 14, 2105, at a
redemption price of 100 per cent of the principal amount. Interest on the debentures
will cease to accrue on and after the Redemption Date.
REPAYMENT SCHEDULE
The aggregate remaining maturities of the Bank’s subordinated notes
and debentures are as follows:
Maturities
(millions of Canadian dollars)
Within 1 year
Over 1 year to 3 years
Over 3 years to 4 years
Over 4 years to 5 years
Over 5 years
Total
172
October 31
2016
$ 2,250
–
–
–
8,641
$ 10,891
As at
October 31
2015
$ 998
–
–
–
7,639
$ 8,637
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
N O T E 2 0
CAPITAL TRUST SECURITIES
The Bank issued innovative capital securities through two structured
entities: TD Capital Trust III (Trust III) and TD Capital Trust IV (Trust IV).
TD CAPITAL TRUST III SECURITIES – SERIES 2008
On September 17, 2008, Trust III, a closed-end trust, issued TD Capital
Trust III Securities – Series 2008 (TD CaTS III). The proceeds from the
issuance were invested in trust assets purchased from the Bank. Each
TD CaTS III may be automatically exchanged, without the consent of
the holders, into 40 non-cumulative Class A First Preferred Shares,
Series A9 of the Bank on the occurrence of certain events. TD CaTS III
are reported on the Consolidated Balance Sheet as Non-controlling
interests in subsidiaries because the Bank consolidates Trust III.
TD CAPITAL TRUST IV NOTES – SERIES 1 TO 3
On January 26, 2009, Trust IV issued TD Capital Trust IV Notes – Series 1
due June 30, 2108 (TD CaTS IV − 1) and TD Capital Trust IV Notes –
Series 2 due June 30, 2108 (TD CaTS IV − 2) and on September 15, 2009,
issued TD Capital Trust IV Notes – Series 3 due June 30, 2108
(TD CaTS IV − 3, and collectively TD CaTS IV Notes). The proceeds from
the issuances were invested in bank deposit notes. Each TD CaTS IV − 1
and TD CaTS IV − 2 may be automatically exchanged into non-cumulative
Class A First Preferred Shares, Series A10 of the Bank and each
TD CaTS IV − 3 may be automatically exchanged into non-cumulative
Class A First Preferred Shares, Series A11 of the Bank, in each case,
without the consent of the holders, on the occurrence of certain
events. On each interest payment date in respect of which certain
events have occurred, holders of TD CaTS IV Notes will be required
to invest interest paid on such TD CaTS IV Notes in a new series of
non-cumulative Class A First Preferred Shares of the Bank. The Bank
does not consolidate Trust IV because it does not absorb significant
returns of Trust IV as it is ultimately exposed only to its own credit
risk. Therefore, TD CaTS IV Notes are not reported on the Bank’s
Consolidated Balance Sheet but the deposit notes issued to Trust IV
are reported in Deposits on the Consolidated Balance Sheet. Refer
to Notes 10 and 17 for further details.
TD announced on February 7, 2011, that, based on OSFI’s
February 4, 2011 Advisory which outlined OSFI’s expectations regarding
the use of redemption rights triggered by regulatory event clauses in
non-qualifying capital instruments, it expects to exercise a regulatory
event redemption right only in 2022 in respect of the TD Capital Trust IV
Notes – Series 2 outstanding at that time. As of October 31, 2016,
there was $450 million (October 31, 2015 – $450 million) in principal
amount of TD Capital Trust IV Notes – Series 2 issued and outstanding.
Capital Trust Securities
(millions of Canadian dollars, except as noted)
Included in Non-controlling interests in subsidiaries
on the Consolidated Balance Sheet
TD Capital Trust III Securities – Series 2008
TD CaTS IV Notes issued by Trust IV
TD Capital Trust IV Notes – Series 1
TD Capital Trust IV Notes – Series 2
TD Capital Trust IV Notes – Series 3
Thousands
of units
Distribution/Interest
payment dates
Annual At the option October 31 October 31
2015
of the issuer
yield
2016
Redemption
date
As at
1,000
June 30, Dec. 31
7.243%1 Dec. 31, 20132
$ 989
$ 964
550
450
750
1,750
June 30, Dec. 31
June 30, Dec. 31
June 30, Dec. 31
9.523%3 June 30, 20144
10.000%5 June 30, 20144
6.631%6 Dec. 31, 20144
550
450
750
$ 1,750
550
450
750
$ 1,750
1 From and including September 17, 2008, to but excluding December 31, 2018,
and thereafter at a rate of one half of the sum of 6-month Bankers’ Acceptance
rate plus 4.30%.
2 On the redemption date and on any distribution date thereafter, Trust III may,
with regulatory approval, redeem TD CaTS III in whole, without the consent of
the holders.
4 On or after the redemption date, Trust IV may, with regulatory approval, redeem
the TD CaTS IV – 1, TD CaTS IV – 2 or TD CaTS IV – 3, respectively, in whole or in
part, without the consent of the holders. Due to the phase-out of non-qualifying
instruments under OSFI’s CAR guideline, the Bank expects to exercise a regulatory
event redemption right in 2022 in respect of the TD CaTS IV – 2 outstanding at
that time.
3 From and including January 26, 2009, to but excluding June 30, 2019. Starting
on June 30, 2019, and on every fifth anniversary thereafter, the interest rate will
reset to equal the then 5-year Government of Canada yield plus 10.125%.
5 From and including January 26, 2009, to but excluding June 30, 2039. Starting on
June 30, 2039, and on every fifth anniversary thereafter, the interest rate will reset
to equal the then 5-year Government of Canada yield plus 9.735%.
6 From and including September 15, 2009, to but excluding June 30, 2021. Starting
on June 30, 2021, and on every fifth anniversary thereafter, the interest rate will
reset to equal the then 5-year Government of Canada yield plus 4.0%.
N O T E 2 1
EQUITY
COMMON SHARES
The Bank is authorized by its shareholders to issue an unlimited
number of common shares, without par value, for unlimited
consideration. The common shares are not redeemable or convertible.
Dividends are typically declared by the Board of Directors of the Bank
on a quarterly basis and the amount may vary from quarter to quarter.
PREFERRED SHARES
The Bank is authorized by its shareholders to issue, in one or more
series, an unlimited number of Class A First Preferred Shares, without
nominal or par value. Non-cumulative preferential dividends are
payable quarterly, as and when declared by the Board of Directors
of the Bank. Preferred shares issued after January 1, 2013, include
NVCC Provisions, necessary for the preferred shares to qualify
as regulatory capital under OSFI’s CAR guideline. NVCC Provisions
require the conversion of the preferred shares into a variable number
of common shares of the Bank if OSFI determines that the Bank is,
or is about to become, non-viable and that after conversion of all
non-common capital instruments, the viability of the Bank is expected
to be restored, or if the Bank has accepted or agreed to accept a
capital injection or equivalent support from a federal or provincial
government without which the Bank would have been determined
by OSFI to be non-viable.
173
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
The following table summarizes the shares issued and outstanding
and treasury shares held as at October 31.
Common and Preferred Shares Issued and Outstanding and Treasury Shares Held
(millions of shares and millions of Canadian dollars)
October 31, 2016
October 31, 2015
Common Shares
Balance as at beginning of year
Proceeds from shares issued on exercise of stock options
Shares issued as a result of dividend reinvestment plan
Purchase of shares for cancellation
Balance as at end of year – common shares
Preferred Shares – Class A
Series S
Series T
Series Y
Series Z
Series 11
Series 31
Series 51
Series 71
Series 91
Series 111
Series 121
Series 141
Balance as at end of year – preferred shares
Treasury shares – common2,3
Balance as at beginning of year
Purchase of shares
Sale of shares
Balance as at end of year – treasury shares – common
Treasury shares – preferred2,3
Balance as at beginning of year
Purchase of shares
Sale of shares
Balance as at end of year – treasury shares – preferred
Number
of shares
1,856.2
4.9
6.0
(9.5)
1,857.6
5.4
4.6
5.5
4.5
20.0
20.0
20.0
14.0
8.0
6.0
28.0
40.0
176.0
1.1
104.9
(105.6)
0.4
0.1
5.1
(5.0)
0.2
Amount
$ 20,294
186
335
(104)
$ 20,711
$
135
115
137
113
500
500
500
350
200
150
700
1,000
$ 4,400
$
$
$
$
(49)
(5,769)
5,787
(31)
(3)
(115)
113
(5)
Number
of shares
1,846.2
3.3
6.7
–
1,856.2
5.4
4.6
5.5
4.5
20.0
20.0
20.0
14.0
8.0
6.0
–
–
108.0
1.6
98.2
(98.7)
1.1
–
9.9
(9.8)
0.1
Amount
$ 19,811
128
355
–
$ 20,294
$
135
115
137
113
500
500
500
350
200
150
–
–
$ 2,700
$
$
$
$
(54)
(5,269)
5,274
(49)
(1)
(244)
242
(3)
1 NVCC Series 1, 3, 5, 7, 9, 11, 12, and 14 Preferred Shares qualify as regulatory
capital under OSFI’s CAR guideline. If a NVCC conversion were to occur in
accordance with the NVCC Provisions, the maximum number of common shares
that could be issued based on the formula for conversion set out in the respective
terms and conditions applicable to each Series of shares, assuming there are no
declared and unpaid dividends on the respective Series of shares at the time of
conversion, as applicable, would be 100 million, 100 million, 100 million, 70 million,
40 million, 30 million, 140 million, and 200 million, respectively.
Preferred Shares Terms and Conditions
2 When the Bank purchases its own shares as part of its trading business, they
are classified as treasury shares and the cost of these shares is recorded as a
reduction in equity.
3 Certain comparative amounts have been restated to conform with the presentation
adopted in the current period.
Fixed Rate Preferred Shares
Series 112
Rate Reset Preferred Shares4
Series S
Series Y
Series 12
Series 32
Series 52
Series 72
Series 92
Series 122
Series 142
Floating Rate Preferred Shares4,5
Series T
Series Z
Issue date
Annual
yield (%)1
Reset Next redemption/ Convertible
into1
conversion date1
spread (%)1
July 21, 2015
4.9
n/a October 31, 20203
n/a
June 11, 2008
July 16, 2008
June 4, 2014
July 31, 2014
December 16, 2014
March 10, 2015
April 24, 2015
January 14, 2016
September 8, 2016
July 31, 2013
October 31, 2013
3.371
3.5595
3.9
3.8
3.75
3.6
3.7
5.5
4.85
n/a
n/a
1.60
1.68
2.24
2.27
2.25
2.79
2.87
4.66
4.12
July 31, 2018
October 31, 2018
October 31, 2019
July 31, 2019
January 31, 2020
July 31, 2020
October 31, 2020
April 30, 2021
October 31, 2021
Series T
Series Z
Series 2
Series 4
Series 6
Series 8
Series 10
Series 13
Series 15
1.60
July 31, 2018
1.68 October 31, 2018
Series S
Series Y
1 Non-cumulative preferred dividends for each Series are payable quarterly, as and
3 Subject to regulatory consent, redeemable on or after October 31, 2020, at
when declared by the Board of Directors. The dividend rate of the Rate Reset
Preferred Shares will reset on the next redemption/conversion date and every
five years thereafter to equal the then five-year Government of Canada bond yield
plus the reset spread noted. Rate Reset Preferred Shares are convertible to the
corresponding Series of Floating Rate Preferred Shares, and vice versa. If converted
into a Series of Floating Rate Preferred Shares, the dividend rate for the quarterly
period will be equal to the then 90-day Government of Canada Treasury bill yield
plus the reset spread noted.
2 Non-viability contingent capital.
a redemption price of $26.00, and thereafter, at a declining redemption price.
4 Subject to regulatory consent, redeemable on the redemption date noted and every
five years thereafter, at $25 per share. Convertible on the conversion date noted
and every five years thereafter if not redeemed. If converted, the holders have the
option to convert back to the original Series of preferred shares every five years.
5 Subject to a redemption price of $25.50 per share if redeemed prior to July 31, 2018,
for Series T and October 31, 2018, for Series Z.
174
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
Currently, these limitations do not restrict the payment of dividends on
common shares or preferred shares.
NON-CONTROLLING INTERESTS IN SUBSIDIARIES
The following are included in non-controlling interests in subsidiaries
of the Bank.
(millions of Canadian dollars)
REIT preferred stock, Series A
TD Capital Trust III Securities – Series 20081
Total
As at
October 31 October 31
2015
2016
$ 661
989
$ 1,650
$ 646
964
$ 1,610
1 Refer to Note 20 for a description of the TD Capital Trust III securities.
REIT Preferred Stock, Fixed-to-Floating Rate Exchangeable
Non-Cumulative Perpetual Preferred Stock, Series A
A real estate investment trust, Northgroup Preferred Capital Corporation
(Northgroup REIT), a subsidiary of TD Bank, N.A., issued 500,000 shares
of Fixed-to-Floating Rate Exchangeable Non-Cumulative Perpetual
Preferred Stock, Series A (Series A shares). Each Series A share is entitled
to semi-annual non-cumulative cash dividends, if declared, at a per
annum rate of 6.378% until October 17, 2017, and at a per annum
rate of three-month LIBOR plus 1.1725% payable quarterly thereafter.
The Series A shares are redeemable by Northgroup REIT, subject to
regulatory consent, at a price of US$1,000 plus a make-whole amount
at any time after October 15, 2012, and prior to October 15, 2017,
and at a price of US$1,000 per Series A share on October 15, 2017, and
every five years thereafter. Each Series A share may be automatically
exchanged, without the consent of the holders, into a newly issued share
of preferred stock of TD Bank, N.A. on the occurrence of certain events.
NORMAL COURSE ISSUER BID
On December 9, 2015, the Bank announced that the Toronto Stock
Exchange and OSFI approved the Bank’s normal course issuer bid
(NCIB) to repurchase for cancellation up to 9.5 million of the Bank’s
common shares. During the year ended October 31, 2016, the Bank
completed its share repurchase under the NCIB and repurchased
9.5 million common shares at an average price of $51.23 per share
for a total amount of $487 million.
DIVIDEND REINVESTMENT PLAN
The Bank offers a dividend reinvestment plan for its common
shareholders. Participation in the plan is optional and under the terms
of the plan, cash dividends on common shares are used to purchase
additional common shares. At the option of the Bank, the common
shares may be issued from the Bank’s treasury at an average market
price based on the last five trading days before the date of the dividend
payment, with a discount of between 0% to 5% at the Bank’s
discretion, or from the open market at market price. During the year,
6.0 million common shares at a discount of 0% were issued from
the Bank’s treasury (2015 – 6.7 million common shares at a discount
of 0%) under the dividend reinvestment plan.
DIVIDEND RESTRICTIONS
The Bank is prohibited by the Bank Act from declaring dividends on
its preferred or common shares if there are reasonable grounds for
believing that the Bank is, or the payment would cause the Bank to
be, in contravention of the capital adequacy and liquidity regulations
of the Bank Act or directions of OSFI. The Bank does not anticipate
that this condition will restrict it from paying dividends in the normal
course of business.
The Bank is also restricted from paying dividends in the event that
either Trust III or Trust IV fails to pay semi-annual distributions or
interest in full to holders of their respective trust securities, TD CaTS III
and TD CaTS IV Notes. In addition, the ability to pay dividends on
common shares without the approval of the holders of the outstanding
preferred shares is restricted unless all dividends on the preferred
shares have been declared and paid or set apart for payment.
N O T E 2 2
TRADING-RELATED INCOME
Trading assets and liabilities, including trading derivatives, certain
securities and loans held within a trading portfolio that are designated
at fair value through profit or loss, trading loans and trading deposits,
are measured at fair value, with gains and losses recognized on the
Consolidated Statement of Income.
Trading-related income comprises Net interest income, Trading
income (losses), and income from financial instruments designated
at fair value through profit or loss that are managed within a trading
portfolio, all recorded on the Consolidated Statement of Income. Net
interest income arises from interest and dividends related to trading
assets and liabilities, and is reported net of interest expense and income
associated with funding these assets and liabilities in the following
table. Trading income (loss) includes realized and unrealized gains and
losses on trading assets and liabilities. Realized and unrealized gains
and losses on financial instruments designated at fair value through
profit or loss are included in Non-interest income on the Consolidated
Statement of Income.
Trading-related income excludes underwriting fees and commissions
on securities transactions, which are shown separately on the
Consolidated Statement of Income.
Trading-related income by product line depicts trading income for
each major trading category.
Trading-Related Income
(millions of Canadian dollars)
Net interest income (loss)
Trading income (loss)
Financial instruments designated at fair value through profit or loss1
Total
By product
Interest rate and credit portfolios
Foreign exchange portfolios
Equity and other portfolios
Financial instruments designated at fair value through profit or loss1
Total
1 Excludes amounts related to securities designated at fair value through profit
or loss that are not managed within a trading portfolio, but which have been
combined with derivatives to form economic hedging relationships.
For the years ended October 31
2016
$ 934
395
6
1,335
742
622
(35)
6
$ 1,335
2015
$ 1,380
(223)
(5)
1,152
636
467
54
(5)
$ 1,152
2014
$ 1,337
(349)
(9)
979
601
385
2
(9)
$ 979
175
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
N O T E 2 3
INSURANCE
INSURANCE REVENUE AND EXPENSES
Insurance revenue is presented on the Consolidated Statement of
Income under insurance revenue and claims-related expenses including
the impact of reinsurance.
Insurance Revenue and Insurance Claims and Related Expenses1
(millions of Canadian dollars)
Insurance Revenue
Earned Premiums
Gross
Reinsurance ceded
Net earned premiums
Fee income and other revenue2
Insurance Revenue
Insurance Claims and Related Expenses
Gross
Reinsurance ceded
Insurance Claims and Related Expenses
For the years ended October 31
2016
2015
2014
$ 4,226
933
3,293
503
3,796
3,086
624
$ 2,462
$ 4,186
891
3,295
463
3,758
2,734
234
$ 2,500
$ 4,389
856
3,533
350
3,883
3,041
208
$ 2,833
1 Certain comparative amounts have been reclassified to conform with the
2 Ceding commissions received and paid are included within fee income and
presentation adopted in the current year.
other revenue. Ceding commissions paid and netted against fee income in 2016
were $142 million (2015 – $177 million; 2014 – $182 million).
RECONCILIATION OF CHANGES IN LIABILITIES FOR PROPERTY
AND CASUALTY INSURANCE
For property and casualty insurance, the recognized liabilities are
comprised of a provision for unpaid claims (refer to the following
section (a)) and unearned premiums (refer to the following section (b)).
(a) Movement in Provision for Unpaid Claims
The following table presents movements in the property and casualty
insurance net provision for unpaid claims during the year.
Movement in Provision for Unpaid Claims
(millions of Canadian dollars)
Balance as at beginning of year
Claims costs for current accident year
Prior accident years claims development
(favourable) unfavourable
Increase (decrease) due to changes
in assumptions:
Discount rate
Provision for adverse deviation
Claims and related expenses
Claims paid during the year for:
Current accident year
Prior accident years
Increase (decrease) in other recoverables
Balance as at end of year
October 31, 2016
October 31, 2015
Reinsurance/
Other
recoverable
$ 138
366
Gross
$ 4,757
2,804
Net
$ 4,619
2,438
Gross
$ 4,371
2,415
Reinsurance/
Other
recoverable
$ 148
6
Net
$ 4,223
2,409
(264)
(16)
(248)
(163)
11
(174)
(4)
30
2,566
(1,189)
(960)
(2,149)
40
$ 5,214
(3)
6
353
(135)
(8)
(143)
40
$ 388
(1)
24
2,213
(1,054)
(952)
(2,006)
–
$ 4,826
18
41
2,311
(1,003)
(929)
(1,932)
7
–
–
17
–
(34)
(34)
7
$ 4,757
$ 138
18
41
2,294
(1,003)
(895)
(1,898)
–
$ 4,619
(b) Movement in Provision for Unearned Premiums
The following table presents movements in the property and casualty
insurance unearned premiums during the year.
Movement in Provision for Unearned Premiums
(millions of Canadian dollars)
Balance as at beginning of year
Written premiums
Earned premiums
Balance as at end of year
October 31, 2016
October 31, 2015
Gross
Reinsurance
Net
Gross
Reinsurance
$ 1,590
3,039
(3,054)
$ 1,575
$
–
105
(105)
–
$
$ 1,590
2,934
(2,949)
$ 1,575
$ 1,559
3,074
(3,043)
$ 1,590
$
–
87
(87)
–
$
Net
$ 1,559
2,987
(2,956)
$ 1,590
176
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
(c) Other Movements in Insurance Liabilities
Other movements of $85 million in insurance liabilities (nil as at
October 31, 2015) consist of changes in life and health insurance
policy benefit liabilities and other insurance payables that were
caused primarily by the aging of in-force business and changes
in actuarial assumptions.
