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2017 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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2017 Snapshot
Year at a Glance
Performance Indicators
TD Framework and Strategy
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
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11
118
127
203
207
209
For more information, see the interactive
TD Annual Report online by visiting
td.com/annual-report/ar2017
For information on TD’s commitments
to the community see the TD Corporate
Responsibility Report online by visiting
td.com/corporate-responsibility
(2017 report available April 2018)
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 2017
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. 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)
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
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,
eliminating duplicate mailings of shareholder
materials or stopping (and resuming) receiving
annual and quarterly reports
Transfer Agent:
AST Trust Company (Canada)
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@astfinancial.com or
www.astfinancial.com/ca-en
Co-Transfer Agent and Registrar:
Computershare
P.O. Box 505000
Louisville, KY 40233 or
462 South 4th Street, Suite 1600
Louisville, KY 40202
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
NORMAL COURSE ISSUER BID
On September 18, 2017, the Bank announced that the TSX and OSFI approved the Bank’s amended NCIB to repurchase for cancellation up to an additional
20 million of the Bank’s common shares. Pursuant to the amended Notice of Intention filed with the TSX, the NCIB ends on March 20, 2018, such earlier date
as the Bank may determine or such earlier date as the Bank may complete its purchases. A copy of the Notice may be obtained without charge by contacting
TD Shareholder Relations by phone at 416-944-6367 or 1-866-756-8936 or by e-mail at tdshinfo@td.com.
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: 1-800-895-4463
Cantonese/Mandarin: 1-800-387-2828
Telephone device for the hearing impaired:
1-800-361-1180
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 29, 2018
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
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Affaires internes et publiques
La Banque Toronto-Dominion
P.O. Box 1, Toronto-Dominion Centre
Toronto (Ontario) M5K 1A2
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TD B ANK GRO UP ANNUAL REP ORT 2017 SHAREHOLDER AND INVESTO R I NFORM ATIO N
209
2017 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)
$12,000
10,000
8,000
6,000
4,000
2,000
0
$6
5
4
3
2
1
0
16.5%
16.0
15.5
15.0
14.5
14.0
13.5
13.0
12.5
12.0
$1,400
1,200
1,000
800
600
400
200
0
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
TD’s 5-year CAGR
TD’s 5-year CAGR
10.6% Reported
8.7% Adjusted
10.2% Reported
8.3% Adjusted
TD’s 2017 Return
on Common Equity
14.9% Reported
15.0% Adjusted
$1,279 billion of total
assets as at
October 31, 2017
DIVIDENDS PER
COMMON 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
16.7%
TD’s premium earnings
mix reflects our North
American retail focus –
lower-risk businesses with
stable, consistent earnings
60%
30%
10%
2013
2014
2015
2016
2017
10.2% TD’s 5-year CAGR
6.8% Canadian peers
5-year CAGR
14.6% Canadian peers
90% Retail
10% 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 7 2 017 SNAPSHOT
1
Year at a Glance1
Record Reported Earnings of
$10.5 billion in 2017
TD announced record reported earnings this
year, driven by growth in all our businesses.
TD Shares Reach an All-Time High
TD common shares reached an all-time high
of $73.34 on October 31, 2017. 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.
Returning Capital to
TD Shareholders
TD raised its quarterly dividend 9% from
the previous year and repurchased almost
23 million shares.
TD Canada Trust Remains the
Leader in Service and Convenience
TD Canada Trust (TDCT) continued to lead in
personal deposit and credit card market share
and maintained the #2 position in real estate
secured lending, mutual funds and business
loan and deposit market share3. TDCT ranked
first among the Big 5 Canadian Retail Banks4
for “Customer Service Excellence”5, “Online
Banking Excellence”6, “Mobile Banking
Excellence”7 and “ATM Banking Excellence”8,
according to Ipsos. TD also had the highest
number of mobile unique visitors according
to comScore, Inc.9
TD Bank, America’s Most
Convenient Bank® delivers
record reported earnings
TD’s U.S. Retail Bank delivered over
US$2 billion in reported earnings, up 15%
from the prior year. The customer experience
was enriched with digital services such as
enhancements to TD VoicePrint and TD ASAP,
which allow customers to be transferred to
a live customer service representative within
60 seconds directly from the TD Bank App.
Accelerating Momentum
in Wealth Management
TD Wealth delivered double digit earnings
growth and further enriched the customer
experience with the enhancement of its
award-winning WebBroker platform,
launching a new offering for active traders.
TD Wealth also introduced a behavioral
finance-based Discovery Tool for advisors.
TD Securities Builds on its
Leadership Position in Canada
TD Green Bond Issuance
in the U.S. Market
TD Insurance Continues to
Protect Canadians
TD Securities earned over $1 billion in 2017,
strengthening its position as a top two dealer
in Canada and expanding its U.S. dollar
capabilities, including the acquisition of Albert
Fried & Company (now TD Prime Services)10.
Following up on its landmark 2014 green
bond issuance, TD issued one of the largest
green bonds by a bank in the developed
markets with a US$1 billion issuance.
Since 2010, TD Securities has participated
in underwriting over $10.8 billion in
green bonds, with a record year in 2017
of $6.4 billion.
TD Ranked as One of the World’s
Most Sustainable Companies
For the fourth year in a row, TD was listed in the
Dow Jones Sustainability World Index, the only
Canadian bank to be included in 2017, with
particularly strong results in Customer Relations
Management and Financial Inclusion. To mark
Canada’s sesquicentennial, TD’s Common
Ground Project invested in the revitalization
of over 150 community green spaces.
Brand Evolution: Ready for You
Our research shows that a majority of
Canadians (79%) don’t feel confident about
their financial future. Our new Ready for
You brand is about helping our customers
be ready for everything that life brings their
way, and to be ready ourselves to meet their
unique needs, wherever and however they
interact with us.
In 2017, TD Insurance (TDI) introduced
TD MyAdvantage, a usage-based auto
insurance app to encourage and reward
better driving habits. TDI also expanded
its market leading one-stop Auto Claims
Collision Centres across Canada, helping
customers get back behind the wheel faster,
and launched simplified Term Life Insurance
with instant approval, including for partial
amounts – an industry first.
Innovative Digital Solutions to
Enrich Customers’ Lives
TD launched a state-of-the-art Design
Research Lab in Toronto, part of an
innovation ecosystem that includes
start-ups, academia, and three innovation
hubs to build and explore new technologies.
1 The Toronto-Dominion Bank (“TD” or the “Bank”) prepares its Consolidated
3 Market share ranking is based on most current data available from OSFI for
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”, from reported results. Refer to the
“Financial Results Overview” in the accompanying 2017 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 2012 to
2017 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, 2017.
Source: Bloomberg. Canadian peers include Royal Bank of Canada, Scotiabank,
Bank of Montreal, and Canadian Imperial Bank of Commerce.
personal deposits as at August 2017, from public financial disclosures for average
credit card balances as at March 2017, from the Canadian Bankers Association
for Real Estate Secured Lending as at June 2017, from the Canadian Bankers
Association for business deposits and loans as at March 2017, and from Investment
Funds Institute of Canada for mutual funds as at August 2017.
4 Big 5 Canadian Retail Banks include Bank of Montreal, Canadian Imperial Bank of
Commerce, Royal Bank of Canada, Scotiabank, and The Toronto-Dominion Bank.
5 Ipsos 2017 Best Banking Awards are based on ongoing quarterly Customer
Service Index (CSI) survey results. Sample size for the total 2017 CSI program
year ended with the August 2017 survey wave was 47,813 completed surveys
yielding 68,744 financial institution ratings nationally. Leadership is defined as
either a statistically significant lead over the other Big 5 Canadian Retail Banks
(at a 95% confidence interval) or a statistically equal tie with one or more of the
Big 5 Canadian Retail Banks.
6 TD Canada Trust has won the Online Banking Excellence award among the Big 5
Canadian Retail Banks in the proprietary Ipsos 2005-2017 Best Banking StudiesSM.
2
TD BANK GROU P AN NUAL REPO RT 20 17 YEAR A T A GLAN CE
7 TD Canada Trust has won the Mobile Banking Excellence award among the Big 5
Canadian Retail Banks in the proprietary Ipsos 2013-2017 Best Banking StudiesSM.
The Mobile Banking Excellence award was introduced in 2013.
8 TD Canada Trust has won the ATM Banking Excellence award among the Big 5
Canadian Retail Banks in the proprietary Ipsos 2005-2017 Best Banking StudiesSM.
9 Source: comScore, Inc., Mobile Metrix, Canada, Home & Work, Persons:18+,
November 2016 – September 2017. TD had the highest number of mobile unique
visitors accessing financial services over the full fiscal year to date (November 2016
to September 2017).
10 Ranked #1 in equity block trading (block trades by value on all Canadian
exchanges, Source: IRESS). Ranked #1 in equity options block trading
(block trades by number of contracts on the Montreal Stock Exchange,
Source: Montreal Exchange). Ranked #1 in government debt and corporate debt
underwriting (excludes self-led domestic bank deals and credit card deals, bonus
credit to lead, Source: Bloomberg). Ranked #1 in syndicated loans (on a rolling
twelve-month basis) (deal volume awarded equally between the book-runners,
Source: Bloomberg). Ranked #1 in M&A announced and completed (on a rolling
twelve-month basis) (Canadian targets, Source: Thomson Reuters). Ranked #2 in
equity underwriting (Source: Bloomberg). Rankings reflect TD Securities’ position
among Canadian peers in Canadian product markets.
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
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 assets2
Financial ratios
Return on common equity – reported
Return on common equity – adjusted3
Efficiency ratio – reported
Efficiency ratio – adjusted1
Provision for credit losses as a % of net average loans and acceptances4
Common share information – reported (Canadian dollars)
Per share earnings
Basic
Diluted
Dividends per common share
Book value per share
Closing share price5
Shares outstanding (millions)
Average basic
Average diluted
End of period
Market capitalization (billions of Canadian dollars)
Dividend yield 6,7
Dividend payout ratio
Price-earnings ratio
Total shareholder return (1 year)8
Common share information – adjusted (Canadian dollars)1
Per share earnings
Basic
Diluted
Dividend payout ratio
Price-earnings ratio
Capital ratios
Common Equity Tier 1 Capital ratio2
Tier 1 Capital ratio2
Total Capital ratio2
Leverage ratio
2017
2016
2015
$ 36,149
35,946
2,216
2,216
2,246
19,366
19,092
10,517
10,587
$ 612.6
1,279.0
832.8
75.2
435.8
$ 34,315
34,308
2,330
2,330
2,462
18,877
18,496
8,936
9,292
$ 585.7
1,177.0
773.7
74.2
405.8
$ 31,426
31,437
1,683
1,683
2,500
18,073
17,076
8,024
8,754
$ 544.3
1,104.4
695.6
67.0
382.4
14.9%
15.0
53.6%
53.1
0.37
13.3%
13.9
55.0%
53.9
0.41
13.4%
14.7
57.5%
54.3
0.34
$
5.51
5.50
2.35
37.76
73.34
1,850.6
1,854.8
1,839.6
$ 134.9
$
4.68
4.67
2.16
36.71
60.86
1,853.4
1,856.8
1,857.2
$ 113.0
3.6%
3.9%
$
42.6
13.3
24.8
5.55
5.54
42.3%
13.2
10.7%
12.3
14.9
3.9
$
46.1
13.0
17.9
4.88
4.87
44.3%
12.5
10.4%
12.2
15.2
4.0
$
4.22
4.21
2.00
33.81
53.68
1,849.2
1,854.1
1,855.1
99.6
$
$
3.7%
47.4
12.8
0.4
4.62
4.61
43.3%
11.7
9.9%
11.3
14.0
3.7
1 Refer to footnote 1 on page 2.
2 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
2015 and 2016, the scalars for inclusion of CVA for Common Equity Tier 1 (CET1),
Tier 1, and Total Capital RWA were 64%, 71%, and 77%, respectively. For fiscal
2017, the scalars are 72%, 77%, and 81%, respectively. As the Bank is constrained
by the Basel 1 regulatory floor, the RWA as it relates to the regulatory floor is
calculated based on the Basel 1 risk weights which are the same for all capital ratios.
3 Adjusted return on common equity is a non-GAAP financial measure. Refer to the
“Return on Common Equity” section of this document for an explanation.
4 Excludes acquired credit-impaired (ACI) loans and debt securities classified as loans.
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.
5 Toronto Stock Exchange (TSX) closing market price.
6 Certain comparative amounts have been recast to conform with the presentation
adopted in the current period.
7 Dividend yield is calculated as the dividend per common share paid during the year
divided by the daily average closing stock price during the year.
8 Total shareholder return (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 7 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.
2017 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
• 24.8% vs. Canadian peer average of 20.8%
• 14% EPS growth
• 2.48% vs. Canadian peer average of 2.25%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 6% vs. total expense growth of 3%
• Refer to “Business Segment Analysis” in the MD&A for details
• LEI/CEI composite score 44.4% (target 43.8%)
• Refer to “Business Segment Analysis” in the MD&A for details
• Employee engagement score7 was 4.22 in 2017 vs. 4.18 in 2016
• Refer to TD’s 2017 Corporate Responsibility Report available
April 2018
COMMUNITY
• Donate minimum of 1% of domestic pre-tax profits
(five-year average) to charitable and not-for-profit organizations
• Make positive contributions by:
• $107 million in donations and community sponsorships across
North America and the United Kingdom (U.K.) vs. $103 million
in 2016
– Supporting employees’ community involvement and
• 1.2% of domestic pre-tax profits in donations and community
fundraising efforts
– 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
sponsorships in Canada vs.1.2% in 20168
• $277,000 in domestic employee volunteer grants to 394 different
organizations
• $42 million, or 57%, of our community giving was directed
to promote our areas of focus domestically
– Protecting and preserving the environment
• $6 million distributed to 603 community environmental projects
through TD Friends of the Environment Foundation; an additional
$8 million from TD’s community giving budget was used to support
environmental projects
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.
4 Revenue is net of insurance claims and related expenses.
5 LEI is a 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.
2 TSR is calculated based on share price movement and dividends reinvested over
6 CEI is a survey measurement program that tracks advocacy among TD Wealth
a trailing one year period.
3 Return on CET1 RWA measured year-to-date as at October 31, 2017, 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 72%, 77%, and 81%, respectively.
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 17 PERF ORM ANCE INDIC ATORS
TD Framework
The TD Framework expresses our vision, purpose and set of shared commitments that guide our behaviour,
shape our culture and drive our performance.
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 Strategy
BUSINESS STRATEGY
We will be the premier Canadian retail bank, a peer leading U.S.
retail bank, and a leading Wholesale business.
• Customer-centric experiences
• One TD
• Operational excellence
• Unique and inclusive employee culture
• Strong risk culture
FOCUS FOR 2018
Our key priorities for 2018 are as follows:
• Distribution transformation
• End-to-end customer journeys
• Process simplification
• Project delivery excellence
TD BANK GROUP ANNUAL RE POR T 2 0 17 TD FR AMEWORK AND STRATEGY
5
Group President and CEO’s Message
TD IS READY
TD operates in a world where change is happening faster,
permeating deeper and with far-wider implications than ever before.
Digital technologies are reshaping business models and the
competitive landscape, reinventing the customer experience and
redefining relationships between financial institutions and
their stakeholders.
In all of this, TD sees the opportunity to build deeper and more
personal relationships with those we serve. We also see new and
better ways to run our business, empower our colleagues and compete
in the market. The bank of the future is full of promise and potential.
And we are dedicating significant resources to create it. TD is not only
responding to the change, we are leading it.
2017 marked another year of record reported earnings – $10.5 billion.
We generated double digit growth in net income and Earnings Per
Share. Return on Equity reached 14.9% – up more than 160 basis
points from the previous year. At the same time, we improved our
operating efficiency and remained well-capitalized with a CET1
ratio of 10.7%.
Our financial performance, in large part, reflects the competitive
strengths embedded in our businesses and brand. Canadian Retail
earnings of $6.5 billion represent an increase of 9% from last year.
Our U.S. Retail business saw revenues rise by 10%, generating over
$3 billion in net income. TD Securities had a strong year, with more
than $1 billion in earnings.
These results allowed for a full-year dividend of $2.35. TD delivered
above average Total Shareholder Return among our major five
competitors over the short, medium, and long-term.
READY FOR OUR CUSTOMERS
TD’s strong performance is underpinned by our unwavering purpose
to enrich the lives of those we serve, and a set of shared commitments;
all part of the TD Framework, as outlined on page 5. This includes our
promise to think like a customer. Delivering on this commitment helps
us attract more people to bank with TD year after year. Today we
have the privilege to serve more than 25 million customers across
our footprint.
2017’s results show we are ready to meet their evolving needs and
rising expectations in an increasingly digital world. We now serve
approximately 11.5 million active online and mobile customers. We
continue to build on our leadership in mobile engagement, by adding
value to each customer in real time, and in a way that is personalized
and relevant to them.
As a customer-centric bank, we are guided by two commitments:
to innovate with purpose and execute with speed. By doing so, we will
seamlessly deliver personal, connected human experiences and advice to
our customers and clients across multiple channels anywhere, anytime.
Earning the trust of each customer is something we do not take for
granted. That is why we undertook a review of our sales practices
following media stories that simply did not reflect our values. We did
not find a widespread problem with people acting unethically in order
to achieve sales goals. Still, we identified ways to improve processes,
and have implemented a plan to do so.
READY FOR OUR COLLEAGUES
More broadly, developing our colleagues remained a key commitment
for us. All of our colleagues must be empowered to make meaningful
contributions to our business and the customer experience we deliver.
What’s more, the capabilities we look for in our colleagues are
evolving. We are recruiting engineers, computer scientists and even
anthropologists to redesign how we run the Bank, build solutions and
engage with the marketplace.
Harnessing the diverse talents and energies of our people is vital to
our continued success. This year, significant resources were dedicated
to developing a universal understanding of what leadership looks
like at TD, and how each and every one of us can align our actions to
the TD Framework. Our efforts have helped TD’s highly engaged and
motivated team fulfill our commitment to act like owners.
READY FOR OUR COMMUNITIES
TD is also committed to helping communities grow and prosper in a
changing world. For instance, in 2017, we issued one of the largest
bank-issued green bonds, which will help fund infrastructure needed
for the transition to a low carbon economy. TD recently announced
a set of initiatives to advance the low carbon economy of the future,
including a target of $100 billion in low-carbon lending, financing,
asset management and other programs by 2030.
We partnered with local organizations, and made more than
$105 million of investments to contribute to enriching the lives of
people and their neighbourhoods. TD understands many forces that
will help fuel economic growth may also be disruptive. And so our
focus is on creating a more inclusive future, where everyone has the
opportunity to prosper.
READY FOR THE FUTURE
Looking ahead, the financial services industry will be further shaped
by rapid innovation and disruption. We must be prepared for
increasingly sophisticated cyber security and fraud risks, as well as
evolving regulatory landscapes. Additionally, there are a host of
geopolitical risks such as mounting trade protectionism that could
undermine economic growth. At the same time, consumer expectations
will continue to rise, just as competition from traditional and
non-traditional players intensifies.
TD will continue to invest in its business, people and brand to
deliver customer-centric experiences and help those we serve feel more
confident about their financial future. We will leverage our size and
scope as One TD to create even more value for our customers and
clients. We will also maintain a strong risk culture, and focus on
operational excellence. Last but not least, TD will foster our unique
and inclusive culture to bring out the best in our colleagues.
TD is not only ready for the future; we are helping to create it.
And that is exactly what our incredibly talented team of 85,000
colleagues will do on behalf of our customers, communities, and
shareholders. We are grateful for your confidence in TD’s future, and
in our commitment to bring our purpose to life each and every day.
Bharat Masrani
Group President and Chief Executive Officer
6
TD BANK GROU P AN NUAL REPO RT 20 17 GROU P PR ESID ENT AND CE O’S M ESSA GE
Chairman of the Board’s Message
TD Bank Group achieved strong financial results in 2017 with record
reported earnings of $10.5 billion. The bank raised its quarterly dividend
by nine percent and delivered above average Total Shareholder Return
among our major five competitors over the short, medium and long-
term. TD remains one of the world’s safest banks and is recognized as
the safest in North America by Global Finance.
We continue to invest in our communities. To celebrate Canada’s
150th birthday, we launched the TD Common Ground initiative with
the aim of revitalizing over 150 parks and green spaces across the
country. Our commitment to the environment contributed to TD being
the only Canadian bank listed in the 2017 Dow Jones Sustainability
World Index, the benchmark for global leaders in economic,
environmental and social responsibility.
In keeping with best practices in corporate governance, and in
response to shareholder feedback, TD has adopted a new proxy access
policy. This policy allows qualifying shareholders to submit one or more
director nominations to be included in TD’s proxy circular and form
of proxy and ballot for the annual shareholders’ meeting. The terms
of the policy reflect developed practices in the United States as well
as the requirements of the Bank Act.
This year TD undertook a review of sales practices. A leading
professional services firm was engaged to provide an objective
assessment of the review, and provided reports to the Risk Committee
of your Board of Directors. The review did not identify evidence of a
widespread problem with people acting unethically in order to achieve
sales goals but identified opportunities to improve our practices.
The Board has reviewed management’s plans to make the identified
improvements and is monitoring the plans’ implementation.
On behalf of the Board I would like to thank our Group President
and CEO, Bharat Masrani, and his senior colleagues for their
leadership, as well as each of our 85,000 employees for their
commitment to providing legendary service to our customers.
I also want to thank our shareholders for their ongoing support
and our customers for the opportunity to serve them every day.
We look forward to continuing to work on your behalf in 2018.
Brian M. Levitt
Chairman of the Board
THE BOARD OF DIRECTORS
AND ITS COMMITTEES
The Board of Directors as at November 29,
2017, its committees and key committees’
responsibilities are listed below. Our Proxy
Circular for the 2018 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
Corporate Director and
former 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,
Saint-Laurent, Québec
Alan N. MacGibbon
Corporate Director
and Non-executive
Vice Chair,
Osler, Hoskin &
Harcourt LLP,
Toronto, Ontario
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
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 7 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;
• 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; and
• Oversee strategy, design and management of the Bank’s employee pension, retirement savings
and benefit plans.
Risk Committee
William E. Bennett
(Chair)
Amy W. Brinkley
Colleen A. Goggins
David E. Kepler
Alan N. MacGibbon
Karen E. Maidment
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 Enterprise Risk Appetite Statement and related measures for approval
by the Board and oversee TD’s major risks as set out in the ERF;
• Review TD’s risk profile against Risk Appetite measures; and
• Provide a forum for “big-picture” analysis of an enterprise view of risk, including considering trends
and emerging risks.
Audit Committee
Alan N. MacGibbon2
(Chair)
William E. Bennett2
Brian C. Ferguson2
Jean-René Halde
Irene R. Miller2
Claude Mongeau2
1 As at November 29, 2017
2 Designated Audit Committee Financial Expert
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 internal 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, Chief Anti-Money Laundering Officer and Bank Secrecy Act 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 2017 Annual
Information Form.
8
TD BANK GROU P AN NUAL REPO RT 20 17 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 2017 Annual Report or the 2017 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 2017 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.
Page
Annual Report
SFI
Refer to below for location
of disclosures
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
The bank’s risk terminology and risk measures and present key
parameter values used.
72-77, 82,
88-91, 101-102
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.
Analysis of capital requirements for each methods used for
calculating RWA.
Tabulate credit risk in the banking book for Basel asset classes
and major portfolios.
67-71
62-63, 95-96
73-76
72-73
61, 72,
77-103
58, 76,
84, 101
56-58, 63
79-80, 83
56
79-81
57-59, 101
59, 61
78-84, 98,
198-199
82
5-8
78
53-73
Flow statement reconciling the movements of RWA by risk type.
59-60
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 7 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.
Analysis of the bank’s counterparty credit risks that arises from
derivative transactions.
Discussion of credit risk mitigation, including collateral held for
all sources of credit risk.
Description of ‘other risk’ types based on management’s
classifications and discuss how each one is identified, governed,
measured and managed.
94, 190
98-100
97-98
82
82, 84-87
83-87, 89-90
83-87
41-55, 77-82,
154-157,
166-168,
196-199
49-50,
129-130, 154
46, 155-156
80, 139-140,
162-163,
166-168
80-81, 133,
139-140
88-90,
101-103
32
Discuss publicly known risk events related to other risks.
71, 188-190
21-39,
43-76
25, 29
43-46
10
TD BANK GROU P AN NUAL REPO RT 20 17 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, 2017, 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, 2017. This MD&A is dated November 29, 2017. 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 period.
Caution Regarding Forward-Looking Statements
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
2016 FINANCIAL RESULTS OVERVIEW
Summary of 2016 Performance
2016 Financial Performance by Business Line
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 Policies and Estimates
Current and Future Changes in Accounting Policies
Controls and Procedures
ADDITIONAL FINANCIAL INFORMATION
11
15
16
18
18
19
20
22
25
29
33
36
37
38
40
41
56
64
66
67
67
72
104
106
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, the Management’s Discussion and Analysis (“2017 MD&A”) under
the heading “Economic Summary and Outlook”, for the Canadian Retail, U.S. Retail and Wholesale Banking segments under headings “Business Outlook and Focus for
2018”, and for the Corporate segment, “Focus for 2018”, and in other statements regarding the Bank’s objectives and priorities for 2018 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”, “would”, “should”, “believe”, “expect”, “anticipate”, “intend”, “estimate”, “plan”, “goal”, “target”, “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,
interest rate, and credit spreads), 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 and the bank recapitalization “bail-in” regime;
exposure related to significant litigation and regulatory matters; 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 2017 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 2017 MD&A under the headings
“Economic Summary and Outlook”, for the Canadian Retail, U.S. Retail, and Wholesale Banking segments, “Business Outlook and Focus for 2018”, and for the
Corporate segment, “Focus for 2018”, 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 2017 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 more than 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 11.5 million active online and mobile
customers. TD had $1.3 trillion in assets on October 31, 2017. 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”, 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
2017
$ 20,847
15,302
36,149
2,216
2,246
19,366
12,321
2,253
449
10,517
193
$ 10,324
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
$ 10,203
121
$ 8,680
115
$ 7,813
112
12
TD BANK GROUP ANNUAL REPORT 2017 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)
2017
2016
2015
Operating results – adjusted
Net interest income
Non-interest income1
Total revenue
Provision for credit losses
Insurance claims and related expenses
Non-interest expenses2
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 Ameritrade3
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
Pre-tax adjustments of items of note
Amortization of intangibles4
Charges associated with the Scottrade transaction5
Dilution gain on the Scottrade transaction6
Loss on sale of the Direct Investing business in Europe7
Fair value of derivatives hedging the reclassified available-for-sale securities portfolio8
Impairment of goodwill, non-financial assets, and other charges9
Restructuring charges10
Charge related to the acquisition in U.S. strategic cards portfolio and related integration costs11
Litigation and litigation-related charge(s)/reserve(s)12
Provision for (recovery of) income taxes for items of note
Amortization of intangibles
Charges associated with the Scottrade transaction
Dilution gain on the Scottrade transaction
Loss on sale of the Direct Investing business in Europe
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 available to common shareholders – reported
$ 20,847
15,099
35,946
2,216
2,246
19,092
12,392
2,336
531
10,587
193
10,394
121
10,273
(310)
(46)
204
(42)
41
–
–
–
–
(78)
(10)
–
(2)
7
–
–
–
–
(70)
$ 10,203
$ 19,923
14,385
34,308
2,330
2,462
18,496
11,020
2,226
498
9,292
141
9,151
115
9,036
(335)
–
–
–
7
(111)
–
–
–
(89)
–
–
–
1
5
–
–
–
(356)
$ 8,680
$ 18,724
12,713
31,437
1,683
2,500
17,076
10,178
1,862
438
8,754
99
8,655
112
8,543
(350)
–
–
–
62
–
(686)
(82)
(13)
(95)
–
–
–
7
–
(215)
(31)
(5)
(730)
$ 7,813
1 Adjusted non-interest income excludes the following items of note: Dilution gain
on the Scottrade transaction, as explained in footnote 6 - 2017 – $204 million.
Loss on sale of the Direct Investing business in Europe, as explained in footnote 7 -
2017 – $42 million. Gain on fair value of derivatives hedging the reclassified
available-for-sale securities portfolio, as explained in footnote 8 - 2017 – $41 million,
2016 – $7 million, and 2015 – $62 million. These amounts were reported in the
Corporate segment. Charges related to the acquisition in the U.S. strategic cards
portfolio, as explained in footnote 11 - 2015 – $73 million. This amount was
reported in the U.S. Retail segment.
2 Adjusted non-interest expenses exclude the following items of note:
Amortization of intangibles, as explained in footnote 4 - 2017 – $248 million,
2016 – $270 million, and 2015 – $289 million, reported in the Corporate segment.
Charges associated with the Bank’s acquisition of Scottrade Bank, as explained in
footnote 5 - 2017 – $26 million, reported in the U.S. Retail segment. Impairment
of goodwill, non-financial assets, and other charges as explained in footnote 9 -
2016 – $111 million, and initiatives to reduce costs, as explained in footnote 10 -
2015 – $686 million, reported in Corporate segment. Integration costs related to
the acquisition in U.S. strategic cards portfolio, as explained in footnote 11 -
2015 – $9 million, and litigation charges and recovery of litigation losses as
explained in footnote 12 - 2015 – $52 million and $39 million, respectively,
reported in the U.S. Retail segment.
3 Adjusted equity in net income of an investment in TD Ameritrade excludes the
following items of note: Amortization of intangibles as explained in footnote 4 -
2017 – $62 million, 2016 – $65 million, and 2015 – $61 million. These amounts
were reported in the Corporate segment. The Bank’s share of charges associated
with TD Ameritrade’s acquisition of Scottrade Financial Services Inc. (Scottrade),
as explained in footnote 5 - 2017 – $20 million. This amount was reported in the
U.S. Retail segment.
4 Amortization of intangibles relates to intangibles acquired as a result of asset
acquisitions and business combinations, including the after tax amounts for
amortization of intangibles relating to the equity in net income of the investment
in TD Ameritrade. 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.
5 On September 18, 2017, the Bank acquired Scottrade Bank and TD Ameritrade
acquired Scottrade. Scottrade Bank merged with TD Bank, N.A. The Bank and
TD Ameritrade incurred acquisition related charges including employee severance,
contract termination fees, direct transaction costs, and other one-time charges.
These amounts have been recorded as an adjustment to net income including
$26 million ($16 million after tax) relating to the charges associated with the
Bank’s acquisition of Scottrade Bank and $20 million after tax amounts relating
to the Bank’s share of charges associated with TD Ameritrade’s acquisition of
Scottrade reported in the U.S. Retail segment.
6 In connection with TD Ameritrade’s acquisition of Scottrade on September 18, 2017,
TD Ameritrade issued 38.8 million shares, of which the Bank purchased 11.1 million
pursuant to its pre-emptive rights (together with the Bank’s acquisition of Scottrade
Bank and TD Ameritrade’s acquisition of Scottrade, the “Scottrade transaction”).
As a result of the share issuances, the Bank’s common stock ownership percentage
in TD Ameritrade decreased and the Bank realized a dilution gain of $204 million
reported in the Corporate segment.
7 On June 2, 2017, the Bank completed the sale of its Direct Investing business in
Europe to Interactive Investor PLC. A loss of $40 million after tax, which remains
subject to the final purchase price adjustment, was recorded in the Corporate
segment in other income (loss). The loss is not considered to be in the normal
course of business for the Bank.
8 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. As a result the derivatives were accounted for on
an accrual basis in Wholesale Banking and the gains and losses related to
the derivatives in excess of the accrued amounts were reported in the
Corporate segment. Adjusted results of the Bank in prior periods exclude the
gains and losses of the derivatives in excess of the accrued amount. Effective
February 1, 2017, the total gains and losses as a result of changes in fair value
of these derivatives are recorded in Wholesale Banking.
9 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 had been experiencing continued losses. These amounts are
reported in the Corporate segment.
10 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.
13
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
11 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.
12 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.
T A B L E 3
RECONCILIATION OF REPORTED TO ADJUSTED EARNINGS PER SHARE (EPS)1
2017
$ 5.51
0.04
$ 5.55
$ 5.50
0.04
$ 5.54
2017
$ 91
62
42
17
20
232
351
$ 583
2016
$ 4.68
0.20
$ 4.88
$ 4.67
0.20
$ 4.87
2016
$ 108
65
36
17
20
246
340
$ 586
2015
$ 4.22
0.40
$ 4.62
$ 4.21
0.40
$ 4.61
2015
$ 116
61
37
17
24
255
289
$ 544
Adjusted ROE is a non-GAAP financial measure and 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.
2017
2016
$ 68,349
10,203
70
10,273
$ 65,121
8,680
356
9,036
2015
$ 58,178
7,813
730
8,543
14.9%
15.0
13.3%
13.9
13.4%
14.7
(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
1 EPS is computed by dividing net income available to common shareholders by the
weighted-average number of shares outstanding during the period.
2 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.
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.
2 Included in equity in net income of an investment in TD Ameritrade.
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
available 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.
14
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
SIGNIFICANT EVENTS IN 2017
On September 18, 2017, the Bank acquired 100% of the outstanding
equity of Scottrade Bank, a federal savings bank wholly-owned by
Scottrade, for cash consideration of approximately $1.6 billion
(US$1.4 billion). Scottrade Bank merged with TD Bank, N.A. In
connection with the acquisition, TD has agreed to accept sweep
deposits from Scottrade clients, expanding the Bank’s sweep deposit
activities. The acquisition is consistent with the Bank’s U.S. strategy and
is accounted for as a business combination under the purchase method.
The acquisition contributed $15 billion of investment securities,
$5 billion of loans, and $19 billion of deposit liabilities. Goodwill of
$34 million reflects the excess of the consideration paid over the fair
value of the identifiable net assets acquired. The results of the acquired
business have been consolidated from the date of close and are
included in the U.S. Retail segment.
TD Ameritrade also concurrently completed its acquisition of
Scottrade on September 18, 2017 for cash and TD Ameritrade shares.
Pursuant to its pre-emptive rights, the Bank purchased 11.1 million
new common shares in TD Ameritrade. As a result of the share
issuance, the Bank’s common stock ownership percentage in
TD Ameritrade decreased and the Bank realized a dilution gain
of $204 million.
FINANCIAL RESULTS OVERVIEW
Net Income
Reported net income for the year was $10,517 million, an increase of
$1,581 million, or 18%, compared with last year. The increase reflects
revenue growth, lower insurance claims, and PCL, partially offset by
higher non-interest expenses. The reported ROE for the year was
14.9%, compared with 13.3% last year. Adjusted net income of
$10,587 million increased $1,295 million, or 14%, compared with
last year.
By segment, the increase in reported net income was due to an
increase in Canadian Retail of $537 million, or 9%, an increase in U.S.
Retail of $363 million, or 12%, an increase in Wholesale Banking2 of
$119 million, or 13% and a lower net loss in the Corporate segment
of $562 million, or 60%.
Reported diluted EPS for the year was $5.50, an increase of 18%,
compared with $4.67 last year. Adjusted diluted EPS for the year was
$5.54, a 14% increase, compared with $4.87 last year.
NET INCOME – REPORTED BY BUSINESS SEGMENT
(as a percentage of total net income)
1
70%
60
50
40
30
20
10
0
2015
2016
2017
2015
2016
2017
2015
2016
2017
NET INCOME – ADJUSTED BY BUSINESS SEGMENT
(as a percentage of total net income)
1
70%
60
50
40
30
20
10
0
2015
2016
2017
2015
2016
2017
2015
2016
2017
Canadian Retail
U.S. Retail
Wholesale Banking
1 Amounts exclude Corporate Segment.
2 Net interest income within Wholesale Banking is calculated on a tax equivalent
basis (TEB). Refer to the “Business Segment Analysis” section in this document
for additional details.
15
TD BANK GROUP ANNUAL REPORT 2017 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.
Appreciation of the Canadian dollar had an unfavourable impact on
the U.S. Retail segment earnings for the year ended October 31, 2017,
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 EARNINGS
(millions of Canadian dollars, except as noted)
U.S. Retail Bank
Total revenue
Non-interest expenses – reported
Non-interest expenses – adjusted
Net income – reported, after tax
Net income – adjusted, after tax
Equity in net income of an investment in TD Ameritrade – reported
Equity in net income of an investment in TD Ameritrade – adjusted
U.S. Retail segment increased net income – reported, after tax
U.S. Retail segment increased net income – adjusted, after tax
Earnings per share (Canadian dollars)
Basic – reported
Basic – adjusted
Diluted – reported
Diluted – adjusted
On a trailing twelve month basis, a one cent appreciation/depreciation
in the U.S. dollar to Canadian dollar average exchange rate would
have increased/decreased U.S. Retail segment net income by
approximately $44 million.
FINANCIAL RESULTS OVERVIEW
Revenue
Reported revenue was $36,149 million, an increase of $1,834 million,
or 5%, compared with last year. Adjusted revenue was $35,946 million,
an increase of $1,638 million, or 5%, compared with last year.
NET INTEREST INCOME
Net interest income for the year was $20,847 million, an increase
of $924 million, or 5%, compared with last year. The increase reflects
loan and deposit volume growth in the Canadian and U.S. Retail
segments, and a more favourable interest rate environment. The
increase was partially offset by a favourable accounting impact from
balance sheet management activities in the prior year, which was
largely offset in non-interest income.
By segment, the increase in reported net interest income was due
to an increase in Canadian Retail of $632 million, or 6%, an increase
in U.S. Retail of $393 million, or 6%, and an increase in Wholesale
Banking of $119 million, or 7%, partially offset by a decrease in the
Corporate segment of $220 million, or 19%.
NET INTEREST MARGIN
Net interest margin declined by 5 basis points (bps) during the year
to 1.96%, compared with 2.01% last year, primarily due to a change
in non-retail product mix and a favourable accounting impact from
balance sheet management activities in the prior year, the latter of
which was largely offset in non-interest income.
NON-INTEREST INCOME
Reported non-interest income for the year was $15,302 million, an
increase of $910 million, or 6%, compared with last year. The increase
reflects fee growth in the Canadian and U.S. Retail segments, a dilution
gain on the Scottrade transaction, an unfavourable accounting impact
from balance sheet management activities in the prior year, which was
16
2017
vs. 2016
Increase
(Decrease)
2016
vs. 2015
Increase
(Decrease)
$ (151)
(90)
(89)
(39)
(40)
(4)
(7)
(43)
(47)
$ (0.02)
(0.03)
(0.02)
(0.03)
$ 581
344
344
157
157
33
33
190
190
$ 0.10
0.10
0.10
0.10
largely offset in net interest income, and increased corporate lending
fees in Wholesale Banking, partially offset by changes in the fair value
of investments supporting claims liabilities which resulted in a similar
decrease to insurance claims. Adjusted non-interest income for the year
was $15,099 million, an increase of $714 million, or 5%, compared
with last year.
By segment, the increase in reported non-interest income was due
to an increase in U.S. Retail of $369 million, or 16%, an increase in
Canadian Retail of $221 million, or 2%, an increase in the Corporate
segment of $198 million, or 44%, and an increase in Wholesale
Banking of $122 million, or 9%.
NET INTEREST INCOME
(millions of Canadian dollars)
$21,000
18,000
15,000
12,000
9,000
6,000
3,000
0
2015 2016 2017
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 7
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. 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.
Trading-related income excludes underwriting fees and commissions
on securities transactions. Management believes that the total trading-
related income is the appropriate measure of trading performance.
T A B L E 8
TRADING-RELATED INCOME
(millions of Canadian dollars)
Net interest income (loss)1
Trading income (loss)
Financial instruments designated at fair value through profit or loss2
Total
By product
Interest rate and credit
Foreign exchange
Equity and other1
Financial instruments designated at fair value through profit or loss2
Total
1 Excludes TEB.
2 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.
2017
2016
2015
% change
2017 vs. 2016
$
493
960
589
534
1,738
145
4,459
1,130
128
303
2,648
2,388
3,760
486
$ 15,302
$
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
6
13
8
6
7
(5)
8
8
137
(23)
3
3
(1)
575
6
Trading-related income for the year was $1,084 million, a decrease
of $251 million, or 19%, compared with last year. The decrease in
trading-related income over last year reflected lower equity trading
(excluding TEB) and lower fixed income, partially offset by foreign
exchange trading.
Trading-related income by product line depicts trading income for
each major trading category.
2017
$ 770
303
11
1,084
668
673
(268)
11
$ 1,084
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
17
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
PROVISION FOR
CREDIT LOSSES
(millions of Canadian dollars)
$2,500
2,000
1,500
1,000
500
0
2015 2016 2017
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
2015
2016
2017
2015
2016
2017
Reported
Adjusted
Reported
Adjusted
FINANCIAL RESULTS OVERVIEW
Provision for Credit Losses
PCL for the year was $2,216 million, a decrease of $114 million, or
5%, compared with last year. The decrease primarily reflects higher
provisions for incurred but not identified credit losses recognized in the
prior year, the recovery of specific provisions in the oil and gas sector,
and lower provisions in the Canadian Retail segment. The decrease
is partially offset by higher provisions in the U.S. Retail segment due
to volume growth, mix change in auto loans and credit cards, and
seasoning in credit cards.
By segment, the decrease in PCL was due to a decrease in
Wholesale Banking of $102 million, a decrease in the Corporate
segment of $35 million, or 7%, and a decrease in Canadian Retail
of $25 million, or 2%, partially offset by an increase in U.S. Retail
of $48 million, or 6%.
FINANCIAL RESULTS OVERVIEW
Expenses
NON-INTEREST EXPENSES
Reported non-interest expenses for the year were $19,366 million, an
increase of $489 million, or 3%, compared with last year. The increase
was primarily due to higher employee-related expenses including
variable compensation, and investments in technology modernization
and customer-focused initiatives. These increases were partially offset
by productivity savings and the positive impact of tax adjustments in
the current year.
By segment, the increase in reported non-interest expenses was due
to an increase in Canadian Retail of $377 million, or 4%, an increase
in Wholesale Banking of $190 million, or 11%, and an increase in U.S.
Retail of $185 million, or 3%, partially offset by a decrease in the
Corporate segment of $263 million, or 9%.
Adjusted non-interest expenses were $19,092 million, an increase
of $596 million, or 3%, compared with last year.
INSURANCE CLAIMS AND RELATED EXPENSES
Insurance claims and related expenses were $2,246 million, a decrease
of $216 million, or 9%, compared with last year, reflecting changes in
the fair value of investments supporting claims liabilities which resulted
in a similar decrease in non-interest income, less weather related
events, and more favourable prior years’ claims development, partially
offset by higher current year claims.
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 53.6%, compared with 55.0%
last year.
18
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 9
NON-INTEREST EXPENSES AND EFFICIENCY RATIO
(millions of Canadian dollars, except as noted)
2017
2016
2015
% change
2017 vs. 2016
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 – adjusted1
$ 5,839
2,454
1,725
10,018
917
402
475
1,794
184
201
607
992
704
726
2
314
1,165
140
222
171
3,118
3,651
$ 19,366
$ 5,576
2,170
1,552
9,298
915
427
483
1,825
182
202
560
944
708
743
(18)
316
1,232
176
225
191
3,237
3,829
$ 18,877
$ 5,452
2,057
1,534
9,043
887
376
456
1,719
172
212
508
892
662
728
686
324
1,032
139
222
175
2,451
2,987
$ 18,073
5
13
11
8
–
(6)
(2)
(2)
1
–
8
5
(1)
(2)
111
(1)
(5)
(20)
(1)
(10)
(4)
(5)
3
53.6%
53.1
55.0%
53.9
57.5%
54.3
(140)bps
(80)
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.
FINANCIAL RESULTS OVERVIEW
Taxes
Reported total income and other taxes increased $92 million, or 3%,
compared with last year, reflecting an increase in income tax expense
of $110 million, or 5%, and a decrease in other taxes of $18 million,
or 1%. Adjusted total income and other taxes were up $92 million
from last year, reflecting an increase in income tax expense of
$110 million, or 5%.
The Bank’s reported effective tax rate was 18.3% for 2017,
compared with 20.1% last year. The year-over-year decrease was largely
due to higher tax-exempt dividend income, and a non-taxable dilution
gain on the Scottrade transaction. For a reconciliation of the Bank’s
effective income tax rate with the Canadian statutory income tax rate,
refer to Note 25 of the 2017 Consolidated Financial Statements.
The Bank’s adjusted effective income tax rate for 2017 was 18.9%,
compared with 20.2% last year. The year-over-year decrease was
largely due to higher tax-exempt dividend income.
The Bank reports its investment in TD Ameritrade using the equity
method of accounting. TD Ameritrade’s tax expense of $268 million
in 2017, compared with $214 million last year, was not part of the
Bank’s effective tax rate.
19
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 1 0
NON-GAAP FINANCIAL MEASURES – Reconciliation of Reported to Adjusted Provision for Income Taxes 1
(millions of Canadian dollars, except as noted)
Provision for income taxes – reported
Total adjustments for items of note2,3
Provision for income taxes – adjusted
Other taxes
Payroll
Capital and premium
GST, HST, and provincial sales4
Municipal and business
Total other taxes
Total taxes – adjusted
Effective income tax rate – reported
Effective income tax rate – adjusted5
2017
$ 2,253
83
2,336
517
136
462
202
1,317
$ 3,653
2016
$ 2,143
83
2,226
502
169
461
203
1,335
$ 3,561
2015
$ 1,523
339
1,862
485
135
428
181
1,229
$ 3,091
18.3%
18.9
20.1%
20.2
16.6%
18.3
1 Certain comparative amounts have been restated to conform with the presentation
3 The tax effect for each item of note is calculated using the statutory income tax
adopted in the current period.
rate of the applicable legal entity.
2 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 Goods and services tax (GST) and Harmonized sales tax (HST).
5 Adjusted effective income tax rate is the adjusted provision for income taxes
before other taxes as a percentage of adjusted net income before taxes.
FINANCIAL RESULTS OVERVIEW
Quarterly Financial Information
FOURTH QUARTER 2017 PERFORMANCE SUMMARY
Reported net income for the quarter was $2,712 million, an increase
of $409 million, or 18%, compared with fourth quarter last year.
The increase reflects revenue growth and lower non-interest expenses,
partially offset by higher insurance claims and higher PCL. Adjusted
net income for the quarter was $2,603 million, an increase of
$256 million, or 11%, compared with the fourth quarter last year.
Reported diluted EPS for the quarter was $1.42, an increase of 18%,
compared with $1.20 in the fourth quarter of last year. Adjusted
diluted EPS for the quarter was $1.36, an increase of 11%, compared
with $1.22 in the fourth quarter of last year.
Reported revenue for the quarter was $9,270 million, an increase
of $525 million, or 6%, compared with the fourth quarter last year.
Net interest income for the quarter was $5,330 million, an increase
of $258 million, or 5%, primarily due to higher loan and deposit
volume growth, and higher deposit margins in the Canadian and U.S.
Retail segments, partially offset by lower trading-related net interest
income. By segment, the increase in reported net interest income
was due to an increase in Canadian Retail of $222 million, or 9%,
an increase in the Corporate segment of $115 million, or 39%, and
an increase in U.S. Retail of $40 million, or 2%, partially offset by
a decrease in Wholesale Banking of $119 million, or 30%. Adjusted
net interest income for the quarter was $5,330 million, an increase
of $258 million, or 5%.
Non-interest income for the quarter was $3,940 million, an increase
of $267 million, or 7% reflecting the dilution gain on the Scottrade
transaction reported as an item of note, higher wealth fee-based
revenue, trading and advisory fee revenue in the Wholesale Banking,
and lower revenue from treasury and balance sheet management
activities in the Corporate segment. By segment, the increase in
reported non-interest income was due to increase in the Corporate
segment of $92 million, or 67%, an increase in U.S. Retail of
$77 million, or 13%, an increase in Wholesale Banking of $72 million,
or 21%, and an increase in Canadian Retail of $26 million, or 1%.
Adjusted non-interest income for the quarter was $3,736 million,
an increase of $82 million, or 2%.
PCL for the quarter was $578 million, an increase of $30 million,
or 5%, compared with the fourth quarter last year. The increase was
primarily due to higher provisions related to growth and mix in auto
lending and credit cards in the U.S. Retail segment, partially offset by
a higher prior year increase in commercial allowance in the U.S. Retail
segment. By segment, the increase in PCL was due to increase in the
Corporate Segment of $40 million, or 44%, an increase in U.S. Retail of
$10 million, or 5%, partially offset by a decrease in Canadian Retail of
$19 million, or 7%, and a decrease in Wholesale Banking of $1 million.
Insurance claims and related expenses for the quarter were
$615 million, an increase of $30 million, or 5%, compared with
the fourth quarter last year, reflecting higher current year claims,
partially offset by less weather related events, and more favourable
prior years’ claims development.
Reported non-interest expenses for the quarter were $4,828 million,
a decrease of $20 million, compared with the fourth quarter last year,
reflecting productivity savings, the positive impact of tax adjustments
in the current quarter, and the sale of the Direct Investing business in
Europe. The decrease was partially offset by higher employee-related
expenses, and higher investment in technology initiatives. By segment,
the decrease in reported non-interest expenses was due to a decrease
in the Corporate segment of $60 million, or 9%, a decrease in
Wholesale Banking of $12 million, or 3%, partially offset by an increase
in U.S. Retail of $30 million, or 2%, and an increase in Canadian Retail
of $22 million, or 1%. Adjusted non-interest expenses for the quarter
were $4,739 million, a decrease of $45 million, or 1%, compared with
fourth quarter last year.
The Bank’s reported effective tax rate was 19.7% for the quarter,
compared with 20.1% in the same quarter last year. The decrease was
largely due to a non-taxable dilution gain on the Scottrade transaction,
partially offset by lower tax-exempt dividend income. The Bank’s
adjusted effective tax rate was 21.3% for the quarter, compared with
20.4% in the same quarter last year. The increase was largely due to
lower tax-exempt dividend income.
20
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
QUARTERLY TREND ANALYSIS
Subject to the impact of seasonal trends and items of note, the Bank
has increased reported earnings over the past eight quarters reflecting
a consistent strategy, revenue growth, expense discipline, and
investments to support future growth. The Bank’s earnings reflect
increasing revenue from loan and deposit volume growth, increasing
margins, and wealth asset growth in the Canadian and U.S. Retail
segments, as well as growth in trading revenue, underwriting, and
corporate lending volumes in the Wholesale Banking segment. Revenue
growth is partially offset by moderate expense growth in all business
segments. 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.