PROPERTY AND CASUALTY CLAIMS DEVELOPMENT
The following table shows the estimates of cumulative incurred claims
for the nine most recent accident years, with subsequent developments
during the periods and together with cumulative payments to date.
The original reserve estimates are evaluated monthly for redundancy
or deficiency. The evaluation is based on actual payments in full or
partial settlement of claims and current estimates of claims liabilities
for claims still open or claims still unreported.
Incurred Claims by Accident Year
(millions of Canadian dollars)
Net ultimate claims cost at end of accident year
Revised estimates
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Current estimates of cumulative claims
Cumulative payments to date
Net undiscounted provision for unpaid claims
Effect of discounting
Provision for adverse deviation
Net provision for unpaid claims
2008
and prior
2009
2010
2011
2012
2013
2014
2015
2016
Total
$ 3,335 $ 1,598 $ 1,742 $ 1,724 $ 1,830 $ 2,245 $ 2,465 $ 2,409 $ 2,438
Accident year
3,366
3,359
3,423
3,527
3,631
3,612
3,646
3,623
3,623
(3,425)
198
1,627
1,663
1,720
1,763
1,753
1,756
1,740
–
1,740
(1,660)
80
1,764
1,851
1,921
1,926
1,931
1,904
–
–
1,904
(1,766)
138
1,728
1,823
1,779
1,768
1,739
–
–
–
1,739
(1,556)
183
1,930
1,922
1,884
1,860
–
–
–
–
1,860
(1,516)
344
2,227 2,334 2,367
–
2,191 2,280
–
–
2,158
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,158 2,280 2,367
(1,617) (1,523) (1,353) (1,054)
757 1,014
–
–
–
–
–
–
–
–
2,438
541
1,384 $ 4,639
(250)
437
$ 4,826
SENSITIVITY TO INSURANCE RISK
A variety of assumptions are made related to the future level of claims,
policyholder behaviour, expenses and sales levels when products are
designed and priced, as well as when actuarial liabilities are determined.
Such assumptions require a significant amount of professional judgment.
The insurance claims provision is sensitive to certain assumptions. It has
not been possible to quantify the sensitivity of certain assumptions such
as legislative changes or uncertainty in the estimation process. Actual
experience may differ from the assumptions made by the Bank.
For property and casualty insurance, the main assumption underlying
the claims liability estimates is that past claims development experience
can be used to project future claims development and hence ultimate
claims costs. As such, these methods extrapolate the development of
paid and incurred losses, average costs per claim and claim numbers
based on the observed development of earlier years and expected loss
ratios. Claims liabilities estimates are based on various quantitative and
qualitative factors including the discount rate, the margin for adverse
deviation, reinsurance, trends in claims severity and frequency, and
other external drivers.
Qualitative and other unforeseen factors could negatively impact the
Bank’s ability to accurately assess the risk of the insurance policies that
the Bank underwrites. In addition, there may be significant lags
between the occurrence of an insured event and the time it is actually
reported to the Bank and additional lags between the time of reporting
and final settlements of claims.
The following table outlines the sensitivity of the Bank’s property
and casualty insurance claims liabilities to reasonably possible
movements in the discount rate, the margin for adverse deviation,
and the frequency and severity of claims, with all other assumptions
held constant. Movements in the assumptions may be non-linear.
Sensitivity of Critical Assumptions – Property and Casualty Insurance Contract Liabilities
(millions of Canadian dollars)
As at
October 31, 2016
October 31, 2015
Impact on net
income (loss)
before
income taxes
Impact on
equity
Impact on net
income (loss)
before
income taxes
Impact on
equity
Impact of an absolute change of 1% in key assumptions
Discount rate assumption used
Increase in assumption
Decrease in assumption
Margin for adverse deviation assumption used
Increase in assumption
Decrease in assumption
Impact of an absolute change of 5% in key assumptions
Frequency of claims
Increase in assumption
Decrease in assumption
Severity of claims
Increase in assumption
Decrease in assumption
$ 135
(145)
(47)
47
(32)
32
(240)
240
$ 98
(106)
(35)
35
(23)
23
(175)
175
$ 127
(136)
(45)
45
(32)
32
(219)
219
$ 94
(100)
(33)
33
(24)
24
(161)
161
177
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
For life and health insurance, critical assumptions used in the
measurement of insurance contract liabilities are determined by
the Appointed Actuary. The processes used to determine critical
assumptions are as follows:
• Mortality, morbidity and lapse assumptions are based on industry
and historical company data.
• Expense assumptions are based on an annually updated expense
study that is used to determine expected expenses for future years.
• Asset reinvestment rates are based on projected earned rates,
and liabilities are calculated using the Canadian Asset Liability
Method (CALM).
A sensitivity analysis for possible movements in the life and health
insurance business assumptions was performed and the impact is not
significant to the Bank’s Consolidated Financial Statements.
CONCENTRATION OF INSURANCE RISK
Concentration risk is the risk resulting from large exposures to similar
risks that are positively correlated.
Risk associated with automobile, residential and other products may
vary in relation to the geographical area of the risk insured. Exposure
to concentrations of insurance risk, by type of risk, is mitigated by
ceding these risks through reinsurance contracts, as well as careful
selection and implementation of underwriting strategies, which is in
turn largely achieved through diversification by line of business and
geographical areas. For automobile insurance, legislation is in place at
a provincial level and this creates differences in the benefits provided
among the provinces.
As at October 31, 2016, for the property and casualty insurance
business, 67.3% of net written premiums were derived from
auto mobile policies (October 31, 2015 – 68.9%) followed by residential
with 32.2% (October 31, 2015 – 30.6%). The distribution by provinces
show that business is mostly concentrated in Ontario with 57.6%
of net written premiums (October 31, 2015 – 59.0%). The Western
provinces represented 28.6% (October 31, 2015 – 28.8%), followed
by the Atlantic provinces with 7.8% (October 31, 2015 – 6.3%),
and Québec at 6.0% (October 31, 2015 – 5.9%).
Concentration risk is not a major concern for the life and health
insurance business as it does not have a material level of regional
specific characteristics like those exhibited in the property and casualty
insurance business. Reinsurance is used to limit the liability on a single
claim. Concentration risk is further limited by diversification across
uncorrelated risks. This limits the impact of a regional pandemic and
other concentration risks. To improve understanding of exposure to
this risk, a pandemic scenario is tested annually.
N O T E 2 4
SHARE-BASED COMPENSATION
STOCK OPTION PLAN
The Bank maintains a stock option program for certain key employees.
Options on common shares are periodically granted to eligible employees
of the Bank under the plan for terms of ten years and vest over
a four-year period. These options provide holders with the right to
purchase common shares of the Bank at a fixed price equal to the
closing market price of the shares on the day prior to the date the
options were issued. Under this plan, 21.7 million common shares have
been reserved for future issuance (October 31, 2015 – 23.6 million).
The outstanding options expire on various dates to December 9, 2025.
The following table summarizes the Bank’s stock option activity and
related information, adjusted to reflect the impact of the stock
dividend on a retrospective basis, for the years ended October 31.
Stock Option Activity
(millions of shares and Canadian dollars)
Number outstanding, beginning of year
Granted
Exercised
Forfeited/cancelled
Number outstanding, end of year
Exercisable, end of year
2016
Weighted-
average
of shares exercise price
Number
18.4
2.5
(4.9)
(0.6)
15.4
$ 40.65
53.15
35.21
48.29
$ 44.18
2015
Weighted-
average
exercise price
$ 36.72
52.46
30.31
44.25
$ 40.65
Number
of shares
19.4
2.6
(3.3)
(0.3)
18.4
5.5
$ 37.19
7.0
$ 35.90
2014
Weighted-
average
exercise price
$ 33.89
47.59
31.32
39.60
$ 36.72
$ 31.18
Number
of shares
22.0
2.6
(5.0)
(0.2)
19.4
7.1
The weighted average share price for the options exercised in 2016 was
$54.69 (2015 – $53.98; 2014 – $52.15).
The following table summarizes information relating to stock options
outstanding and exercisable as at October 31, 2016.
Range of Exercise Prices
(millions of shares and Canadian dollars)
$32.99 – $36.63
$36.64 – $40.22
$40.54 – $44.61
$44.74 – $47.59
$52.46 – $53.15
178
Options outstanding
Options exercisable
Number of
shares
outstanding
Weighted-
average
remaining
contractual
Weighted-
average
life (years) exercise price
2.5
2.4
2.9
2.9
4.7
3.7
4.3
6.0
6.0
8.5
35.35
37.23
40.55
47.02
52.80
Number of
shares
Weighted-
average
exercisable exercise price
2.5
2.4
–
0.6
–
35.35
37.23
–
44.74
–
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
For the year ended October 31, 2016, the Bank recognized
compensation expense for stock option awards of $6.5 million
(October 31, 2015 – $19.8 million; October 31, 2014 – $25.6 million).
For the year ended October 31, 2016, 2.5 million (October 31, 2015 –
2.6 million; October 31, 2014 – 2.6 million) options were granted
by the Bank at a weighted-average fair value of $4.93 per option
(2015 – $9.06 per option; 2014 – $9.29 per option).
The deferred share units are not redeemable by the participant until
termination of employment or directorship. Once these conditions are
met, the deferred share units must be redeemed for cash no later than
the end of the next calendar year. Dividend equivalents accrue to the
participants in the form of additional units. As at October 31, 2016,
6.2 million deferred share units were outstanding (October 31, 2015 –
6.5 million).
The following table summarizes the assumptions used for estimating
the fair value of options for the twelve months ended October 31.
Assumptions Used for Estimating Fair Value of Options
(in Canadian dollars, except as noted)
2016
2015
2014
Risk-free interest rate
Expected option life (years)
Expected volatility1
Expected dividend yield
Exercise price/share price
1.00%
1.44%
1.90%
6.3 years
15.82%
3.45%
$ 53.15
6.3 years
25.06%
3.65%
$ 52.46
6.2 years
27.09%
3.66%
$ 47.59
1 Expected volatility is calculated based on the average daily volatility measured over
a historical period corresponding to the expected option life.
OTHER SHARE-BASED COMPENSATION PLANS
The Bank operates restricted share unit and performance share unit
plans which are offered to certain employees of the Bank. Under these
plans, participants are awarded share units equivalent to the Bank’s
common shares that generally vest over three years. During the vesting
period, dividend equivalents accrue to the participants in the form
of additional share units. At the maturity date, the participant receives
cash representing the value of the share units. The final number of
performance share units will vary from 80% to 120% of the number
of units outstanding at maturity (consisting of initial units awarded
plus additional units in lieu of dividends) based on the Bank’s total
shareholder return relative to the average of a peer group of large
financial institutions. The number of such share units outstanding under
these plans as at October 31, 2016, was 26 million (2015 – 26 million).
The Bank also offers deferred share unit plans to eligible employees
and non-employee directors. Under these plans, a portion of the
participant’s annual incentive award may be deferred, or in the case
of non-employee directors, a portion of their annual compensation may
be delivered as share units equivalent to the Bank’s common shares.
N O T E 2 5
EMPLOYEE BENEFITS
DEFINED BENEFIT PENSION AND OTHER POST-EMPLOYMENT
BENEFIT (OPEB) PLANS
The Bank’s principal pension plans, consisting of The Pension Fund
Society of The Toronto-Dominion Bank (the “Society”) and the
TD Pension Plan (Canada) (TDPP), are defined benefit plans for
Canadian Bank employees. The Society was closed to new members
on January 30, 2009, and the TDPP commenced on March 1, 2009.
Benefits under the principal pension plans are determined based upon
the period of plan participation and the average salary of the member
in the best consecutive five years in the last ten years of combined
plan membership.
Funding for the Bank’s principal pension plans is provided by
contributions from the Bank and members of the plans, as applicable.
In accordance with legislation, the Bank contributes amounts, as
determined on an actuarial basis to the plans and has the ultimate
responsibility for ensuring that the liabilities of the plan are adequately
funded over time. The Bank’s contributions to the principal pension
plans during 2016 were $384 million (2015 – $357 million). The 2016
contributions were made in accordance with the actuarial valuation
reports for funding purposes as at October 31, 2015, for both of
the principal pension plans. The 2015 contributions were made in
accordance with the actuarial valuation reports for funding purposes
as at October 31, 2014, for the Society and the TDPP. The next
valuation date for funding purposes is as at October 31, 2016, for
both of the principal pension plans.
Compensation expense for these plans is recorded in the year
the incentive award is earned by the plan participant. Changes
in the value of these plans are recorded, net of the effects of related
hedges, on the Consolidated Statement of Income. For the year
ended October 31, 2016, the Bank recognized compensation
expense, net of the effects of hedges, for these plans of $467 million
(2015 – $441 million; 2014 – $415 million). The compensation
expense recognized before the effects of hedges was $720 million
(2015 – $471 million; 2014 – $718 million). The carrying amount of
the liability relating to these plans, based on the closing share price,
was $1.8 billion at October 31, 2016 (October 31, 2015 – $1.6 billion),
and is reported in Other liabilities on the Consolidated Balance Sheet.
EMPLOYEE OWNERSHIP PLAN
The Bank also operates a share purchase plan available to Canadian
employees. Employees can contribute any amount of their eligible
earnings (net of source deductions), subject to an annual cap of 10%
of salary to the Employee Ownership Plan. For participating employees
below the level of Vice President, the Bank matches 100% of the
first $250 of employee contributions each year and the remainder
of employee contributions at 50% to an overall maximum of 3.5% of
the employee’s eligible earnings or $2,250, whichever comes first. The
Bank’s contributions vest once an employee has completed two years of
continuous service with the Bank. For the year ended October 31, 2016,
the Bank’s contributions totalled $66 million (2015 – $67 million;
2014 – $65 million) and were expensed as salaries and employee benefits.
As at October 31, 2016, an aggregate of 20 million common shares
were held under the Employee Ownership Plan (October 31, 2015 –
20 million). The shares in the Employee Ownership Plan are purchased
in the open market and are considered outstanding for computing the
Bank’s basic and diluted earnings per share. Dividends earned on the
Bank’s common shares held by the Employee Ownership Plan are used
to purchase additional common shares for the Employee Ownership
Plan in the open market.
The Bank also provides certain post-retirement benefits, which
are generally non-funded. Post-retirement benefit plans, where
offered, generally include health care and dental benefits. Employees
must meet certain age and service requirements to be eligible for
post-retirement benefits and are generally required to pay a portion
of the cost of the benefits.
INVESTMENT STRATEGY AND ASSET ALLOCATION
The primary objective of the Society and the TDPP is to achieve an
annualized real rate of return of 1.50% and 1.75%, respectively, over
rolling ten-year periods. The investments of the Society and the TDPP
are managed with the primary objective of providing reasonable and
stable rates of return, consistent with available market opportunities,
prudent portfolio management, and levels of risk commensurate with
the return expectations and asset mix policy as set out by the risk
budget of 7% and 14% surplus volatility, respectively. The investment
policies for the principal pension plans exclude Pension Enhancement
Account (PEA) assets which are invested at the member’s discretion in
certain mutual funds.
Public debt instruments of both the Society and the TDPP must
meet or exceed a credit rating of BBB- at the time of purchase and
during the holding period. There are no limitations on the maximum
amount allocated to each credit rating above BBB+ for the total
public debt portfolio.
179
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
With respect to the Society’s public debt portfolio, up to 15% of the
total fund can be invested in a bond mandate subject to the following
constraints: debt instruments rated BBB+ to BBB- must not exceed
25%; asset-backed securities must have a minimum credit rating
of AAA and not exceed 25% of the mandate; debt instruments of
non-government entities must not exceed 80%; debt instruments
of non-Canadian government entities must not exceed 20%; debt
instruments of a single non-government or non-Canadian government
entity must not exceed 10%; and debt instruments issued by the
Government of Canada, provinces of Canada, or municipalities must
not exceed 100%, 75%, or 10%, respectively. Also with respect to the
Society’s public debt portfolio, up to 14% of the total fund can be
invested in a bond mandate subject to the following constraints: debt
instruments rated BBB+ to BBB- must not exceed 25%; asset-backed
securities must have a minimum credit rating of AAA and not exceed
25% of the mandate; and there is a limitation of 10% for any one
issuer. The remainder of the public debt portfolio is not permitted to
invest in debt instruments of non-government entities.
The TDPP is not permitted to invest in debt instruments of non-
government entities.
The equity portfolios of both the Society and the TDPP are broadly
diversified primarily across medium to large capitalization quality
companies and income trusts with no individual holding exceeding
10% of the equity portfolio or 10% of the outstanding securities
of any one company at any time. Foreign equities are permitted
to be included to further diversify the portfolio. A maximum of 10%
of a total fund may be invested in emerging market equities.
For both the Society and the TDPP, derivatives can be utilized
provided they are not used to create financial leverage, but rather for
risk management purposes. Both the Society and the TDPP are also
permitted to invest in other alternative investments, such as private
equity, infrastructure equity and real estate.
The asset allocations by asset category for the principal pension plans
(excluding PEA assets) are as follows:
Plan Asset Allocation
(millions of Canadian dollars,
except as noted)
As at October 31, 2016
Debt
Equity
Alternative investments1
Other2
Total
As at October 31, 2015
Debt
Equity
Alternative investments1
Other2
Total
As at October 31, 2014
Debt
Equity
Cash equivalents
Alternative investments1
Other2
Total
Acceptable
range
40-70%
24-42
0-35
n/a
58-76%
24-42
0-10
n/a
58-72%
24-34.5
0-4
0-12.5
n/a
% of
total
62%
33
5
n/a
100%
64%
30
6
n/a
100%
60%
32
2
6
n/a
100%
Society1
Fair value
Quoted
Unquoted
–
$
1,165
31
–
$ 1,196
$
–
1,015
37
–
$ 1,052
$
–
1,228
–
40
–
$ 1,268
$ 2,962
407
208
43
$ 3,620
$ 2,852
346
227
74
$ 3,499
$ 2,489
84
93
188
101
$ 2,955
Acceptable
range
25-56%
44-65
0-20
n/a
44-56%
44-56
n/a
n/a
44-56%
44-56
n/a
n/a
n/a
% of
total
43%
56
1
n/a
100%
50%
50
n/a
n/a
100%
50%
50
n/a
n/a
n/a
100%
TDPP1
Fair value
Quoted
Unquoted
–
$
51
–
–
$ 51
$
–
–
n/a
–
–
$
$
–
–
n/a
n/a
–
–
$
$ 413
488
11
44
$ 956
$ 369
374
n/a
33
$ 776
$ 277
280
n/a
n/a
25
$ 582
1 The Society’s alternative investments primarily include private equity funds, none of
which is invested in the Bank and its affiliates. The principal pension plans also
invest in investment vehicles which may hold shares or debt issued by the Bank.
2 Consists mainly of PEA assets, interest and dividends receivable, and amounts
due to and due from brokers for securities traded but not yet settled.
RISK MANAGEMENT PRACTICES
The principal pension plans’ investments include financial instruments
which are exposed to various risks. These risks include market risk
(including foreign currency, interest rate, inflation, and price risks),
credit risk, longevity risk and liquidity risk. Key material risks faced by
all plans are a decline in interest rates or credit spreads, which could
increase the defined benefit obligation by more than the change in the
value of plan assets, or from longevity risk (that is, lower mortality rates).
Asset-liability matching strategies are focused on obtaining an
appropriate balance between earning an adequate return and having
changes in liability values being hedged by changes in asset values.
The principal pension plans manage these financial risks in accordance
with the Pension Benefits Standards Act, 1985, applicable regulations, as
well as both the principal pension plans’ Statement of Investment Policies
and Procedures (SIPP) and the Management Operating Policies and
Procedures (MOPP). The following are some specific risk management
practices employed by the principal pension plans:
• Monitoring credit exposure of counterparties
• Monitoring adherence to asset allocation guidelines
• Monitoring asset class performance against benchmarks
The Bank’s principal pension plans are overseen by a single retirement
governance structure established by the Human Resources Committee
of the Bank’s Board of Directors. The governance structure utilizes
retirement governance committees who have responsibility to oversee
plan operations and investments, acting in a fiduciary capacity. Where
required, approvals will also be sought from the applicable local body
to comply with local regulatory requirements. Strategic, material plan
changes require the approval of the Bank’s Board of Directors.
OTHER PENSION AND RETIREMENT PLANS
CT Pension Plan
As a result of the acquisition of CT Financial Services Inc. (CT), the
Bank sponsors a pension plan consisting of a defined benefit portion
and a defined contribution portion. The defined benefit portion was
closed to new members after May 31, 1987, and newly eligible
employees joined the defined contribution portion of the plan. The
Bank received regulatory approval to wind-up the defined contribution
portion of the plan effective April 1, 2011. The wind-up was completed
on May 31, 2012. Funding for the defined benefit portion is provided
by contributions from the Bank and members of the plan.
180
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
TD Bank, N.A. Retirement Plans
TD Bank, N.A. and its subsidiaries maintain a defined contribution
401(k) plan covering all employees. The contributions to the plan for the
year ended October 31, 2016, were $121 million (October 31, 2015 –
$103 million; October 31, 2014 – $92 million), which included core
and matching contributions. Annual expense is equal to the Bank’s
contributions to the plan.
TD Bank, N.A. also has frozen defined benefit retirement
plans covering certain legacy TD Banknorth and TD Auto Finance
(legacy Chrysler Financial) employees. TD Bank, N.A. also has
closed post-retirement benefit plans, which include limited medical
coverage and life insurance benefits, covering certain TD Auto Finance
(legacy Chrysler Financial) employees.
Supplemental Employee Retirement Plans
Supplemental employee retirement plans are partially funded by the
Bank for eligible employees.
The following table presents the financial position of the Bank’s principal
pension plans, the principal non-pension post-retirement benefit plan,
and the Bank’s significant other pension and retirement plans.
Employee Benefit Plans’ Obligations, Assets and Funded Status
(millions of Canadian dollars, except as noted)
Change in projected benefit obligation
Projected benefit obligation at beginning of year
Obligations included due to TD Auto Finance plan merger3
Service cost – benefits earned
Interest cost on projected benefit obligation
Remeasurement (gain) loss – financial
Remeasurement (gain) loss – demographic
Remeasurement (gain) loss – experience
Members’ contributions
Benefits paid
Change in foreign currency exchange rate
Past service cost (credit)4,5
Projected benefit obligation as at October 31
Change in plan assets
Plan assets at fair value at beginning of year
Assets included due to TD Auto Finance plan merger3
Interest income on plan assets
Remeasurement gain (loss) – return on plan assets less
interest income
Members’ contributions
Employer’s contributions
Benefits paid
Change in foreign currency exchange rate
Defined benefit administrative expenses
Plan assets at fair value as at October 31
Net defined benefit asset (liability)
Annual expense
Net employee benefits expense includes the following:
Service cost – benefits earned
Net interest cost (income) on net defined
benefit liability (asset)
Past service cost (credit)4,5
Defined benefit administrative expenses
Total expense
Actuarial assumptions used to determine the
projected benefit obligation as at
October 31 (percentage)
Weighted-average discount rate for projected
benefit obligation
Weighted-average rate of compensation increase
Principal
pension plans
2016
2015
2014
$ 5,377 $ 5,321
–
359
219
(279)
18
(71)
69
(259)
–
–
5,377
–
331
191
1,179
–
8
66
(347)
–
–
6,805
$ 4,338
–
282
205
591
44
(1)
66
(204)
–
–
5,321
5,327
–
195
4,805
–
205
4,177
–
208
207
66
384
(347)
–
(9)
5,823
(982)
158
69
357
(259)
–
(8)
5,327
(50)
264
66
302
(204)
–
(8)
4,805
(516)
Principal non-pension
post-retirement
benefit plan1
2014
2015
2016
Other pension and
retirement plans2
2014
2015
2016
$ 553
–
17
21
(9)
–
2
–
(16)
–
–
568
–
–
–
–
–
16
(16)
–
–
–
(568)
$ 557
–
20
23
(12)
–
(21)
–
(14)
–
–
553
–
–
–
–
–
14
(14)
–
–
–
(553)
$ 551 $ 2,743
–
10
105
259
(11)
(12)
–
(265)
45
(11)
2,863
–
18
26
50
(82)
6
–
(12)
–
–
557
$ 2,644
19
13
113
(35)
(11)
17
–
(251)
264
(30)
2,743
$ 2,196
–
10
106
188
129
17
–
(114)
106
6
2,644
–
–
–
1,910
–
74
1,734
18
76
1,575
–
77
–
–
12
(12)
–
–
–
(557)
40
–
101
(265)
39
(4)
1,895
(968)
(31)
–
153
(251)
216
(5)
1,910
(833)
72
–
35
(114)
98
(9)
1,734
(910)
331
359
282
17
20
18
(4)
–
9
14
–
8
$ 336 $ 381
(3)
–
7
$ 286
21
–
–
$ 38
23
–
–
$ 43
26
–
–
$ 44 $
10
31
(11)
7
37
$
13
37
(30)
8
28
$
10
29
6
5
50
3.52%
2.66
4.42%
2.63
4.21%
2.86
3.60%
3.25
4.40%
3.25
4.30%
3.50
3.65%
4.39%
1.18
1.20
4.27%
1.30
1 The rate of increase for health care costs for the next year used to measure the
expected cost of benefits covered for the principal non-pension post-retirement
benefit plan is 5.0%. The rate is assumed to decrease gradually to 3.17% by
the year 2028 and remain at that level thereafter.
2 Includes CT defined benefit pension plan, TD Banknorth defined benefit pension
plan, TD Auto Finance retirement plans, and supplemental employee retirement
plans. Other employee benefit plans operated by the Bank and certain of its
subsidiaries are not considered material for disclosure purposes. The TD Banknorth
defined benefit pension plan was frozen as of December 31, 2008, and no service
credits can be earned after that date. Certain TD Auto Finance defined benefit
pension plans were frozen as of April 1, 2012, and no service credits can be earned
after March 31, 2012.
3 Effective December 31, 2014, certain TD Auto Finance retirement plans were
merged and certain previously undisclosed obligations and assets are now included
in fiscal 2016 and 2015. The opening balances of these obligations and assets for
the year ended October 31, 2015, were $19 million and $18 million, respectively
(October 31, 2014 – $14 million and $16 million, respectively).
4 Includes a settlement gain of $12 million related to a portion of the TDAF defined
benefit pension plan that was settled during 2016.
5 Includes a settlement gain of $35 million related to a portion of the TD Banknorth
defined benefit pension plan that was settled during 2015.
181
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
During the year ended October 31, 2017, the Bank expects to contribute
$438 million to its principal pension plans, $17 million to its principal
non-pension post-retirement benefit plan, and $33 million to its other
pension and retirement plans. Future contribution amounts may change
upon the Bank’s review of its contribution levels during the year.
Assumptions related to future mortality which have been used to
determine the defined benefit obligation and net benefit cost are
as follows:
Assumed Life Expectancy at Age 65
(number of years)
Male aged 65 at measurement date
Female aged 65 at measurement date
Male aged 40 at measurement date
Female aged 40 at measurement date
Principal
pension plans
Principal non-pension
post-retirement
benefit plan
Other pension and
retirement plans
As at October 31
2016
22.1
24.0
23.4
25.1
2015
22.1
23.9
23.3
25.1
2014
21.9
23.8
23.2
25.0
2016
2015
2014
2016
2015
22.1
24.0
23.4
25.1
22.1
23.9
23.3
25.1
21.9
23.8
23.2
25.0
21.4
23.4
22.5
25.0
22.0
24.0
22.5
25.0
2014
22.0
23.3
23.1
25.6
The weighted-average duration of the defined benefit obligation
for the Bank’s principal pension plans, principal non-pension
post-retirement benefit plan and other pension and retirement plans
at the end of the reporting period are 16 years (2015 – 16 years,
2014 – 16 years), 17 years (2015 – 17 years, 2014 – 18 years), and
13 years (2015 – 13 years, 2014 – 13 years), respectively.
The following table provides the sensitivity of the projected benefit
obligation for the Bank’s principal pension plans, the principal
non-pension post-retirement benefit plan, and the Bank’s significant
other pension and retirement plans to actuarial assumptions considered
significant by the Bank. These include discount rate, life expectancy,
rates of compensation increase, and health care cost initial trend rates,
as applicable. For each sensitivity test, the impact of a reasonably
possible change in a single factor is shown with other assumptions
left unchanged.
Sensitivity of Significant Actuarial Assumptions
(millions of Canadian dollars, except as noted)
Impact of an absolute change in significant actuarial assumptions
Discount rate
1% decrease in assumption
1% increase in assumption
Rates of compensation increase
1% decrease in assumption
1% increase in assumption
Life expectancy
1 year decrease in assumption
1 year increase in assumption
Health care cost initial trend rate
1% decrease in assumption
1% increase in assumption
1 An absolute change in this assumption is immaterial.
As at
October 31, 2016
Principal
non-pension
post-
retirement
benefit plan
Principal
pension
plans
Obligation
Other
pension
and
retirement
plans
$ 1,230
(948)
(366)
397
(142)
135
n/a
n/a
$ 103
(81)
n/a1
n/a1
(20)
20
(89)
111
$ 414
(335)
–
–
(86)
84
(4)
5
182
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
The Bank recognized the following amounts on the Consolidated
Balance Sheet.
Amounts Recognized in the Consolidated Balance Sheet
(millions of Canadian dollars)
Other assets
Principal pension plans
Other pension and retirement plans1
Other employee benefit plans2
Total other assets
Other liabilities
Principal pension plans
Principal non-pension post-retirement benefit plan
Other pension and retirement plans1
Other employee benefit plans2
Total other liabilities
Net amount recognized
October 31
2016
October 31
2015
$
–
3
8
11
982
568
971
490
3,011
$ (3,000)
$
95
–
9
104
145
553
833
416
1,947
$ (1,843)
As at
October 31
2014
$
–
9
6
15
516
557
919
401
2,393
$ (2,378)
1 Effective December 31, 2014, certain TD Auto Finance retirement plans were
2 Consists of other defined benefit pension and other post-employment benefit plans
merged. For fiscal 2016 and 2015, these assets and liabilities have been included
in Other pension and retirement plans. Previously, these assets or liabilities were
included in Other employee benefit plans.
operated by the Bank and its subsidiaries that are not considered material for
disclosure purposes.
The Bank recognized the following amounts in the Consolidated
Statement of Other Comprehensive Income.
Amounts Recognized in the Consolidated Statement of Other Comprehensive Income1
(millions of Canadian dollars)
Actuarial gains (losses) recognized in Other Comprehensive Income
Principal pension plans
Principal non-pension post-retirement benefit plan
Other pension and retirement plans2
Other employee benefit plans3
Total actuarial gains (losses) recognized in Other Comprehensive Income
1 Amounts are presented on pre-tax basis.
2 Effective December 31, 2014, certain TD Auto Finance retirement plans were
merged. For fiscal 2016 and 2015, these actuarial gains or losses have been
included in Other pension and retirement plans. Previously, these actuarial gains
or losses were included in Other employee benefit plans.
For the years ended
October 31
2016
October 31
2015
October 31
2014
$
(980)
7
(193)
(56)
$ (1,222)
$ 490
33
1
23
$ 547
$ (371)
26
(266)
(57)
$ (668)
3 Consists of other defined benefit pension and other post-employment benefit plans
operated by the Bank and its subsidiaries that are not considered material for
disclosure purposes.
183
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
For the years ended October 31
2016
2015
2014
$ 2,106
(66)
2,040
$ 1,881
(6)
1,875
$ 1,450
31
1,481
50
2
–
51
103
2,143
51
(229)
(178)
26
(5)
21
1,986
1,003
693
421
2,117
(171)
(116)
156
(131)
$ 1,986
(372)
(1)
8
13
(352)
1,523
(1,279)
414
(865)
14
51
65
723
53
61
496
610
37
1
(11)
4
31
1,512
(623)
(269)
(892)
(9)
(4)
(13)
607
413
284
152
849
220
134
(241)
113
$ 723
(72)
(44)
(126)
(242)
$ 607
2016
2015
$ 2,819
26.5%
$ 2,409
26.3%
$ 2,385
(233)
(439)
(4)
$ 2,143
(2.2)
(4.1)
(0.1)
20.1%
(319)
(556)
(11)
$ 1,523
(3.5)
(6.1)
(0.1)
16.6%
(321)
(489)
(63)
$ 1,512
2014
26.3%
(3.5)
(5.4)
(0.7)
16.7%
N O T E 2 6
INCOME TAXES
The provision for (recovery of) income taxes is comprised of the following.
Provision for (Recovery of) Income Taxes
(millions of Canadian dollars)
Provision for income taxes – Consolidated Statement of Income
Current income taxes
Provision for (recovery of) income taxes for the current period
Adjustments in respect of prior years and other
Total current income taxes
Deferred income taxes
Provision for (recovery of) deferred income taxes related to the origination
and reversal of temporary differences
Effect of changes in tax rates
Recovery of income taxes due to recognition of previously unrecognized deductible
temporary differences and unrecognized tax losses of a prior period
Adjustments in respect of prior years and other
Total deferred income taxes
Total provision for income taxes – Consolidated Statement of Income
Provision for (recovery of) income taxes – Statement of Other Comprehensive Income
Current income taxes
Deferred income taxes
Income taxes – other non-income related items including business
combinations and other adjustments
Current income taxes
Deferred income taxes
Total provision for (recovery of) income taxes
Current income taxes
Federal
Provincial
Foreign
Deferred income taxes
Federal
Provincial
Foreign
Total provision for (recovery of) income taxes
Reconciliation to Statutory Income Tax Rate
(millions of Canadian dollars, except as noted)
Income taxes at Canadian statutory income tax rate
Increase (decrease) resulting from:
Dividends received
Rate differentials on international operations
Other – net
Provision for income taxes and effective income tax rate
184
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
Deferred tax assets and liabilities comprise of the following.
Deferred Tax Assets and Liabilities
(millions of Canadian dollars)
Deferred tax assets
Allowance for credit losses
Land, buildings, equipment, and other depreciable assets
Deferred (income) expense
Trading loans
Employee benefits
Pensions
Losses available for carry forward
Tax credits
Other
Total deferred tax assets1
Deferred tax liabilities
Securities
Intangibles
Goodwill
Total deferred tax liabilities
Net deferred tax assets
Reflected on the Consolidated Balance Sheet as follows:
Deferred tax assets
Deferred tax liabilities2
Net deferred tax assets
1 The amount of temporary differences, unused tax losses, and unused tax credits for
which no deferred tax asset is recognized on the Consolidated Balance Sheet was
$29 million as at October 31, 2016 (October 31, 2015 – $21 million), of which
$7 million (October 31, 2015 – $11 million) is scheduled to expire within five years.
2 Included in Other liabilities on the Consolidated Balance Sheet.
The movement in the net deferred tax asset for the years ended
October 31 was as follows:
Deferred Income Tax Expense (Recovery)
(millions of Canadian dollars)
Consolidated
statement of
income
Other
comprehensive
income
Business
combinations
and other
October 31
2016
As at
October 31
2015
$ 865
29
31
114
841
424
154
165
346
2,969
793
331
106
1,230
1,739
2,084
345
$ 1,739
$ 737
19
65
124
714
114
260
399
322
2,754
664
404
78
1,146
1,608
1,931
323
$ 1,608
2016
Total
Consolidated
statement of
income
Other
comprehensive
income
Business
combinations
and other
2015
Total
Deferred income tax expense
(recovery)
Allowance for credit losses
Land, buildings, equipment,
and other depreciable assets
Deferred (income) expense
Trading loans
Pensions
Employee benefits
Losses available for carry forward
Tax credits
Other deferred tax assets
Securities
Intangible assets
Pensions
Total deferred income tax
$ (128)
$
–
$ –
$ (128)
$ (155)
$
–
$ –
$ (155)
(10)
34
10
30
(132)
106
234
(19)
23
(73)
28
–
–
–
(340)
5
–
–
–
106
–
–
–
–
–
–
–
–
–
(5)
–
–
–
(10)
34
10
(310)
(127)
106
234
(24)
129
(73)
28
(12)
(35)
–
111
(27)
(4)
(42)
(193)
(124)
117
12
–
–
–
142
8
–
–
–
264
–
–
–
–
–
–
–
–
–
(6)
–
–
57
(12)
(35)
–
253
(19)
(4)
(42)
(199)
140
117
69
expense (recovery)
$ 103
$ (229)
$ (5)
$ (131)
$ (352)
$ 414
$ 51
$ 113
Certain taxable temporary differences associated with the Bank’s
investments in subsidiaries, branches and associates, and interests
in joint ventures did not result in the recognition of deferred tax
liabilities as at October 31, 2016. The total amount of these temporary
differences was $51 billion as at October 31, 2016 (October 31, 2015 –
$48 billion).
185
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
N O T E 2 7
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income attributable
to common shareholders by the weighted-average number of common
shares outstanding for the period.
Diluted earnings per share is calculated using the same method as
basic earnings per share except that certain adjustments are made to
net income attributable to common shareholders and the weighted-
average number of shares outstanding for the effects of all dilutive
potential common shares that are assumed to be issued by the Bank.
Basic and Diluted Earnings Per Share
(millions of Canadian dollars, except as noted)
Basic earnings per share
Net income attributable to common shareholders
Weighted-average number of common shares outstanding (millions)
Basic earnings per share (dollars)
Diluted earnings per share
Net income attributable to common shareholders
Net income available to common shareholders including impact of dilutive securities
Weighted-average number of common shares outstanding (millions)
Effect of dilutive securities
Stock options potentially exercisable (millions)1
Weighted-average number of common shares outstanding – diluted (millions)
Diluted earnings per share (dollars)1
1 For the years ended October 31, 2016, October 31, 2015, and October 31, 2014,
the computation of diluted earnings per share did not include any weighted-
average options where the option price was greater than the average market price
of the Bank’s common shares.
The following table presents the Bank’s basic and diluted earnings per
share for the years ended October 31, and reflects the impact of the
stock dividend on the Bank’s basic and diluted earnings per share, as
if it was retrospectively applied to all periods presented.
For the years ended October 31
2016
2015
2014
$ 8,680
1,853.4
4.68
$
$ 7,813
1,849.2
4.22
$
$ 8,680
8,680
1,853.4
$ 7,813
7,813
1,849.2
3.4
1,856.8
4.67
$
4.9
1,854.1
4.21
$
$ 7,633
1,839.1
4.15
$
$ 7,633
7,633
1,839.1
6.2
1,845.3
4.14
$
N O T E 2 8
PROVISIONS, CONTINGENT LIABILITIES, COMMITMENTS, GUARANTEES, PLEDGED ASSETS, AND COLLATERAL
PROVISIONS
The following table summarizes the Bank’s provisions.
Provisions
(millions of Canadian dollars)
Balance as at November 1, 2015
Additions
Amounts used
Release of unused amounts
Foreign currency translation adjustments and other
Balance as of October 31, 2016, before allowance for
credit losses for off-balance sheet instruments
Add: allowance for credit losses for off-balance sheet instruments3
Balance as of October 31, 2016
1 Includes provisions for onerous lease contracts.
2 Certain amounts were reclassified to conform with the presentation adopted
in the current period.
3 Refer to Note 8 for further details.
Restructuring1
$ 486
20
(276)
(38)
6
Litigation
and Other2
$ 301
175
(101)
(53)
5
$ 198
$ 327
Total
$ 787
195
(377)
(91)
11
$ 525
500
$ 1,025
LITIGATION AND OTHER
Litigation and other primarily include provisions relating to legal reserves.
In the ordinary course of business, the Bank and its subsidiaries are
involved in various legal and regulatory actions. The Bank establishes
legal provisions when it becomes probable that the Bank will incur a
loss and the amount can be reliably estimated. The Bank also estimates
the aggregate range of reasonably possible losses (RPL) in its legal
and regulatory actions (that is, those which are neither probable nor
remote), in excess of provisions. As at October 31, 2016, the Bank’s
RPL is from zero to approximately $461 million. The Bank’s provisions
and RPL represent the Bank’s best estimates based upon currently
available information for actions for which estimates can be made,
but there are a number of factors that could cause the Bank’s provisions
and/or RPL to be significantly different from its actual or reasonably
possible losses. For example, the Bank’s estimates involve significant
judgment due to the varying stages of the proceedings, the existence
of multiple defendants in many of such proceedings whose share of
liability has yet to be determined, the numerous yet-unresolved issues
in many of the proceedings, some of which are beyond the Bank’s
control and/or involve novel legal theories and interpretations,
the attendant uncertainty of the various potential outcomes of
such proceedings, and the fact that the underlying matters will change
from time to time. In addition, some matters seek very large or
indeterminate damages.
186
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
In management’s opinion, based on its current knowledge and after
consultation with counsel, the ultimate disposition of these actions,
individually or in the aggregate, will not have a material adverse effect
on the consolidated financial condition or the consolidated cash flows
of the Bank. However, because of the factors listed above, as well as
other uncertainties inherent in litigation and regulatory matters, there
is a possibility that the ultimate resolution of those legal or regulatory
actions may be material to the Bank’s consolidated results of operations
for any particular reporting period.
The following is a description of the Bank’s material legal or
regulatory actions.