T A B L E 1 1
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
Pre-tax adjustments for items of note1
Amortization of intangibles
Charges associated with the Scottrade transaction
Dilution gain on the Scottrade transaction
Loss on sale of TD Direct Investment business in Europe
Fair value of derivatives hedging the reclassified
available-for-sale securities portfolio
Impairment of goodwill, non-financial assets, and other charges
Total pre-tax adjustments for items of note
Provision for (recovery of) income taxes 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)
2017
For the three months ended
2016
Oct. 31
Jul. 31
Apr. 30
Jan. 31
Oct. 31
Jul. 31
Apr. 30
Jan. 31
$ 5,330
3,940
9,270
578
615
4,828
640
103
2,712
$ 5,267
4,019
9,286
505
519
4,855
760
122
2,769
$ 5,109
3,364
8,473
500
538
4,786
257
111
2,503
$ 5,141
3,979
9,120
633
574
4,897
596
113
2,533
$ 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
78
46
(204)
–
74
–
–
42
78
–
–
–
80
–
–
–
80
–
–
–
79
–
–
–
86
–
–
–
90
–
–
–
–
–
(80)
29
2,603
50
–
–
116
20
2,865
47
–
–
78
20
2,561
48
(41)
–
39
14
2,558
48
(19)
–
61
17
2,347
43
–
–
79
21
2,416
36
58
111
255
25
2,282
37
(46)
–
44
20
2,247
25
2,553
2,818
2,513
2,510
2,304
2,380
2,245
2,222
2,518
35
$
2,789
29
$
2,485
28
$
2,481
29
$
2,275
29
$
2,351
29
$
2,217
28
$
2,193
29
$
$ 1.42
1.36
$ 1.46
1.51
$ 1.31
1.34
$ 1.32
1.34
$ 1.20
1.23
$ 1.24
1.27
$ 1.07
1.20
$ 1.17
1.18
1.42
1.36
15.4%
14.7
1.46
1.51
15.5%
16.1
1.31
1.34
14.4%
14.8
1.32
1.33
14.4%
14.5
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
Average earning assets
Net interest margin as a percentage of average earning assets
$ 1,077
$ 1,077
$ 1,056
$ 1,041
$ 1,031
$ 989
1.96%
1.94%
1.98%
1.96%
1.96%
1.98%
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.
$ 969
2.05%
$ 975
2.06%
21
TD BANK GROUP ANNUAL REPORT 2017 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.
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
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.
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 29 of the
2017 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 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 increase to net interest income and provision for income taxes
reflected in Wholesale Banking results is reversed in the Corporate
segment. The TEB adjustment for the year was $654 million, compared
with $312 million last year.
The “Business Outlook and Focus for 2018” section for each
business 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.
Canadian Retail provides a full range of financial products and
services to over 15 million customers in the Canadian personal and
commercial banking, wealth, and insurance businesses. Under the
TD Canada Trust brand, personal banking provides a full range of
financial products and services through its network of 1,128 branches,
3,157 automated teller machines (ATM), telephone, internet, and
mobile banking. Business Banking serves the needs of small, 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 dealer network. The credit card business
provides a comprehensive 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 in Canada 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 personal and business banking
operations under the brand TD Bank, America’s Most Convenient
Bank,® and wealth management in the U.S. Personal banking provides
a full range of financial products and services to over 8 million retail
customers through multiple delivery channels, including a network
of 1,270 stores located along the east coast from Maine to Florida,
mobile and internet banking, ATM, and telephone. Business banking
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. 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.
Wholesale Banking offers a wide range of capital markets and
corporate and investment banking 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.
22
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 1 2
RESULTS BY SEGMENT1
(millions of Canadian dollars)
Net interest income (loss)
Non-interest income (loss)
Total revenue4
Provision for (recovery 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) – reported
Pre-tax adjustments for items of note5
Amortization of intangibles
Charges associated with the
Scottrade transaction
Dilution gain on the Scottrade transaction
Loss on sale of the Direct Investing
business in Europe
Fair value of derivatives hedging the reclassified
available-for-sale securities portfolio
Impairment of goodwill, non-financial assets,
and other charges
Total pre-tax adjustments for items of note
Provision for (recovery of) income taxes
for items of note
Canadian
Retail
U.S. Retail
Wholesale
2017
2016
2017
2016
2017
Banking2,3
2016
Corporate2,3
2017
2016
2017
Total
2016
$ 10,611 $ 9,979 $ 7,486 $ 7,093 $ 1,804 $ 1,685 $
10,451
21,062
986
2,246
8,934
8,896
2,371
10,230
2,735
20,209 10,221
792
–
5,878
3,551
671
2,366
9,459
744
–
5,693
3,022
498
1,345
3,030
74
–
1,739
1,217
297
(28)
–
1,929
1,370
331
1,011
2,462
8,557
8,179
2,191
1,467
3,271
946 $ 1,166 $ 20,847 $ 19,923
451 15,302 14,392
649
1,617 36,149 34,315
1,595
2,330
2,216
466
2,462
2,246
–
2,888 19,366 18,877
2,625
(1,772) 12,321 10,646
(1,496)
2,143
(1,120)
501
–
2,253
(843)
–
6,525
–
5,988
442
3,322
435
2,959
–
1,039
–
920
7
(369)
(2)
449
(931) 10,517
433
8,936
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
46
–
–
–
–
46
10
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
310
335
310
335
–
(204)
42
–
–
–
46
(204)
42
–
–
–
(41)
(7)
(41)
(7)
–
107
111
439
–
153
111
439
–
920 $
73
(335) $
83
83
(575) $ 10,587 $ 9,292
83
Net income (loss) – adjusted
$ 6,525 $ 5,988 $ 3,358 $ 2,959 $ 1,039 $
Average common equity
CET1 Capital risk-weighted assets6
$ 14,434 $ 14,291 $ 34,278 $ 33,687 $ 5,979 $ 5,952 $ 13,658 $ 11,191 $ 68,349 $ 65,121
16,408 435,750 405,844
99,025 227,671 222,995
45,958
67,416
62,428
99,693
1 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.
2 Net interest income within Wholesale Banking is calculated on a taxable equivalent
basis (TEB). The TEB adjustment reflected in Wholesale Banking is reversed in the
Corporate segment.
3 Effective February 1, 2017, the total gains and losses as a result of changes in fair
value of the credit default swap (CDS) and interest rate swap contracts hedging the
reclassified available-for-sale securities portfolio are recorded in Wholesale Banking.
Previously, these derivatives were accounted for on an accrual basis in Wholesale
Banking and the gains and losses related to the derivatives, in excess of the
accrued costs were reported in Corporate Segment.
4 Effective fiscal 2017, the impact from certain treasury and balance sheet
management activities relating to the U.S. Retail segment is recorded in the
Corporate segment.
5 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.
6 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). For fiscal 2016, the
scalars for inclusion of CVA for CET1, Tier 1 and Total Capital RWA were 64%,
71%, and 77%, respectively. For fiscal 2017, the scalars are 72%, 77%, and 81%,
respectively. As the Bank is constrained by the Basel 1 regulatory floor, the RWA
as it relates to the regulatory floor is calculated based on the Basel 1 risk weights
which are the same for all capital ratios.
23
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
ECONOMIC SUMMARY AND OUTLOOK
The pace of global expansion in recent quarters has surpassed
expectations in a number of regions, particularly for the United States
and Eurozone. Global real Gross Domestic Product (GDP) is expected
to run at a 3.6% average pace over the 2017-19 calendar period.
Accommodative monetary policy in advanced economies will continue to
play a supporting role, particularly for domestic demand. Rebounding
global trade volumes have also been a welcome development, which
together with rising domestic demand is evidence of an ongoing,
self-sustaining expansion.
In the United States, the initial release of real GDP for the July to
September 2017 period revealed a brisk 3% rate of growth, despite
the negative impacts of hurricane damage. Post-hurricane rebuilding
efforts are expected to further support activity in the closing months
of calendar 2017, lifting auto sales in particular. Consumer spending
is expected to remain a key driver of U.S. economic growth, supported
by ongoing employment and aggregate income gains.
As time goes by, a moderation of U.S. growth to around 2% to
2.5% is expected, consistent with an economy that is in the mature
phase of the business cycle. Our outlook does not incorporate any
evolving federal budget developments around taxes or spending. Still,
solid labour markets and modest inflationary pressures are forecast
to be sufficient to stir the Federal Reserve to action at its upcoming
meeting on December 12th and 13th, where a further 25 bps hike
in the overnight rate is expected. An additional 50 bps of tightening
is anticipated in each calendar year, 2018 and 2019. A continuation
of tepid inflation, which has been running well below the Federal
Reserve’s 2% target, remains the key downside risk to this outlook.
Central bank officials point to transitory shocks as working to hold
back inflation, but also acknowledge that more persistent factors,
such as the emergence of e-commerce, may also be at play. In
addition, outcomes related to government policy, both trade-related
and domestic, could work to delay or hasten the Fed’s efforts to
normalize monetary policy in the coming years.
After experiencing a negative oil price shock in the 2015 and early
2016 calendar years, Canada’s economy bounced back this year. In the
second calendar quarter of 2017, the economy expanded at a robust
4.5% rate (annualized), bringing the year-over-year rate to 3.7%.
Broad-based gains have been recorded across sectors. A key exception
was a government policy-induced retreat in residential investment
over the April to June period. Despite a pull-back in the housing
sector, the Canadian job market has added more than 340,000 net
full-time positions in the ten months ending October 2017 – the
strongest 10-month pace amount since 1999.
However, the economic performance in the first half of the year
was unsustainable and the Canadian economy has moved into
a normalization phase that is more consistent with underlying
fundamentals. The economic data released since this autumn point
to a moderation of growth to around the 2% mark in the second half
of the calendar year. Recent data have revealed several months of
weak or declining exports, while households have been slowing their
spending to a more sustainable rate. Measures undertaken by
governments and regulators to both cool housing markets and support
longer-term financial stability are expected to remain a near-term
headwind on residential investment activity, with recently-announced
changes to underwriting requirements by OSFI set to come into effect
in January 2018. Similar to the U.S., Canada appears to be entering
the mature phase of the economic cycle, as evidenced by the Bank of
Canada’s willingness to raise interest rates. As such, economic growth
in Canada is expected to fall within a more sustainable range of
1.5-2% in the 2018 and 2019 calendar years.
Regionally, convergence in economic growth is ongoing, with
commodity producers leading the way. Following two difficult years,
Alberta is expected to record the fastest provincial growth rate in the
2017 calendar year of close to 4%. Meanwhile, the pace of expansion
in British Columbia and Ontario likely eased somewhat, to slightly
below 3%. Elsewhere, economic growth has remained modest but
steady this year. Alberta and other energy-driven economies are
expected to remain on the recovery track.
After increasing its short-term policy interest rate in both July
and September, the Bank of Canada has shifted the tone of its
communications, signalling that it is likely to proceed at a slower pace
going forward within a more risk-management focused framework.
Although the Bank of Canada estimates that the economy is running
at or near capacity, it continues to see persistent labour market slack
as a mitigating force on inflation. The caution is expected to translate
into a moderate pace of tightening, with an additional 50 bps increase
in its policy rate anticipated by the end of calendar 2018. Consistent
with this, the Canadian dollar is expected to remain in the US78 to
US81 cent range through the end of 2018.
Key downside risks to the Canadian economy relate to the possibility
of a more pronounced than expected slowdown in Canadian housing
activity and a period of household deleveraging. Another risk relates to
the outcome of the North American Free Trade Agreement (NAFTA)
negotiations. Although recent developments have revealed heightened
tensions surrounding the possibility of U.S. withdrawal from the treaty,
even if this risk doesn’t materialize, prolonged uncertainty may delay or
discourage investment intentions among Canadian and U.S. firms. In
addition, a number of geo-political risks, including heightened tensions
surrounding North Korea, negotiations over the United Kingdom’s
(U.K.) exit from the European Union (E.U.), and the ongoing populist
threat to established political and economic systems may keep global
uncertainty elevated and drive bouts of financial market volatility.
24
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS BUSINESS SEGMENT ANALYSIS
Canadian Retail
Canadian Retail offers a full range of financial products and services to over 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
(billions of Canadian dollars)
$7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
$24,000
20,000
16,000
12,000
8,000
4,000
0
$350
300
250
200
150
100
50
0
2015
2016
2017
2015
2016
2017
2015
2016
2017
Personal
Business
Wealth
T A B L E 1 3
REVENUE
(millions of Canadian dollars)
Personal banking
Business banking
Wealth
Insurance
Total
2017
$ 10,706
2,702
3,838
3,816
$ 21,062
2016
$ 10,157
2,454
3,640
3,958
$ 20,209
2015
$ 9,993
2,323
3,436
3,933
$ 19,685
25
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
INDUSTRY PROFILE
The personal and business banking environment in Canada is
comprised of large chartered banks with sizeable regional banks and
a number of niche competitors providing strong competition in specific
products and markets. Continued success depends upon delivering
outstanding customer service and convenience, maintaining disciplined
risk management practices, and prudent expense management.
The Canadian wealth management industry includes banks, insurance
companies, independent mutual fund companies, brokers and
independent asset management companies. Business growth in the
wealth management industry lies in the ability to differentiate by
providing the right products, services, tools and solutions to serve
our clients’ needs. The property and casualty industry in Canada is
fragmented and competitive, consisting of personal and commercial
lines writers, whereas the life and health insurance industry is made up
of several large competitors. Success in the insurance business depends
on offering a range of products that provide protection at competitive
prices that properly reflect the level of risk assumed. These industries
also include non-traditional competitors ranging from start-ups to
established non-financial companies expanding into financial services.
OVERALL BUSINESS STRATEGY
The strategy for Canadian Retail is to:
• Consistently deliver legendary personal connected customer
experiences across all channels and provide trusted advice to help
our customers feel confident about their financial future.
• Deepen customer relationships by delivering One TD and growing
in underrepresented products and markets.
• Execute with speed and impact, taking only those risks we can
•
understand and manage.
Innovate with purpose for our customers and colleagues, simplifying
to make it easier to get things done.
• Be recognized as an extraordinary place to work where diversity and
inclusiveness are valued.
• Contribute to the well-being of our communities.
BUSINESS HIGHLIGHTS
• Continued to focus on customer service and convenience
by optimizing our branch network, investing in our digital
channel experience, and enhancing the value proposition
of our products, including waiving fees for withdrawals at
non-TD ATMs across Canada.
• Ranked first among the Big 5 Canadian Retail Banks3 for
“Customer Service Excellence”4, “Online Banking Excellence”5,
“Mobile Banking Excellence”6 and “ATM Banking Excellence”7,
according to Ipsos.
• TD mobile banking app ranked as the #1 Canadian banking
app according to Silicon Valley-based firm App Annie8.
• Ranked first in Canadian mobile banking with the highest
number of mobile unique visitors according to Comscore9.
• Continued to generate strong volume growth across
key businesses:
– Record originations in real estate secured lending and
auto finance;
– Personal Banking recorded strong chequing and savings
deposit volume growth of 9%;
– Strong retail sales on TD credit cards with year-over-year
growth of 8%;
– Business Banking generated strong loan volume
growth of 9%;
– TD Asset Management (TDAM) 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 insurer10
and leader in the affinity market10 in Canada.
• TD has maintained strong Canadian market share11
in key products:
– #1 in personal deposit, credit card, and Direct Investing
market share; and
– #2 in real estate secured lending, personal loan, mutual
funds and Business Banking deposit and loan market share.
CHALLENGES IN 2017
• Relatively low interest rate environment contributed to lower
margins on lending products.
• Strong competition for new and existing customers from
the major Canadian banks and non-bank competitors.
• Housing market was impacted by federal and provincial
measures aimed at cooling excessive growth.
• Heightened level of investment across all businesses to
respond to evolving customer needs and intense competition.
3 Big 5 Canadian Retail Banks include Bank of Montreal, Canadian Imperial Bank of
Commerce, Royal Bank of Canada, Scotiabank, and The Toronto-Dominion Bank.
4 Ipsos 2017 Best Banking Awards are based on ongoing quarterly Customer Service
Index (CSI) survey results. Sample size for the total 2017 CSI program year ended with
the August 2017 survey wave was 47,813 completed surveys yielding 68,744 financial
institution ratings nationally. Leadership is defined as either a statistically significant
lead over the other Big 5 Canadian Retail Banks (at a 95% confidence interval)
or a statistically equal tie with one or more of the Big 5 Canadian Retail Banks.
5 TD Canada Trust has won the Online Banking Excellence award among the Big 5
Canadian retail banks in the proprietary Ipsos 2005-2017 Best Banking StudiesSM.
6 TD Canada Trust has won the Mobile Banking Excellence award among the Big 5
Canadian retail banks in the proprietary Ipsos 2013-2017 Best Banking StudiesSM.
The Mobile Banking Excellence award was introduced in 2013.
7 TD Canada Trust has won the ATM Banking Excellence award among the Big 5
Canadian retail banks in the proprietary Ipsos 2005-2017 Best Banking StudiesSM.
8 TD ranked first according to 2017 App Annie report, which measured Monthly
Active Users, Downloads, Average Sessions per User, Open Rate, and Average
Review Score.
26
9 Source: comScore, Inc., Mobile Metrix, Canada, Home & Work, Persons:18+,
November 2016 – September 2017. TD had the highest number of mobile unique
visitors accessing financial services over the full fiscal year to date (November 2016
to September 2017).
10 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, 2016.
11 Market share ranking is based on most current data available from OSFI for personal
deposits and loans as at August 2017, from public financial disclosures for average
credit card balances as at March 2017, from the Canadian Bankers Association for
Real Estate Secured Lending as at June 2017, from the Canadian Bankers Association
for business deposits and loans as at March 2017, from Strategic Insight for Direct
Investing asset, trades, and revenue metrics as at June 2017, and from Investment
Funds Institute of Canada for mutual funds as at August 2017.
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 1 4
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
Provision for (recovery of) income taxes
Net income
Selected volumes and ratios
Return on common equity1
Margin on average earning assets (including securitized assets)
Efficiency ratio
Assets under administration (billions of Canadian dollars)2
Assets under management (billions of Canadian dollars)2
Number of Canadian retail branches
Average number of full-time equivalent staff
2017
2016
$ 10,611
10,451
21,062
986
2,246
8,934
2,371
6,525
$ 9,979
10,230
20,209
1,011
2,462
8,557
2,191
5,988
2015
$ 9,781
9,904
19,685
887
2,500
8,407
1,953
5,938
$
45.2%
2.83
42.4
387
283
1,128
38,880
$
41.9%
2.78
42.3
379
271
1,156
38,575
$
42.8%
2.87
42.7
347
246
1,165
39,218
1 Capital allocated to the business segment was based on 9% CET1 Capital in 2017,
2 Effective the first quarter of 2017, the Bank changed the framework for classifying
2016, and 2015.
REVIEW OF FINANCIAL PERFORMANCE
Canadian Retail net income for the year was $6,525 million, an
increase of $537 million, or 9%, compared with last year. The increase
in earnings reflected revenue growth, lower insurance claims and PCL,
partially offset by higher non-interest expenses. The ROE for the year
was 45.2%, compared with 41.9% last year.
Canadian Retail revenue is derived from the Canadian personal and
commercial banking, wealth, and insurance businesses. Revenue for
the year was $21,062 million, an increase of $853 million, or 4%,
compared with last year.
Net interest income increased $632 million, or 6%, reflecting
deposit and loan volume growth. Average loan volumes increased
$16 billion, or 5%, compared with last year, comprised of 4% growth
in personal loan volumes and 9% growth in business loan volumes.
Average deposit volumes increased $29 billion, or 10%, compared
with last year, comprised of 7% growth in personal deposit volumes,
15% growth in business deposit volumes and 15% growth in wealth
deposit volumes. Margin on average earning assets was 2.83%, a
5 bps increase, primarily due to rising interest rates and favourable
balance sheet mix.
Non-interest income increased $221 million, or 2%, reflecting higher
fee-based revenue in the banking businesses and wealth asset growth,
partially offset by changes in the fair value of investments supporting
claims liabilities which resulted in a similar decrease in insurance claims
and higher liabilities associated with increased customer engagement
in credit card loyalty programs.
assets under administration (AUA) and assets under management (AUM). The
primary change is to recognize mutual funds sold through the branch network
as part of AUA. In addition, AUA has been updated to reflect a change in the
measurement of certain business activities within Canadian Retail. Comparative
amounts have been recast to conform with the revised presentation.
AUA were $387 billion as at October 31, 2017, an increase of
$8 billion, or 2%, and AUM were $283 billion as at October 31, 2017,
an increase of $12 billion, or 4%, compared with last year, both
reflecting new asset growth and increases in market value.
PCL for the year was $986 million, a decrease of $25 million, or 2%
compared with last year. Personal banking PCL was $952 million, a
decrease of $18 million, or 2%. Business banking PCL was $34 million,
a decrease of $7 million. Annualized PCL as a percentage of credit
volume was 0.26%, or a decrease of 2 bps, compared with last year.
Net impaired loans were $555 million, a decrease of $150 million,
or 21%, compared with last year.
Insurance claims and related expenses for the year were
$2,246 million, a decrease of $216 million, or 9%, compared with last
year, reflecting changes in the fair value of investments supporting
claims liabilities which resulted in a similar decrease in non-interest
income, less weather related events, and more favourable prior years’
claims development, partially offset by higher current year claims.
Non-interest expenses for the year were $8,934 million, an increase
of $377 million, or 4%, compared with last year. The increase reflected
higher employee-related expenses including revenue-based variable
expenses in the wealth business, and higher investment in technology
initiatives, partially offset by productivity savings and the sale of the
Direct Investing business in Europe.
The efficiency ratio was 42.4%, compared with 42.3% last year.
27
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
KEY PRODUCT GROUPS
Personal Banking
• Personal Deposits – offers a comprehensive line-up 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, as well as point-of-sale technology and payment solutions
for large and small businesses.
• Auto Finance – offers retail automotive and recreational vehicle
financing through an extensive network of dealers across Canada.
Business Banking
• Commercial Banking – serves the borrowing, deposit and cash
management 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 suite of products and
services 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. All asset management
units work in close partnership with other TD businesses.
Insurance
• Property and Casualty – TD is the largest direct distribution insurer12
and the fourth largest personal insurer12 in Canada. It is also the
national leader in the affinity market12 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 through TD Canada Trust
Branches. Other simple life and health insurance products, credit
card balance protection and travel insurance products are
distributed through direct channels.
BUSINESS OUTLOOK AND FOCUS FOR 2018
Economic growth in Canada is expected to moderate somewhat
in 2018 compared to 2017. While many factors affect margins
and they will fluctuate from quarter to quarter, the current
economic environment and the possibility of further interest
rate increases is expected to support a positive trend for
margins on a full year basis. We expect regulatory changes to
continue, which combined with the high level of competition,
including from market disruptors, will require continued
investment in our products, channels and infrastructure. We will
maintain our disciplined approach to risk management, but
credit losses may be impacted by volume growth, adoption of
IFRS 9, and possible normalization of credit conditions. Overall,
absent significant changes in the economic and operating
environment, we expect to deliver strong results in 2018.
Our key priorities for 2018 are as follows:
• Enhance digital and multi-channel capabilities across key
customer journeys, enabling a simple, intuitive and legendary
customer experience.
• Grow our market share by providing best-in-class products
and services when and where our customers need them with
an emphasis on underrepresented products and markets.
• Accelerate growth and distribution capabilities 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.
• Invest in our business and infrastructure to keep pace with
evolving customer expectations, offering advice that helps
our customers understand their financial needs and feel
confident about their financial future.
• Continue to evolve our brand as an employer of choice, where
colleagues achieve their full potential and where diversity
and inclusiveness are valued.
12 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, 2016.
28
TD BANK GROUP ANNUAL REPORT 2017 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 over 9 million customers in the bank’s U.S. personal and
business banking operations, including wealth management. 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)
$3,600
3,000
2,400
1,800
1,200
600
0
$12,000
10,000
8,000
6,000
4,000
2,000
0
64%
62
60
58
56
54
2015
2016
2017
2015
2016
2017
2015
2016
2017
Reported
Adjusted
Reported
Adjusted
Reported
Adjusted
T A B L E 1 5
REVENUE – Reported 1
(millions of dollars)
Personal Banking
Business Banking
Wealth
Other2
Total
1 Excludes equity in net income of an investment in TD Ameritrade.
2 Other revenue consists primarily of revenue from investing activities.
2017
$ 5,599
3,399
504
719
$ 10,221
Canadian dollars
2016
$ 5,153
3,173
455
678
$ 9,459
2015
$ 4,354
2,804
411
660
$ 8,229
2017
$ 4,283
2,600
386
549
$ 7,818
2016
$ 3,884
2,391
343
512
$ 7,130
U.S. dollars
2015
$ 3,498
2,253
330
533
$ 6,614
29
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS HIGHLIGHTS
• Record performance in:
– Reported earnings of US$2,536 million, an increase of 14%,
compared with last year;
– Reported return on equity of 9.7%, an increase of 90 bps,
compared with last year; and
– Reported efficiency ratio of 57.6%, an improvement
of 260 bps, compared with last year.
• Continued to provide legendary customer service and
convenience:
– “Ranked Highest in Dealer Satisfaction among Non-Captive
Lenders With Retail Credit by J.D. Power”13; and
– “Ranked Highest in Small Business Banking in the South
Region by J.D. Power”14.
• Recognized as an extraordinary and inclusive place to work:
– Named to DiversityInc.’s Top 50 Companies in the U.S. for
diversity for the fifth year in a row; and
– Recognized by Great Place to Work® as a certified “Great
Place to Work” for 2018.
• Outperformed our peers in loan and deposit growth, as well
as household acquisition.
• Deepened relationships with new and existing customers.
• Continued to invest in digital and in our omni-channel
experience.
• Acquired Scottrade Bank in September 2017.
CHALLENGES IN 2017
• Moderating corporate loan growth.
• Reduced residential real estate loan originations in the rising
rate environment.
• Normalizing retail credit conditions resulted in a moderate
earnings headwind.
• Competition from U.S. banks and non-bank competitors.
INDUSTRY PROFILE
The U.S. personal and business 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. The wealth
management industry includes national and regional banks, insurance
companies, independent mutual fund companies, brokers, and
independent asset management companies. The personal and
business banking and wealth management industries also include
non-traditional competitors ranging from start-ups to established
non-financial companies expanding into financial services.
These industries serve individuals, businesses, and governments.
Products include deposit, lending, cash management, financial advice,
and asset management. These products may be distributed through
a single channel or an array of distribution channels such as physical
locations, phone, mobile, and ATMs. Certain businesses also serve
customers through indirect channels.