Stanford Litigation
The Toronto-Dominion Bank was named as a defendant in Rotstain v.
Trustmark National Bank, et al., a putative class action lawsuit in the
United States District Court for the Northern District of Texas related
to a US$7.2 billion Ponzi scheme perpetrated by R. Allen Stanford, the
owner of Stanford International Bank, Limited (“SIBL”), an offshore bank
based in Antigua. Plaintiffs purport to represent a class of investors
in SIBL-issued certificates of deposit. The Bank provided certain
correspondent banking services to SIBL. Plaintiffs allege that the Bank
and four other banks aided and abetted or conspired with Mr. Stanford
to commit fraud and that the bank defendants received fraudulent
transfers from SIBL by collecting fees for providing certain services.
The Official Stanford Investors Committee, a court-approved
committee representing investors, received permission to intervene in the
lawsuit and has brought similar claims against all the bank defendants.
The court denied in part and granted in part The Toronto-Dominion
Bank’s motion to dismiss the lawsuit on April 21, 2015. The court also
entered a class certification scheduling order, requiring the parties to
conduct discovery and submit briefing regarding class certification. The
class certification motion was fully submitted on October 26, 2015.
Plaintiffs filed an amended complaint asserting certain additional state
law claims against the Bank on June 23, 2015. The Bank’s motion
to dismiss the newly amended complaint in its entirety was fully
submitted on August 18, 2015. On April 22, 2016, the Bank filed
a motion to reconsider the court’s April 2015 dismissal decision with
respect to certain claims by the Official Stanford Investors Committee
(“OSIC”) under the Texas Uniform Fraudulent Transfer Act based on an
intervening change in the law announced by the Texas Supreme Court
on April 1, 2016. On July 28, 2016, the court issued a decision denying
defendants’ motions to dismiss the class plaintiffs’ complaint and to
reconsider with respect to the OSIC’s complaint. TD filed its answer
to class plaintiffs’ complaint on August 26, 2016.
The Toronto-Dominion Bank is also a defendant in two cases filed
in the Ontario Superior Court of Justice: (1) Wide & Dickson v. The
Toronto-Dominion Bank, an action filed by the Joint Liquidators of
SIBL appointed by the Eastern Caribbean Supreme Court, and (2)
Dynasty Furniture Manufacturing Ltd., et al. v. The Toronto-Dominion
Bank, an action filed by five investors in certificates of deposits sold
by Stanford. The suits assert that the Bank acted negligently and
provided knowing assistance to SIBL’s fraud. The court denied the
Bank’s motion for summary judgment in the Joint Liquidators case
to dismiss the action based on the applicable statute of limitations
on November 9, 2015 and designated the limitations issues to be
addressed as part of a future trial on the merits. The parties intend
to schedule a status conference to set a timetable for proceeding with
the Joint Liquidators’ case and dealing with the Dynasty case.
Overdraft Litigation
TD Bank, N.A. was originally named as a defendant in six putative
nationwide class actions challenging the manner in which it calculates
and collects overdraft fees: Dwyer v. TD Bank, N.A. (D. Mass.);
Hughes v. TD Bank, N.A. (D. N.J.); Mascaro v. TD Bank, N.A. (D. D.C.);
Mazzadra, et al. v. TD Bank, N.A. (S.D. Fla.); Kimenker v. TD Bank,
N.A. (D. N.J.); and Mosser v. TD Bank, N.A. (D. Pa.). These actions
were transferred to the United States District Court for the Southern
District of Florida and have now been dismissed or settled. Settlement
payments were made to class members in June 2013, and a second
distribution to eligible class members of residual settlement funds was
made in October 2014. The Court retains jurisdiction over class
members and distributions.
TD Bank, N.A. was subsequently named as a defendant in eleven
putative nationwide class actions challenging the overdraft practices
of TD Bank, N.A. from August 16, 2010 to the present: King, et al. v.
TD Bank, N.A f/k/a Carolina First Bank (D.S.C.); Padilla, et al. v. TD Bank,
N.A. (E.D. Pa.); Hurel v. TD Bank, N.A. and The Toronto-Dominion Bank
(D.N.J.); Koshgarian v. TD Bank, N.A. and The Toronto-Dominion Bank
(S.D.N.Y.); Goodall v. The Toronto-Dominion Bank and TD Bank, N.A.
(M.D. FL.); Klein et al. v. TD Bank, N.A. (D.N.J.); Ucciferri v. TD Bank,
N.A. (D.N.J.); and Austin v. TD Bank, N.A. (D. Conn.); Robinson v.
TD Bank, N.A. (S.D. Fla.) (“Robinson Case No. 60469”); Robinson v.
TD Bank, N.A. (S.D. Fla.) (“Robinson Case No. 60476”); and Mingrone
v. TD Bank, N.A. (E.D.N.Y.). The King action further challenges the
overdraft practices of Carolina First Bank prior to its merger into
TD Bank, N.A. in September 2010. The Toronto-Dominion Bank was
also named as a defendant in the Hurel, Koshgarian, and Goodall
actions, but was subsequently dismissed without prejudice in Hurel. All
eleven of the actions have been consolidated for pretrial proceedings
as MDL 2613 in the United States District Court for the District of
South Carolina. The plaintiffs filed a consolidated amended class action
complaint on June 19, 2015, which governs all of the consolidated
cases other than the Mingrone action. The Mingrone class action
complaint was dismissed without prejudice on July 21, 2015.
The Toronto-Dominion Bank was not named as a defendant in the
consolidated amended class action complaint. On December 10, 2015,
the court granted in part and denied in part TD Bank, N.A.’s motion
to dismiss. Discovery relevant to class certification has been completed,
and the parties’ briefing of class certification issues is in progress.
Credit Card Fees
Between 2011 and 2013, seven proposed class actions were
commenced in British Columbia, Alberta, Saskatchewan, Ontario
and Québec: Coburn and Watson’s Metropolitan Home v. Bank of
America Corporation, et al.; 1023916 Alberta Ltd. v. Bank of America
Corporation, et al.; Macaronies Hair Club v. BOFA Canada Bank, et al.;
The Crown & Hand Pub Ltd. v. Bank of America Corporation, et al.;
Hello Baby Equipment Inc. v. BOFA Canada Bank, et al.; Bancroft-Snell,
et al. v. Visa Canada Corporation, et al.; and 9085-4886 Quebec Inc. v.
Visa Canada Corporation, et al. The defendants in each action are Visa
Canada Corporation (Visa) and MasterCard International Incorporated
(MasterCard) (collectively, the “Networks”), along with TD and several
other financial institutions. The plaintiff class members are Canadian
merchants who accept payment for products and services by Visa and/
or MasterCard. While there is some variance, in most of the actions
it is alleged that, from March 2001 to the present, the Networks
conspired with their issuing banks and acquirers to fix excessive fees
and that certain rules (Honour All Cards, No Discrimination and
No Surcharge) have the effect of increasing the merchant fees. The
actions include claims of civil conspiracy, breach of the Competition
Act, interference with economic relations and unjust enrichment.
Unspecified general and punitive damages are sought on behalf
of the merchant class members. In the lead case proceeding in
British Columbia, the decision to partially certify the action as a class
proceeding was released on March 27, 2014. The certification decision
was appealed by both plaintiff class representatives and defendants.
The appeal hearing took place in December 2014 and the decision was
released on August 19, 2015. While both the plaintiffs and defendants
succeeded in part on their respective appeals, the class period for the
plaintiffs’ key claims has been shortened significantly. At a hearing in
October 2016, the plaintiffs sought to amend their claims to reinstate
the extended class period.
RESTRUCTURING
In fiscal 2015 the Bank recorded restructuring charges of $686 million
($471 million after tax) on a net basis. During 2015 the Bank
commenced its restructuring review and in the second quarter of
2015 recorded $337 million ($228 million after tax) of restructuring
charges and recorded an additional restructuring charge of
187
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS $349 million ($243 million after tax) on a net basis in the fourth
quarter of 2015. The restructuring initiatives were intended to reduce
costs and manage expenses in a sustainable manner and to achieve
greater operational efficiencies. These measures included process
redesign and business restructuring, retail branch and real estate
optimization, and organizational review and primarily related to asset
impairments, exiting of lease agreements, employee severance and
other personnel-related costs.
COMMITMENTS
Credit-related Arrangements
In the normal course of business, the Bank enters into various
commitments and contingent liability contracts. The primary purpose
of these contracts is to make funds available for the financing needs
of customers. The Bank’s policy for requiring collateral security with
respect to these contracts and the types of collateral security held
is generally the same as for loans made by the Bank.
Financial and performance standby letters of credit represent
irrevocable assurances that the Bank will make payments in the event
that a customer cannot meet its obligations to third parties and they
carry the same credit risk, recourse and collateral security requirements
as loans extended to customers. Refer to the Guarantees section in
this Note for further details.
Documentary and commercial letters of credit are instruments issued
on behalf of a customer authorizing a third party to draw drafts on the
Bank up to a certain amount subject to specific terms and conditions.
The Bank is at risk for any drafts drawn that are not ultimately settled
by the customer, and the amounts are collateralized by the assets to
which they relate.
Commitments to extend credit represent unutilized portions of
authorizations to extend credit in the form of loans and customers’
liability under acceptances. A discussion on the types of liquidity
facilities the Bank provides to its securitization conduits is included
in Note 10.
The values of credit instruments reported as follows represent
the maximum amount of additional credit that the Bank could be
obligated to extend should contracts be fully utilized.
Credit Instruments
(millions of Canadian dollars)
Financial and performance standby
letters of credit
Documentary and commercial letters of credit
Commitments to extend credit1
Original term to maturity of one year or less
Original term to maturity of more than one year
Total
As at
October 31 October 31
2015
2016
$ 22,747 $ 21,046
330
436
40,477
41,096
106,274
90,803
$ 170,553 $ 152,656
1 Commitments to extend credit exclude personal lines of credit and credit card lines,
which are unconditionally cancellable at the Bank’s discretion at any time.
In addition, as at October 31, 2016, the Bank is committed to
fund $131 million (October 31, 2015 – $133 million) of private
equity investments.
Long-term Commitments or Leases
The Bank has obligations under long-term non-cancellable leases
for premises and equipment. Future minimum operating lease
commitments for premises and for equipment, where the annual
rental is in excess of $100 thousand, is estimated at $943 million
for 2017; $896 million for 2018; $814 million for 2019, $720 million
for 2020, and $4,582 million for 2021 and thereafter.
Future minimum finance lease commitments where the annual
payment is in excess of $100 thousand, is estimated at $27 million
for 2017; $28 million for 2018; $26 million for 2019, $12 million
for 2020, and $22 million for 2021 and thereafter.
The premises and equipment net rental expense, included under
Non-interest expenses in the Consolidated Statement of Income, was
$1.1 billion for the year ended October 31, 2016 (October 31, 2015 –
$1.1 billion; October 31, 2014 – $0.9 billion).
188
PLEDGED ASSETS AND COLLATERAL
In the ordinary course of business, securities and other assets are
pledged against liabilities or contingent liabilities, including repurchase
agreements, securitization liabilities, covered bonds, obligations related
to securities sold short, and securities borrowing transactions. Assets
are also deposited for the purposes of participation in clearing and
payment systems and depositories or to have access to the facilities
of central banks in foreign jurisdictions, or as security for contract
settlements with derivative exchanges or other derivative counterparties.
Details of assets pledged against liabilities and collateral assets held
or repledged are shown in the following table:
Sources and Uses of Pledged Assets and Collateral1
(millions of Canadian dollars)
As at
October 31 October 31
2015
2016
Sources of pledged assets and collateral
Bank assets
Cash and due from banks
Interest-bearing deposits with banks
Loans
Securities
Other assets
$
187 $
6,106
–
5,862
76,150 69,585
53,546 70,612
751
–
136,740 146,059
Third-party assets2
Collateral received and available for sale or repledging 163,040 150,125
(66,596)
(51,678)
Less: Collateral not repledged
96,444 98,447
233,184 244,506
Uses of pledged assets and collateral3
Derivatives
Obligations related to securities sold under
repurchase agreements
Securities borrowing and lending
Obligations related to securities sold short
Securitization
Covered bond
Clearing systems, payment systems, and depositories
Foreign governments and central banks
Other
Total
12,595 11,478
53,103 70,011
37,874 30,867
22,481 36,303
34,601 36,500
28,668 22,071
4,137
1,320
37,861 31,819
$ 233,184 $ 244,506
4,521
1,480
1 Certain comparative amounts have been restated to conform with the
presentation adopted in the current period.
2 Includes collateral received from reverse repurchase agreements, securities
borrowing, margin loans, and other client activity.
3 Includes $19.1 billion of on-balance sheet assets that the Bank has pledged
and that the counterparty can subsequently repledge as at October 31, 2016
(October 31, 2015 – $33.4 billion).
ASSETS SOLD WITH RECOURSE
In connection with its securitization activities, the Bank typically makes
customary representations and warranties about the underlying assets
which may result in an obligation to repurchase the assets. These
representations and warranties attest that the Bank, as the seller,
has executed the sale of assets in good faith, and in compliance with
relevant laws and contractual requirements. In the event that they do
not meet these criteria, the loans may be required to be repurchased
by the Bank.
GUARANTEES
The following types of transactions represent the principal guarantees
that the Bank has entered into.
Assets Sold With Contingent Repurchase Obligations
The Bank sells mortgage loans, which it continues to service, to the
TD Mortgage Fund (the “Fund”), a mutual fund managed by
the Bank. As part of its responsibilities, the Bank has an obligation
to repurchase mortgage loans when they default or if the Fund
experiences a liquidity event such that it does not have sufficient cash
to honour unit-holder redemptions. On April 22, 2016, the Fund
was discontinued and merged with another mutual fund managed
by the Bank. The mortgages held by the Fund were not merged into
the other mutual fund and as a result of the Fund’s discontinuation,
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
the mortgages were repurchased from the Fund at a fair value of
$155 million. Prior to the discontinuation of the Fund, during the year
ended October 31, 2016, the fair value of the mortgages repurchased
from the Fund as a result of a liquidity event was $21 million
(twelve months ended October 31, 2015 – $29 million). For further
details on the Bank’s involvement with the Fund, refer to Note 10.
Credit Enhancements
The Bank guarantees payments to counterparties in the event that
third party credit enhancements supporting asset pools are insufficient.
Indemnification Agreements
In the normal course of operations, the Bank provides indemnification
agreements to various counterparties in transactions such as service
agreements, leasing transactions, and agreements relating to acquisitions
and dispositions. Under these agreements, the Bank is required to
compensate counterparties for costs incurred as a result of various
contingencies such as changes in laws and regulations and litigation
claims. The nature of certain indemnification agreements prevent the
Bank from making a reasonable estimate of the maximum potential
amount that the Bank would be required to pay such counterparties.
N O T E 2 9
RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability to directly
or indirectly control the other party or exercise significant influence over
the other party in making financial or operational decisions. The Bank’s
related parties include key management personnel, their close family
members and their related entities, subsidiaries, associates, joint
ventures, and post-employment benefit plans for the Bank’s employees.
TRANSACTIONS WITH KEY MANAGEMENT PERSONNEL, THEIR
CLOSE FAMILY MEMBERS AND THEIR RELATED ENTITIES
Key management personnel are those persons having authority and
responsibility for planning, directing, and controlling the activities
of the Bank, directly or indirectly. The Bank considers certain of its
officers and directors to be key management personnel. The Bank
makes loans to its key management personnel, their close family
members, and their related entities on market terms and conditions
with the exception of banking products and services for key
management personnel, which are subject to approved policy
guidelines that govern all employees.
As at October 31, 2016, $231 million (October 31, 2015 – $340 million)
of loans were made to key management personnel, their close family
members and their related entities.
COMPENSATION
The remuneration of key management personnel was as follows:
Compensation
(millions of Canadian dollars)
Short-term employee benefits
Post-employment benefits
Share-based payments
Total
For the years ended October 31
2016
$ 25
3
32
$ 60
2015
$ 22
3
31
$ 56
2014
$ 27
1
37
$ 65
In addition, the Bank offers deferred share and other plans to
non-employee directors, executives, and certain other key employees.
Refer to Note 24 for further details.
In the ordinary course of business, the Bank also provides various
banking services to associated and other related corporations on terms
similar to those offered to non-related parties.
TRANSACTIONS WITH SUBSIDIARIES, TD AMERITRADE
AND SYMCOR INC.
Transactions between the Bank and its subsidiaries meet the definition
of related party transactions. If these transactions are eliminated
on consolidation, they are not disclosed as related party transactions.
The Bank also indemnifies directors, officers and other persons, to
the extent permitted by law, against certain claims that may be made
against them as a result of their services to the Bank or, at the Bank’s
request, to another entity.
The following table summarizes as at October 31, the maximum
potential amount of future payments that could be made under
guarantees without consideration of possible recoveries under
recourse provisions or from collateral held or pledged.
Maximum Potential Amount of Future Payments
(millions of Canadian dollars)
As at
Financial and performance standby letters of credit
Assets sold with contingent repurchase obligations
Total
October 31 October 31
2015
2016
$ 22,747 $ 21,046
207
39
$ 22,786 $ 21,253
Transactions between the Bank, TD Ameritrade and Symcor Inc.
(Symcor) also qualify as related party transactions. There were no
significant transactions between the Bank, TD Ameritrade and Symcor
during the year ended October 31, 2016, other than as described in
the following sections.
Other Transactions with TD Ameritrade and Symcor
(1) TRANSACTIONS WITH TD AMERITRADE HOLDING CORPORATION
The Bank is party to an insured deposit account (IDA) agreement with
TD Ameritrade, pursuant to which the Bank makes available to clients
of TD Ameritrade, IDAs as designated sweep vehicles. TD Ameritrade
provides marketing and support services with respect to the IDA. The
Bank paid fees of $1.2 billion during the year ended October 31, 2016
(October 31, 2015 – $1.1 billion; October 31, 2014 – $0.9 billion)
to TD Ameritrade for the deposit accounts. The fee paid by the Bank
is based on the average insured deposit balance of $112 billion for
the year ended October 31, 2016 (October 31, 2015 – $95 billion;
October 31, 2014 – $80 billion) with a portion of the fee tied to the
actual yield earned by the Bank on the investments, less the actual
interest paid to clients of TD Ameritrade, and the balance tied to
an agreed rate of return. The Bank earns a servicing fee of 25 basis
points (bps) on the aggregate average daily balance in the sweep
accounts (subject to adjustment based on a specified formula).
As at October 31, 2016, amounts receivable from TD Ameritrade
were $72 million (October 31, 2015 – $79 million). As at
October 31, 2016, amounts payable to TD Ameritrade were
$141 million (October 31, 2015 – $140 million).
(2) TRANSACTIONS WITH SYMCOR
The Bank has one-third ownership in Symcor, a Canadian provider
of business process outsourcing services offering a diverse portfolio
of integrated solutions in item processing, statement processing
and production, and cash management services. The Bank accounts
for Symcor’s results using the equity method of accounting. During
the year ended October 31, 2016, the Bank paid $97 million
(October 31, 2015 – $124 million; October 31, 2014 – $122 million)
for these services. As at October 31, 2016, the amount payable
to Symcor was $16 million (October 31, 2015 – $10 million).
The Bank and two other shareholder banks have also provided a
$100 million unsecured loan facility to Symcor which was undrawn
as at October 31, 2016, and October 31, 2015.
189
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
N O T E 3 0
SEGMENTED INFORMATION
For management reporting purposes, the Bank reports its results under
three key business segments: Canadian Retail, which includes the
results of the Canadian personal and commercial banking businesses,
Canadian credit cards, TD Auto Finance Canada and Canadian wealth
and insurance businesses; U.S. Retail, which includes the results of the
U.S. personal and commercial banking businesses, U.S. credit cards,
TD Auto Finance U.S., U.S. wealth business and the Bank’s investment
in TD Ameritrade; and Wholesale Banking. The Bank’s other activities
are grouped into the Corporate segment.
Canadian Retail is comprised of Canadian personal and commercial
banking, which provides financial products and services to personal,
small business, and commercial customers, TD Auto Finance Canada,
the Canadian credit card business, the Canadian wealth business,
which provides investment products and services to institutional and
retail investors, and the insurance business. U.S. Retail is comprised of
the personal and commercial banking operations in the U.S. operating
under the brand TD Bank, America’s Most Convenient Bank,® primarily
in the Northeast and Mid-Atlantic regions and Florida, and the
U.S. wealth business, including Epoch and the Bank’s equity investment
in TD Ameritrade. Wholesale banking provides a wide range of capital
markets, investment banking, and corporate banking products and
services, including underwriting and distribution of new debt and equity
issues, providing advice on strategic acquisitions and divestitures, and
meeting the daily trading, funding, and investment needs of the Bank’s
clients. The Bank’s other activities are grouped into the Corporate
segment. The Corporate segment includes the effects of certain asset
securitization programs, treasury management, the collectively assessed
allowance for incurred but not identified credit losses in Canadian
Retail and Wholesale Banking, elimination of taxable equivalent
adjustments and other management reclassifications, corporate level
tax items, and residual unallocated revenue and expenses.
The results of each business segment reflect revenue, expenses
and assets generated by the businesses in that segment. Due to the
complexity of the Bank, its management reporting model uses various
estimates, assumptions, allocations and risk-based methodologies
for funds transfer pricing, inter-segment revenue, income tax rates,
capital, indirect expenses and cost transfers to measure business
segment results. The basis of allocation and methodologies are
reviewed periodically to align with management’s evaluation of the
Bank’s business segments. Transfer pricing of funds is generally
applied at market rates. Inter-segment revenue is negotiated between
each business segment and approximates the fair value of the services
provided. Income tax provision or recovery is generally applied to
each segment based on a statutory tax rate and may be adjusted for
items and activities unique to each segment. Amortization of intangibles
acquired as a result of business combinations is included in the
Corporate segment. Accordingly, net income for business segments
is presented before amortization of these intangibles.
Net interest income within Wholesale Banking is calculated on a
taxable equivalent basis (TEB), which means that the value of non-
taxable or tax-exempt income, including dividends, is adjusted to its
equivalent before-tax value. Using TEB allows the Bank to measure
income from all securities and loans consistently and makes for a more
meaningful comparison of net interest income with similar institutions.
The TEB adjustment reflected in Wholesale Banking is reversed in the
Corporate segment.
The Bank purchases CDS to hedge the credit risk in Wholesale
Banking’s corporate lending portfolio. These CDS do not qualify for
hedge accounting treatment and are measured at fair value with
changes in fair value recognized in current period’s earnings. The
related loans are accounted for at amortized cost. Management
believes that this asymmetry in the accounting treatment between
CDS and loans would result in periodic profit and loss volatility which
is not indicative of the economics of the corporate loan portfolio or
the underlying business performance in Wholesale Banking. As a
result, these CDS are accounted for on an accrual basis in Wholesale
Banking and the gains and losses on these CDS, in excess of the
accrued cost, are reported in the Corporate segment.
The Bank reclassified certain debt securities from trading to the
available-for-sale category effective August 1, 2008. As part of the
Bank’s trading strategy, these debt securities are economically hedged,
primarily with CDS and interest rate swap contracts. These derivatives
are not eligible for reclassification and are recorded on a fair value
basis with changes in fair value recorded in the period’s earnings.
Management believes that this asymmetry in the accounting treatment
between derivatives and the reclassified debt securities results in
volatility in earnings from period to period that is not indicative of
the economics of the underlying business performance in Wholesale
Banking. As a result, the derivatives are accounted for on an accrual
basis in Wholesale Banking and the gains and losses related to
the derivatives, in excess of the accrued costs, are reported in the
Corporate segment.
190
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS The following table summarizes the segment results for the years
ended October 31.
Results by Business Segment1
(millions of Canadian dollars)
Net interest income (loss)
Non-interest income (loss)
Total revenue
Provision for (reversal of) credit losses
Insurance claims and related expenses
Non-interest expenses
Income (loss) before income taxes
Provision for (recovery of) income taxes
Equity in net income of an investment in
TD Ameritrade
Net income (loss)
For the years ended October 31
Canadian
Retail
9,979
$
10,230
20,209
1,011
2,462
8,557
8,179
2,191
$
U.S.
Retail
7,093
2,366
9,459
744
–
5,693
3,022
498
Wholesale
Banking
$
1,685
1,345
3,030
74
–
1,739
1,217
297
$
Corporate
$ 1,166
451
1,617
501
–
2,888
(1,772)
(843)
2016
Total
19,923
14,392
34,315
2,330
2,462
18,877
10,646
2,143
–
5,988
$
435
2,959
$
$
–
920
(2)
(931)
$
$
433
8,936
Total assets as at October 31
$ 383,011
$ 388,749
$ 342,478
$ 62,729
$ 1,176,967
Net interest income (loss)
Non-interest income (loss)
Total revenue
Provision for (reversal of) credit losses
Insurance claims and related expenses
Non-interest expenses
Income (loss) before income taxes
Provision for (recovery of) income taxes
Equity in net income of an investment in TD Ameritrade
Net income (loss)
$
9,781
9,904
19,685
887
2,500
8,407
7,891
1,953
–
5,938
$
$
$
6,131
2,098
8,229
535
–
5,188
2,506
394
376
2,488
$
$
2,295
631
2,926
18
–
1,701
1,207
334
–
873
$
517
69
586
243
–
2,777
(2,434)
(1,158)
1
$ (1,275)
$
$
2015
18,724
12,702
31,426
1,683
2,500
18,073
9,170
1,523
377
8,024
Total assets as at October 31
$ 360,100
$ 347,249
$ 343,485
$ 53,539
$ 1,104,373
Net interest income (loss)
Non-interest income (loss)
Total revenue
Provision for (reversal of) credit losses
Insurance claims and related expenses
Non-interest expenses
Income (loss) before income taxes
Provision for (recovery of) income taxes
Equity in net income of an investment in TD Ameritrade
Net income (loss)
$
9,538
9,623
19,161
946
2,833
8,438
6,944
1,710
–
5,234
$
$
$
5,179
1,986
7,165
436
–
4,512
2,217
412
305
2,110
$
$
2,210
470
2,680
11
–
1,589
1,080
267
–
813
$
657
298
955
164
–
1,957
(1,166)
(877)
15
(274)
$
2014
17,584
12,377
29,961
1,557
2,833
16,496
9,075
1,512
320
7,883
$
$
Total assets as at October 31
$ 334,660
$ 277,085
$ 317,524
$ 31,242
$ 960,511
1 Effective fiscal 2016, the presentation of the U.S. strategic cards portfolio revenues,
provision for credit losses, and expenses in the U.S. Retail segment includes only
the Bank’s agreed portion of the U.S. strategic cards portfolio, while the Corporate
segment includes the retailer program partners’ share. Certain comparative amounts
have been recast to conform with this revised presentation. There was no impact
on the net income of the segments or on the presentation of gross and net results
in the Bank’s Consolidated Statement of Income.
191
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
RESULTS BY GEOGRAPHY
For reporting of geographic results, segments are grouped into
Canada, United States, and Other international. Transactions are
primarily recorded in the location responsible for recording the
revenue or assets. This location frequently corresponds with
the location of the legal entity through which the business is
conducted and the location of the customer.
(millions of Canadian dollars)
For the years ended October 31
As at October 31
2016
2016
Canada
United States
Other international
Total
Canada
United States
Other international
Total
Canada
United States
Other international
Total
Income before
income taxes
Net income
Total revenue
$ 20,374
12,217
1,724
$ 34,315
$ 6,760
2,873
1,013
$ 10,646
$ 20,224
10,140
1,062
$ 31,426
$ 6,625
2,040
505
$ 9,170
$ 19,642
8,363
1,956
$ 29,961
$ 6,314
1,579
1,182
$ 9,075
$ 5,133
2,436
1,367
$ 8,936
2015
$ 5,361
1,802
861
$ 8,024
2014
$ 5,106
1,284
1,493
$ 7,883
Total assets
$ 632,215
462,330
82,422
$ 1,176,967
2015
$ 623,061
417,186
64,126
$ 1,104,373
2014
$ 554,036
324,865
81,610
$ 960,511
N O T E 3 1
INTEREST RATE RISK
The Bank earns and pays interest on certain assets and liabilities. To
the extent that the assets and liabilities mature or reprice at different
points in time, the Bank is exposed to interest rate risk. The following
table details the balances of interest-rate sensitive assets and liabilities
by the earlier of the maturity or repricing date. Contractual repricing
dates may be adjusted according to management’s estimates for
prepayments or early redemptions that are independent of changes
in interest rates. Certain assets and liabilities are shown as non-rate
sensitive although the profile assumed for actual management may
be different. Derivatives are presented in the floating rate category.
The Bank’s risk management policies and procedures relating to credit,
market, and liquidity risks as required under IFRS 7 are outlined in the
shaded sections of the “Managing Risk” section of the MD&A.
192
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
Interest Rate Risk1
(millions of Canadian dollars,
except as noted)
Assets
Cash resources and other
Trading loans, securities, and other
Financial assets designated at fair
value through profit or loss
Available-for-sale
Held-to-maturity
Securities purchased under reverse
repurchase agreements
Loans
Other
Total assets
Liabilities and equity
Trading deposits
Other financial liabilities designated
As at
October 31, 2016
Floating
rate
Within
3 months
3 months
to 1 year
Total
within
1 year
Over 1
year to
5 years
Over
5 years
Non-
interest
sensitive
Total
$ 21,808
908
$ 35,177
3,160
$
435
15,174
$ 57,420
19,242
$
–
27,444
$
–
15,081
$
201
37,490
$
57,621
99,257
736
127
–
7,780
24,390
87,949
143,698
63
24,482
23,337
67,652
241,749
–
395,620
821
7,159
7,020
6,951
67,969
–
105,529
1,620
31,768
30,357
82,383
334,108
87,949
644,847
1,566
52,863
44,172
–
205,286
–
331,331
1,012
22,300
9,866
–
31,996
–
80,255
85
640
–
3,669
14,266
64,183
120,534
4,283
107,571
84,395
86,052
585,656
152,132
1,176,967
–
27,516
47,770
75,286
699
–
3,801
79,786
at fair value through profit or loss
Other deposits
Securitization liabilities at fair value
Obligations related to securities
13
283,443
–
102
78,682
594
74
41,243
1,238
189
403,368
1,832
–
124,107
6,933
1
32,412
3,725
–
213,773
–
190
773,660
12,490
sold short
Obligations related to securities
33,115
–
–
33,115
–
sold under repurchase agreements
656
39,895
1,457
42,008
3,308
–
–
–
33,115
3,657
48,973
Securitization liabilities at
amortized cost
Subordinated notes and debentures
Other
Equity
Total liabilities and equity
Net position
–
–
81,131
–
398,358
$ (254,660)
6,698
2,265
–
–
155,752
$ 239,868
1,608
260
–
–
93,650
$ 11,879
8,306
2,525
81,131
–
647,760
(2,913)
$
7,334
4,950
–
3,400
150,731
$ 180,600
2,278
3,416
–
1,000
42,832
$ 37,423
–
–
44,599
69,814
335,644
$ (215,110)
17,918
10,891
125,730
74,214
1,176,967
–
$
Total assets
Total liabilities and equity
Net position
$ 133,302
351,641
$ (218,339)
$ 366,821
169,453
$ 197,368
$ 102,253
91,507
$ 10,746
$ 602,376
612,601
$ (10,225)
$ 282,792
130,286
$ 152,506
$ 83,820
39,633
$ 44,187
$ 135,385
321,853
$ (186,468)
$ 1,104,373
1,104,373
–
$
October 31, 2015
1 Certain comparative amounts have been reclassified to conform with the
presentation adopted in the current year.
Interest Rate Risk by Category1
(millions of Canadian dollars)
As at
October 31, 2016
Canadian currency
Foreign currency
Net position
Canadian currency
Foreign currency
Net position
Floating
rate
$ (226,294)
(28,366)
$ (254,660)
Within
3 months
$ 119,905
119,963
$ 239,868
3 months
to 1 year
$ 35,798
(23,919)
$ 11,879
Total
within
1 year
Over 1
year to
5 years
$ (70,591)
67,678
$ (2,913)
$ 132,887
47,713
$ 180,600
Over
5 years
$ 5,992
31,431
$ 37,423
Non-
interest
sensitive
$ (121,817)
(93,293)
$ (215,110)
Total
$ (53,529)
53,529
$
–
$ (172,121)
(46,218)
$ (218,339)
$ 118,865
78,503
$ 197,368
$ 34,537
(23,791)
$ 10,746
$ (18,719)
8,494
$ (10,225)
$ 112,985
39,521
$ 152,506
$ 11,279
32,908
$ 44,187
$ (110,591)
(75,877)
$ (186,468)
$ (5,046)
5,046
$
–
October 31, 2015
1 Certain comparative amounts have been reclassified to conform with the
presentation adopted in the current year.
193
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
N O T E 3 2
CREDIT RISK
Concentration of credit risk exists where a number of borrowers or
counterparties are engaged in similar activities, are located in the same
geographic area or have comparable economic characteristics. Their
ability to meet contractual obligations may be similarly affected by
changing economic, political or other conditions. The Bank’s
portfolio could be sensitive to changing conditions in particular
geographic regions.
Concentration of Credit Risk
(millions of Canadian dollars, except as noted)
Canada
United States6
United Kingdom
Europe – other
Other international
Total
Loans and customers’ liability
under acceptances1
October 31
2015
October 31
2016
Credit instruments2,3
October 31
2016
October 31
2015
As at
Derivative financial
instruments4,5
October 31
2015
October 31
2016
66%
33
–
–
1
100%
68%
31
–
–
1
100%
41%
56
1
1
1
100%
40%
55
1
3
1
100%
30%
28
18
18
6
100%
35%
25
16
18
6
100%
$ 601,362
$ 560,987
$ 170,553
$ 152,656
$ 65,914
$ 62,778
1 Of the total loans and customers’ liability under acceptances, the only industry
4 As at October 31, 2016, the current replacement cost of derivative financial
segment which equalled or exceeded 5% of the total concentration as at
October 31, 2016, was: real estate 10% (October 31, 2015 – 9%).
2 As at October 31, 2016, the Bank had commitments and contingent liability
instruments amounted to $66 billion (October 31, 2015 – $63 billion). Based on
the location of the ultimate counterparty, the credit risk was allocated as detailed
in the table above. The table excludes the fair value of exchange traded derivatives.
contracts in the amount of $171 billion (October 31, 2015 – $153 billion). Included
are commitments to extend credit totalling $147 billion (October 31, 2015 –
$131 billion), of which the credit risk is dispersed as detailed in the table above.
3 Of the commitments to extend credit, industry segments which equalled or
exceeded 5% of the total concentration were as follows as at October 31, 2016:
financial institutions 19% (October 31, 2015 – 17%); pipelines, oil and gas 10%
(October 31, 2015 – 10%); power and utilities 9% (October 31, 2015 – 9%);
sundry manufacturing and wholesale 7% (October 31, 2015 – 7%); automotive
7% (October 31, 2015 – 6%); telecommunications, cable and media 6%
(October 31, 2015 – 5%); professional and other services 6% (October 31, 2015 – 6%);
government, public sector entities, and education 5% (October 31, 2015 – 6%);
non-residential real estate development 5% (October 31, 2015 – 4%).
5 The largest concentration by counterparty type was with financial institutions
(including non-banking financial institutions), which accounted for 75% of the
total as at October 31, 2016 (October 31, 2015 – 74%). The second largest
concentration was with governments, which accounted for 17% of the total
as at October 31, 2016 (October 31, 2015 – 19%). No other industry segment
exceeded 5% of the total.
6 Debt securities classified as loans were 0.2% as at October 31, 2016
(October 31, 2015 – 0.3%), of the total loans and customers’ liability
under acceptances.
194
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
The following table presents the maximum exposure to credit risk
of financial instruments, before taking account of any collateral held
or other credit enhancements.
Gross Maximum Credit Risk Exposure1
(millions of Canadian dollars)
Cash and due from banks
Interest-bearing deposits with banks
Securities2
Financial assets designated at fair value through profit and loss
Government and government-insured securities
Other debt securities
Trading
Government and government-insured securities
Other debt securities
Retained interest
Available-for-sale
Government and government-insured securities
Other debt securities
Held-to-maturity
Government and government-insured securities
Other debt securities
Securities purchased under reverse purchase agreements
Derivatives3
Loans
Residential mortgages
Consumer instalment and other personal
Credit card
Business and government
Debt securities classified as loans
Trading loans
Customers’ liability under acceptances
Amounts receivable from brokers, dealers and clients
Other assets
Total assets
Credit instruments4
Unconditionally cancellable commitments to extend credit
relating to personal lines of credit and credit card lines
Total credit exposure
October 31
2016
As at
October 31
2015
$
3,907
53,714
$
3,154
42,483
2,127
2,060
39,699
10,432
31
77,499
27,832
51,290
33,105
86,052
75,249
2,393
1,808
39,136
10,165
38
59,916
26,894
43,667
30,783
97,364
79,870
217,220
143,701
30,700
192,622
1,413
11,606
15,706
17,436
4,352
1,097,753
170,553
212,245
134,693
29,101
166,379
1,923
10,650
16,646
21,996
4,247
1,035,551
152,656
269,912
$ 1,538,218
239,839
$ 1,428,046
1 Certain comparative amounts have been restated to conform with the
presentation adopted in the current year.
2 Excludes equity securities.
3 The gross maximum credit exposure for derivatives is based on the credit equivalent
amount less the impact of certain master netting arrangements. The amounts
exclude exchange traded derivatives and non-trading credit derivatives. Refer to
Note 11 for further details.
4 The balance represents the maximum amount of additional funds that the Bank
could be obligated to extend should the contracts be fully utilized. The actual
maximum exposure may differ from the amount reported above. Refer to Note 28
for further details.
195
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
Credit Quality of Financial Assets
The following table provides the on and off-balance sheet exposures
by risk-weight for certain financial assets that are subject to the
Standardized Approach to credit risk. Under the Standardized
Approach, assets receive an OSFI-prescribed risk-weight based on
factors including counterparty type, product type, collateral, and
external credit assessments. These assets relate primarily to the Bank’s
U.S. Retail portfolio. Refer to the “Managing Risk – Credit Risk” section
of the MD&A for a discussion on the risk rating for the Standardized
Approach and on the Bank’s risk ratings.
Financial Assets Subject to the Standardized Approach by Risk-Weights1,2
(millions of Canadian dollars)
As at
October 31, 2016
0%
20%
35%
50%
75%3
100%4
150%
350%
Total
Loans
Residential mortgages
Consumer instalment and other personal
Credit card
Business and government
Debt securities classified as loans
Total loans
Held-to-maturity
Securities purchased under reverse
repurchase agreements
Customers’ liability under acceptances
Other assets5
Total assets
Off-balance sheet credit instruments
Total
Loans
Residential mortgages
Consumer instalment and other personal
Credit card
Business and government
Debt securities classified as loans
Total loans
Held-to-maturity
Securities purchased under reverse
repurchase agreements
Customers’ liability under acceptances
Other assets5
Total assets
Off-balance sheet credit instruments
Total
$
22 $
207 $
49
488
–
–
8,542
11,208
29
–
11,718
8,827
1,683 47,104
–
–
–
–
13,165
917
26,566 56,848
4,012
535
$ 27,101 $ 60,860 $
48
5
–
–
–
53
–
–
–
–
53
–
53
$
$
– $
27
742 $
903
15,929
–
–
767 82,840
5
18,341 82,872
224
–
–
–
–
–
–
–
–
$
–
95
290
430
–
815
–
–
–
–
–
–
1
1
–
–
–
–
1
–
–
815
18,341 83,097
394 27,383
–
1 $ 18,735 $ 110,480 $ 815
$
– $
847
–
11,279
–
12,126
1,646
– $ 24,010
5,154
–
–
–
29,164
–
317
–
5,190
134
5,641
41,994
386 $
$
– $ 2,901 $
– 32,302
79
–
– 21,258
– 3,891 73,087
–
7
– 60,352 73,559
–
–
–
–
4
294
180
717
–
1,195
–
–
–
12,710
26,482
382
–
–
–
–
–
527
29,164
48,162
–
2,516
$ 26,864 $ 50,678 $ 29,164
–
–
–
–
–
–
–
2
–
–
1
–
1,195
1 60,352 73,561
–
461 25,776
–
1 $ 60,813 $ 99,337 $ 1,195
$
$
1,046
– $
–
1,540
– 16,219
– 103,787
–
34
– 122,626
519 49,530
–
–
–
1
– 14,083
519 186,240
– 32,324
$ 519 $ 218,564
October 31, 2015
$
$
– $ 27,301
– 38,993
– 21,438
– 94,164
–
141
– 182,037
– 43,640
–
–
–
2
– 13,238
– 238,917
– 29,135
– $ 268,052
1 Certain comparative amounts have been reclassified to conform with the presentation
adopted in the current period.
2 Effective the third quarter of 2016, the majority of U.S. Retail’s retail portfolio
credit risk Risk Weighted Assets (RWA) are calculated using Advanced Internal
Rating Based (AIRB) approach. Prior to the third quarter of 2016, RWA were
calculated using the Standardized Approach.