Traditional competitors are embracing new technologies and
strengthening 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 keys to profitability continue to be attracting and
retaining customer relationships with legendary service and convenience,
offering products and services through an array of distribution channels
that meet customers’ evolving needs, making strategic investments while
maintaining disciplined expense management over operating costs, and
prudent 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 customer and
employee experience.
• Build upon our unique employee culture.
• Maintain our conservative risk appetite.
• Actively support the communities where we operate.
13 TD Auto Finance received the highest numerical score among 17 non-captive
leaders in the J.D. Power 2017 Dealer Financing Satisfaction Study based on
13,537 total responses, measuring the perceptions and experiences of dealerships
with their financing providers, surveyed April-May 2017. Your experiences may
vary. Visit www.jdpower.com.
14 TD Bank ranked highest in Small Business Banking in the South Region for the
first time in the 2017 J.D. Power Small Business Banking Satisfaction Study SM.
J.D. Power’s 2017 Small Business Satisfaction Study SM surveyed more than
8,300 small business owners or financial decision makers who use business
banking services. Visit www.jdpower.com for more information.
30
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 1 6
U.S. RETAIL
(millions of dollars, except as noted)
Canadian Dollars
Net interest income
Non-interest income
Total revenue – reported1
Total revenue – adjusted1,2
Provisions for credit losses
Non-interest expenses – reported
Non-interest expenses – adjusted3
Provisions for (recovery of) income taxes – reported
Provisions for (recovery of) income taxes – adjusted
U.S. Retail Bank net income – reported
U.S. Retail Bank net income – adjusted
Equity in net income of an investment in TD Ameritrade – reported
Equity in net income of an investment in TD Ameritrade – adjusted4
Net income – reported
Net income – adjusted
U.S. Dollars
Net interest income
Non-interest income
Total revenue – reported1
Total revenue – adjusted1,2
Provision for credit losses
Non-interest expenses – reported
Non-interest expenses – adjusted3
Provisions for (recovery of) income taxes – reported
Provisions for (recovery of) income taxes – adjusted
U.S. Retail Bank net income – reported
U.S. Retail Bank net income – adjusted
Equity in net income of an investment in TD Ameritrade – reported
Equity in net income of an investment in TD Ameritrade – adjusted4
Net income – reported
Net income – adjusted
Selected volumes and ratios
Return on common equity – reported5
Return on common equity – adjusted5
Margin on average earning assets1,6
Efficiency ratio – reported
Efficiency ratio – adjusted
Assets under administration (billions of U.S. dollars)7
Assets under management (billions of U.S. dollars)7
Number of U.S. retail stores
Average number of full-time equivalent staff
2017
2016
2015
$ 7,486
2,735
10,221
10,221
792
5,878
5,852
671
681
2,880
2,896
442
462
3,322
$ 3,358
$ 5,727
2,091
7,818
7,818
607
4,500
4,479
511
519
2,200
2,213
336
352
2,536
$ 2,565
$ 7,093
2,366
9,459
9,459
744
5,693
5,693
498
498
2,524
2,524
435
435
2,959
$ 2,959
$ 5,346
1,784
7,130
7,130
559
4,289
4,289
376
376
1,906
1,906
328
328
2,234
$ 2,234
$ 6,131
2,098
8,229
8,302
535
5,188
5,166
394
430
2,112
2,171
376
376
2,488
$ 2,547
$ 4,925
1,689
6,614
6,670
430
4,165
4,146
318
347
1,701
1,747
306
306
2,007
$ 2,053
9.7%
9.8
3.11
57.6
57.3
18
63
1,270
25,923
$
8.8%
8.8
3.12
60.2
60.2
17
66
1,278
25,732
$
8.0%
8.2
3.12
63.0
62.2
16
79
1,298
25,647
$
1 Effective the first quarter of 2017, the impact from certain treasury and balance
4 Adjusted equity in net income of an investment in TD Ameritrade excludes the
sheet management activities relating to the U.S. Retail segment is recorded in the
Corporate segment.
2 Adjusted revenue excludes the following item of note: Charges related to the
acquisition in the U.S. strategic cards portfolio – 2015 – $73 million ($45 million after
tax) or US$56 million (US$35 million after tax). 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.
3 Adjusted non-interest expense excludes the following items of note: Charges
associated with the Bank’s acquisition of Scottrade Bank – 2017 – $26 million
($16 million after tax) or US$21 million (US$13 million after tax). Integration costs
related to the acquisition in U.S. strategic cards portfolio – 2015 – $9 million
($6 million after tax) or US$7 million (US$4 million after tax). Litigation charges
and recovery of litigation losses – 2015 – $13 million ($8 million after tax) or
US$12 million (US$7 million after tax). 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.
following item of note: The Bank’s share of charges associated with TD Ameritrade’s
acquisition of Scottrade – 2017 – $20 million or US$16 million, after tax amounts.
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.
5 Capital allocated to the business segments was based on 9% CET1 Capital in fiscal
2017, 2016, and 2015.
6 The margin on average earning assets excludes the impact related to the
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.
7 Effective the first quarter of 2017, the Bank changed the framework for classifying
AUA and AUM. The primary change is to include a portion of the AUM balance
administered by the Bank in AUA. Comparative amounts have been recast to
conform with the revised presentation.
31
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
REVIEW OF FINANCIAL PERFORMANCE
U.S. Retail reported net income for the year was $3,322 million
(US$2,536 million), an increase of $363 million (US$302 million), or
12% (14% in U.S. dollars), compared with last year. On an adjusted
basis, net income for the year was $3,358 million (US$2,565 million),
an increase of $399 million (US$331 million), or 13% (15% in U.S.
dollars). The reported and adjusted ROE for the year was 9.7% and
9.8%, respectively, compared with 8.8% in the prior year.
U.S. Retail net income includes contributions from the U.S. Retail
Bank and the Bank’s investment in TD Ameritrade. Reported net
income for the year from the U.S. Retail Bank and the Bank’s
investment in TD Ameritrade were $2,880 million (US$2,200 million)
and $442 million (US$336 million), respectively. On an adjusted
basis for the year, the U.S. Retail Bank and the Bank’s investment
in TD Ameritrade contributed net income of $2,896 million
(US$2,213 million) and $462 million (US$352 million), respectively.
The reported contribution from TD Ameritrade of US$336 million
increased US$8 million, or 2%, compared with last year, primarily due
to higher asset-based revenue, partially offset by higher operating
expenses and charges associated with the Scottrade transaction.
On an adjusted basis, the contribution from TD Ameritrade increased
US$24 million, or 7%.
U.S. Retail Bank reported net income for the year was
US$2,200 million, an increase of US$294 million, or 15%, compared
with last year, primarily due to a more favourable interest rate
environment, higher loan and deposit volumes, and fee income
growth, partially offset by higher expenses. U.S. Retail Bank adjusted
net income increased US$307 million, or 16%.
U.S. Retail Bank revenue is derived from personal and business
banking, and wealth management. Revenue for the year was
US$7,818 million, an increase of US$688 million, or 10%, compared
with last year. Net interest income increased US$381 million, or 7%,
primarily due to a more favourable interest rate environment and
growth in loan and deposit volumes, partially offset by the prior year
accounting impact from balance sheet management activities, which
was largely offset in non-interest income. Margin on average earning
assets was 3.11%, a 1 basis point decrease due to the same prior year
accounting impact. Excluding this impact, margin increased 8 bps,
primarily due to higher interest rates. Non-interest income increased
US$307 million, or 17%, reflecting fee income growth in personal
banking and wealth management, and the prior year accounting
impact from balance sheet management activities.
Average loan volumes increased US$8 billion, or 6%, compared with
last year, due to growth in personal and business loans of 5% and 7%,
respectively. Average deposit volumes increased US$19 billion, or 9%,
reflecting 5% growth in business deposit volumes, 8% growth in
personal deposit volumes and a 12% increase in sweep deposit volume
from TD Ameritrade.
AUA were US$18 billion as at October 31, 2017, an increase of 5%,
compared with last year, primarily due to higher private banking
balances. AUM were US$63 billion as at October 31, 2017, a decrease
of 5%, primarily due to the previously disclosed outflow from an
institutional account, partially offset by positive market returns.
PCL was US$607 million, an increase of US$48 million, or 9%,
compared with last year. Personal banking PCL was US$536 million,
an increase of US$146 million, or 37%, primarily due to volume
growth, mix change in auto loans and credit cards, and seasoning in
credit cards, coupled with the prior year benefit related to the release
of special reserves held for South Carolina flood (the “South Carolina
flood release”). Business banking PCL was US$81 million, a decrease
of US$84 million, primarily due to slower growth in business loans,
and an allowance increase in the prior year, partially offset by the prior
year benefit related to the South Carolina flood release. PCL associated
with debt securities classified as loans was a benefit of US$10 million,
a decrease of US$14 million, due to a recovery in the second quarter
and improvement in cash flows associated with underlying mortgage
assets. Annualized PCL as a percentage of credit volume for loans,
excluding debt securities classified as loans, was relatively flat at
0.41%. Net impaired loans, excluding ACI loans and debt securities
classified as loans, were US$1.4 billion, a decrease of US$54 million,
or 4%. Excluding ACI loans and debt securities classified as loans,
net impaired loans as a percentage of total loans were 0.9% as at
October 31, 2017, a decrease of 0.1% compared with last year.
Reported non-interest expenses for the year were US$4,500 million,
an increase of US$211 million, or 5%, compared with last year,
reflecting higher employee costs, volume growth, and investments
in technology modernization and customer-focused initiatives, partially
offset by productivity savings. On an adjusted basis, non-interest
expenses for the year were US$4,479 million, an increase of
US$190 million, or 4%.
The reported and adjusted efficiency ratios for the year were 57.6%
and 57.3%, respectively, compared with 60.2%, 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.
• Auto Finance – offers indirect retail automotive financing and
dealer floorplan 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 Epoch Investment Partners Inc. and the U.S. arm
of TDAM’s institutional investment business.
BUSINESS OUTLOOK AND FOCUS FOR 2018
We anticipate the operating environment to remain relatively
stable in 2018, characterized by solid economic growth, rising
interest rates, and fierce competition. This bodes well for solid
loan and deposit growth and improving net interest margin.
Volume growth, continued normalizing of credit conditions, and
the adoption of IFRS 9 may lead to an increase in credit losses in
2018, with higher volatility. We expect to maintain a disciplined
expense management approach, using the benefits from
on-going productivity initiatives to partially fund strategic
business investments. We expect to generate positive operating
leverage for the year and see further improvements in the
efficiency ratio.
Our key priorities for 2018 are as follows:
• Outgrow our competitors by acquiring more customers and
deepening relationships.
• Advance our omni-channel strategy, including key strategic
investments in digital capabilities across our businesses.
• Enhance the customer and employee experience.
• Continue to prudently manage risk and meet heightened
regulatory expectations.
• Drive productivity initiatives across the Bank.
TD AMERITRADE HOLDING CORPORATION
Refer to Note 12 of the 2017 Consolidated Financial Statements for
further information on TD Ameritrade.
32
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS SEGMENT ANALYSIS
Wholesale Banking
Operating under the brand name TD Securities, Wholesale Banking offers a wide range of capital markets
and corporate and investment banking services to corporate, government, and institutional clients in key
global financial centres.
NET INCOME
(millions of Canadian dollars)
TOTAL REVENUE
(millions of Canadian dollars)
RETURN ON
COMMON EQUITY
(percent)
$1,250
1,000
750
500
250
0
$3,500
3,000
2,500
2,000
1,500
1,000
500
0
18%
16
14
12
10
2015
2016
2017
2015
2016
2017
2015
2016
2017
T A B L E 1 7
REVENUE1
(millions of Canadian dollars)
Global markets
Corporate and investment banking
Other
Total
1 Certain comparative amounts have been recast to conform with the
presentation adopted in the current period.
2017
$ 2,348
860
63
$ 3,271
2016
$ 2,239
767
24
$ 3,030
2015
$ 2,202
692
32
$ 2,926
33
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS HIGHLIGHTS
• Earnings of $1,039 million and an ROE of 17.4%.
• Higher revenue, reflecting the strength in our business in
Canada and the continued growth in the U.S.
• Notable deals in the year:
– Reinforcing our leadership position in the core Canadian
market, TD Securities acted as the sole underwriter and
book-runner on Canadian Natural Resources’ $11.1 billion
acquisition of Royal Dutch Shell’s oil sands assets, and
served as co-lead underwriter on TransCanada
Corporation’s $4.5 billion equity underwritings.
– Continuing to win significant cross-border mandates,
TD Securities was the joint book-runner on Canadian
Natural Resources’ bond offerings in the third quarter
that were the largest concurrent cross-border multi-tranche
U.S. dollar and Canadian dollar debt offerings ever
completed, acted as the joint book-runner on AltaGas’
$2.6 billion subscription receipt offering, and served as
the exclusive financial advisor to Shaw Communications Inc.
on the sale of ViaWest, Inc. to Peak 10 Holding Corporation
for US$1.675 billion.
– TD completed the issuance of a US$1 billion green bond,
its first in U.S. dollars and one of the largest green bonds
ever issued by a bank. This transaction demonstrates TD’s
continuing commitment to environmental leadership in
Canada’s transition to cleaner energy. Since 2010, TD
Securities has participated in underwriting over $10.8 billion
in green bonds, with a record year in 2017 of $6.4 billion.
• Continued to make investments to build our U.S. dollar
business, adding people to our investment banking,
debt underwriting and trading teams, and enhancing our
product offerings.
• Successfully completed the acquisition and integration of
TD Prime Services (formerly Albert Fried & Company), our new
prime brokerage business based in New York.
• Top-two dealer status in Canada (for the nine-month period
ended September 30, 2017)15:
– #1 in equity block trading and equity options block trading;
– #1 in government debt and corporate debt underwriting;
– #1 in syndicated loans (on a rolling twelve-month basis);
– #1 in M&A announced and completed (on a rolling twelve-
month basis); and
– #2 in equity underwriting.
• Recognized by Global Finance magazine as a winner
of the 2017 Innovators Award in the Foreign Exchange
category – underscoring our commitment to process and
product innovation16.
CHALLENGES IN 2017
• Sustained low interest rates for most of the year, tight credit
spreads, and high equity valuations resulted in weaker
trading activity in the second half of the year.
• Higher levels of competition in the industry increased
pressure on margins and demand for talent.
• Global political environment contributed to
investor uncertainty.
• Investments and capital required to meet regulatory changes.
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 corporate, government, and institutional clients. Products include
capital markets and corporate and investment banking services.
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
• Be a leading North American dealer with global reach by expanding
our client-focused business through organic growth.
• Strengthen our position as a top investment dealer in Canada and
grow our U.S. dollar business.
• Provide superior advice and execution to meet clients’ needs.
• Leverage TD’s franchise.
• 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.
15 Equity block trading: block trades by value on all Canadian exchanges, Source:
IRESS. Equity options block trading: block trades by number of contracts on the
Montreal Stock Exchange, Source: Montreal Exchange. Government and corporate
debt underwriting: excludes self-led domestic bank deals and credit card deals,
bonus credit to lead, Source: Bloomberg. Syndicated loans: deal volume awarded
equally between the book-runners, Source: Bloomberg. M&A completed and
announced: Canadian targets, Source: Thomson Reuters. Equity underwriting,
Source: Bloomberg. Rankings reflect TD Securities’ position among Canadian peers
in Canadian product markets.
34
16 Every year, Global Finance recognizes financial institutions that have devised
breakthrough products and services in Corporate Finance, Islamic Finance, Trade
Finance, Transaction Services, and Foreign Exchange. The Foreign Exchange
category recognizes groundbreaking organizations that are transforming how
companies implement complex foreign exchange strategies and limit currency risk.
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 1 8
WHOLESALE BANKING
(millions of Canadian dollars, except as noted)
Net interest income (TEB)
Non-interest income1
Total revenue
Provision for (recovery of) credit losses2
Non-interest expenses
Provision for (recovery of) income taxes (TEB)
Net income
Selected volumes and ratios
Trading-related revenue (TEB)
Gross drawn (billions of Canadian dollars)3
Return on common equity4
Efficiency ratio
Average number of full-time equivalent staff
2017
$ 1,804
1,467
3,271
(28)
1,929
331
$ 1,039
2016
$ 1,685
1,345
3,030
74
1,739
297
$ 920
2015
$ 2,295
631
2,926
18
1,701
334
$ 873
$ 1,714
20.3
17.4%
59.0
3,989
$ 1,636
20.7
15.5%
57.4
3,766
$ 1,545
16.1
15.2%
58.1
3,748
1 Effective February 1, 2017, the total gains and losses on derivatives hedging the
reclassified available-for-sale securities portfolio are recorded in Wholesale Banking,
previously reported in the Corporate segment and treated as an item 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 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 29 for
further details.
3 Includes gross loans and bankers’ acceptances, excluding letters of credit, cash
collateral, credit default swaps, and reserves for the corporate lending business.
4 Capital allocated to the business segments was based on 9% CET1 Capital in 2017,
2016, and 2015.
REVIEW OF FINANCIAL PERFORMANCE
Wholesale Banking net income for the year was $1,039 million, an
increase of $119 million, or 13%, compared with the prior year. The
increase in earnings was due to higher revenue and a net recovery of
credit losses, partially offset by higher non-interest expenses. The ROE
for the year was 17.4%, compared with 15.5% in the prior year.
Revenue for the year was $3,271 million, an increase of $241 million,
or 8%, compared with the prior year reflecting increased client activity
in equity trading, corporate lending fees, and underwriting.
PCL is comprised of specific provisions for credit losses and accrual
costs for credit protection. PCL for the year was a net recovery of
$28 million as compared with a charge of $74 million in the prior year,
reflecting the recovery of specific provisions in the oil and gas sector.
Non-interest expenses for the year were $1,929 million, an increase
of $190 million, or 11%, compared with the prior year reflecting
higher variable compensation and higher technology costs as well as
focused investments made in our U.S. businesses, including in client
facing employees, enhanced product offerings, e-trading capabilities,
and TD Prime Services.
LINES OF BUSINESS
• Global Markets includes sales, trading and research, debt and
equity underwriting, client securitization, trade finance, cash
management, prime services, and trade execution services17.
• Corporate and Investment Banking includes corporate
lending and syndications, debt and equity underwriting, and
advisory services17.
• Other includes the investment portfolio and other
accounting adjustments.
BUSINESS OUTLOOK AND FOCUS FOR 2018
Looking ahead to fiscal 2018, we are cautiously optimistic that
capital markets activity may improve given robust markets.
However, we remain watchful of market sentiment as a
combination of global market events, uncertainty over the
outlook for interest rates, increased competition, and evolving
capital and regulatory requirements, including IFRS 9, may
continue to impact our business. While these factors may affect
corporate and investor sentiment in the near term, we expect
that our diversified, integrated, client-focused business model
will continue to deliver solid results and grow our business.
Our key priorities for 2018 are as follows:
• Continue to be a top ranked investment dealer in Canada
by deepening client relationships.
• Grow our U.S. business in partnership with U.S. Retail.
• Expand the TD Prime Services platform for the U.S. market
including self-clearing.
• Invest in an efficient and agile infrastructure to support
growth and adapt to industry and regulatory changes.
• Maintain our focus on managing risks, capital,
and productivity.
• Continue to be an extraordinary place to work with a focus
on inclusion and diversity.
17 Revenue is shared between Global Markets and Corporate and Investment Banking
lines of business in accordance with an established agreement.
35
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS SEGMENT ANALYSIS
Corporate
Corporate segment comprises of a number of service and control 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 1 9
CORPORATE
(millions of Canadian dollars)
Net income (loss) – reported1,2
Pre-tax adjustments for items of note3
Amortization of intangibles
Dilution gain on the Scottrade transaction4
Loss on sale of the Direct Investing business in Europe
Fair value of derivatives hedging the reclassified available-for-sale securities portfolio2
Impairment of goodwill, non-financial assets, and other charges
Restructuring charges
Total pre-tax adjustments for items of note
Provision for (recovery of) income taxes 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
2017
2016
2015
$
(369)
$
(931)
$ (1,275)
310
(204)
42
(41)
–
–
107
73
(335)
(767)
311
121
(335)
$
$
$
335
–
–
(7)
111
–
439
83
(575)
(836)
146
115
(575)
$
$
$
350
–
–
(62)
–
686
974
303
(604)
(734)
18
112
(604)
$
$
$
14,368
13,160
12,870
1 Effective the first quarter of 2017, the impact from certain treasury and balance
3 For explanations of items of note, refer to the “Non-GAAP Financial Measures –
sheet management activities relating to the U.S. Retail segment is recorded in the
Corporate segment.
Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results
Overview” section of this document.
2 Effective February 1, 2017, the total gains and losses on derivatives hedging the
reclassified available-for-sale securities portfolio are recorded in Wholesale Banking.
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 In connection with TD Ameritrade’s acquisition of Scottrade on September 18, 2017,
TD Ameritrade issued 38.8 million shares, of which the Bank purchased 11.1 million
pursuant to its pre-emptive rights. As a result of the share issuance, the Bank’s
common stock ownership percentage in TD Ameritrade decreased and the Bank
realized the above dilution gain.
FOCUS FOR 2018
We continue to focus on enterprise and regulatory initiatives
and manage the Bank’s balance sheet and funding 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, technologies, enterprise and regulatory controls
and initiatives to enable the Bank’s key businesses to operate
efficiently, reliably, and in compliance with all applicable
regulatory requirements.
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 $369 million,
compared with a reported net loss of $931 million last year. The year-
over-year decrease in reported net loss was attributable to the dilution
gain on the Scottrade transaction this year, impairment of goodwill,
non-financial assets, and other charges in the prior year net of the loss
on sale of the Direct Investing business in Europe this year, gain on fair
value of derivatives hedging the reclassified available-for-sale securities
portfolio this year, higher contribution from other items and lower
net corporate expenses. Higher contribution from Other items was
primarily due to provisions for incurred but not identified credit losses
recognized in the prior year and higher revenue from treasury and
balance sheet management activities this year. Net corporate expenses
decreased primarily reflecting the positive impact of tax adjustments
this year. The adjusted net loss for the year was $335 million,
compared with an adjusted net loss of $575 million last year.
36
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
2016 FINANCIAL RESULTS OVERVIEW
Summary of 2016 Performance
T A B L E 2 0
REVIEW OF 2016 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 INCOME
Reported net income for the year was $8,936 million, an increase of
$912 million, or 11%, compared with the prior year. The increase
reflects revenue growth and lower insurance claims, partially offset
by higher non-interest expenses and higher PCL. Adjusted net income
for the year was $9,292 million, an increase of $538 million or 6%,
compared with $8,754 million in the prior year. Reported diluted EPS
for the year were $4.67, an increase of 11%, compared with $4.21
in the prior year. Adjusted diluted EPS for the year were $4.87, an
increase of 6%, compared with $4.61 in the prior year.
Reported revenue for the year was $34,315 million, an increase
of $2,889 million, or 9%, compared with the prior year. Adjusted
revenue was $34,308 million, an increase of $2,871 million, or 9%,
compared with the prior year.
NET INTEREST INCOME
Net interest income for the year was $19,923 million, an increase of
$1,199 million, or 6%, compared with the prior year. The increase was
primarily due to higher loan and deposit volume growth, the benefit
of an acquisition in the U.S. strategic cards portfolio, and a more
favourable interest rate environment in the U.S., partially offset by
lower trading-related net interest income in the Wholesale Banking
segment. By segment, the increase in net interest income was due to
an increase in the U.S. Retail segment of $962 million, or 16%, an
increase in the Corporate segment of $649 million, and an increase in
the Canadian Retail segment of $198 million, or 2%, partially offset by
a decrease in the Wholesale Banking segment of $610 million, or 27%.
NON-INTEREST INCOME
Reported non-interest income for the year was $14,392 million, an
increase of $1,690 million, or 13%, compared with the prior year
reflecting higher trading and fee revenue in Wholesale Banking, the
contribution from an acquisition in the strategic cards portfolio, higher
personal and business banking fee-based revenue, and wealth asset
growth. By segment, the increase in reported non-interest income was
due to an increase in Wholesale Banking of $714 million, an increase
in the Corporate segment of $382 million, an increase in the Canadian
Retail segment of $326 million, or 3%, and an increase in the U.S.
Retail segment of $268 million, or 13%. Adjusted non-interest income
for the year was $14,385 million, an increase of $1,672 million, or
13%, compared with the prior year.
Canadian
Retail
$ 9,979
10,230
20,209
1,011
2,462
8,557
8,179
2,191
–
5,988
–
$ 5,988
U.S.
Retail
$ 7,093
2,366
9,459
744
–
5,693
3,022
498
435
2,959
–
$ 2,959
Wholesale
Banking
Corporate
$ 1,685
1,345
3,030
74
–
1,739
1,217
297
–
920
–
$ 920
$ 1,166
451
1,617
501
–
2,888
(1,772)
(843)
(2)
(931)
356
(575)
$
Total
$ 19,923
14,392
34,315
2,330
2,462
18,877
10,646
2,143
433
8,936
356
$ 9,292
PROVISION FOR CREDIT LOSSES
PCL for the year was $2,330 million, an increase of $647 million,
or 38%, compared with the prior year. All segments experienced
increases in PCL. The increase was primarily due to higher provisions
in the auto lending portfolio, higher provisions for identified but not
incurred credit losses in the Corporate segment, higher provisions due
to an acquisition in the strategic cards portfolio, higher Commercial
allowance in the U.S. Retail segment, and higher specific provisions
in the oil and gas sector in Wholesale Banking. The increase is partially
offset by the release of the South Carolina flooding reserve, and
improvements on residential mortgages and home equity loans.
By segment, the increase in PCL was due to an increase in the
Corporate segment of $258 million, an increase in the U.S. Retail
segment of $209 million, or 39%, an increase in the Canadian Retail
segment of $124 million, or 14%, and an increase in Wholesale
Banking of $56 million.
INSURANCE CLAIMS AND RELATED EXPENSES
Insurance claims and related expenses were $2,462 million, a decrease
of $38 million, or 2%, compared with the prior 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
Reported non-interest expenses for the year were $18,877 million,
an increase of $804 million, or 4%, compared with the prior year,
reflecting the expenses related to an acquisition in the strategic
cards portfolio, higher employee-related expenses including variable
compensation, and higher investment in technology initiatives,
partially offset by productivity savings. By segment, the increase in
reported non-interest expenses were due to an increase in the U.S.
Retail segment of $505 million, or 10%, an increase in the Canadian
Retail segment of $150 million, or 2%, an increase in the Corporate
segment of $111 million, or 4%, and an increase in Wholesale
Banking of $38 million, or 2%. Adjusted non-interest expenses for
the year were $18,496 million, an increase of $1,420 million, or 8%,
compared with the prior year.
37
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
PROVISION FOR INCOME TAXES
Reported total income and other taxes increased $881 million, or 32%,
compared with the prior year, reflecting an increase in income tax
expense of $620 million, or 41%, compared with the prior year, and
an increase in other taxes of $261 million, or 21%, compared with the
prior year. Adjusted total income and other taxes were up $625 million
from the prior year, reflecting an increase in income tax expense of
$364 million, or 20%, from the prior year.
The Bank’s reported effective tax rate was 20.1% for 2016,
compared with 16.6% in the prior 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 recorded in the prior 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% in the prior 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 in the prior year, was not part
of the Bank’s effective tax rate.
BALANCE SHEET
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 as at October 31, 2016, primarily in the U.S. Retail
segment, was approximately $12 billion or 1%.
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
as at October 31, 2016, primarily in the U.S. Retail segment, was
approximately $11 billion or 1%.
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 (AOCI) due to foreign currency translation.
2016 FINANCIAL RESULTS OVERVIEW
2016 Financial Performance by Business Line
Canadian Retail net income for the year was $5,988 million, an
increase of $50 million, or 1%, compared with the prior 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% in the prior 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 the prior 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
the prior 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 the prior year, comprised
of 6% growth in personal deposit volumes, 7% growth in business
deposit volumes and 14% growth in wealth deposit volumes.
AUA were $345 billion as at October 31, 2016, an increase of
$35 billion, or 11%, and AUM were $268 billion as at October 31, 2016,
an increase of $23 billion, or 9%, compared with the prior 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 the prior 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
the prior year. Net impaired loans were $705 million, a decrease of
$10 million, or 1%, compared with the prior year.
Insurance claims and related expenses for the year were
$2,462 million, a decrease of $38 million, or 2%, compared with
the prior 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 the prior 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% in the
prior year.
38
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS 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
the prior 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, in the prior year.
The contribution from TD Ameritrade of US$328 million increased
US$22 million, or 7%, compared with the prior 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 the prior 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 the prior 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 the prior 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 the
prior 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.
AUA were US$13 billion as at October 31, 2016, an increase
of 11%, compared with the prior 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 the prior 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 in the prior 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 the prior 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 the prior 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, in the prior year.
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.
Corporate segment reported net loss for the year was $931 million,
compared with a reported net loss of $1,275 million in the prior 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
in the prior year.
39
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS GROUP FINANCIAL CONDITION
Balance Sheet Review
AT A GLANCE OVERVIEW
Total assets were $1,279 billion as at October 31, 2017, an
increase of $102 billion, or 9%, compared with October 31, 2016.
Available-for-sale securities increased $39 billion primarily due to
new investments, including from the acquisition of Scottrade Bank,
partially offset by maturities and foreign currency translation.
T A B L E 2 1
CONDENSED CONSOLIDATED BALANCE
SHEET ITEMS 1
Held-to-maturity securities decreased $13 billion primarily due
to maturities and foreign currency translation, partially offset by
new investments.
As at
October 31
2017
October 31
2016
Securities purchased under reverse repurchase agreements
increased $48 billion primarily due to an increase in trading volumes
and the impact of the acquisition of TD Prime Services (formerly Albert
Fried & Company).
Loans (net of allowance for loan losses) increased $27 billion
primarily due to growth in the Canadian Retail segment, the U.S.
Retail segment, including from the acquisition of Scottrade Bank,
and Wholesale Banking. The increase was primarily due to growth in
personal, business and government loans, partially offset by foreign
currency translation.
Other amounts received from brokers, dealers and clients increased
by $13 billion primarily due to unsettled trades.
Total liabilities were $1,204 billion as at October 31, 2017, an
increase of $101 billion, or 9%, from October 31, 2016. The increase
was primarily due to an increase in deposits of $59 billion, obligations
related to securities sold under repurchase agreements of $40 billion,
amounts payable to brokers, dealers and clients of $15 billion,
partially offset by a decrease in derivatives of $14 billion. The foreign
currency translation impact on total liabilities as at October 31, 2017,
primarily in the U.S. Retail segment, was a decrease of approximately
$20 billion, or 2%.
Derivatives decreased $14 billion primarily due to the current interest
rate and foreign exchange environment.
Deposits increased $59 billion largely driven by growth in Wholesale
Banking, the Canadian Retail segment and the U.S. Retail segment,
including from the acquisition of Scottrade Bank. The increase was
primarily due to growth in personal, business and government
deposits, partially offset by foreign currency translation.
Obligations related to securities sold under repurchase
agreements increased $40 billion primarily due to higher financing
and trading volumes.
Amounts payable to brokers, dealers and clients increased
$15 billion primarily due to unsettled trades and higher trading volumes.
Equity was $75 billion as at October 31, 2017, an increase of
$1 billion, or 1%, from October 31, 2016. The increase was primarily
due to higher retained earnings, partially offset by a decrease in other
comprehensive income due to losses on cash flow hedges and foreign
exchange translation.
(millions of Canadian dollars)
Assets
Cash and Interest-bearing deposits with banks
Trading loans, securities, and other
Derivatives
Available-for-sale securities
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
Obligations related to securities sold
under repurchase agreements
Subordinated notes and debentures
Other
Total liabilities
Total equity
Total liabilities and equity
$
55,156
103,918
56,195
146,411
71,363
$
57,621
99,257
72,242
107,571
84,395
134,429
612,591
98,932
$ 1,278,995
86,052
585,656
84,173
$ 1,176,967
$
79,940
51,214
832,824
$
79,786
65,425
773,660
88,591
9,528
141,708
1,203,805
75,190
$ 1,278,995
48,973
10,891
124,018
1,102,753
74,214
$ 1,176,967
1 Certain comparative amounts have been restated to conform with the
presentation adopted in the current period.
Total assets were $1,279 billion as at October 31, 2017, an increase
of $102 billion, or 9%, from October 31, 2016. The increase was
primarily in securities purchased under reverse repurchase agreements
of $48 billion, available-for-sale securities of $39 billion, loans net of
allowances for loan losses of $27 billion, other amounts received from
brokers, dealers and clients of $13 billion, trading loans, securities
and other of $5 billion, partially offset by a decrease in derivatives of
$16 billion and held-to-maturity securities of $13 billion. The foreign
currency translation impact on total assets as at October 31, 2017,
primarily in the U.S. Retail segment, was a decrease of approximately
$20 billion, or 2%.
Trading loans, securities and other increased by $5 billion primarily
due to higher trading volumes, partially offset by lower market value
of equity derivatives.
Derivatives decreased $16 billion primarily due to the current interest
rate and foreign exchange environment.
40
TD BANK GROUP ANNUAL REPORT 2017 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 $630 billion, an increase of $29 billion compared
with last year.
• Impaired loans net of counterparty-specific and individually
insignificant allowances were $2,398 million, a decrease of
$387 million compared with last year.
• Provision for credit losses was $2,216 million, compared
with $2,330 million last year.
• Total allowance for loan losses decreased by $90 million
to $3,783 million.
LOAN PORTFOLIO
Overall in 2017, the Bank’s credit quality remained strong. During
2017, the Bank increased its credit portfolio by $29 billion, or 5%, from
the prior year, largely due to volume growth in the Canadian and U.S.
Retail segments and partially offset by 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 31 of the 2017
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 card loans, representing 65% of total loans net of
counterparty-specific and individually insignificant allowances,
consistent with 2016. During the year, these portfolios increased by
$19 billion, or 5%, and totalled $411 billion at year end. Residential
mortgages represented 35% of the portfolio in 2017, down from 36%
in 2016. Consumer instalment and other personal loans, and credit
card loans were 30% of total loans net of counterparty-specific and
individually insignificant allowances in 2017, up from 29% in 2016.
The Bank’s business and government credit exposure was 34% of
total loans net of counterparty-specific and individually insignificant
allowances, down from 35% in 2016. The largest business and
government sector concentrations in Canada were the real estate and
financial sectors, which comprised 5% and 2%, respectively. Real
estate and the Government, public sector entities and education sector
were the leading U.S. sectors of concentration in 2017 representing
5% and 2% of net loans respectively.
Geographically, the credit portfolio remained concentrated in
Canada. In 2017, the percentage of loans held in Canada was 66%,
consistent with 2016. The largest Canadian regional exposure was in
Ontario, which represented 39% of total loans net of counterparty-
specific and individually insignificant allowance for loan losses for
2017, consistent with 2016.
The balance of the credit portfolio was predominantly in the U.S.,
which represented 33% of the portfolio, consistent with 2016.
Exposures to debt securities classified as loans, ACI loans, and other
geographic regions were relatively small. The largest U.S. regional
exposures were in New England, New York, and New Jersey which
represented 6%, 6%, and 5% of total loans net of counterparty-
specific and individually insignificant allowances, respectively,
compared with 6%, 5% and 6%, respectively, in the prior year.
41
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 2 2
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
2017
October 31
2016
October 31
2015
October 31
2017
October 31
2016
October 31
2015
Counterparty-
specific and
individually
insignificant
allowances
Gross
loans
Net
loans
Net
loans
Net
loans
$ 190,325
$ 17
$ 190,308
$ 189,284
$ 184,992
30.1%
31.3%
32.8%
74,937
22,282
17,355
18,028
322,927
6
37
29
93
182
74,931
22,245
17,326
17,935
322,745
65,059
20,537
16,424
18,120
309,424
61,303
19,008
16,042
17,833
299,178
7
2
9
2
–
–
1
–
–
4
17,974
12,830
30,804
6,674
6,657
13,102
1,968
500
4,251
5,837
15,994
12,778
28,772
6,015
5,481
10,198
2,076
523
6,589
5,476
15
6
23
–
5
11
13
–
1
3
93
$ 275
2,931
1,400
3,975
2,010
3,865
2,782
2,742
1,966
1,671
3,805
96,940
$ 419,685
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
11.8
3.5
2.7
2.8
51.0
2.8
2.0
4.8
1.1
1.1
2.1
0.3
0.1
0.7
0.9
0.5
0.2
0.6
0.3
0.6
0.4
0.4
0.3
0.3
0.6
15.3
66.3%
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%
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
17,981
12,832
30,813
6,676
6,657
13,102
1,969
500
4,251
5,841
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
2,946
1,406
3,998
2,010
3,870
2,793
2,755
1,966
1,672
3,808
97,033
$ 419,960
1 Primarily based on the geographic location of the customer’s address.
42
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 2 2
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
2017
October 31
2016
October 31
2015
October 31
2017
October 31
2016
October 31
2015
Counterparty-
specific and
individually
insignificant
allowances
Gross
loans
Net
loans
Net
loans
Net
loans
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 loans 2
Total other loans
Total
$ 31,460
$ 25
$ 31,435
$ 27,628
$ 26,892
5.0%
4.6%
4.8%
12,434
29,182
846
14,972
88,894
7,316
22,163
29,479
710
7,335
7,137
3,191
567
12,429
11,410
1,852
1,675
2,078
3,221
10,391
4,915
7,023
3,800
9,997
2,140
119,350
208,244
14
1,579
1,593
629,797
3,209
665
3,874
$ 633,671
52
20
3
242
342
7
10
17
–
3
7
2
–
1
2
6
1
8
–
7
6
4
1
2
3
70
412
–
–
–
687
12,382
29,162
843
14,730
88,552
7,309
22,153
29,462
710
7,332
7,130
3,189
567
12,428
11,408
1,846
1,674
2,070
3,221
10,384
4,909
7,019
3,799
9,995
2,137
119,280
207,832
14
1,579
1,593
629,110
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
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
2.0
4.6
0.1
2.3
14.0
1.2
3.5
4.7
0.1
1.2
1.1
0.5
0.1
2.0
1.8
0.3
0.3
0.3
0.5
1.6
0.8
1.1
0.6
1.6
0.3
18.9
32.9
–
0.2
0.2
99.4
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
126
35
161
$ 848
3,083
630
3,713
$ 632,823
1,468
912
2,380
$ 604,243
1,980
1,331
3,311
$ 563,547
0.5
0.1
0.6
100.0%
0.2
0.2
0.4
100.0%
0.4
0.2
0.6
100.0%
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
2,915
20
2,935
$ 629,888
2,826
55
2,881
$ 601,362
2,503
57
2,560
$ 560,987
4.7%
7.2%
14.0%
4.7
7.2
14.0
1 Primarily based on the geographic location of the customer’s address.
2 Includes all Federal Deposit Insurance Corporation (FDIC) covered loans and
other ACI loans.
43
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 2 3
LOANS AND ACCEPTANCES, NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT
ALLOWANCES BY GEOGRAPHY1
(millions of Canadian dollars, except as noted)
As at
Percentage of total
October 31
2017
October 31
2016
October 31
2015
October 31
2017
October 31
2016
October 31
2015
Counterparty-
specific and
individually
insignificant
allowances
Gross
loans
Net
loans
Net
loans
Net
loans
Canada
Atlantic provinces
British Columbia2
Ontario2
Prairies2
Québec
Total Canada
United States
Carolinas (North and South)
Florida
New England3
New Jersey
New York
Pennsylvania
Other
Total United States
International
Europe
Other
Total international
Total excluding other loans
Other loans
Total
$ 11,389
57,945
249,656
68,948
32,022
419,960
10,829
15,832
38,627
34,068
35,180
11,618
62,090
208,244
678
915
1,593
629,797
3,874
$ 633,671
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
$ 11
21
148
69
26
275
$ 11,378
57,924
249,508
68,879
31,996
419,685
$ 10,895
54,169
236,508
67,498
31,293
400,363
$ 10,706
51,979
224,532
66,083
29,935
383,235
16
26
63
44
62
24
177
412
–
–
–
687
161
$ 848
10,813
15,806
38,564
34,024
35,118
11,594
61,913
207,832
678
915
1,593
629,110
3,713
$ 632,823
2,935
$ 629,888
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
2017
4.8%
3.9
4.2
56.0
4.7%
2016
4.5%
14.3
(22.9)
(28.1)
7.2%
2015
7.4%
33.3
(7.0)
(19.2)
14.0%
1.8%
9.2
39.4
10.9
5.0
66.3
1.7
2.5
6.1
5.4
5.6
1.8
9.8
32.9
0.1
0.1
0.2
99.4
0.6
100.0%
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%
1 Primarily based on the geographic location of the customer’s address.
2 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.
3 The states included in New England are as follows: Connecticut, Maine,
Massachusetts, New Hampshire, and Vermont.
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.
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 are
designed to 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.
44
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 2 4
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, 2017
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
2.0% $ 2,225
$ 3,749
19,774
14,561
7.7
50,882
41,319 21.7
14,080
25,421 13.4
10,576
7,738
5.6
95,626 50.4% 94,699
30,895
$ 125,594
859
$ 96,485
1.2% $
10.4
26.5
7.4
4.1
49.6%
487
2,329
8,052
3,861
1,286
16,015
10
$ 16,025
0.6% $ 1,187
11,386
3.1
32,474
10.7
9,640
5.2
4,235
1.7
21.3% 58,922
12,472
$ 71,394
15.2
43.3
12.9
5.7
1.6% $ 4,236
16,890
49,371
29,282
11,862
78.7% 111,641
869
$ 112,510
1.6% $ 3,412
31,160
6.4
83,356
18.6
23,720
11.0
11,973
4.5
42.1% 153,621
43,367
$ 196,988
1.3%
11.7
31.5
8.9
4.5
57.9%
October 31, 2016
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%
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 5
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%
4.3
1.6%
4.0%
7.3
4.5%
7.3%
7.6
7.3%
14.3%
5.2
13.0%
41.8%
20.7
38.9%
30.4%
53.8
33.7%
1.1%
0.8
1.0%
–% 100.0%
0.3
100.0
–% 100.0%
October 31, 2017
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 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.
45
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 2 6
UNINSURED AVERAGE LOAN-TO-VALUE – Newly Originated and Newly Acquired 1,2,3
For the 12 months ended
October 31, 2017
For the 12 months ended
October 31, 2016
Residential Home equity
mortgages
lines of credit4,5
Total
Residential
mortgages
Home equity
lines of credit4,5
Total
Canada
Atlantic provinces
British Columbia6
Ontario6
Prairies6
Québec
Total Canada
United States
Total
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 Based on house price at origination.
4 Home equity lines of credit (HELOC) loan-to-value includes first position
collateral mortgage if applicable.
73%
67
68
73
72
69
67
68%
70%
62
65
71
73
66
62
65%
72%
65
66
72
73
67
64
67%
73%
67
69
73
72
69
67
69%
69%
62
65
69
71
65
62
64%
72%
65
67
71
72
68
65
67%
5 Home equity lines of credit fixed rate advantage option is included in
loan-to-value calculation.
6 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.
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 decreased $424 million, or 12%, compared with the
prior year, due to resolutions outpacing formations and the impact
of foreign exchange.
In Canada, net impaired loans decreased by $183 million, or 25% in
2017. Residential mortgages, consumer instalment and other personal
loans, and credit cards, had impaired loans net of counterparty-specific
and individually insignificant allowances of $462 million, a decrease
of $138 million, or 23%, compared with the prior year, primarily due
to resolutions outpacing formations in the real estate secured lending
portfolio. Business and government loans had $92 million in net
impaired loans, a decrease of $45 million, or 33%, compared with the
prior year, largely due to resolutions in the pipelines, oil and gas sector.
In the U.S., net impaired loans decreased by $204 million, or 10% in
2017. Residential mortgages, consumer instalment and other personal
loans, and credit cards, had net impaired loans of $1,500 million, a
decrease of $13 million, or 1%, compared with the prior year due to the
impact of foreign exchange, offset by increased impaired loans in the
credit card and indirect auto portfolios. Business and government loans
had $344 million in net impaired loans, a decrease of $191 million, or
36%, compared with the prior year primarily due to decreases in the
pipelines, oil and gas, real estate, and professional and other services
sectors and the impact of foreign exchange.
Geographically, 23% of total impaired loans net of counterparty-
specific and individually insignificant allowances were generated in
Canada and 77% in the U.S. The largest regional concentration of net
impaired loans in Canada was in Ontario, which represented 8% of
total net impaired loans, down from 10% in the prior year. The largest
regional concentration of net impaired loans in the U.S. was in New
England representing 18% of total net impaired loans, compared with
20% in the prior year.
T A B L E 2 7
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
2017
2016
2015
$ 3,509
4,724
(966)
(1,556)
–
(2,538)
–
(88)
$ 3,085
$ 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
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 2017 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 2017 Consolidated
Financial Statements.
46
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 2 8
IMPAIRED LOANS NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT
ALLOWANCES BY INDUSTRY SECTOR1,2,3
(millions of Canadian dollars,
except as noted)
Oct. 31
2017
Oct. 31
2016
Oct. 31
2015
Oct. 31
2014
Oct. 31 Oct. 31
2017
2013
Oct. 31
2016
Oct. 31
2015
Oct. 31
2014
Oct. 31
2013
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
$ 296
$ 17
$ 279
$ 385
$ 378
$ 427
$ 434
11.6%
13.9%
14.2%
19.0%
19.3%
108
48
48
144
644
6
37
29
93
182
102
11
19
51
462
140
9
20
46
600
166
17
19
45
625
249
17
20
66
779
301
16
21
43
815
4.3
0.5
0.8
2.1
19.3
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
10
5
15
7
2
–
2
–
–
15
17
21
45
–
11
19
20
7
2
9
2
–
–
1
–
–
4
15
6
23
–
5
11
13
3
3
6
5
2
–
1
–
–
11
2
15
22
–
6
8
7
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
0.1
0.1
0.2
0.2
0.1
–
–
–
–
0.5
0.1
0.7
0.9
–
0.2
0.3
0.3
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
–
6
5
185
$ 829
–
1
3
93
$ 275
–
5
2
92
$ 554
–
–
4
137
$ 737
2
2
3
121
$ 746
1
1
5
54
$ 833
–
1
2
100
$ 915
–
0.2
0.1
3.8
23.1%
–
–
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%
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 2017 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 2017 Consolidated Financial Statements.
47
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 2 8
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
2017
Oct. 31
2016
Oct. 31
2015
Oct. 31
2014
Oct. 31 Oct. 31
2017
2013
Oct. 31
2016
Oct. 31
2015
Oct. 31
2014
Oct. 31
2013
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
$ 454
$ 25 $ 429 $ 418 $ 361 $ 303 $ 250
17.9%
15.0%
13.6%
13.5%
11.1%
847
254
7
280
1,842
52
20
3
242
342
795
234
4
38
1,500
863
190
4
38
1,513
780
155
5
44
1,345
7
10
17
–
3
7
2
–
1
2
6
1
8
–
7
6
4
27
73
100
2
12
39
9
1
9
11
20
4
17
1
46
37
26
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
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
34
83
117
2
15
46
11
1
10
13
26
5
25
1
53
43
30
2
8
6
414
2,256
–
–
$ 3,085
1
2
3
70
412
1
6
3
344
1,844
9
25
6
535
2,048
13
31
5
569
1,914
16
15
5
622
1,411
12
39
12
699
1,328
–
–
–
–
$ 687 $ 2,398 $ 2,785 $ 2,660 $ 2,244 $ 2,243
–
–
–
–
–
–
–
–
3.45%
4.09%
4.24%
4.28%
4.83%
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
33.1
9.8
0.2
1.6
62.6
31.0
6.8
0.1
1.4
54.3
29.3
5.8
0.2
1.7
50.6
1.1
3.1
4.2
0.1
0.5
1.6
0.4
–
0.4
0.5
0.8
0.2
0.7
–
1.9
1.6
1.1
–
0.2
0.1
14.3
76.9
–
–
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
–
–
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 2017 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 2017 Consolidated Financial Statements.
48
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 2 9
IMPAIRED LOANS NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT
ALLOWANCES FOR LOAN LOSSES BY GEOGRAPHY1,2,3
(millions of Canadian dollars, except as noted)
As at
Percentage of total
October 31
2017
October 31
2016
October 31
2015
October 31
2017
October 31
2016
October 31
2015
Canada
Atlantic provinces
British Columbia4
Ontario4
Prairies4
Québec
Total Canada
United States
Carolinas (North and South)
Florida
New England5
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
Net
impaired
loans
$
40
78
344
260
107
829
113
174
504
380
428
150
507
2,256
$ 3,085
$ 11
21
148
69
26
275
16
26
63
44
62
24
177
412
$ 687
$
29
57
196
191
81
554
97
148
441
336
366
126
330
1,844
$ 2,398
$
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
1.2%
2.4
8.2
7.9
3.4
23.1
4.0
6.2
18.4
14.0
15.3
5.2
13.8
76.9
100.0%
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%
Net impaired loans as a % of net loans6
0.38%
0.46%
0.48%
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 2017 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 2017 Consolidated Financial Statements.
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.
5 The states included in New England are as follows: Connecticut, Maine,
Massachusetts, New Hampshire, and Vermont.
6 Includes customers’ liability under acceptances.
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 2017, counterparty-specific allowances decreased by
$136 million, or 34%, resulting in a total counterparty-specific
allowance of $263 million. The decrease is primarily attributable to the
debt securities classified as loans portfolio, improved credit quality 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 decreased by $55 million, or
29% from the prior year, primarily due to the improved credit quality
in the oil and gas sector and the impact of foreign exchange.
Collectively assessed allowance for individually insignificant
impaired loans
Individually insignificant loans, such as the Bank’s personal and small
business banking loans and credit card loans, 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 2017, the collectively assessed allowance for individually
insignificant impaired loans decreased by $8 million, or 1%, resulting
in a total of $585 million. Excluding FDIC covered loans and other ACI
loans, the collectively assessed allowance for individually insignificant
impaired loans increased by $18 million, or 3% from the prior year.
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.
49
TD BANK GROUP ANNUAL REPORT 2017 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, 2017, the collectively assessed allowance for
incurred but not identified credit losses was $3,502 million, up from
$3,381 million as at October 31, 2016. Excluding debt securities
classified as loans, the collectively assessed allowance for incurred but
not identified credit losses increased by $156 million, or 5% from the
prior year, primarily due to the Business and Government and U.S.
Credit Card portfolios, offset by the impact of foreign exchange.
The Bank periodically reviews the input and assumptions 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, 2017, certain
refinements were made, the cumulative effect of which was not
material. Allowance for credit losses are further described in Note 8
of the 2017 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 $2,216 million in 2017, compared
with a total PCL of $2,330 million in 2016. This amount comprised
$1,990 million of counterparty-specific and individually insignificant
provisions and $226 million of collectively assessed incurred but not
identified provisions. Total PCL as a percentage of net average loans
and acceptances decreased to 0.36% from 0.40%.
In Canada, residential mortgages, consumer instalment and other
personal loans, and credit card loans, required counterparty-specific
and individually insignificant provisions of $931 million, a decrease of
$14 million, or 1%, compared to 2016. Business and government loans
required counterparty-specific and individually insignificant provisions
of $35 million, a decrease of $68 million, or 66%, compared to 2016
primarily due to improved credit quality in the oil and gas sector.