3 Based on the Bank’s internal risk ratings, 66% of retail exposures are rated
‘low risk’ or ‘normal risk’ and 34% are rated ‘high risk’ or ‘default’ as at
October 31, 2016 (October 31, 2015 – 70% and 30%, respectively).
4 Based on the Bank’s internal risk ratings, 39% of non-retail exposures are
rated ‘investment grade’ and 61% are rated ‘non-investment grade’ as at
October 31, 2016 (October 31, 2015 – 38% and 62%, respectively).
5 Other assets include amounts due from banks and interest-bearing deposits
with banks.
The following tables provide the on and off-balance sheet exposures
by risk rating for certain non-retail and retail financial assets that are
subject to the AIRB Approach to credit risk in the Basel III Capital
Accord. Under the AIRB Approach, assets receive a risk rating
based on internal models of the Bank’s historical loss experience
(by counterparty type) and on other key risk assumptions. The non-retail
and retail asset risk rating classifications subject to the AIRB Approach
reflect whether the exposure is subject to a guarantee, which would
result in the exposure being classified based on the internal risk rating
of the guarantor. The following risk ratings may not directly correlate
with the ‘Neither past due nor impaired’, ‘Past due but not impaired’
and ‘Impaired’ status disclosed in Note 8 – Loans, Impaired Loans and
Allowance for Credit Losses, because of the aforementioned risk
transference guarantees, and certain loan exposures that remain
subject to the Standardized Approach. Refer to the “Managing Risk –
Credit Risk” section of the MD&A for a discussion on the credit risk
rating for non-retail and retail exposures subject to the AIRB Approach.
196
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
Non-Retail Financial Assets Subject to the AIRB Approach by Risk Rating
(millions of Canadian dollars)
As at
October 31, 2016
Investment
grade
Non-
investment
grade
Watch and
classified
Impaired/
defaulted
Loans
Residential mortgages1
Consumer instalment and other personal1
Business and government
Debt securities classified as loans
Total loans
Held-to-maturity
Securities purchased under reverse repurchase agreements
Customers’ liability under acceptances
Other assets2
Total assets
Off-balance sheet credit instruments
Total
Loans
Residential mortgages1
Consumer instalment and other personal1
Business and government
Debt securities classified as loans
Total loans
Held-to-maturity
Securities purchased under reverse repurchase agreements
Customers’ liability under acceptances
Other assets2
Total assets
Off-balance sheet credit instruments
Total
$ 90,124
17,925
39,468
1,024
148,541
34,865
75,441
8,411
40,421
307,679
75,364
$ 383,043
$ 98,583
21,392
32,933
1,356
154,264
30,810
86,801
9,039
29,617
310,531
71,725
$ 382,256
$
–
1
38,134
82
38,217
–
10,611
7,080
72
55,980
10,840
$ 66,820
$
–
30
32,194
163
32,387
–
10,563
7,326
160
50,436
10,300
$ 60,736
$
–
–
1,776
72
1,848
–
–
214
–
2,062
1,039
$ 3,101
$
–
–
1,054
113
1,167
–
–
273
–
1,440
340
$ 1,780
1 Includes CMHC insured exposures classified as sovereign exposure under Basel III
and therefore included in the non-retail category under the AIRB Approach.
2 Other assets include amounts due from banks and interest-bearing deposits
with banks.
Retail Financial Assets Subject to the AIRB Approach by Risk Rating1,2
(millions of Canadian dollars)
Total
$ 90,124
17,926
79,711
1,428
189,189
34,865
86,052
15,705
40,493
366,304
87,261
$ 453,565
$
–
–
333
250
583
–
–
–
–
583
18
$ 601
October 31, 2015
$
–
–
161
207
368
–
–
6
–
374
19
$ 393
$ 98,583
21,422
66,342
1,839
188,186
30,810
97,364
16,644
29,777
362,781
82,384
$ 445,165
As at
October 31, 2016
Loans
Residential mortgages3
Consumer instalment and other personal3
Credit card
Business and government4
Total loans
Held-to-maturity
Off-balance sheet credit instruments
Total
Loans
Residential mortgages3
Consumer instalment and other personal3
Credit card
Business and government4
Total loans
Held-to-maturity
Off-balance sheet credit instruments
Total
Low risk
Normal risk Medium risk
High risk
Default
Total
$ 59,331
46,710
5,030
810
111,881
–
83,184
$ 195,065
$ 56,105
47,392
3,663
3,691
110,851
–
18,945
$ 129,796
$ 7,902
20,898
4,402
3,967
37,169
–
5,258
$ 42,427
$ 43,920
31,290
2,564
545
78,319
–
58,822
$ 137,141
$ 36,169
28,953
2,398
3,193
70,713
–
12,571
$ 83,284
$ 4,684
10,322
2,354
2,232
19,592
–
3,379
$ 22,971
$ 2,185
9,336
2,530
1,896
15,947
–
1,272
$ 17,219
$ 1,572
4,223
1,407
999
8,201
–
916
$ 9,117
$ 643
729
70
212
1,654
–
4
$ 1,658
$ 126,166
125,065
15,695
10,576
277,502
–
108,663
$ 386,165
October 31, 2015
$ 144
268
54
54
520
–
4
$ 524
$ 86,489
75,056
8,777
7,023
177,345
–
75,692
$ 253,037
1 Effective the third quarter of 2016, the majority of U.S. Retail’s retail portfolio
3 Excludes CMHC insured exposures classified as sovereign exposure under Basel III
credit risk RWA are calculated using AIRB approach. Prior to the third quarter of
2016, RWA were calculated using the Standardized Approach.
and therefore included in the non-retail category under the AIRB Approach.
4 Business and government loans in the retail portfolio include small business loans.
2 Credit exposures relating to the Bank’s insurance subsidiaries have been excluded.
The financial instruments held by the insurance subsidiaries are mainly comprised
of available-for-sale securities and securities designated at fair value through profit
or loss, which are carried at fair value on the Consolidated Balance Sheet.
197
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
N O T E 3 3
REGULATORY CAPITAL
The Bank manages its capital under guidelines established by OSFI.
The regulatory capital guidelines measure capital in relation to
credit, market, and operational risks. The Bank has various capital
policies, procedures, and controls which it utilizes to achieve its
goals and objectives.
The Bank’s capital management objectives are:
• To be an appropriately capitalized financial institution as
determined by:
– the Bank’s Risk Appetite Statement;
– capital requirements defined by relevant regulatory authorities;
and
– the Bank’s internal assessment of capital requirements consistent
with the Bank’s risk profile and risk tolerance levels.
For accounting purposes, IFRS is followed for consolidation of
subsidiaries and joint ventures. For regulatory capital purposes,
insurance subsidiaries are deconsolidated and reported as a deduction
from capital. Insurance subsidiaries are subject to their own capital
adequacy reporting, such as OSFI’s Minimum Continuing Capital
Surplus Requirements and Minimum Capital Test. Currently, for
regulatory capital purposes, all the entities of the Bank are either
consolidated or deducted from capital and there are no entities
from which surplus capital is recognized.
Some of the Bank’s subsidiaries are individually regulated by either
OSFI or other regulators. Many of these entities have minimum capital
requirements which they must maintain and which may limit the
Bank’s ability to extract capital or funds for other uses.
• To have the most economically achievable weighted average cost
During the year ended October 31, 2016, the Bank complied with
of capital, consistent with preserving the appropriate mix of capital
elements to meet targeted capitalization levels.
• To ensure ready access to sources of appropriate capital, at reasonable
cost, in order to:
– insulate the Bank from unexpected events; or
– support and facilitate business growth and/or acquisitions consistent
with the Bank’s strategy and risk appetite.
• To support strong external debt ratings, in order to manage the
Bank’s overall cost of funds and to maintain accessibility to
required funding.
These objectives are applied in a manner consistent with the
Bank’s overall objective of providing a satisfactory return on
share holders’ equity.
Basel III Capital Framework
Capital requirements of the Basel Committee on Banking and Supervision
(BCBS) are commonly referred to as Basel III. Under Basel III, Total Capital
consists of three components, namely Common Equity Tier 1 (CET1),
Additional Tier 1, and Tier 2 Capital. Risk sensitive regulatory capital
ratios are calculated by dividing CET1, Tier 1, and Total Capital by their
respective risk-weighted assets (RWA). In 2015, Basel III also implemented
a non-risk sensitive leverage ratio to act as a supplementary measure
to the risk-sensitive capital requirements. The objective of the leverage
ratio is to constrain the build-up of excess leverage in the banking
sector. The leverage ratio is calculated by dividing Tier 1 Capital by
leverage ratio exposure which is primarily comprised of on-balance sheet
assets with adjustments made to derivative and securities financing
transaction exposures, and credit equivalent amounts of off-balance
sheet exposures.
Capital Position and Capital Ratios
The Basel framework allows qualifying banks to determine capital
levels consistent with the way they measure, manage, and mitigate
risks. It specifies methodologies for the measurement of credit, market,
and operational risks. The Bank uses the advanced approaches for
the majority of its portfolios. Effective the third quarter of 2016, OSFI
approved the Bank to calculate the majority of the retail portfolio
credit RWA in the U.S. Retail segment using the AIRB approach. The
remaining assets in the U.S. Retail segment continue to use the
standardized approach for credit risk.
the OSFI Basel III guideline related to capital ratios and the leverage
ratio. Effective January 1, 2016, OSFI’s target CET1, Tier 1, and Total
Capital ratios for Canadian banks designated as D-SIBs includes a 1%
common equity capital surcharge bringing the targets to 8%, 9.5%,
and 11.5%, respectively.
OSFI has provided IFRS transitional provisions for the leverage ratio
(as previously with the ACM), which allows for the exclusion of assets
securitized and sold through CMHC-sponsored programs prior to
March 31, 2010, from the calculation.
The following table summarizes the Bank’s regulatory capital position
as at October 31.
Regulatory Capital Position
(millions of Canadian dollars, except as noted)
Capital
Common Equity Tier 1 Capital
Tier 1 Capital
Total Capital
Risk-weighted assets used in the
calculation of capital ratios1
Common Equity Tier 1 Capital
Tier 1 Capital
Total Capital
Capital and leverage ratios
Common Equity Tier 1 Capital ratio1
Tier 1 Capital ratio1
Total Capital ratio1
Leverage ratio
As at
October 31 October 31
2015
2016
$ 42,328 $ 37,958
43,416
49,397
53,600
61,816
$ 405,844 $ 382,360
405,844 383,301
405,844 384,108
10.4%
12.2
15.2
4.0
9.9%
11.3
14.0
3.7
1 In accordance with the final CAR guideline, the Credit Valuation Adjustment (CVA)
capital charge is being phased in until the first quarter of 2019. Each capital ratio has
its own RWA measure due to the OSFI prescribed scalar for inclusion of the CVA. The
scalars for inclusion of CVA for CET1, Tier 1, and Total Capital RWA are 64%, 71%,
and 77%, respectively.
198
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
N O T E 3 4
RISK MANAGEMENT
The risk management policies and procedures of the Bank are provided
in the MD&A. The shaded sections of the “Managing Risk” section of
the MD&A relating to market, liquidity, and insurance risks are an
integral part of the 2016 Consolidated Financial Statements.
N O T E 3 5
INFORMATION ON SUBSIDIARIES
The following is a list of the directly or indirectly held
significant subsidiaries.
Significant Subsidiaries1
(millions of Canadian dollars)
North America
Meloche Monnex Inc.
Security National Insurance Company
Primmum Insurance Company
TD Direct Insurance Inc.
TD General Insurance Company
TD Home and Auto Insurance Company
TD Asset Management Inc.
TD Waterhouse Private Investment Counsel Inc.
TD Auto Finance (Canada) Inc.
TD Auto Finance Services Inc.
TD Financing Services Home Inc.
TD Financing Services Inc.
TD Group US Holdings LLC
Toronto Dominion Holdings (U.S.A.), Inc.
TD Securities (USA) LLC
Toronto Dominion (Texas) LLC
Toronto Dominion (New York) LLC
Toronto Dominion Capital (U.S.A.), Inc.
TD Bank US Holding Company
Epoch Investment Partners, Inc.
TD Bank USA, National Association
TD Bank, National Association
TD Auto Finance LLC
TD Equipment Finance, Inc.
TD Private Client Wealth LLC
TD Wealth Management Services Inc.
TD Investment Services Inc.
TD Life Insurance Company
TD Mortgage Corporation
TD Pacific Mortgage Corporation
The Canada Trust Company
TD Securities Inc.
TD Vermillion Holdings ULC
TD Financial International Ltd.
TD Reinsurance (Barbados) Inc.
Toronto Dominion International Inc.
TD Waterhouse Canada Inc.
TDAM USA Inc.
Address of Head
or Principal Office2
Montréal, Québec
Montréal, Québec
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Wilmington, Delaware
New York, New York
New York, New York
New York, New York
New York, New York
New York, New York
Cherry Hill, New Jersey
New York, New York
Wilmington, Delaware
Wilmington, Delaware
Farmington Hills, Michigan
Cherry Hill, New Jersey
New York, New York
Cherry Hill, New Jersey
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Vancouver, British Columbia
Toronto, Ontario
Toronto, Ontario
Vancouver, British Columbia
Hamilton, Bermuda
St. James, Barbados
St. James, Barbados
Toronto, Ontario
Wilmington, Delaware
Description
As at October 31, 2016
Carrying value of shares
owned by the Bank
Holding Company providing management
$ 1,660
services to subsidiaries
Insurance Company
Insurance Company
Insurance Company
Insurance Company
Insurance Company
Investment Counselling and Portfolio Management
Investment Counselling and Portfolio Management
Automotive Finance Entity
Automotive Finance Entity
Mortgage Lender
Financial Services Entity
Holding Company
Holding Company
Securities Dealer
Financial Services Entity
Financial Services Entity
Small Business Investment Company
Holding Company
Investment Counselling and Portfolio Management
U.S. National Bank
U.S. National Bank
Automotive Finance Entity
Financial Services Entity
Broker-dealer and Registered Investment Advisor
Insurance Agency
Mutual Fund Dealer
Insurance Company
Loans and Deposits Entity
Deposit Taking Entity
Trust, Loans and Deposits Entity
Investment Dealer and Broker
Holding Company
Holding Company
Reinsurance Company
Intragroup Lending Company
Investment Dealer
Investment Counselling and Portfolio Management
314
1,966
1,325
48
163
48,548
32
63
12,102
1,913
20,451
2,044
12
1 Unless otherwise noted, The Toronto-Dominion Bank, either directly or through its
subsidiaries, owns 100% of the entity and/or 100% of any issued and outstanding
voting securities and non-voting securities of the entities listed.
2 Each subsidiary is incorporated or organized in the country in which its head or
principal office is located, with the exception of Toronto Dominion Investments
B.V., a company incorporated in The Netherlands, but with its principal office
in the United Kingdom.
199
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
Significant Subsidiaries (continued)1
(millions of Canadian dollars)
International
TD Bank International S.A.
TD Bank N.V.
TD Ireland
TD Global Finance
TD Luxembourg International Holdings
TD Ameritrade Holding Corporation3
TD Wealth Holdings (UK) Limited
TD Direct Investing (Europe) Limited
Thirdco II Limited
TD Asset Administration UK Limited
Toronto Dominion Australia Limited
Toronto Dominion Investments B.V.
TD Bank Europe Limited
Toronto Dominion Holdings (U.K.) Limited
TD Securities Limited
Toronto Dominion (South East Asia) Limited
Address of Head
or Principal Office2
Luxembourg, Luxembourg
Amsterdam, The Netherlands
Dublin, Ireland
Dublin, Ireland
Luxembourg, Luxembourg
Omaha, Nebraska
Leeds, England
Leeds, England
Leeds, England
Leeds, England
Sydney, Australia
London, England
London, England
London, England
London, England
Singapore, Singapore
Description
International Direct Brokerage
Dutch Bank
Holding Company
Securities Dealer
Holding Company
Securities Dealer
Holding Company
Direct Broker
Investment Holding Company
Foreign Securities Dealer
Securities Dealer
Holding Company
UK Bank
Holding Company
Securities Dealer
Foreign Financial Institution
As at October 31, 2016
Carrying value of shares
owned by the Bank
43
$
699
1,056
7,091
139
108
238
1,028
1,310
1 Unless otherwise noted, The Toronto-Dominion Bank, either directly or through its
subsidiaries, owns 100% of the entity and/or 100% of any issued and outstanding
voting securities and non-voting securities of the entities listed.
2 Each subsidiary is incorporated or organized in the country in which its head or
principal office is located, with the exception of Toronto Dominion Investments B.V.,
a company incorporated in The Netherlands, but with its principal office in the
United Kingdom.
3 As at October 31, 2016, the Bank’s reported investment in TD Ameritrade Holding
Corporation was 42.38% (October 31, 2015 – 41.54%) of the outstanding shares
of TD Ameritrade Holding Corporation. TD Luxembourg International Holdings
and its ownership of TD Ameritrade Holding Corporation is included given the
significance of the Bank’s investment in TD Ameritrade Holding Corporation.
SUBSIDIARIES WITH RESTRICTIONS TO TRANSFER FUNDS
Certain of the Bank’s subsidiaries have regulatory requirements to
fulfill, in accordance with applicable law, in order to transfer funds,
including paying dividends to, repaying loans to, or redeeming
subordinated debentures issued to, the Bank. These customary
requirements include, but are not limited to:
• Local regulatory capital and/or surplus adequacy requirements;
• Basel requirements under Pillar 1 and Pillar 2;
• Local regulatory approval requirements; and
• Local corporate and/or securities laws.
As at October 31, 2016, the net assets of subsidiaries subject to
regulatory or capital adequacy requirements was $73.1 billion
(October 31, 2015 – $66.2 billion), before intercompany eliminations.
In addition to regulatory requirements outlined above, the Bank
may be subject to significant restrictions on its ability to use the
assets or settle the liabilities of members of its group. Key contractual
restrictions may arise from the provision of collateral to third parties in
the normal course of business, for example through secured financing
transactions; assets securitized which are not subsequently available
for transfer by the Bank; and assets transferred into other consolidated
and unconsolidated structured entities. The impact of these restrictions
has been disclosed in Notes 9 and 28.
Aside from non-controlling interests disclosed in Note 21, there
were no significant restrictions on the ability of the Bank to access or
use the assets or settle the liabilities of subsidiaries within the group
as a result of protective rights of non-controlling interests.