In the U.S., residential mortgages, consumer instalment and other
personal loans, and credit card loans, required counterparty-specific
and individually insignificant provisions of $1,059 million, an increase
of $252 million, or 31%, compared to 2016, primarily due to an
increase in provisions for the credit card and indirect auto loan
portfolios. Business and government loans required counterparty-
specific and individually insignificant provisions of $5 million, a
decrease of $34 million, or 87%, compared to 2016 primarily due
to improved credit quality in the oil and gas sector.
Geographically, 49% of counterparty-specific and individually
insignificant provisions were attributed to Canada and 51% to the U.S.
when accounting for recoveries in the debt securities classified as loans
and acquired credit-impaired loan portfolios. The largest regional
concentration of counterparty-specific and individually insignificant
provisions in Canada were concentrated in Ontario, which represented
19% of total counterparty-specific and individually insignificant
provisions, down from 21% in 2016. The largest regional
concentration of counterparty-specific and individually insignificant
provisions in the U.S. were concentrated in New York, representing
7% of total counterparty-specific and individually insignificant
provisions, up from 5% 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 0
PROVISION FOR CREDIT LOSSES
(millions of Canadian dollars)
Provision for credit losses – counterparty-specific and individually insignificant
Counterparty-specific
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 Banking1
U.S. Retail
Corporate2
Total provision for credit losses – incurred but not identified
Provision for credit losses
1 The incurred but not identified PCL is included in the Corporate segment results
for management reporting.
2 The retailer program partners’ share of the U.S. strategic cards portfolio.
2017
2016
2015
$
40
2,575
(625)
1,990
–
144
82
226
$ 2,216
$ 139
2,334
(602)
1,871
165
210
84
459
$ 2,330
$
76
2,062
(601)
1,537
44
76
26
146
$ 1,683
50
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 3 1
PROVISION FOR CREDIT LOSSES BY INDUSTRY SECTOR1
(millions of Canadian dollars, except as noted)
For the years ended
Percentage of total
October 31
2017
October 31
2016
October 31
2015
October 31
2017
October 31
2016
October 31
2015
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
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
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.
$
22
$
15
$
25
1.1%
0.8%
1.6%
7
245
172
485
931
–
1
1
–
–
–
–
1
–
4
9
5
(11)
–
6
11
1
1
2
5
35
966
7
7
229
128
688
1,059
1
(3)
(2)
–
(1)
19
1
(7)
(2)
(6)
7
(1)
(15)
(1)
3
–
(6)
(1)
1
16
5
1,064
2,030
(2)
(38)
(40)
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)
0.4
12.3
8.6
24.4
46.8
–
0.1
0.1
–
–
–
–
0.1
–
0.2
0.4
0.2
(0.5)
–
0.3
0.5
0.1
0.1
0.1
0.2
1.8
48.6
0.4
0.4
11.5
6.4
34.5
53.2
0.1
(0.2)
(0.1)
–
(0.1)
1.0
0.1
(0.4)
(0.1)
(0.3)
0.4
(0.1)
(0.8)
(0.1)
0.2
–
(0.3)
(0.1)
0.1
0.8
0.2
53.4
102.0
(0.1)
(1.9)
(2.0)
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)
$ 1,990
$ 1,871
$ 1,537
100.0%
100.0%
100.0%
237
(11)
226
$ 2,216
463
(4)
459
$ 2,330
157
(11)
146
$ 1,683
51
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 3 2
PROVISION FOR CREDIT LOSSES BY GEOGRAPHY1
(millions of Canadian dollars, except as noted)
For the years ended
Percentage of total
October 31
2017
October 31
2016
October 31
2015
October 31
2017
October 31
2016
October 31
2015
3.4%
4.9
16.9
11.6
6.8
43.6
1.9
3.5
5.1
4.3
6.4
2.3
24.5
48.0
91.6
(1.8)
89.8
10.2
100.0%
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%
Canada
Atlantic provinces
British Columbia2
Ontario2
Prairies2
Québec
Total Canada
United States
Carolinas (North and South)
Florida
New England3
New Jersey
New York
Pennsylvania
Other4
Total United States
Total excluding other loans
Other loans
Total counterparty-specific and individually insignificant provision
Incurred but not identified provision
Total provision for credit losses
Provision for credit losses as a % of average
net loans and acceptances5
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
$
75
109
374
258
150
966
42
77
112
95
143
52
543
1,064
2,030
(40)
1,990
226
$ 2,216
$
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
1,600
(63)
1,537
146
$ 1,683
October 31
2017
October 31
2016
October 31
2015
0.01%
0.73
0.04
0.24
0.03
1.92
–
0.55
–
0.34
(1.47)
0.33
0.04
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
net loans and acceptances
0.36%
0.40%
0.32%
1 Primarily based on the geographic location of the customer’s address.
2 The territories are included as follows: Yukon is included in British Columbia; Nunavut
4 Other includes PCL attributable to other states/regions including those outside
TD’s core U.S. geographic footprint.
is included in Ontario; and Northwest Territories is included in the Prairies region.
5 Includes customers’ liability under acceptances.
3 The states included in New England are as follows: Connecticut, Maine,
Massachusetts, New Hampshire, and Vermont.
NON-PRIME LOANS
As at October 31, 2017, the Bank had approximately $2.5 billion
(October 31, 2016 – $2.6 billion), gross exposure to non-prime loans,
which primarily consist of automotive loans originated in Canada. The
credit loss rate, an indicator of credit quality, and defined as annual
PCL divided by the average month-end loan balance was approximately
5.25% on an annual basis (October 31, 2016 – 6.79%). PCL primarily
declined due to lower provisions for individually insignificant impaired
loans, reflecting the economic recovery in oil and gas impacted
regions. These loans are recorded at amortized cost.
52
TD BANK GROUP ANNUAL REPORT 2017 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 3
EXPOSURE TO EUROPE – Total Net Exposure by Country and Counterparty 1
(millions of Canadian dollars)
As at
Loans and commitments2
Derivatives, repos, and securities lending3
Trading and investment portfolio4,5
Country
Corporate Sovereign
Financial
Total Corporate Sovereign
Financial
Total Corporate Sovereign
Financial
Total
Total Exposure6
GIIPS
Greece
Italy
Ireland
Portugal
Spain
Total GIIPS
Rest of Europe
Austria
Finland
France
Germany
Luxembourg
Netherlands
Norway
Sweden
Switzerland
United Kingdom
Other7
Total Rest of Europe
Total Europe
GIIPS
Greece
Italy
Ireland
Portugal
Spain
Total GIIPS
Rest of Europe
Austria
Finland
France
Germany
Luxembourg
Netherlands
Norway
Sweden
Switzerland
United Kingdom
Other7
Total Rest of Europe
Total Europe
$
– $
–
–
–
–
–
–
168
–
–
99
267
$
– $
3
194
–
47
244
– $
171
194
–
146
511
– $
–
11
–
–
11
– $
–
–
–
–
–
– $
3
274
16
35
328
–
3
285
16
35
339
$
– $
– $
29
–
7
9
45
35
–
–
1,277
1,312
– $
2
–
–
3
5
– $
66
–
7
1,289
1,362
–
240
479
23
1,470
2,212
October 31, 2017
–
–
134
6
636
602
522
1,259
–
–
339
548
67
–
105
–
58
975
2,784
2,511
5
258
6,159
4,650
$ 6,159 $ 4,917
–
1
117
28
–
161
4
122
42
20
–
24
–
41
141
3,202
1,355
2,193
1,809
1,173
–
1,370
1,048
355
71
606
227
635
1,075
9,086 10,502
5,315
533
263
495 11,304
3,688 15,009 20,634
$ 739 $ 11,815 $ 1,948 $ 3,688 $ 15,337 $ 20,973
12
–
66
419
35
320
22
–
34
836
193
1,937
1
1
2,532
873
1,138
323
22
245
601
11
40
604
901
–
727
311
361
–
580
153
187
–
–
78
233
6
72
1
5
55
269
42
51
–
275
45
–
313
457
788
59
1,744
11
1,148
1,124
1,073
1,066
1,248
1,066
5,690 10,247
5,337
7,846 11,848
7,568
1,179
–
6,912
4,109
1,211
327
2,815
1,189
1,824
–
4,095 19,912
2,082
1,221
372
761 23,123
3,743 27,627 59,565
$ 806 $ 24,435 $ 3,748 $ 28,989 $ 61,777
6
4,494
785
1,982
114
425
October 31, 2016
$
– $
–
–
–
–
–
–
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
–
–
64
7
765
437
644
1,037
–
–
555
588
4
–
64
–
58
1,125
3,009
1,787
–
268
5,163
5,249
$ 5,249 $ 5,436
–
13
169
55
–
271
4
222
125
37
8
25
–
121
84
2,541
1,371
1,911
1,736
504
–
1,211
1,414
130
8
323
286
877
1,308
6,373
4,833
633
276
14,649
904 11,316
$ 958 $ 11,643 $ 2,510 $ 3,021 $ 9,842 $ 15,373
17
21
863
738
–
240
95
247
–
550
250
3,021
–
–
96
464
59
604
1
–
75
1,000
166
2,465
8
100
1,582
709
445
367
34
76
802
4,823
217
9,163
182
–
262
944
737
–
1,584
1,379
–
11,016
108
6,734
14,631
186 10,779
636
75
7,418
4,271
722
305
2,426
1,359
2,404
–
16,558
1,765
1,317
343
59,656
538 27,747
$ 563 $ 27,783 $ 5,407 $ 33,753 $ 60,769
919
1,379
7,104
19 10,984
132
57
4,793
506
584
272
1,817
451
219
168
5,352
3,429
408
60
5,406 33,691
–
16
7
7
51
158
5
1 Certain comparative amounts have been recast to conform with the presentation
4 Trading and Investment portfolio includes deposits and trading exposures are net
adopted in the current period.
of eligible short positions.
2 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, 2017, or October 31, 2016.
3 Exposures are calculated on a fair value basis and are net of collateral. Total market
5 The fair values of the GIIPS exposures in Level 3 in the trading and investment
portfolio were not significant as at October 31, 2017, and October 31, 2016.
6 The reported exposures do not include $0.2 billion of protection the Bank
purchased through credit default swaps (October 31, 2016 – $0.3 billion).
value of pledged collateral is $1.5 billion (October 31, 2016 – $6.9 billion) for
GIIPS and $67.4 billion (October 31, 2016 – $24.7 billion) for the rest of Europe.
Derivatives are presented as net exposures where there is an International Swaps
and Derivatives Association (ISDA) master netting agreement.
7 Other European exposure is distributed across 7 countries (October 31, 2016 –
7 countries), each of which has a net exposure including loans and commitments,
derivatives, repos and securities lending, and trading and investment portfolio
below $1.0 billion as at October 31, 2017.
53
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
Of the Bank’s European exposure, approximately 96%
(October 31, 2016 – 98%) 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, and
cash. The Bank also takes a limited amount of 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 $9.5 billion (October 31, 2016 – $8.9 billion) of exposure
to supranational entities with European sponsorship and $2.3 billion
(October 31, 2016 – $0.2 billion) of indirect exposure to 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
T A B L E 3 4
ACQUIRED CREDIT-IMPAIRED LOAN PORTFOLIO
(millions of Canadian dollars, except as noted)
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.
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 originated from FDIC-assisted transactions, including
covered loans subject to loss sharing agreements with the FDIC and
The South Financial Group acquisition. 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.
FDIC-assisted acquisitions3
South Financial
Total ACI loan portfolio
FDIC-assisted acquisitions3
South Financial
Total ACI loan portfolio
Unpaid
principal
balance1
$ 362
359
$ 721
$ 508
529
$ 1,037
Carrying
value
Counterparty-
specific
allowance2
Allowance for
individually
insignificant
impaired loans
$ 335
330
$ 665
$ 480
494
$ 974
$ 1
2
$ 3
$ 1
3
$ 4
$ 19
13
$ 32
$ 35
23
$ 58
As at
Carrying
Percentage of
value net of unpaid principal
balance
allowances
October 31, 2017
$ 315
315
$ 630
87.0%
87.7
87.4%
October 31, 2016
$ 444
468
$ 912
87.4%
88.5
87.9%
1 Represents contractual amount owed net of charge-offs since acquisition of the loan.
2 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.
3 Carrying value does not include the effect of the FDIC loss sharing agreement.
During the year ended October 31, 2017, the Bank recorded a
recovery of $38 million in PCL on ACI loans (2016 – $31 million,
2015 – $36 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 5
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
1 Represents contractual amount owed net of charge-offs since acquisition of the loan.
54
October 31, 2017
Unpaid principal balance1
October 31, 2016
Unpaid principal balance1
As at
$ 650
15
56
$ 721
$ 481
183
54
3
$ 721
90.1%
2.1
7.8
100.0%
66.7%
25.4
7.5
0.4
100.0%
$ 912
24
101
$ 1,037
$ 691
260
83
3
$ 1,037
88.0%
2.3
9.7
100.0%
66.6%
25.1
8.0
0.3
100.0%
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
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 (CMO)
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. Refer to
the “Exposure to Non-Agency Collateralized Mortgage Obligations”
section of the 2016 Annual Report for further details on CMOs.
The allowance for losses that are incurred but not identified
as at October 31, 2017, was US$16 million (October 31, 2016 –
US$41 million).
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, 2017,
and October 31, 2016. As at October 31, 2017, the balance of the
remaining acquisition-related incurred loss was US$115 million
(October 31, 2016 – US$160 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 6
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
$ 613
$ 542
$ 114
$ 428
69.8%
October 31, 2017
$ 1,158
$ 1,020
$ 195
$ 825
71.2%
October 31, 2016
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 reflected the discount on acquisition
and the Bank’s risk inherent on the entire portfolio, resulting in a net
capital benefit. The net capital benefit expired on October 31, 2016.
During the first quarter of 2017, the Bank unwound the
re-securitizations and sold a portion of the non-agency CMO portfolio
resulting in a gain on sale, recognized in other income within the
Corporate segment. The impact of the sale on the portfolio and related
allowance for loan losses is reflected in the table above.
T A B L E 3 7
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
Amortized
cost
$ 16
40
50
93
152
$ 351
$ 20
49
204
157
226
$ 656
Alt-A
Fair
value
$ 18
44
68
107
173
$ 410
$ 23
55
248
187
270
$ 783
Prime Jumbo
Amortized
cost
Fair
value
Amortized
cost
As at
Total
Fair
value
October 31, 2017
$
9
12
7
32
33
$ 10
13
7
36
39
$ 93
$ 105
$ 20
15
14
73
88
$ 21
17
16
84
99
$ 210
$ 237
$
28
57
75
143
212
$ 515
$ 25
52
57
125
185
$ 444
16
$ 428
October 31, 2016
$
44
72
264
271
369
$ 1,020
$ 40
64
218
230
314
$ 866
41
$ 825
55
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
GROUP FINANCIAL CONDITION
Capital Position
T A B L E 3 8
CAPITAL STRUCTURE AND RATIOS – Basel III 1
(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
Investments in own Tier 2 instruments
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
2017
2016
$ 20,967
40,489
8,006
69,462
$ 20,881
35,452
11,834
68,167
(18,820)
(2,310)
(113)
506
(805)
(73)
(13)
–
(1,206)
(22,834)
46,628
4,247
3,229
–
7,476
(19,517)
(2,241)
(172)
(1,690)
(906)
(166)
(11)
(72)
(1,064)
(25,839)
42,328
3,899
3,236
286
7,421
(1)
–
(352)
(353)
7,123
53,751
7,156
2,648
–
1,668
11,472
(352)
(352)
7,069
49,397
5,760
4,899
270
1,660
12,589
(25)
–
(160)
(185)
11,287
65,038
(170)
(170)
12,419
61,816
$ 435,750
435,750
435,750
$ 405,844
405,844
405,844
10.7%
12.3
14.9
3.9
10.4%
12.2
15.2
4.0
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. For fiscal 2016, the scalars for inclusion of CVA for CET1,
Tier 1, and Total Capital RWA were 64%, 71%, and 77% respectively. For fiscal
2017, the scalars are 72%, 77%, and 81%, respectively. As the Bank is constrained
by the Basel 1 regulatory floor, the RWA as it relates to the regulatory floor is
calculated based on the Basel 1 risk weights which are the same for all capital ratios.
3 The leverage ratio is calculated as Tier 1 Capital divided by leverage exposure,
as defined.
56
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
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 capital requirements
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 in a manner consistent with TD’s capital
management objectives.
The Bank operates 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 risks associated with 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.
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, inclusive of any minimum requirements outlined
under the Basel I floor. 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 2017, the
scalars for inclusion of the CVA for CET1, Tier 1, and Total Capital RWA
are 72%, 77%, and 81%. This scalar increases to 80% in 2018 and
100% in 2019 for the CET1 calculation. 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.
In March 2013, OSFI designated the six major Canadian banks as
domestic systemically important banks (D-SIBs), 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.
At the discretion of OSFI, a common equity countercyclical capital
buffer (CCB) within a range of 0% to 2.5% could be imposed. The
primary objective of the CCB is to protect the banking sector against
future potential losses resulting from periods of excess aggregate
credit growth that have often been associated with the build-up of
system-wide risk. The CCB is an extension of the capital conservation
buffer and must be met with CET1 capital. The CCB is calculated using
the weighted-average of the buffers deployed in Canada and across
BCBS member jurisdictions and selected non-member jurisdictions to
which the bank has private sector credit exposures.
57
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS Effective the first quarter of 2017, OSFI required D-SIBs and foreign
bank subsidiaries in Canada to comply with the CCB regime, phased-in
according to the transitional arrangements. As a result, the maximum
countercyclical buffer relating to foreign private sector credit exposures
will be capped at 1.25% of total RWA in the first quarter of 2017 and
increase each subsequent year by an additional 0.625%, to reach its
final maximum of 2.5% of total RWA in the first quarter of 2019. As
at October 31, 2017, the CCB is only applicable to private sector credit
exposures located in Hong Kong, Sweden, Norway, and the United
Kingdom. Based on the allocation of exposures and buffers currently in
place in Hong Kong, Sweden, Norway, and the United Kingdom, the
Bank’s countercyclical buffer requirement is 0% as at October 31, 2017.
The leverage ratio is calculated as per OSFI’s Leverage Requirements
guideline and has a regulatory minimum requirement of 3%.
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, 2017, the Bank’s CET1, Tier 1, and Total Capital
ratios were 10.7%, 12.3%, and 14.9%, respectively. Compared with
the Bank’s CET1 Capital ratio of 10.4% at October 31, 2016, the CET1
Capital ratio, as at October 31, 2017, increased due to organic capital
growth, actuarial gains on employee benefit plans primarily due to an
increase in long term interest rates, unrealized gains in AOCI from
available-for-sale securities portfolio due to tightening of the credit
spreads, partially offset by an increase in RWA attributable to the Basel
I regulatory floor, RWA growth across all segments, common shares
repurchased, and the impact of the Scottrade transaction.
As at October 31, 2017, the Bank’s leverage ratio was 3.9%.
Compared with the Bank’s leverage ratio of 4.0% at October 31, 2016,
the leverage ratio, as at October 31, 2017, decreased as capital
generation and preferred share issuances were more than offset
by business growth in all segments.
Common Equity Tier 1 Capital
CET1 Capital was $46.6 billion as at October 31, 2017. 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 $477 million under the
dividend reinvestment plan and from stock option exercises.
Tier 1 and Tier 2 Capital
Tier 1 Capital was $54 billion as at October 31, 2017, consisting of
CET1 Capital and Additional Tier 1 Capital of $47 billion and $7 billion,
respectively. Tier 1 Capital management activities during the year
consisted of the issuance of $350 million non-cumulative Rate Reset
Preferred Shares, Series 16, which included NVCC Provisions to ensure
loss absorbency at the point of non-viability, and the redemption, by
TD’s indirect subsidiary Northgroup Preferred Capital Corporation, of
US$500 million Fixed-to-Floating Rate Exchangeable Non-Cumulative
Perpetual Preferred Stock, Series A.
Tier 2 Capital was $11 billion as at October 31, 2017. Tier 2 Capital
management activities during the year consisted of the issuance of
$1.5 billion 3.224% subordinated debentures due July 25, 2029,
which included NVCC Provisions to ensure loss absorbency at the point
of non-viability, and the redemption of $2.25 billion 4.779%
subordinated debentures due December 14, 2105 and the redemption,
by TD’s indirect subsidiary TD Bank, N.A., of $270 million 4.644%
Fixed Rate/Floating Rate Subordinated Notes due September 20, 2022.
On November 7, 2017, the Bank announced its intention to redeem
$1.8 billion 5.763% subordinated debentures due December 18, 2106
on December 18, 2017.
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.
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, 2017, the quarterly dividend was $0.60 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 $2.35 per share (2016 – $2.16). For cash dividends payable on
the Bank’s preferred shares, refer to Note 21 of the 2017 Consolidated
Financial Statements. As at October 31, 2017, 1,840 million common
shares were outstanding (2016 – 1,857 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 2017 Consolidated
Financial Statements for further information on dividend restrictions.
58
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS NORMAL COURSE ISSUER BID
On September 18, 2017, the Bank announced that the Toronto Stock
Exchange (TSX) and OSFI approved the Bank’s amended normal course
issuer bid (NCIB) to repurchase for cancellation up to an additional
20 million of the Bank’s common shares. On October 4, 2017, in
connection with its amended NCIB, the Bank announced its intention
to purchase for cancellation up to 7.98 million of its common shares
pursuant to specific share repurchase programs. During the quarter
ended October 31, 2017, the Bank completed the purchase of common
shares pursuant to the specific share repurchase programs, which
shares were purchased at a discount to the prevailing market price of
the Bank’s common shares on the TSX at the time of purchase. During
the three months ended October 31, 2017, the Bank repurchased
7.98 million common shares under its amended NCIB at an average
price of $64.80 per share for a total amount of $517 million.
On March 16, 2017, the Bank announced that the TSX and OSFI
approved the Bank’s previously announced NCIB to repurchase for
cancellation up to 15 million of the Bank’s common shares. On March
28, 2017, in connection with its NCIB, the Bank announced its
intention to purchase for cancellation up to 14.5 million of its common
shares pursuant to a specific share repurchase program. During the
quarter ended April 30, 2017, the Bank completed the purchase of
common shares pursuant to the specific share repurchase program,
which shares were purchased at a discount to the prevailing market
price of the Bank’s common shares on the TSX at the time of purchase.
During the three months ended April 30, 2017, the Bank repurchased
15 million common shares under its NCIB at an average price of
$58.65 per share for a total amount of $880 million.
On December 9, 2015, the Bank announced that the TSX and OSFI
approved the Bank’s previously announced NCIB to repurchase for
cancellation up to 9.5 million of the Bank’s common shares. On
January 11, 2016, in connection with its NCIB, the Bank announced its
intention to purchase for cancellation up to 3 million of its common
shares pursuant to private agreements between the Bank and an arm’s
length third party seller. During the quarter ended January 31, 2016,
the Bank completed the purchase of common shares by way of
private agreements, which shares were purchased at a discount to the
prevailing market price of the Bank’s common shares on the TSX at the
time of purchase. During the three months ended January 31, 2016,
the Bank repurchased 9.5 million common shares under its NCIB 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 3 9
COMMON EQUITY TIER 1 CAPITAL
RISK-WEIGHTED ASSETS1
(millions of Canadian dollars)
Credit risk
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
Operational risk
Regulatory floor
Total
As at
October 31 October 31
2016
2017
$ 30,500 $ 29,563
18,965
43,288
19,432
45,300
168,119 169,559
5,139
9,087
16,161
789
7,618
8,275
14,442
805
294,491 292,551
8,515
8,615
36,687
39,230
339,793 340,296
12,211
48,001
5,336
$ 435,750 $ 405,844
14,020
48,392
33,545
1 Each capital ratio has its own RWA measure due to the OSFI-prescribed scalar for
inclusion of the CVA. For fiscal 2016, the scalars for inclusion of CVA for CET1,
Tier 1 and Total Capital RWA were 64%, 71%, and 77%, respectively. For fiscal
2017, the scalars are 72%, 77%, and 81%, respectively. As the Bank is constrained
by the Basel 1 regulatory floor, the RWA as it relates to the regulatory floor is
calculated based on the Basel 1 risk weights which are the same for all capital ratios.
T A B L E 4 0
FLOW STATEMENT FOR RISK-WEIGHTED ASSETS – Disclosure for Non-Counterparty Credit Risk and
Counterparty Credit Risk – Risk-Weighted Assets Movement by Key Driver
(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
October 31, 2017
For the years ended
October 31, 2016
Non-counterparty
credit risk
Counterparty Non-counterparty
credit risk
credit risk
Counterparty
credit risk
$ 324,335
10,087
(6,724)
(1,291)
4,948
4,018
(8,019)
1,181
4,200
$ 328,535
$ 15,961
(4,292)
(651)
–
578
–
(338)
–
(4,703)
$ 11,258
$ 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
59
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
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 72% for fiscal 2017 (2016 –
64%). Non-counterparty credit risk includes loans and advances
to individuals and small business retail customers, wholesale and
commercial corporate customers, and banks and governments, as
well as holdings of debt, equity securities, and other assets including
prepaid expenses, deferred income taxes, land, buildings, 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 2017, is mainly due to growth in various retail portfolios and
commercial exposures in the U.S. Retail and Canadian Retail segments.
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, and for
fiscal 2017, decreased mainly due to savings from the annual update
of non-retail credit risk parameters.
The Model updates category relates to model implementation,
changes in model scope, or any changes to address model malfunctions.
The Methodology and policy category impacts reflect newly adopted
methodology changes to the calculations driven by regulatory policy
changes, such as new regulations, and for fiscal 2017, increased mainly
due to a change in treatment for certain securitization exposures in the
U.S. Retail segment.
The Movement in risk levels category reflects changes in risk due to
position changes and market movements. An increase in interest rate
risk drove the increase in RWA. 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. 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 Driver1
T A B L E 4 2
(millions of Canadian dollars)
RWA, balance at beginning of period
Revenue generation
Movement in risk levels
Model updates
Methodology and policy
Acquisitions and disposals
Foreign exchange movements and other
RWA, balance at end of period
For the years ended
October 31 October 31
2016
2017
$ 48,001 $ 41,118
2,291
324
–
3,648
–
620
$ 48,392 $ 48,001
643
705
–
–
–
(957)
1 Certain comparative amounts have been restated to conform with the
The Acquisitions and disposals category impact, for fiscal 2017,
presentation adopted in the current period.
is mainly due to the Scottrade Bank acquisition.
Foreign exchange movements are mainly due to a change in the
U.S. dollar foreign exchange rate for the U.S. portfolios in the U.S.
Retail and Wholesale Banking segments.
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,
deferred income taxes, land, buildings, 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 1
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, internal control factors, and scenario analysis. 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.
Foreign exchange movements are mainly due to a change in the U.S.
dollar foreign exchange rate for the U.S. portfolios in the U.S. Retail
segment. Effective the third quarter of 2016, OSFI approved the Bank
to use the Advanced Measurement Approach (AMA) to calculate
operational risk-weighted assets.
(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
2016
2017
$ 12,211 $ 12,655
548
–
(992)
–
n/m1
(444)
$ 13,993 $ 12,211
1,782
–
–
–
n/m1
1,782
60
TD BANK GROUP ANNUAL REPORT 2017 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, 2017. 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 requirements 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
66%
7%
10%
17%
$ 339,793
Credit Risk
Market Risk
$ 14,020
Operational Risk $ 48,392
Other2
$ 33,545
TD Bank Group
Corporate
Canadian Retail
U.S. Retail3
Wholesale Banking
• 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
• Global Markets
• Corporate and
Investment Banking
• Other
• Treasury and Balance
Sheet Management
• Other Control Functions
Economic Capital (%)
Credit Risk
Market Risk
Operational Risk
Other Risks
76%
3%
7%
14%
Credit Risk
Market Risk
Operational Risk
Other Risks
60%
7%
11%
22%
Credit Risk
Market Risk
Operational Risk
Other Risks
72%
15%
11%
2%
Credit Risk
Market Risk
Operational Risk
Other Risks
25%
3%
33%
39%
CET1 RWA1
$ 90,317
Credit Risk
Market Risk
–
$
Operational Risk $ 9,376
$ 200,624
Credit Risk
Market Risk
–
$
Operational Risk $ 27,047
$ 40,029
Credit Risk
Market Risk
$ 14,020
Operational Risk $ 8,379
$ 8,823
Credit Risk
Market Risk
–
$
Operational Risk $ 3,590
Other 2
$ 33,545
1 Amounts are in millions of Canadian dollars
2 Reflects regulatory floor
3 U.S. Retail includes TD Ameritrade in Other Risks for Economic Capital
61
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 4 3
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 12
Series 32
Series 52
Series 72
Series 92
Series 112
Series 122
Series 142
Series 162,3
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
2016
2017
Number of Number of
shares/units shares/units
1,842.5
(2.9)
1,839.6
1,857.6
(0.4)
1,857.2
5.4
8.9
5.4
4.6
5.5
4.5
20.0
20.0
20.0
14.0
8.0
6.0
28.0
40.0
14.0
190.0
(0.3)
189.7
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
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 2017 Consolidated Financial
Statements.
2 NVCC Series 1, 3, 5, 7, 9, 11, 12, 14, and 16 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, 200 million, and 70 million, respectively.
3 Issued by the Bank on July 14, 2017, with quarterly non-cumulative cash dividends
on these shares, if declared, payable at a per annum rate of 4.50% for the initial
period ending October 31, 2022. Thereafter, the dividend rate will reset every five
years equal to the then five-year Government of Canada bond yield plus 3.01%.
Holders of these shares will have the right to convert their shares into
non-cumulative NVCC Floating Rate Preferred Shares, Series 17, subject to certain
conditions, on October 31, 2022, and on October 31 every five years thereafter.
Holders of the Series 17 Shares will be entitled to receive quarterly floating rate
dividends, if declared, at a rate equal to the then average three-month Government
of Canada Treasury Bills yield plus 3.01%. The Series 16 Shares are redeemable by
the Bank, subject to regulatory consent, at $25 per share on October 31, 2022,
and on October 31 every five years thereafter.
Future Regulatory Capital Developments
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.
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 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. The SMA framework is a
standardized approach that incorporates risk-sensitive elements
of an advanced approach.
In April 2016, BCBS issued a consultative document on revisions to
the Basel III Leverage Ratio Framework. The proposal reaffirms the 3%
minimum leverage ratio requirement, and seeks views on a higher
requirement for global systemically important banks (G-SIBs). 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 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. In March 2017, BCBS issued the final standard
“Regulatory treatment of accounting provisions – interim approach
and transitional arrangements”. The standard retains, for an interim
period, the current regulatory treatment of accounting provisions
under the standardized and internal rating-based approaches. The
BCBS has determined that jurisdictions may introduce a transitional
arrangement for the impact on regulatory capital from the
implementation of IFRS 9 and outlines the requirements for
jurisdictions choosing to adopt a transitional arrangement. Based on
the current regulatory requirements, the expected impact to CET1
capital is a decrease of 15 bps almost exclusively due to the Basel I
regulatory floor. The IFRS 9 impact from the adoption of the expected
credit loss methodology is offset by the decrease in the shortfall
deduction and by the IFRS 9 classification and measurement impact.
Refer to the section on “Future Changes in Accounting Policy” in this
document for additional details on IFRS 9. The Bank is awaiting final
guidance from OSFI related to the BCBS standard. In August 2017,
OSFI released for public consultation revisions to the CAR guideline
for implementation in the first quarter of 2018.
62
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
In March 2017, BCBS issued the final standard on Phase 2 of the
Pillar 3 Disclosure Requirements. The final standard consolidates all
existing and prospective BCBS disclosure requirements into the Pillar 3
framework, prescribes enhanced disclosure of key prudential metrics,
and for banks which record prudent valuation adjustments, a new
disclosure requirement for a granular breakdown of how the
adjustments are calculated. The standard also includes new disclosure
requirements for the total loss-absorbing capital regime for G-SIBs and
revised disclosure requirements for market risk. The implementation
date for these disclosure requirements will be determined when OSFI
issues Phase 2 of the Pillar 3 Disclosure Requirements.
The BCBS has commenced Phase 3, the final phase of the Pillar 3
review. The objectives of Phase 3 is to develop disclosure requirements
for standardized RWA to benchmark internally modelled capital
requirements, asset encumbrances, operational risk, and ongoing
policy reforms.
In April 2017, OSFI issued the final guidelines on Phase 1 of the 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
(Revised Basel Pillar 3 standard) issued by the BCBS in January 2015.
The revised standard requires disclosure of fixed format tables and
templates to provide comparability and consistency of capital and
risk disclosures amongst banks with the focus on improving the
transparency of the internal model-based approaches that banks use
to calculate RWA. The guideline replaces OSFI’s November 2007
Advisory on Pillar 3 Disclosure Requirements. D-SIBs are expected to
prospectively disclose the reporting requirements under the Revised
Basel Pillar 3 standard by the fourth quarter of 2018.
In June 2017, OSFI issued for comment a draft guideline on Total Loss
Absorbing Capacity (TLAC). The guideline establishes two minimum
standards, the risk-based TLAC ratio and the TLAC leverage ratio, which
form part of the framework for assessing whether D-SIBs maintain
minimum capacity to absorb losses. OSFI anticipates that D-SIBs will be
expected to maintain a minimum risk-based TLAC ratio of at least 21.5%
of risk-weighted assets and a minimum TLAC leverage ratio of at least
6.75%, effective the first quarter of 2022. D-SIBs will also be expected
to hold buffers above the minimum TLAC ratios.
In July 2017, BCBS and Board of the International Organization
of Securities Commissions released a consultative document
on the criteria for “simple, transparent, and comparable” (STC)
securitizations. In July 2017, BCBS also released a consultative
document related to the capital treatment for STC short-term
securitizations. These two documents set out a proposed approach
to incorporate short-term STC criteria into the revised securitization
framework issued in July 2016. Short-term securitization exposures
that meet the STC criteria qualify for reduced minimum capital
requirements. The revised securitization framework is expected
to be effective for the Bank in the first quarter of 2019.
In July 2017, OSFI extended the timeline for Canadian
implementation for the adoption of the Minimum capital requirements
for market risk (Fundamental Review of the Trading Book) rules, by at
least one year, to no earlier than the first quarter of 2021. The timeline
was extended due to complexities and uncertainties associated with
implementation of the requirements.
In October 2017, BCBS issued final guidelines on Identification
and management of step-in risk. Step-in risk is the risk that the bank
decides to provide financial support to an unconsolidated entity that
is facing stress, in the absence of, or in excess of, any contractual
obligations. The guideline requires banks to define the scope of
entities to be evaluated, self-assess step-in risk within the scope, and
report to supervisor. For step-in risk identified, banks need to estimate
the potential impact on liquidity and capital positions and determine
the appropriate internal risk management actions. The framework
entails no automatic Pillar 1 capital or liquidity charge additional to
the existing Basel standards. The guidelines are expected to be
implemented by 2020.
Global Systemically Important Banks
In July 2013, the BCBS issued an update to the final rules on G-SIBs
and outlined the G-SIB assessment methodology, which is based on
the submissions of the largest global banks. Twelve indicators are
used in the G-SIB assessment methodology to determine systemic
importance. The indicators relate to cross-jurisdictional activity, size,
interconnectedness, sustainability/financial institution infrastructure,
and complexity. The score for a particular indicator is calculated
by dividing the individual bank value by the aggregate amount for
the indicator summed across all banks included in the assessment.
Accordingly, an individual bank’s ranking is reliant on the results
and submissions of other global banks.
Based on 2016 fiscal year indicators, the Bank was not designated
a G-SIB in November 2017. Public disclosure of financial year-end
indicators is required annually and the Bank’s 2017 fiscal year
indicators will be published by the Bank in the first quarter of 2018.
If the Bank were designated a G-SIB in the future, the Bank’s capital
ratio requirements would include the higher of the D-SIB and G-SIB
surcharges, both of which are currently 1%, as per the draft OSFI CAR
guideline released for public consultation in August 2017. Additionally,
the Bank’s minimum leverage ratio requirement would be the current
OSFI and BCBS stipulated 3%. The D-SIB and G-SIB surcharges, and
leverage ratio requirements, are subject to change at the discretion
of the regulators. On December 15, 2016, the Federal Reserve Board
adopted a final rule establishing TLAC and related requirements for
U.S. bank holding companies designated as G-SIBs and IHCs of foreign
banking organizations designated as G-SIBs. The rule requires that
covered institutions maintain a minimum amount of loss-absorbing
capital, long term debt and imposes other limits and requirements
so that, in the event of the covered institution’s failure, there will
be sufficient internal loss-absorbing capacity available to allow for
an orderly resolution. If the Bank should be designated as a G-SIB
in the future, the rule will be applicable to the Bank’s intermediate
holding company (IHC), TD Group US Holding LLC (TDGUS), with
a phase-in period.
Failure to meet the Bank’s capital ratios and TLAC requirements,
including any applicable surcharge if the Bank were designated
a G-SIB in the future, could result in limitations on the Bank’s ability
to distribute capital and make certain discretionary compensation
payments, and may negatively impact TD’s reputation in the market.
63
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 and Note 10 of the 2017 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 card loans, 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 card 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 2017 Consolidated Financial
Statements for further information.
T A B L E 4 4
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
$ 22,733
–
–
–
$ 22,733
$ 23,081
–
–
–
$ 23,081
Carrying
value of
retained
interests
Securitized
assets
Securitized
assets
Carrying
value of
retained
interests
$ –
–
–
–
$ –
$ –
–
–
–
$ –
–
$
2,481
3,354
–
$ 5,835
$
–
3,642
2,012
–
$ 5,654
October 31, 2017
$ 2,252
–
–
1,428
$ 3,680
$ –
–
–
32
$ 32
October 31, 2016
$ 3,661
–
–
1,664
$ 5,325
$ –
–
–
31
$ 31
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 special purpose entities (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, 2017, the Bank has not recognized any retained
interests due to the securitization of residential mortgage loans on
its Consolidated Balance Sheet.
Consumer Instalment and Other Personal Loans
The Bank securitizes consumer instalment and other personal
loans through consolidated SPE. The Bank consolidates the SPE
as it serves as a financing vehicle 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 SPE.
As at October 31, 2017, the SPE had $2 billion of issued notes
outstanding (October 31, 2016 – $4 billion). As at October 31, 2017,
the Bank’s maximum potential exposure to loss for these conduits
was $2 billion (October 31, 2016 – $4 billion) with a fair value of
$2 billion (October 31, 2016 – $4 billion).
64
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
Credit Card Loans
The Bank securitizes credit card loans through an SPE. The Bank
consolidates the SPE as it serves as a financing vehicle 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
SPE. As at October 31, 2017, the Bank had $3 billion of securitized
credit card receivables outstanding (October 31, 2016 – $2 billion). As
at October 31, 2017, the consolidated SPE had US$2.6 billion variable
rate notes outstanding (October 31, 2016 – US$1.5 billion). The notes
are issued to third party investors and have fair value of US$2.6 billion
as at October 31, 2017 (October 31, 2016 – US$1.5 billion). Due to
the nature of the credit card receivables, their carrying amounts
approximate fair value.
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.
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. The Bank’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 $13.2 billion as at
October 31, 2017 (October 31, 2016 – $14.5 billion). Further, as at
October 31, 2017, the Bank had committed to provide an additional
$2.9 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, 2016 – $3.5 billion).
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 5
EXPOSURE TO THIRD PARTY-ORIGINATED ASSETS SECURITIZED BY BANK-SPONSORED UNCONSOLIDATED CONDUITS
(millions of Canadian dollars, except as noted)
Residential mortgage loans
Automobile loans and leases
Equipment 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.
October 31, 2017
October 31, 2016
As at
Exposure and
ratings profile of
unconsolidated
SPEs
AAA1
$ 8,294
3,306
168
1,465
$ 13,233
Expected
weighted-
average life
(years)2
2.5
1.6
1.8
0.2
2.0
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
As at October 31, 2017, the Bank held $1.0 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, 2016 – $1.1 billion).
control processes in place to mitigate these risks. Certain commitments
still remain off-balance sheet. Note 27 of the 2017 Consolidated
Financial Statements provides detailed information about the maximum
amount of additional credit the Bank could be obligated to extend.
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 $1.5 billion as at October 31, 2017 (October 31, 2016 –
$1.8 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, 2017, 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
Leveraged Finance Credit Commitments
Also included in “Commitments to extend credit” in Note 27 of the
2017 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. As at October 31, 2017, the Bank’s
exposure to leveraged finance credit commitments, including funded
and unfunded amounts, was $22.7 billion (October 31, 2016 –
$24.9 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, and
indemnification agreements. Certain guarantees remain off-balance
sheet. Refer to Note 27 of the 2017 Consolidated Financial Statements
for further information.
65
TD BANK GROUP ANNUAL REPORT 2017 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 23 of the 2017 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 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.
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, 2017, other than as described in
the following sections and in Note 12 of the 2017 Consolidated
Financial Statements.
Other Transactions with TD Ameritrade and Symcor
(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 or TD’s U.S. subsidiaries.
Insured Deposit Account (formerly known as Money Market
Deposit Account) Agreement
The Bank is party to an IDA agreement with TD Ameritrade, pursuant
to which the Bank makes available to clients of TD Ameritrade and
Scottrade, FDIC-insured money market deposit accounts as either
designed sweep vehicles or non-sweep deposit accounts. TD Ameritrade
provides marketing and support services with respect to the IDA. The
Bank paid $1.5 billion in 2017 (2016 – $1.2 billion; 2015 – $1.1 billion)
to TD Ameritrade related to deposit accounts. The amount paid by the
Bank is based on the average insured deposit balance of $124 billion
in 2017 (2016 – $112 billion; 2015 – $95 billion) with a portion of the
amount tied to the actual yield earned by the Bank on the investments,
less the actual interest paid to clients of TD Ameritrade and Scottrade,
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, 2017, amounts receivable from TD Ameritrade
were $68 million (October 31, 2016 – $72 million). As at
October 31, 2017, amounts payable to TD Ameritrade were
$167 million (October 31, 2016 – $141 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, 2017, the Bank paid $93 million (October 31, 2016 –
$97 million; October 31, 2015 – $124 million) for these services. As at
October 31, 2017, the amount payable to Symcor was $15 million
(October 31, 2016 – $16 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, 2017, and October 31, 2016.
66
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS 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.
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
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 and 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 to a lesser
extent 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, reputational risk associated with
increased regulatory, public, and media focus, 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.
67
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 2018”, “Focus for 2018”, 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 (including their own devices)
and the third parties providing services to us, may be subject to
attacks, disruption of services, breaches or other compromises. These
may include cyber-attacks such as targeted and automated online
attacks on banking systems and applications, introduction of malicious
software, denial of service attacks, and phishing attacks which could
result in the fraudulent use or theft of data or amounts that customers
hold with the Bank as reflected in 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 or its customers’ data or amounts
that the Bank or that its customers hold with the Bank as reflected in
data. In addition, the Bank’s customers often use their own devices,
such as computers, smart phones and tablets, to make payments and
manage their accounts, and the Bank has limited ability to assure the
safety and security of its customers’ transactions with the Bank to the
extent they are using their own devices. 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 leading 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.
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 and these crimes can arise
from numerous sources, including potential or existing clients or
customers, agents, vendors or outsourcers, other external parties, or
employees. 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 customers,
counterparties or other external parties including financial statements
and financial information and authentication information. The Bank
may also rely on the representations of customers, counterparties and
other external parties as to the accuracy and completeness of such
information. In order to authenticate customers, whether through
the Bank’s phone or digital channels or in its branches and stores,
the Bank may also rely on certain authentication questions and the
presentation of identification information which could be subject to
fraud. In addition to the risk of material loss that could result in the
event of a financial crime, the Bank could face legal action and 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,
including cyber fraud.
68
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 may also create a
reliance upon the provider with respect to continuity, reliability and
security of these relationships, and their associated processes, people
and facilities. As the financial services industry and its supply chain
become more complex, the need for robust, holistic, and sophisticated
controls and ongoing oversight increases. 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, criminal or terrorist acts (such as cyber-
attacks), or non-compliance with regulations, 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 risk management,
as well as policies and procedures governing third party relationships
from the point of selection through the life cycle of the business
arrangement. 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 financial services industry is highly regulated. TD’s operations,
profitability and reputation could be adversely affected by the
introduction of new laws and regulations, changes to, or changes
in interpretation or application of current laws and regulations, and
issuance of judicial decisions. These adverse effects could also result
from the fiscal, economic, and monetary policies of various regulatory
agencies and governments in Canada, the U.S., the United Kingdom, and
other countries, and changes in the interpretation or implementation
of those policies. 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 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 Europe, there are a number of uncertainties in
connection with the future of the United Kingdom and its relationship
with the European Union, and reforms implemented through the
European Market Infrastructure Regulation and the review of Markets
in Financial Instruments Directive and accompanying Regulation could
result in higher operational and system costs and potential changes
in the types of products and services the Bank can offer to clients in
the region. Finally, in Canada, there are a number of government
initiatives underway that could impact financial institutions, including
regulatory initiatives with respect to payments evolution and
modernization, consumer protection, and the Canadian housing
market and an industry review of sales practices. In addition,
potential changes relating to interchange could impact the Bank’s
credit card businesses.
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 has required significant structural reform to the U.S. financial services
industry and affects every banking organization operating in the U.S.,
including the Bank. In general, in connection with Dodd-Frank the Bank
could be negatively impacted by loss of revenue, limitations on the
products or services it offers, and additional operational and compliance
costs. 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 rules under Dodd-Frank and other
regulatory requirements that impact the Bank include:
• The “Volcker Rule” – The Bank and its affiliates are subject to the
Volcker Rule, which restricts 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.
• Capital Planning and Stress Testing – 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 U.S. Board of
Governors of the Federal Reserve System (Federal Reserve). TD Bank,
N.A. and TD Bank USA, N.A. are also required to submit prescribed
stress testing results to the U.S. Office of the Comptroller of the
Currency (OCC). Any issues arising from U.S. regulators’ review of
such submissions may negatively impact the Bank’s operations and/
or reputation and lead to increased costs.
• Enhanced Prudential Standards – The Bank is subject to certain
“enhanced prudential standards” as adopted by the Federal
Reserve. Such standards include enhanced capital and liquidity
requirements, stress testing obligations and risk management
standards, as well as additional reporting, recordkeeping and
disclosure obligations. For certain large non-U.S. banking
organizations, such as the Bank, the Federal Reserve has required
the establishment of a separately capitalized top-tier U.S. IHC to
hold the ownership interests in all U.S. subsidiaries, subject to
limited exceptions and exclusions. On July 1, 2016, TD Group US
Holdings LLC was officially designated as the Bank’s IHC and
now holds the Bank’s ownership interests in its U.S. subsidiaries
(subject to limited exceptions and exclusions), including its
investment in TD Ameritrade Holding Corporation. TD has incurred,
and will continue to incur, operational, capital, liquidity, and
compliance costs, and compliance with these standards may impact
TD’s businesses, operations, and results in the U.S. and overall. The
current U.S. regulatory environment for banking organizations may
be impacted by future legislative developments, including changes
to the Volcker Rule, capital requirements, stress testing and other
key aspects of Dodd-Frank, and post-crisis related rulemakings. The
scope of the new administration’s short-term legislative agenda is
not yet known, but it may include certain deregulatory measures for
the U.S. financial services industry.
69
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS Bank Recapitalization “Bail-In” Regime
In 2016, legislation to amend the Bank Act, the Canada Deposit
Insurance Corporation Act (the CDIC Act) and certain other federal
statutes pertaining to banks to create a bank recapitalization or bail-in
regime for domestic systemically important banks (D-SIBs), which
include the Bank, was approved. The legislation is to come into force
on a date to be determined by the Government of Canada (GOC).
Under the legislation, if the Superintendent is of the opinion that
a D-SIB has ceased or is about to cease to be viable and its viability
cannot be restored through the exercise of the Superintendent’s
powers, the GOC can, among other things, appoint the Canada
Deposit Insurance Corporation (CDIC) as receiver of the Bank and
direct CDIC to convert certain shares (including preferred shares) and
liabilities of the Bank (including senior debt securities) into common
shares of the Bank or any of its affiliates (a Bail-in Conversion).
However, under the legislation, the conversion powers of CDIC would
not apply to shares and liabilities issued or originated before the date
on which the legislation comes into force unless, on or after such date,
they are amended or in the case of liabilities, their term is extended.
On June 16, 2017, the GOC published in draft for comment
regulations under the CDIC Act and the Bank Act (the Bail-in
Regulations) setting forth further details in respect of the bail-in
regime. The Bail-in Regulations prescribe the types of shares and
liabilities that will be subject to a Bail-in Conversion. In general, any
senior debt securities with an initial or amended term to maturity
greater than 400 days that are unsecured or partially secured and have
been assigned a CUSIP or ISIN or similar identification number would
be subject to a Bail-in Conversion. Shares, other than common shares,
and subordinated debt, would also be subject to a Bail-in Conversion,
unless they are NVCC instruments. However, certain other debt
obligations of the Bank such as structured notes (as defined in the
Bail-in Regulations), covered bonds, and certain derivatives would not
be subject to a Bail-in Conversion. There is no assurance that the
Bail-in Regulations will be adopted as proposed.
The Bail-in Regulations will come into force 180 days following the
publication of the final version of the Bail-in Regulations.
The proposed bail-in regime could adversely affect the Bank’s cost
of funding.
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. Regulators have demonstrated an increased focus on
conduct risk. As well, they have continued the trends towards
establishing new standards and best practice expectations and a
willingness to use 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, 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,
if regulators take formal enforcement action, rather than taking
informal/supervisory actions, then, despite the Bank’s prudence and
management efforts, its 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, in a manner which meets regulator expectations.
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.
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 experience, pricing and variety of products and services
offered, as well as an institution’s reputation and ability to
differentiate. Ongoing or increased competition in the digital space
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 (such as Fintech) 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 continues to invest in differentiated
experiences for our customers, enabling them to transact across
all of our channels seamlessly, with a particular emphasis on mobile
technologies. In addition, the Bank continues to accelerate innovation by
engaging with Fintech through strategic investments and partnerships.
70
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS OTHER RISK FACTORS
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 litigation
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 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 27
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 undertakes due
diligence before completing an acquisition and closely monitors
integration activities and performance post acquisition. 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.
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 talent. There is intense competition for the best people and
emerging capabilities 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 talent 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 talent which are actioned
throughout the course of the year.
Foreign Exchange Rates, Interest Rates and Credit Spreads
Foreign exchange rate, interest rate, and credit spread 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. A change in the level of credit spreads
affects the relative valuation of assets and liabilities, and as a result,
impacts the Bank’s earnings. The Bank manages its structural foreign
exchange rate, interest rate, and credit spread 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 designed 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.
71
TD BANK GROUP ANNUAL REPORT 2017 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
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 the Senior Executive Team
(SET), which informs TD’s vision, purpose and shared commitments.
These governing objectives describe the 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 is prepared by Risk Management, reviewed by the Risk Committee
and 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 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS In addition, governance, risk, and oversight functions operate
The Bank’s risk governance model includes a senior management
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.