200
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS
$ 25,128
199,280
60,919
–
69,198
408,848
47,680
811,053
38,774
64,997
487,754
160,105
11,318
762,948
18,691
3,395
(167)
196
20,868
3,645
46,628
1,477
48,105
$ 811,053
2012
$ 15,026
10,520
25,546
1,795
2,424
14,016
7,311
1,085
234
6,460
196
$ 24,112
171,109
59,845
–
56,981
377,187
46,259
735,493
29,613
61,715
449,428
139,190
11,543
691,489
17,491
3,395
(116)
212
18,213
3,326
42,521
1,483
44,004
$ 735,493
2011
$ 13,661
10,179
23,840
1,490
2,178
13,047
7,125
1,326
246
6,045
180
Ten-year Statistical Review – IFRS1
Condensed Consolidated Balance Sheet
(millions of Canadian dollars)
2016
2015
2014
2013
2012
2011
ASSETS
Cash resources and other
Trading loans, securities, and other2
Derivatives
Held-to-maturity securities
Securities purchased under reverse
repurchase agreements
Loans, net of allowance for loan losses
Other
Total assets
LIABILITIES
Trading deposits
Derivatives
Deposits
Other
Subordinated notes and debentures
Total liabilities
EQUITY
$
57,621
211,111
72,242
84,395
86,052
585,656
79,890
$
45,637
188,317
69,438
74,450
97,364
544,341
84,826
1,176,967
1,104,373
79,786
65,425
773,660
172,991
10,891
74,759
57,218
695,576
201,155
8,637
1,102,753
1,037,345
Common shares
Preferred shares
Treasury shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income (loss)
Non-controlling interests in subsidiaries
Total equity
20,711
4,400
(36)
203
35,452
11,834
72,564
1,650
74,214
20,294
2,700
(52)
214
32,053
10,209
65,418
1,610
67,028
$ 46,554
168,926
55,796
56,977
82,556
478,909
70,793
960,511
59,334
51,209
600,716
185,236
7,785
904,280
19,811
2,200
(55)
205
27,585
4,936
54,682
1,549
$ 32,164
188,016
49,461
29,961
64,283
444,922
53,214
862,021
50,967
49,471
541,605
160,613
7,982
810,638
19,316
3,395
(147)
170
23,982
3,159
49,875
1,508
56,231
51,383
Total liabilities and equity
$ 1,176,967
$ 1,104,373
$ 960,511
$ 862,021
Condensed Consolidated Statement of Income – Reported
(millions of Canadian dollars)
2016
Net interest income
Non-interest income
Total revenue
Provision for credit losses
Insurance claims and related expenses
Non-interest expenses
$
Income before income taxes and equity in net
income of an investment in TD Ameritrade
Provision for (recovery of) income taxes
Equity in net income of an investment in TD Ameritrade
Net income
Preferred dividends
Net income available to common shareholders
and non-controlling interests in subsidiaries
Attributable to:
Common shareholders
Non-controlling interests in subsidiaries
$
$
19,923
14,392
34,315
2,330
2,462
18,877
10,646
2,143
433
8,936
141
8,795
8,680
115
Condensed Consolidated Statement of Income – Adjusted
(millions of Canadian dollars)
2016
Net interest income
Non-interest income
Total revenue
Provision for credit losses
Insurance claims and related expenses
Non-interest expenses
$
Income before income taxes and equity in net
income of an investment in TD Ameritrade
Provision for (recovery of) income taxes
Equity in net income of an investment in TD Ameritrade
Net income
Preferred dividends
Net income available to common shareholders
and non-controlling interests in subsidiaries
Attributable to:
Common shareholders
Non-controlling interests in subsidiaries
$
$
19,923
14,385
34,308
2,330
2,462
18,496
11,020
2,226
498
9,292
141
9,151
9,036
115
$
$
$
$
$
$
2015
18,724
12,702
31,426
1,683
2,500
18,073
9,170
1,523
377
8,024
99
2014
$ 17,584
12,377
29,961
1,557
2,833
16,496
9,075
1,512
320
7,883
143
2013
$ 16,074
11,185
27,259
1,631
3,056
15,069
7,503
1,135
272
6,640
185
7,925
$
7,740
$
6,455
$
6,264
$
5,865
7,813
112
$
7,633
107
$
6,350
105
$
6,160
104
$
5,761
104
2015
18,724
12,713
31,437
1,683
2,500
17,076
10,178
1,862
438
8,754
99
2014
$ 17,584
12,097
29,681
1,582
2,833
15,863
9,403
1,649
373
8,127
143
2013
$ 16,074
11,114
27,188
1,606
3,056
14,390
8,136
1,326
326
7,136
185
2012
$ 15,062
10,615
25,677
1,903
2,424
13,180
8,170
1,397
291
7,064
196
2011
$ 13,661
10,052
23,713
1,490
2,178
12,373
7,672
1,545
305
6,432
180
8,655
$
7,984
$
6,951
$
6,868
$
6,252
8,543
112
$
7,877
107
$
6,846
105
$
6,764
104
$
6,148
104
1 The Bank prepares its Consolidated Financial Statements in accordance with
2 Includes available-for-sale securities and financial assets designated at fair value
IFRS, as issued by the IASB, the current GAAP, and refers to results prepared in
accordance with IFRS as “reported” results. Adjusted results (excluding “items
of note”, net of income taxes, from reported results) and related terms are
not defined terms under GAAP and therefore, may not be comparable to similar
terms used by other issuers. For further explanation, refer to the “How the
Bank Reports” section in the 2016 MD&A. Refer to the following page for a
reconciliation with reported results.
through profit or loss.
TD BANK GROUP ANNUAL REP O RT 20 1 6 TEN -YEA R S TATISTI CAL REV IEW 201
Ten-year Statistical Review – IFRS1
Reconciliation of Non-GAAP Financial Measures
(millions of Canadian dollars)
2016
2015
2014
2013
2012
2011
$ 8,680
$ 7,813
$ 7,633
$ 6,350
$ 6,160
$ 5,761
Net income available to common
shareholders – reported
Adjustments for items of note,
net of income taxes
Amortization of intangibles
Fair value of derivatives hedging the reclassified
available-for-sale securities portfolio
Impairment of goodwill, non-financial assets,
and other charges
Restructuring charges
Charge related to the acquisition in U.S. strategic
cards portfolio and related integration costs
Litigation and litigation-related charge(s)/reserve(s)
Integration charges and direct transaction costs
relating to the acquisition of the credit card
portfolio of MBNA Canada
Set-up, conversion and other one-time costs related
to affinity relationship with Aimia and
acquisition of Aeroplan Visa credit card accounts
Impact of Alberta flood on the loan portfolio
Gain on sale of TD Waterhouse Institutional Services
Impact of Superstorm Sandy
Integration charges, direct transaction costs, and
changes in fair value of contingent consideration
relating to the Chrysler Financial acquisition
Reduction of allowance for incurred but not identified
credit losses
Positive impact due to changes in statutory income tax rates
Integration charges and direct transaction costs relating
to U.S. Retail acquisitions
Fair value of credit default swaps hedging the corporate
loan book, net of provision for credit losses
246
(6)
116
–
–
–
–
–
–
–
–
–
–
–
–
–
255
(55)
–
471
51
8
–
–
–
–
–
–
–
–
–
–
246
(43)
–
–
–
–
125
131
(19)
(196)
–
–
–
–
–
–
244
232
(57)
–
90
–
100
92
20
19
–
–
–
–
–
–
–
496
238
89
–
–
–
248
104
–
–
–
37
17
(120)
(18)
9
–
604
391
(128)
–
–
–
–
–
–
–
–
–
55
–
–
82
(13)
387
Total adjustments for items of note
356
730
Net income available to common
shareholders – adjusted
$ 9,036
$ 8,543
$ 7,877
$ 6,846
$ 6,764
$ 6,148
Condensed Consolidated Statement of Changes in Equity
(millions of Canadian dollars)
2016
Common shares
Preferred shares
Treasury shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income (loss)
Total
Non-controlling interests in subsidiaries
$ 20,711
4,400
(36)
203
35,452
11,834
$ 72,564
1,650
2015
$ 20,294
2,700
(52)
214
32,053
10,209
$ 65,418
1,610
2014
$ 19,811
2,200
(55)
205
27,585
4,936
$ 54,682
1,549
2013
2012
$ 19,316
3,395
(147)
170
23,982
3,159
$ 49,875
$ 18,691
3,395
(167)
196
20,868
3,645
$ 46,628
2011
$ 17,491
3,395
(116)
212
18,213
3,326
$ 42,521
1,508
1,477
1,483
Total equity
$ 74,214
$ 67,028
$ 56,231
$ 51,383
$ 48,105
$ 44,004
1 The Bank prepares its Consolidated Financial Statements in accordance with
IFRS, as issued by the IASB, the current GAAP, and refers to results prepared in
accordance with IFRS as “reported” results. Adjusted results (excluding “items
of note”, net of income taxes, from reported results) and related terms are not
defined terms under GAAP and therefore, may not be comparable to similar terms
used by other issuers. For further explanation, refer to the “How the Bank Reports”
section in the 2016 MD&A.
202
TD BANK GROU P AN NUAL REPO RT 20 16 TEN- YEAR S TATIS TICAL RE VIEW
Ten-year Statistical Review – IFRS1
Other Statistics – Reported
Per common share
$
1 Basic earnings
2 Diluted earnings
3 Dividends
4 Book value
5 Closing market price
6 Closing market price to book value
7 Closing market price appreciation
8 Total shareholder return on common
shareholders’ investment2
Performance ratios
9 Return on common equity
10 Return on Common Equity Tier 1
Capital risk-weighted assets3,4
11 Efficiency ratio
12 Net interest margin as a % of average
earning assets
13 Common dividend payout ratio
14 Dividend yield5
15 Price earnings ratio6
Asset quality
16
Impaired loans net of counterparty-specific
and individually insignificant allowances
as a % of net loans7,8
17 Net impaired loans as a % of common equity7,8
18 Provision for credit losses as a %
of net average loans7,8
Capital ratios
Other
19 Common Equity Tier 1 capital ratio4,9
20 Tier 1 capital ratio3,4
21 Total capital ratio3,4
22 Common equity to total assets
23 Number of common shares
outstanding (millions)
24 Market capitalization
2016
4.68
4.67
2.16
36.71
60.86
1.66
13.4%
17.9
13.3%
2.21
55.0
2.01
46.1
3.9
13.0
0.46%
4.09
0.41
10.4%
12.2
15.2
5.8
$
2015
4.22
4.21
2.00
33.81
53.68
1.59
(3.2)%
0.4
13.4%
2.20
57.5
2.05
47.4
3.8
12.8
0.48%
4.24
0.34
9.9%
11.3
14.0
5.7
$
2014
4.15
4.14
1.84
28.45
55.47
1.95
16.0%
20.1
15.4%
2.45
55.1
2.18
44.3
3.5
13.4
0.46%
4.28
0.34
9.4%
10.9
13.4
5.5
2013
2012
2011
$
3.46
3.44
1.62
25.33
47.82
1.89
17.7%
22.3
14.2%
2.32
55.3
2.20
46.9
3.7
13.9
0.50%
4.83
0.38
9.0%
11.0
14.2
5.4
$
3.40
3.38
1.45
23.60
40.62
1.72
8.0%
11.9
15.0%
2.58
54.9
2.23
42.5
3.8
12.0
0.52%
4.86
0.43
n/a%
12.6
15.7
5.3
$
3.25
3.21
1.31
21.72
37.62
1.73
2.4%
5.7
16.2%
2.78
60.2
2.30
40.2
3.4
11.7
0.56%
5.27
0.39
n/a%
13.0
16.0
5.3
1,857.2
1,855.1
1,844.6
1,835.0
1,832.3
1,802.0
(millions of Canadian dollars)
$ 113,028
$ 99,584
$ 102,322
$ 87,748
$ 74,417
$ 67,782
25 Average number of full-time
equivalent staff10
26 Number of retail outlets11
27 Number of retail brokerage offices
28 Number of automated banking machines
81,233
2,476
111
5,263
81,483
2,514
108
5,171
81,137
2,534
111
4,833
78,748
2,547
110
4,734
78,397
2,535
112
4,739
75,631
2,483
108
4,650
Other Statistics – Adjusted
Per common share
1 Basic earnings
2 Diluted earnings
Performance ratios
3 Return on common equity
4 Return on Common Equity Tier 1
Capital risk-weighted assets3,4
5 Efficiency ratio
6 Common dividend payout ratio
7 Price-earnings ratio6
$
2016
4.88
4.87
$
2015
4.62
4.61
$
2014
4.28
4.27
$
2013
3.72
3.71
$
2012
3.73
3.71
$
2011
3.47
3.43
13.9%
14.7%
15.9%
15.3%
16.5%
17.3%
2.31
53.9
44.3
12.5
2.40
54.3
43.3
11.7
2.53
53.4
43.0
13.0
2.50
52.9
43.5
12.9
2.83
51.3
38.7
11.0
2.95
52.2
37.7
11.0
1 The Bank prepares its Consolidated Financial Statements in accordance with IFRS, as
issued by the IASB, the current GAAP, and refers to results prepared in accordance
with IFRS as “reported” results. Adjusted results (excluding “items of note”,
net of income taxes, from reported results) and related terms are not defined
terms under GAAP and therefore, may not be comparable to similar terms used by
other issuers. For further explanation, refer to “How the Bank Reports” section in
the 2016 MD&A.
2 Return is calculated based on share price movement and dividends reinvested
over the trailing twelve month period.
6 The price-earnings ratio is computed using diluted net income per common share
over the trailing 4 quarters.
7 Includes customers’ liability under acceptances.
8 Excludes acquired credit-impaired loans and debt securities classified as loans.
For additional information on acquired credit-impaired loans, refer to the “Credit
Portfolio Quality” section of the 2016 MD&A. For additional information on debt
securities classified as loans, refer to the “Exposure to Non-Agency Collateralized
Mortgage Obligations” discussion and tables in the “Credit Portfolio Quality”
section of the 2016 MD&A.
3 Effective fiscal 2013, amounts are calculated in accordance with the Basel III
9 Effective fiscal 2013, the Bank implemented the Basel III regulatory framework.
regulatory framework, and are presented based on the “all-in” methodology. Prior
to fiscal 2013, amounts were calculated in accordance with the Basel II regulatory
framework. Prior to 2012, amounts were calculated based on Canadian GAAP.
4 Effective fiscal 2014, the CVA is being implemented based on a phase-in approach
until the first quarter of 2019. Effective the third quarter of 2014, the scalars for
inclusion of CVA for CET1, Tier 1 and Total Capital RWA are 57%, 65% and 77%
respectively. For fiscal 2015 and 2016, the scalars are 64%, 71%, and
77% respectively.
As a result, the Bank began reporting the measures, CET1 and CET1 Capital ratio,
in accordance with the “all-in” methodology. Accordingly, amounts for periods
prior to fiscal 2013 are not applicable (n/a).
10 In fiscal 2014, the Bank conformed to a standardized definition of full-time
equivalent staff across all segments. The definition includes, among other things,
hours for overtime and contractors as part of its calculations. Comparatives for
periods prior to fiscal 2014 have not been restated.
11 Includes retail bank outlets, private client centre branches, and estate and
5 Yield is calculated as dividends paid during the year divided by average of high
trust branches.
and low common share prices for the year.
TD BANK GROUP ANNUAL REP O RT 20 1 6 TEN -YEA R S TATISTI CAL REV IEW 203
Ten-year Statistical Review – Canadian GAAP1
Condensed Consolidated Balance Sheet
(millions of Canadian dollars)
ASSETS
Cash resources and other
Securities
Securities purchased under reverse repurchase agreements
Loans, net of allowance for loan losses
Other
Total assets
LIABILITIES
Deposits
Other
Subordinated notes and debentures
Liabilities for preferred shares and capital trust securities
Non-controlling interests in subsidiaries
EQUITY
Common shares
Preferred shares
Treasury shares2
Contributed surplus
Retained earnings
Accumulated other comprehensive income (loss)
2011
2010
2009
2008
2007
$ 24,111
192,538
53,599
303,495
112,617
$ 21,710
171,612
50,658
269,853
105,712
$ 21,517
148,823
32,948
253,128
100,803
$ 17,946
144,125
42,425
219,624
139,094
$ 16,536
123,036
27,648
175,915
78,989
686,360
619,545
557,219
563,214
422,124
481,114
145,209
11,670
32
1,483
429,971
132,691
12,506
582
1,493
391,034
112,078
12,383
1,445
1,559
375,694
140,406
12,436
1,444
1,560
276,393
112,905
9,449
1,449
524
639,508
577,243
518,499
531,540
400,720
18,417
3,395
(116)
281
24,339
536
46,852
16,730
3,395
(92)
305
20,959
1,005
42,302
15,357
3,395
(15)
336
18,632
1,015
38,720
13,278
1,875
(79)
392
17,857
(1,649)
31,674
6,577
425
–
119
15,954
(1,671)
21,404
Total liabilities and shareholders’ equity
$ 686,360
$ 619,545
$ 557,219
$ 563,214
$ 422,124
Condensed Consolidated Statement of Income – Reported
(millions of Canadian dollars)
Net interest income
Non-interest income
Total revenue
Provision for credit losses
Non-interest expenses
Income before income taxes, non-controlling interests in subsidiaries
and equity in net income of an associated company
Provision for (recovery of) income taxes
Non-controlling interests in subsidiaries, net of income taxes
Equity in net income of an associated company, net of income taxes
Net income
Preferred dividends
2011
2010
2009
$ 12,831
8,763
$ 11,543
8,022
$ 11,326
6,534
$
21,594
1,465
13,083
19,565
1,625
12,163
17,860
2,480
12,211
7,046
1,299
104
246
5,889
180
5,777
1,262
106
235
4,644
194
3,169
241
111
303
3,120
167
2008
8,532
6,137
14,669
1,063
9,502
4,104
537
43
309
3,833
59
2007
$
6,924
7,357
14,281
645
8,975
4,661
853
95
284
3,997
20
Net income available to common shareholders
$
5,709
$
4,450
$
2,953
$
3,774
$
3,977
Condensed Consolidated Statement of Income – Adjusted
(millions of Canadian dollars)
Net interest income
Non-interest income
Total revenue
Provision for credit losses
Non-interest expenses
Income before income taxes, non-controlling interests in subsidiaries
and equity in net income of an associated company
Provision for (recovery of) income taxes
Non-controlling interests in subsidiaries, net of income taxes
Equity in net income of an associated company, net of income taxes
Net income
Preferred dividends
2011
2010
2009
$ 12,831
8,587
$ 11,543
8,020
$ 11,326
7,294
$
21,418
1,465
12,395
19,563
1,685
11,464
18,620
2,225
11,016
7,558
1,508
104
305
6,251
180
6,414
1,387
106
307
5,228
194
5,379
923
111
371
4,716
167
2008
8,532
5,840
14,372
1,046
9,291
4,035
554
43
375
3,813
59
2007
$
6,924
7,148
14,072
705
8,390
4,977
1,000
119
331
4,189
20
Net income available to common shareholders
$
6,071
$
5,034
$
4,549
$
3,754
$
4,169
1 Results prepared in accordance with Canadian GAAP were referred to as “reported”
2 Effective fiscal 2008, treasury shares have been reclassified from common and
results. Adjusted results (excluding “items of note”, net of income taxes, from
reported results) and related terms were not defined terms under Canadian GAAP
and therefore, may not be comparable to similar terms used by other issuers.
For further explanation, refer to the “How the Bank Reports” section of the 2016
MD&A. Refer to the following page for a reconciliation with reported results.
preferred shares and are shown separately. Prior to fiscal 2008, the amounts for
treasury shares were not reasonably determinable.
204204
TD BANK GROU P AN NUAL REPO RT 20 16 TEN- YEAR S TATIS TICAL RE VIEW
Ten-year Statistical Review – Canadian GAAP1
Reconciliation of Non-GAAP Financial Measures
(millions of Canadian dollars)
Net income available to common shareholders – reported
Adjustments for items of note, net of income taxes
Amortization of intangibles
Reversal of Enron litigation reserve
Fair value of derivatives hedging the reclassified available-for-sale
debt securities portfolio
Gain relating to restructuring of VISA
TD Banknorth restructuring, privatization and merger-related charges
Integration and restructuring charges relating to U.S. Retail acquisitions
Fair value of credit default swaps hedging the corporate loan book,
net of provision for credit loss
Integration charges related to the Chrysler Financial acquisition
Other tax items1
Provision for (release of) insurance claims
Reduction of general allowance for credit losses
Agreement with Canada Revenue Agency
Settlement of TD Banknorth shareholder litigation
FDIC special assessment charge
Total adjustments for items of note
2011
2010
2009
2008
2007
$ 5,709
$ 4,450
$ 2,953
$ 3,774
$ 3,977
426
–
(134)
–
–
69
(13)
14
–
–
–
–
–
–
362
467
–
(5)
–
–
69
4
–
(11)
(17)
(44)
121
–
–
584
492
–
450
–
–
276
126
–
–
–
178
–
39
35
1,596
404
(323)
(118)
–
–
70
(107)
–
34
20
–
–
–
–
(20)
353
–
–
(135)
43
–
(30)
–
–
–
(39)
–
–
–
192
Net income available to common shareholders – adjusted
$ 6,071
$ 5,034
$ 4,549
$ 3,754
$ 4,169
Condensed Consolidated Statement of Changes in Equity
(millions of Canadian dollars)
Common shares
Preferred shares
Treasury shares2
Contributed surplus
Retained earnings
Accumulated other comprehensive income (loss)
Total equity
2011
2010
2009
2008
2007
$ 18,417
3,395
(116)
281
24,339
536
$ 16,730
3,395
(92)
305
20,959
1,005
$ 15,357
3,395
(15)
336
18,632
1,015
$ 13,278
1,875
(79)
392
17,857
(1,649)
$ 6,577
425
–
119
15,954
(1,671)
$ 46,852
$ 42,302
$ 38,720
$ 31,674
$ 21,404
1 Results prepared in accordance with Canadian GAAP were referred to as
2 Effective fiscal 2008, treasury shares have been reclassified from common and
“reported” results. Adjusted results (excluding “items of note”, net of income
taxes, from reported results) and related terms were not defined terms under
Canadian GAAP and therefore, may not be comparable to similar terms used by
other issuers. For further explanation, refer to the “How the Bank Reports”
section of the 2016 MD&A.
preferred shares and are shown separately. Prior to fiscal 2008, the amounts for
treasury shares were not reasonably determinable.
TD BANK GROUP ANNUAL REP O RT 20 1 6 TEN -YEA R S TATISTI CAL REV IEW 205205
Ten-year Statistical Review – Canadian GAAP1
Other Statistics – Reported
Per common share
1 Basic earnings
2 Diluted earnings
3 Dividends
4 Book value
5 Closing market price
6 Closing market price to book value
7 Closing market price appreciation
8 Total shareholder return on common
shareholders’ investment2
Performance ratios 9 Return on common equity
10 Return on risk-weighted assets
11 Efficiency ratio3
12 Net interest margin
13 Common dividend payout ratio
14 Dividend yield4
15 Price-earnings ratio5
Asset quality
16
Impaired loans net of specific allowance as a % of
net loans6,7
17 Net impaired loans as a % of common equity6,7
18 Provision for credit losses as a % of net average loans6,7
Capital ratios
19 Tier 1 Capital ratio
20 Total Capital ratio
$
$
2011
3.23
3.21
1.31
24.12
37.62
1.56
2.4%
5.7
14.5%
2.78
60.6
2.37
40.6
3.4
11.7
0.59%
4.07
0.48
13.0%
16.0
2010
2.57
2.55
1.22
22.15
36.73
1.66
19.1%
23.4
12.1%
2.33
62.2
2.35
47.6
3.5
14.4
0.65%
4.41
0.63
12.2%
15.5
2009
2008
2007
$
1.75
1.74
1.22
20.57
30.84
1.50
8.4%
13.6
8.4%
1.47
68.4
2.54
70.3
4.8
17.8
0.62%
4.41
0.92
11.3%
14.9
$
2.45
2.44
1.18
18.39
28.46
1.55
(20.2)%
$
2.77
2.74
1.06
14.62
35.68
2.44
9.6%
(17.1)
14.4%
2.19
64.8
2.22
49.0
3.8
11.7
0.35%
2.70
0.50
9.8%
12.0
13.0
19.3%
2.67
62.8
2.06
38.1
3.0
13.0
0.20%
1.74
0.37
10.3%
13.0
Other
21 Common equity to total assets
22 Number of common shares outstanding (millions)
23 Market capitalization (millions of Canadian dollars)
24 Average number of full-time equivalent staff8
25 Number of retail outlets9
26 Number of retail brokerage offices
27 Number of Automated Banking Machines
6.3
1,802.0
$ 67,782
75,631
2,483
108
4,650
6.3
1,757.0
$ 64,526
68,725
2,449
105
4,550
6.3
1,717.6
$ 52,972
65,930
2,205
190
4,197
5.3
1,620.2
$ 46,112
58,792
2,238
249
4,147
5.0
1,435.6
$ 51,216
51,163
1,733
211
3,344
Other Statistics – Adjusted
Per common share
1 Basic earnings
2 Diluted earnings
Performance ratios 3 Return on common equity
4 Return on risk-weighted assets
5 Efficiency ratio3
6 Common dividend payout ratio
7 Price-earnings ratio5
1 Results prepared in accordance with Canadian GAAP were referred to as
“reported” results. Adjusted results (excluding “items of note”, net of income
taxes, from reported results) and related terms were not defined terms under
Canadian GAAP and therefore, may not be comparable to similar terms used
by other issuers. For further explanation, refer to the “How the Bank Reports”
section of the 2016 MD&A.
2 Return is calculated based on share price movement and reinvested dividends
over the trailing twelve-month period.
3 The efficiency ratios under Canadian GAAP for the fiscal years 2011 and prior
are based on the presentation of Insurance revenues being reported net of claims
and expenses.
4 Yield is calculated as dividends paid during the year divided by average of high
and low common share prices for the year.
5 The price earnings ratio is computed using diluted net income per common share
over the trailing 4 quarters.
$
2011
3.43
3.41
15.4%
2.95
57.9
38.1
11.0
$
2010
2.91
2.89
13.7%
2.63
58.6
42.1
12.7
$
2009
2.69
2.68
$
2008
2.46
2.44
$
2007
2.90
2.88
12.9%
2.27
59.2
45.6
11.6
14.3%
2.18
64.6
49.3
11.6
20.3%
2.80
59.6
36.4
12.4
6 Includes customers’ liability under acceptances.
7 Excludes acquired credit-impaired loans and debt securities classified as loans.
For additional information on acquired credit-impaired loans, refer to the “Credit
Portfolio Quality” section of the 2016 MD&A. For additional information on debt
securities classified as loans, refer to the “Exposure to Non-Agency Collateralized
Mortgage Obligations” discussion and tables in the “Credit Portfolio Quality”
section of the 2016 MD&A.
8 Reflects the number of employees on an average full-time equivalent basis.
9 Includes retail bank outlets, private client centre branches, and estate and
trust branches.
206206
TD BANK GROU P AN NUAL REPO RT 20 16 TEN- YEAR S TATIS TICAL RE VIEW
GLOSSARY
Financial and Banking Terms
Adjusted Results: A non-GAAP financial measure used to assess each
of the Bank’s businesses and to measure the Bank’s overall performance.
Allowance for Credit Losses: Total allowance for credit losses
consists of counterparty-specific, collectively assessed allowance for
individually insignificant impaired loans, and collectively assessed
allowance for incurred but not identified credit losses. The allowance
is increased by the provision for credit losses, and decreased by write-
offs net of recoveries and disposals. The Bank maintains the allowance
at levels that management believes are adequate to absorb incurred
credit-related losses in the lending portfolio.
Alt-A Mortgages: A classification of mortgages where borrowers have
a clean credit history consistent with prime lending criteria. However,
characteristics about the mortgage such as loan to value (LTV), loan
documentation, occupancy status or property type, etc., may cause the
mortgage not to qualify under standard underwriting programs.
Amortized Cost: The amount at which a financial asset or financial
liability is measured at initial recognition minus principal repayments,
plus or minus the cumulative amortization, using the EIRM, of any
differences between the initial amount and the maturity amount, and
minus any reduction for impairment.
Assets under Administration (AUA): Assets that are beneficially
owned by customers where the Bank provides services of an
administrative nature, such as the collection of investment income
and the placing of trades on behalf of the clients (where the client
has made his or her own investment selection). These assets are not
reported on the Bank’s Consolidated Balance Sheet.
Assets under Management (AUM): Assets that are beneficially
owned by customers, managed by the Bank, where the Bank makes
investment selections on behalf of the client (in accordance with
an investment policy). In addition to the TD family of mutual funds,
the Bank manages assets on behalf of individuals, pension funds,
corporations, institutions, endowments and foundations. These assets
are not reported on the Bank’s Consolidated Balance Sheet.
Asset-backed Commercial Paper (ABCP): A form of commercial
paper that is collateralized by other financial assets. Institutional
investors usually purchase such instruments in order to diversify their
assets and generate short-term gains.
Asset-backed Securities (ABS): A security whose value and income
payments are derived from and collateralized (or “backed”) by a
specified pool of underlying assets.
Average Common Equity: Average common equity is the equity cost
of capital calculated using the capital asset pricing model.
Average Earnings Assets: The average carrying value of deposits
with banks, loans and securities based on daily balances for the period
ending October 31 in each fiscal year.
Basis Points (bps): A unit equal to 1/100 of 1%. Thus, a 1% change
is equal to 100 basis points.
Carrying Value: The value at which an asset or liability is carried at
on the Consolidated Balance Sheet.
Collateralized Mortgage Obligation (CMO): They are collateralized
debt obligations consisting of mortgage-backed securities that are
separated and issued as different classes of mortgage pass-through
securities with different terms, interest rates, and risks. CMOs by
private issuers are collectively referred to as non-agency CMOs.
Common Equity Tier 1 (CET1) Capital: This is a primary Basel III
capital measure comprised mainly of common equity, retained
earnings and qualifying non-controlling interest in subsidiaries.
Regulatory deductions made to arrive at the CET1 Capital include
goodwill and intangibles, unconsolidated investments in banking,
financial, and insurance entities, deferred tax assets, defined benefit
pension fund assets and shortfalls in allowances.
Common Equity Tier 1 (CET1) Capital Ratio: CET1 Capital ratio
represents the predominant measure of capital adequacy under
Basel III and equals CET1 Capital divided by RWA.
Compound Annual Growth Rate (CAGR): A measure of growth over
multiple time periods from the initial investment value to the ending
investment value assuming that the investment has been compounding
over the time period.
Credit Valuation Adjustment (CVA): CVA represents an add-on
capital charge that measures credit risk due to default of derivative
counterparties. This add-on charge requires banks to capitalize for
the potential changes in counterparty credit spread for the derivative
portfolios. As per OSFI’s Capital Adequacy Requirements (CAR)
guideline, CVA capital add-on charge was effective January 1, 2014.
Dividend Yield: Dividends paid during the year divided by average
of high and low common share prices for the year.
Effective Interest Rate (EIR): The rate that discounts expected future
cash flows for the expected life of the financial instrument to its carrying
value. The calculation takes into account the contractual interest rate,
along with any fees or incremental costs that are directly attributable
to the instrument and all other premiums or discounts.
Effective Interest Rate Method (EIRM): A technique for calculating
the actual interest rate in a period based on the amount of a financial
instrument’s book value at the beginning of the accounting period.
Under EIRM, the effective interest rate, which is a key component of
the calculation, discounts the expected future cash inflows and outflows
expected over the life of a financial instrument.
Efficiency Ratio: Non-interest expenses as a percentage of total
revenue; the efficiency ratio measures the efficiency of the
Bank’s operations.
Enhanced Disclosure Task Force (EDTF): Established by the
Financial Stability Board in May 2012 with the goal of improving
the risk disclosures of the banks and other financial institutions.
Exposure at Default (EAD): It is the total amount the Bank expects
to be exposed to at the time of default.
Fair Value: The price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants
at the measurement date, under current market conditions.
Federal Deposit Insurance Corporation (FDIC): A U.S. government
corporation which provides deposit insurance guaranteeing the safety
of a depositor’s accounts in member banks. The FDIC also examines
and supervises certain financial institutions for safety and soundness,
performs certain consumer-protection functions, and manages banks
in receiverships (failed banks).
Forward Contracts: Over-the-counter contracts between two parties
that oblige one party to the contract to buy and the other party to
sell an asset for a fixed price at a future date.
Futures: Exchange-traded contracts to buy or sell a security at a
predetermined price on a specified future date.
Hedging: A risk management technique intended to mitigate the
Bank’s exposure to fluctuations in interest rates, foreign currency
exchange rates, or other market factors. The elimination or reduction
of such exposure is accomplished by engaging in capital markets
activities to establish offsetting positions.
Impaired Loans: Loans where, in management’s opinion, there has
been a deterioration of credit quality to the extent that the Bank no
longer has reasonable assurance as to the timely collection of the full
amount of principal and interest.
TD BANK GROUP ANNUAL RE POR T 2 016 GLOSSAR Y
207207
GLOSSARY (continued)
Loss Given Default (LGD): It is the amount of the loss the Bank would
likely incur when a borrower defaults on a loan, which is expressed as
a percentage of exposure at default.
Return on Common Equity Tier 1 (CET1) Capital Risk-weighted
Assets: Net income available to common shareholders as a percentage
of average CET1 Capital risk-weighted assets.
Mark-to-Market (MTM): A valuation that reflects current market
rates as at the balance sheet date for financial instruments that are
carried at fair value.
Master Netting Agreements: Legal agreements between two parties
that have multiple derivative contracts with each other that provide for
the net settlement of all contracts through a single payment, in a single
currency, in the event of default or termination of any one contract.
Net Interest Margin: Net interest income as a percentage of average
earning assets.
Non-Viability Contingent Capital (NVCC): Instruments (preferred
shares and subordinated debt) that contain a feature or a provision
that allows the financial institution to either permanently convert these
instruments into common shares or fully write-down the instrument,
in the event that the institution is no longer viable.
Notional: A reference amount on which payments for derivative
financial instruments are based.
Office of the Superintendent of Financial Institutions Canada
(OSFI): The regulator of Canadian federally chartered financial
institutions and federally administered pension plans.
Options: Contracts in which the writer of the option grants the buyer
the future right, but not the obligation, to buy or to sell a security,
exchange rate, interest rate, or other financial instrument or commodity
at a predetermined price at or by a specified future date.
Prime Jumbo Mortgages: A classification of mortgages where
borrowers have a clean credit history consistent with prime lending
criteria and standard mortgage characteristics. However, the size
of the mortgage exceeds the maximum size allowed under government
sponsored mortgage entity programs.
Probability of Default (PD): It is the likelihood that a borrower will
not be able to meet its scheduled repayments.
Provision for Credit Losses (PCL): Amount added to the allowance
for credit losses to bring it to a level that management considers
adequate to absorb all incurred credit related losses in its portfolio.
Return on Common Equity (ROE): Net income available to common
shareholders as a percentage of average common shareholders’
equity. A broad measurement of a bank’s effectiveness in employing
shareholders’ funds.
Risk-Weighted Assets (RWA): Assets calculated by applying a
regulatory risk-weight factor to on and off-balance sheet exposures.
The risk-weight factors are established by the OSFI to convert on
and off-balance sheet exposures to a comparable risk level.
Securitization: The process by which financial assets, mainly loans,
are transferred to a trust, which normally issues a series of asset-
backed securities to investors to fund the purchase of loans.
Special Purpose Entities (SPEs): Entities that are created to
accomplish a narrow and well-defined objective. SPEs may take the
form of a corporation, trust, partnership, or unincorporated entity.
SPEs are often created with legal arrangements that impose limits
on the decision-making powers of their governing board, trustees
or management over the operations of the SPE.
Swaps: Contracts that involve the exchange of fixed and floating
interest rate payment obligations and currencies on a notional principal
for a specified period of time.
Taxable Equivalent Basis (TEB): A non-GAAP financial measure
that increases revenues and the provision for income taxes by an
amount that would increase revenues on certain tax-exempt securities
to an equivalent before-tax basis to facilitate comparison of net
interest income from both taxable and tax-exempt sources.
Tier 1 Capital Ratio: Tier 1 Capital represents the more permanent
forms of capital, consisting primarily of common shareholders’ equity,
retained earnings, preferred shares and innovative instruments.
Tier 1 Capital ratio is calculated as Tier 1 Capital divided by RWA.
Total Capital Ratio: Total Capital is defined as the total of net Tier 1
and Tier 2 Capital. Total Capital ratio is calculated as Total Capital
divided by RWA.
Total Shareholder Return (TSR): The change in market price plus
dividends paid during the year as a percentage of the prior year’s
closing market price per common share.
Value-at-Risk (VaR): A metric used to monitor and control
overall risk levels and to calculate the regulatory capital required
for market risk in trading activities. VaR measures the adverse
impact that potential changes in market rates and prices could
have on the value of a portfolio over a specified period of time.
208
TD BANK GROU P AN NUAL REPO RT 20 16 GLOSSA RY
2016 Snapshot
Year at a Glance
Performance Indicators
TD Framework
Group President and CEO’s Message
Chairman of the Board’s Message
MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL RESULTS
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Ten-Year Statistical Review
Glossary
Shareholder and Investor Information
1
2
4
5
6
7
11
116
124
201
207
209
For more information, see the interactive
TD Annual Report online by visiting
td.com/annual-report/ar2016
For information on TD’s commitments
to the community see the TD Corporate
Responsibility Report online by visiting
td.com/corporate-responsibility
(2016 report available April 2017)
Shareholder and Investor Information
MARKET LISTINGS
The common shares of The Toronto-Dominion
Bank are listed for trading on the Toronto Stock
Exchange and the New York Stock Exchange
under the symbol “TD”. The Toronto-Dominion
Bank preferred shares are listed on the Toronto
Stock Exchange.
Further information regarding the Bank’s
listed securities, including ticker symbols and
CUSIP numbers, is available on our website at
www.td.com under Investor Relations/Share
Information or by calling TD Shareholder
Relations at 1-866-756-8936 or 416-944-6367
or by e-mailing tdshinfo@td.com.
AUDITORS FOR FISCAL 2016
Ernst & Young LLP
DIVIDENDS
Direct dividend depositing: Shareholders
may have their dividends deposited directly
to any bank account in Canada or the U.S.
For this service, please contact the Bank’s
transfer agent at the address below.
U.S. dollar dividends: Dividend payments
sent to U.S. addresses or made directly to
U.S. bank accounts will be made in U.S. funds
unless a shareholder otherwise instructs the
Bank’s transfer agent. Other shareholders can
request dividend payments in U.S. funds by
contacting the Bank’s transfer agent. Until
February 28, 2017, dividends will be exchanged
into U.S. funds at the Bank of Canada noon
rate on the fifth business day after the record
date, or as otherwise advised by the Bank.
Effective March 1, 2017, dividends will be
exchanged into U.S. funds at the Bank of Canada
daily average exchange rate published at 16:30
(Eastern) on the fifth business day after the
record date, or as otherwise advised by the Bank.
Dividend information is available at
www.td.com under Investor Relations/Share
Information. Dividends, including the amounts
and dates, are subject to declaration by the
Board of Directors of the Bank.
DIVIDEND REINVESTMENT PLAN
For information regarding the Bank’s dividend
reinvestment plan, please contact our transfer
agent or visit our website at www.td.com under
Investor Relations/Share Information/Dividends.
IF YOU
AND YOUR INQUIRY RELATES TO
PLEASE CONTACT
Are a registered shareholder (your name appears
on your TD share certificate)
Hold your TD shares through the Direct
Registration System in the United States
Missing dividends, lost share certificates, estate
questions, address changes to the share register,
dividend bank account changes, the dividend
reinvestment plan, eliminating duplicate mailings
of shareholder materials or stopping (and
resuming) receiving annual and quarterly reports
Missing dividends, lost share certificates, estate
questions, address changes to the share register,
eliminating duplicate mailings of shareholder
materials or stopping (and resuming) receiving
annual and quarterly reports
Transfer Agent:
CST Trust Company
P.O. Box 700, Station B
Montréal, Québec H3B 3K3
1-800-387-0825 (Canada and U.S. only)
or 416-682-3860
Facsimile: 1-888-249-6189
inquiries@canstockta.com or www.canstockta.com
Co-Transfer Agent and Registrar:
Computershare
P.O. Box 30170
College Station, TX 77842-3170 or
211 Quality Circle, Suite 210
College Station, TX 77845
1-866-233-4836
TDD for hearing impaired: 1-800-231-5469
Shareholders outside of U.S.: 201-680-6578
TDD shareholders outside of U.S.: 201-680-6610
www.computershare.com
Beneficially own TD shares that are held in the
name of an intermediary, such as a bank, a trust
company, a securities broker or other nominee
Your TD shares, including questions regarding
the dividend reinvestment plan and mailings
of shareholder materials
Your intermediary
TD SHAREHOLDER RELATIONS
For all other shareholder inquiries, please contact
TD Shareholder Relations at 416-944-6367 or
1-866-756-8936 or e-mail tdshinfo@td.com.
Please note that by leaving us an e-mail or
voicemail message you are providing your
consent for us to forward your inquiry to the
appropriate party for response.
Shareholders may communicate directly with the
independent directors through the Chairman
of the Board, by writing to:
Chairman of the Board
The Toronto-Dominion Bank
P.O. Box 1
Toronto-Dominion Centre
Toronto, Ontario M5K 1A2
or you may send an e-mail c/o TD Shareholder
Relations at tdshinfo@td.com. E-mails addressed
to the Chairman received from shareholders and
expressing an interest to communicate directly
with the independent directors via the Chairman
will be provided to Mr. Levitt.
HEAD OFFICE
The Toronto-Dominion Bank
P.O. Box 1
Toronto-Dominion Centre
King St. W. and Bay St.
Toronto, Ontario M5K 1A2
Product and service information 24 hours a day,
seven days a week:
In Canada contact TD Canada Trust
1-866-222-3456
In the U.S. contact TD Bank,
America’s Most Convenient Bank®
1-888-751-9000
French: 1-866-233-2323
Cantonese/Mandarin: 1-800-328-3698
Telephone device for the hearing impaired:
1-800-361-1180
General information:
Contact Corporate and Public Affairs
416-982-8578
Website: In Canada: www.td.com
In the U.S.: www.tdbank.com
E-mail: customer.service@td.com
(Canada only; U.S. customers can e-mail
customer service via www.tdbank.com)
ANNUAL MEETING
Thursday, March 30, 2017
9:30 a.m. (Eastern)
Design Exchange
Toronto, Ontario
SUBORDINATED NOTES SERVICES
Trustee for subordinated notes:
Computershare Trust Company of Canada
Attention: Manager,
Corporate Trust Services
100 University Avenue, 11th Floor
Toronto, Ontario M5J 2Y1
Vous pouvez vous procurer des exemplaires en
français du rapport annuel au service suivant :
Affaires internes et publiques
La Banque Toronto-Dominion
P.O. Box 1, Toronto-Dominion Centre
Toronto (Ontario) M5K 1A2
TD B ANK GRO UP ANNUAL REP ORT 2016 SHAREHOLDER AND I NVESTO R I NFORM ATIO N
209
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Enriching the lives of our customers,
communities and colleagues
2016 Annual Report
FSC Logo
® The TD logo and other trade-marks are the property of
The Toronto-Dominion Bank or a wholly-owned subsidiary,
in Canada and/or other countries.
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