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,
a “three lines of defence” model is employed, in which the first line
of defence are the “Risk Owners”, the second line provides “Risk
Oversight”, and the third line is Internal Audit.
committee structure that is designed to support transparent risk reporting
and discussions. TD’s overall risk and control oversight 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 businesses. 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 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
Business Segments
Internal
Audit
Canadian Retail
U.S. Retail
Wholesale Banking
Internal
Audit
73
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS The Board of Directors
The Board oversees the Bank’s strategic direction, the implementation
of an effective risk 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. The Board reviews and approves
TD’s RAS and related measures annually, and monitors the Bank’s risk
profile and performance against Risk Appetite measures.
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 for approval corporate governance guidelines aimed at
fostering high standards for corporate governance.
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 Enterprise Risk Management Committee (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
Asset/Liability and Capital Committee (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 Operational Risk
Oversight Committee (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 with
respect to public disclosure, shareholders, and the market.
• RRC – chaired by the Group Head and CRO, the Reputational Risk
Committee (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-wide 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 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 reliability and effectiveness of
key elements of the Bank’s risk management, internal control, and
governance processes.
Compliance
The Compliance Department is responsible for fostering a culture
of integrity and compliance throughout TD, to protect TD’s Brand
and to operate within risk appetite; delivering independent regulatory
compliance risk management and oversight of compliance
management and program controls throughout TD globally; 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. The Global
AML Department is also responsible for the Bank’s Anti-Bribery and
Anti-Corruption regulatory compliance program.
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TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS Treasury and Balance Sheet Management
The Treasury and Balance Sheet Management (TBSM) group
manages and reports on the Bank’s capital and investment positions,
as well as liquidity and funding risk, and the market risks of TD’s
non-trading banking activities. The Risk Management function
oversees TBSM’s capital, investment, liquidity, and non-trading
market risk management activities.
Three Lines of Defence
In order to further the understanding of responsibilities for risk
management, the Bank employs the following “three lines of defence”
model that describes the respective accountabilities of each line of
defence in managing risk across the Bank.
THREE LINES OF DEFENCE
First Line
Identify and Control
Risk Owner
• Manage and identify risk in day-to-day activities.
• Manage activities 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
Risk Oversight
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
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.
75
TD BANK GROUP ANNUAL REPORT 2017 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 2017 program, the Bank evaluated two internally
generated macroeconomic stress scenarios covering a range of
severities 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 the scenarios evaluated in the 2017
program, the Bank had sufficient capital to withstand severe, but
plausible, stress conditions. 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
Severe Scenario
Extreme Scenario
• 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.
• The scenario features a marked slowdown in global growth
prospects leading to a prolonged recession and heightened
uncertainty in global financial markets. Protectionist political
pressures mount worldwide leading countries to raise tariffs in a
series of retaliatory trade measures, curtailing global trade. Global
growth prospects deteriorate significantly, raising the risk of
financial distress in China’s domestic debt and property markets.
A robust recovery in the E.U. fails to take hold amid uncertainty
surrounding unproductive negotiations on trade and financial
linkages with the U.K. and rising populism sentiment across E.U.
countries. Contagion spreads beyond periphery countries through
large cross-border debt and bank lending exposures. Risk appetite
retrenches and financial markets worldwide are destabilized. The
monetary policy response is limited in countries where policy rates
are at, or close to, the lower bound and where quantitative easing
programs approach constraints. A prolonged global economic
slowdown erodes investor confidence, leading to a sharp decline
in global equity prices and heightened market volatility.
• 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 Comprehensive Capital Analysis and
Review (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 2017 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 and Decision Support group, under the
leadership of the Group Head and Chief Financial Officer, is charged
with developing the Bank’s overall long-term and shorter-term
strategies 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 shorter-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, assessing, measuring, controlling, 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 seeks to ensure 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, 2017 and 2016.
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 include 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 is accountable for oversight of credit risk by
developing policies that govern and control portfolio risks, and
approval of 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
shorter-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 are designed to 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 2017 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
while working to achieve 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 the majority of 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 2017 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 1994-2016, 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 2017 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, 2017, 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 2017 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. AVMs 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 6
GROSS CREDIT RISK EXPOSURES – Standardized and Advanced Internal Ratings Based Approaches 1
(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, 2017
As at
October 31, 2016
Standardized
AIRB
Total
Standardized
AIRB
Total
$
5,862
–
19,011
24,873
$ 349,749
93,527
75,566
518,842
$ 355,611
93,527
94,577
543,715
125,621
91,567
18,195
235,383
$ 260,256
305,867
157,947
94,181
557,995
$ 1,076,837
431,488
249,514
112,376
793,378
$ 1,337,093
$
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
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.
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 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 2017 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, credit spread, 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, 2017, using the Internal Models 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 7
MARKET RISK LINKAGE TO THE BALANCE SHEET
(millions of Canadian dollars)
October 31, 2017
As at
October 31, 2016
Balance
Non-
trading
sheet market risk market risk
Trading
Balance
Non-
trading
Trading
sheet market risk market risk
Non-trading market
risk – primary
risk sensitivity
Other
Other
Assets subject to market risk
Interest-bearing deposits with banks
Trading loans, securities, and other
Derivatives
$
51,185
103,918
56,195
194 $
$
99,168
51,492
50,991 $
4,750
4,703
Financial assets designated at fair value
through profit or loss
Available-for-sale securities
4,032
146,411
–
–
4,032
146,411
Held-to-maturity securities
71,363
–
71,363
– $
–
–
–
–
–
258 $ 53,456 $
53,714 $
99,257 92,282
72,242 63,931
6,975
8,311
4,283
107,571
4,283
–
– 107,571
84,395
–
84,395
–
–
–
–
–
–
Interest rate
Interest rate
Equity,
foreign exchange,
interest rate
Interest rate
Foreign exchange,
interest rate
Foreign exchange,
interest rate
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
134,429
616,374
17,297
7,784
1,549
68,458
1,278,995
1,345
–
–
–
–
–
133,084
616,374
17,297
7,784
1,549
–
152,199 1,058,338
1,728
–
–
–
–
–
–
–
–
–
–
68,458
– 55,358
68,458 1,176,967 158,199 963,410 55,358
84,324
– 589,529
15,706
–
7,091
–
–
1,769
–
86,052
589,529
15,706
7,091
1,769
55,358
Interest rate
Interest rate
Interest rate
Equity
Interest rate
79,940
51,214
3,539
46,206
76,401
5,008
12,757
12,757
–
8
832,824
1
–
7
832,824
17,297
35,482
–
32,124
17,297
3,358
88,591
16,076
9,528
15,073
2,064
–
–
–
86,527
16,076
9,528
15,073
–
–
–
–
–
–
–
–
–
–
–
79,786
3,876
65,425 60,221
75,910
5,204
12,490 12,490
–
190
773,660
177
13
– 773,660
15,706
–
33,115 29,973
15,706
3,142
48,973
17,918
10,891
15,526
3,657
–
–
–
45,316
17,918
10,891
15,526
–
–
–
–
–
–
–
–
–
–
–
Interest rate
Foreign exchange,
interest rate
Interest rate
Interest rate
Equity,
interest rate
Interest rate
Interest rate
Interest rate
Interest rate
Interest rate
Interest rate
to market risk
Total Liabilities and Equity
120,205
$ 1,278,995
–
– 103,287
$ 96,691 $ 1,062,099 $ 120,205 $ 1,176,967 $ 110,394 $ 963,286 $ 103,287
120,205
103,287
–
–
1 Relates to retirement benefits, insurance, and structured entity liabilities.
82
TD BANK GROUP ANNUAL REPORT 2017 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 Model Development, and includes Wholesale
Banking senior management.
There were no significant reclassifications between trading and
non-trading books during the year ended October 31, 2017.
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
net revenue, reported on a taxable equivalent basis, within Wholesale
Banking. Effective August 1, 2017, to better align with the
computation of VaR, trading net revenue is used for the purpose
of this graph. Trading net revenue includes trading income and net
interest income related to positions within the Bank’s market risk
capital trading books. This change has been applied retroactively
to November 1, 2016.
For the year ending October 31, 2017, there were 11 days of
trading losses and trading net revenue was positive for 96% 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 NET REVENUE
(millions of Canadian dollars)
Trading Net Revenue
Value-at-Risk
$50
40
30
20
10
0
(10)
(20)
(30)
(40)
6
1
0
2
/
1
/
1
1
6
1
0
2
/
8
/
1
1
6
1
0
2
/
5
1
/
1
1
6
1
0
2
/
2
2
/
1
1
6
1
0
2
/
9
2
/
1
1
6
1
0
2
/
6
/
2
1
6
1
0
2
/
3
1
/
2
1
6
1
0
2
/
0
2
/
2
1
6
1
0
2
/
8
2
/
2
1
7
1
0
2
/
5
/
1
7
1
0
2
/
2
1
/
1
7
1
0
2
/
9
1
/
1
7
1
0
2
/
6
2
/
1
7
1
0
2
/
2
/
2
7
1
0
2
/
9
/
2
7
1
0
2
/
6
1
/
2
7
1
0
2
/
3
2
/
2
7
1
0
2
/
2
/
3
7
1
0
2
/
9
/
3
7
1
0
2
/
6
1
/
3
7
1
0
2
/
3
2
/
3
7
1
0
2
/
0
3
/
3
7
1
0
2
/
6
/
4
7
1
0
2
/
3
1
/
4
7
1
0
2
/
0
2
/
4
7
1
0
2
/
7
2
/
4
7
1
0
2
/
4
/
5
7
1
0
2
/
1
1
/
5
7
1
0
2
/
8
1
/
5
7
1
0
2
/
5
2
/
5
7
1
0
2
/
1
/
6
7
1
0
2
/
8
/
6
7
1
0
2
/
5
1
/
6
7
1
0
2
/
2
2
/
6
7
1
0
2
/
9
2
/
6
7
1
0
2
/
6
/
7
7
1
0
2
/
3
1
/
7
7
1
0
2
/
0
2
/
7
7
1
0
2
/
7
2
/
7
7
1
0
2
/
3
/
8
7
1
0
2
/
0
1
/
8
7
1
0
2
/
7
1
/
8
7
1
0
2
/
4
2
/
8
7
1
0
2
/
1
3
/
8
7
1
0
2
/
7
/
9
7
1
0
2
/
4
1
/
9
7
1
0
2
/
1
2
/
9
7
1
0
2
/
8
2
/
9
7
1
0
2
/
5
/
0
1
7
1
0
2
/
2
1
/
0
1
7
1
0
2
/
9
1
/
0
1
7
1
0
2
/
6
2
/
0
1
83
TD BANK GROUP ANNUAL REPORT 2017 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.
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, Incremental Risk Charge (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 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 2017, 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.
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 4 8
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)
$
6.9
7.6
8.5
2.7
2.3
10.1
(23.0)
$ 15.1
40.9
190.8
$ 14.2
8.9
8.9
4.3
1.3
14.1
(30.3)
$ 21.4
39.3
242.9
$
$ 34.9
11.8
12.3
7.9
2.5
17.9
n/m2
$ 36.4
51.1
330.2
$ 15.1
28.1
171.3
2017
Low
6.2
6.0
5.8
2.2
0.7
10.1
n/m2
As at
Average
High
$ 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
$ 21.9
15.6
11.2
7.4
4.2
22.6
n/m2
$ 33.8
43.6
287.9
2016
Low
$
5.4
5.1
3.5
1.4
1.0
7.9
n/m2
$ 11.7
21.6
144.9
1 The aggregate VaR is less than the sum of the VaR of the different risk types due to
2 Not meaningful. It is not meaningful to compute a diversification effect because
risk offsets resulting from portfolio diversification.
the high and low may occur on different days for different risk types.
Average VaR was relatively unchanged compared to the prior year.
Year-over-year, the increase in interest rate VaR was driven by U.S.
interest rate risk positions. The year-over-year increase in average
Stressed VaR was driven by an increase in government and financial
bond positions.
1987 equity market crash, the 1998 Russian debt default crisis, the
aftermath of September 11, 2001, the 2007 ABCP crisis, the credit
crisis of Fall 2008 and the Brexit referendum of June 2016.
Stress tests are produced and reviewed regularly with the Market
Risk Control Committee.
The average IRC increased by $37.1 million over the year due to
changes in U.S. Agency and Canadian bank positions.
Validation of VaR Model
The Bank uses a back-testing process to compare the actual and
theoretical profit and losses to VaR to establish 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
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. This generally reflects the
market risks arising from personal and commercial banking products
(loans and deposits) as well as related funding, investments and high
quality liquid assets (HQLA). Such structural 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 Chief
Financial Officer, 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.
84
TD BANK GROUP ANNUAL REPORT 2017 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. Interest
rate risk management is designed 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 and commercial banking products.
The Bank is exposed to interest rate risk when asset and liability
principal and interest cash flows, determined using contractual
cash-flows and the target-modeled maturity profile for non-maturity
products, have different interest payment or maturity dates. These
are called “mismatched positions”. An interest-sensitive asset or
liability is repriced when interest rates change and when there is:
a final maturity, normal amortization, or option exercise (such as
prepayment, redemption, or conversion).
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 methodology 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 as approved by the Risk Committee sets overall limits
on EVaR and NIIS which are linked to capital and net interest income,
respectively. These 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,
hedged, and reported, and breaches of these Board limits, if any, are
escalated to both the ALCO and the Risk Committee of the Board.
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 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 non-maturity assets
and liabilities;
• A target investment profile on its net equity position; and
• Liquidation assumptions on mortgages other than from embedded
pre-payment options.
The Bank also measures 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.
The objective of portfolio management within the closed-cash-flow
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 measures 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 factors, 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.
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.
85
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS Other Non-Trading Market Risks
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:
ALL INSTRUMENTS PORTFOLIO
Economic Value at Risk After Tax –
October 31, 2017 and October 31, 2016
(millions of Canadian dollars)
– The Bank is exposed to equity risk through its equity-linked
October 31, 2016
October 31, 2017
guaranteed investment certificate product offering. The exposure
is managed by purchasing options to replicate the equity payoff.
– The Bank is also exposed to non-trading equity price risk primarily
from its 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. These share units are recorded as a liability over the vesting
period and revalued at each reporting period until settled in cash.
Changes in the Bank’s share price can impact non-interest
expenses. The Bank uses derivative instruments to manage its
non-trading equity price risk.
Interest Rate Risk
The following graph18 shows the Bank’s interest rate risk exposure (as
measured by EVaR) on all non-trading assets, liabilities, and derivative
instruments used for structural interest rate management. This reflects
the interest rate risk from personal and commercial banking products
(loans and deposits) as well as related funding, investments and HQLA.
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 interest rates. Closely matching asset and
liability cash flows reduces EVaR and mitigates the risk of volatility in
future net interest income.
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i
e
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n
a
h
C
$150
50
(50)
(150)
(250)
(350)
(450)
(550)
(650)
October 31, 2016: $(234)
October 31, 2017: $(235)
(2.0)
(1.5)
(1.0)
(0.5)
0
0.5
1.0
1.5
2.0
Parallel interest rate shock percentage
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, 2017, an immediate and sustained 100 bps increase
in interest rates would have decreased the economic value of
shareholders’ equity by $235 million (October 31, 2016 – $234 million)
after tax. An immediate and sustained 100 bps decrease in interest
rates would have reduced the economic value of shareholders’ equity
by $225 million (October 31, 2016 – $103 million) after tax.
The interest rate exposure, or EVaR, in the insurance business is not
included in the above graph. Interest rate risk in the insurance business
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.
T A B L E 4 9
SENSITIVITY OF AFTER-TAX ECONOMIC VALUE AT RISK BY CURRENCY
(millions of Canadian dollars)
Currency
Canadian dollar
U.S. dollar
October 31, 2017
October 31, 2016
100 bps
increase
$
(24)
(211)
$ (235)
100 bps
decrease
$ (43)
(182)
$ (225)
100 bps
increase
$
8
(242)
$ (234)
100 bps
decrease
$
(64)1
(39)2
$ (103)
1 Due to the low rate environment EVaR sensitivity has been measured using a
75 bps decline for Canadian interest rates for the year ended October 31, 2016,
corresponding to an interest rate environment that is floored at 0%.
2 Due to the low rate environment EVaR sensitivity has been measured using
a 50 bps decline for U.S. interest rates for the year ended October 31, 2016,
corresponding to an interest rate environment that is floored at 0%.
For the NIIS measure (not shown on the graph), a 100 bps increase in
interest rates on October 31, 2017, would have increased pre-tax net
interest income by $116 million (October 31, 2016 – $131 million
increase) in the next twelve months due to the mismatched positions.
A 100 bps decrease in interest rates on October 31, 2017, would
have decreased pre-tax net interest income by $152 million
(October 31, 2016 – $123 million decrease) in the next twelve months
due to the mismatched positions. Reported NIIS remains consistent
with the Bank’s risk appetite and within established Board limits. The
net interest income of the Bank is subject to interest rate sensitivity for
reasons other than the mismatched positions. Such other interest rate
sensitivity is not reflected in the NIIS measure.
18 The footnotes included in Table 51 are also applicable to this graph.
86
TD BANK GROUP ANNUAL REPORT 2017 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 0
SENSITIVITY OF PRE-TAX NET INTEREST INCOME SENSITIVITY BY CURRENCY
(millions of Canadian dollars)
Currency
Canadian dollar
U.S. dollar
October 31, 2017
October 31, 2016
100 bps
increase
$
(9)
125
$ 116
100 bps
decrease
$
9
(161)
$ (152)
100 bps
increase
$ 52
79
$ 131
100 bps
decrease
$
(65)1
(58)2
$ (123)
1 NIIS sensitivity has been measured using a 75 bps rate decline for Canadian interest
rates for the year ended October 31, 2016, 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, corresponding to an interest rate
environment that is floored at 0%.
WHY MARGINS ON AVERAGE EARNING ASSETS
FLUCTUATE OVER TIME
As previously noted, 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;
• 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 create 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 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 certain 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 liquidity 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 2017 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. This definition includes legal risk, but excludes
strategic and reputational risk.
Operational risk is inherent in all of the Bank’s business activities,
including the practices and controls used to manage other risks such
as credit, market, and liquidity risk. Failure to manage operational risk
can result in significant financial loss, reputational harm, or regulatory
censure and penalties.
The Bank actively mitigates and manages operational risk in order
to 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.
In fiscal 2017, operational risk losses remain within the Bank’s risk
appetite. Refer to Note 27 of the Consolidated Financial Statements
for further information on material legal or regulatory actions.
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 is designed to ensure 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.
In addition to the framework, Operational Risk Management designs
and maintains the Bank’s operational risk policies. These policies
govern the activities of the corporate areas responsible for the
management and appropriate oversight of business continuity and
incident management, third party management, data management,
financial crime and fraud management, project management, and
technology, information and cyber security management.
The senior management of individual business units and corporate
areas 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 and corporate area 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.
88
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 determine 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 facilitate the Bank’s analysis
and management of its risks and inform the assessment of 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 used to assess
the likelihood and loss impact for significant 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 promote management accountability and direct the
appropriate level of attention to 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 so 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 manages these risks to assure
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 leading 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.
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS Data Asset Management
The Bank’s data is an asset with economic and strategic business
value that should be appropriately managed and reported. Inconsistent
data management practices may compromise TD’s critical data and
information assets which could result in real financial and reputational
impacts. The Bank’s Office of the Chief Data Office (OCDO), Corporate
and Technology partners develop and implement enterprise wide
business and risk management practices that describe how data and
information assets are managed, governed, used, and protected.
Business Continuity and Incident Management
The Bank maintains an enterprise-wide Business Continuity and
Incident Management Program that supports management’s ability to
operate TD’s businesses and operations (including providing customers
access to products and services) in the event of a business disruption
incident. All areas of the Bank are required to maintain and regularly
test business continuity plans to facilitate the continuity and recovery
of business operations. The Bank’s Program is supported by an incident
management structure so that the appropriate level of leadership,
oversight and management is applied to incidents affecting the Bank.
Third Party 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 is designed to manage third-party activities
throughout the life cycle of an arrangement and ensure the level of
risk management and senior management oversight is appropriate to
the size, risk, and criticality 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 lead the
development and implementation of enterprise-wide financial crime
and fraud management strategies, policies, and practices. TD employs
prevention, detection and monitoring 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 Advanced
Measurement Approach, a risk-sensitive capital model, along with the
Standardized Approach (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.
Model Risk
Model risk is the potential for adverse consequences arising from
decisions based on incorrect or misused models and model-like tools,
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 approves the Bank’s Model Risk Management Framework
bi-annually and the Model Risk Policy annually.
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 also 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, set model performance monitoring standards, 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.
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.
89
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS 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
designed 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 are designed to support strong
independent oversight and control of risk within the insurance
business. The TD Insurance Risk Committee and its sub committees
provide critical oversight of the risk management activities within
the insurance business and monitor 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 claim 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 mostly 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 within the reinsurance business to manage
concentration risk.
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 monetize 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 Liquidity Adequacy Requirements (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 ready access to
wholesale funding markets across diversified terms, funding types,
and currencies that is designed 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 is
designed to ensure low exposure to identified sources of liquidity risk
and compliance with regulatory requirements.
90
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS LIQUIDITY RISK MANAGEMENT RESPONSIBILITY
The Bank’s ALCO oversees the Bank’s liquidity risk management
program. It is designed to ensure 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 annually and the related
policies bi-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. 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 areas are responsible for measuring, monitoring, and
managing liquidity risks for major business segments:
• Risk Management is responsible for maintaining the liquidity risk
management policy and asset pledging policy, along with associated
limits, standards, and processes which are designed to ensure that
consistent and efficient liquidity management approaches are
applied across all of the Bank’s operations. Enterprise Market Risk
Control provides oversight of liquidity risk across the enterprise
and provides independent risk assessment and effective challenge
of liquidity risk.
• TBSM Liquidity Management 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 TBSM Canada, 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 maintains an internal view for measuring and managing
liquidity that uses an assumed “Severe Combined Stress Scenario”
(SCSS) lasting for a 90-day period. The SCSS models potential liquidity
requirements during a crisis resulting in a loss of confidence in TD’s
ability to meet obligations as they come due. In addition to this Bank-
specific event, the SCSS 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 decrease in the marketability of assets.
TD’s liquidity policy stipulates that the Bank must maintain a sufficient
level of liquid assets to cover identified liquidity requirements at all
times throughout the SCSS. The Bank calculates liquidity requirements
for the SCSS related to the following conditions:
• wholesale funding maturing in the next 90 days. Under SCSS,
the Bank assumes loss of access to wholesale funding markets
for up to 90 days, as a result, maturing debt will be repaid instead
of rolled over;
• 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. 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 segments 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 2017 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 1
SUMMARY OF LIQUID ASSETS BY TYPE AND CURRENCY1
(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
transactions2
Total liquid assets
Encumbered Unencumbered
liquid assets2
liquid assets
October 31, 2017
$
–
40,637
45
9,910
2,902
–
220
53,714
–
29,333
494
62,720
1,240
–
2,572
96,359
$
2,202
56,161
37,223
19,775
7,250
9,634
2,197
134,442
44,886
60,091
44,197
117,992
64,107
21,230
14,731
367,234
–%
$
11
8
4
2
2
–
27
9
12
9
23
13
4
3
73
421
33,198
3,888
12,945
576
–
133
51,161
42
29,826
9,560
39,233
4,823
–
2,119
85,603
$
1,781
22,963
33,335
6,830
6,674
9,634
2,064
83,281
44,844
30,265
34,637
78,759
59,284
21,230
12,612
281,631
Bank-owned
liquid assets
$
2,202
15,524
37,178
9,865
4,348
9,634
1,977
80,728
44,886
30,758
43,703
55,272
62,867
21,230
12,159
270,875
Total
$ 351,603
$ 150,073
$ 501,676
100%
$ 136,764
$ 364,912
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
$
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
$
–
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
$
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
October 31, 2016
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
1 Positions stated include gross asset values pertaining to secured borrowing/lending
2 Liquid assets include collateral received that can be re-hypothecated or
and reverse-repurchase/repurchase businesses.
otherwise redeployed.
The increase of $25.2 billion in total unencumbered liquid assets from
October 31, 2016, was mainly due to regular wholesale business
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 2
SUMMARY OF UNENCUMBERED LIQUID ASSETS BY BANK, SUBSIDIARIES, AND BRANCHES
(millions of Canadian dollars)
The Toronto-Dominion Bank (Parent)
Bank subsidiaries
Foreign branches
Total
92
October 31
2017
$ 117,682
210,757
36,473
$ 364,912
As at
October 31
2016
$ 115,816
201,945
21,968
$ 339,729
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
The Bank’s monthly average liquid assets (excluding those held in
insurance subsidiaries) for the years ended October 31, 2017, and
October 31, 2016, are summarized in the following table.
T A B L E 5 3
SUMMARY OF AVERAGE LIQUID ASSETS BY TYPE AND CURRENCY1
(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
transactions2
$
–
39,826
46
11,282
3,059
1,171
245
55,629
–
38,148
Bank-owned
liquid assets
$
3,543
16,991
37,291
9,804
3,636
8,896
2,004
82,165
43,773
29,555
40,262
53,080
60,637
17,998
13,864
259,169
478
61,001
1,331
5,372
3,366
109,696
Total liquid assets
Encumbered Unencumbered
liquid assets2
liquid assets
October 31, 2017
1%
$
$
3,543
56,817
37,337
21,086
6,695
10,067
2,249
137,794
43,773
67,703
40,740
114,081
61,968
23,370
17,230
368,865
11
7
4
1
2
1
27
9
13
8
23
12
5
3
73
392
33,096
3,637
13,269
488
1,719
134
52,735
48
36,493
$
3,151
23,721
33,700
7,817
6,207
8,348
2,115
85,059
43,725
31,210
9,317
43,041
5,384
4,085
2,321
100,689
31,423
71,040
56,584
19,285
14,909
268,176
Total
$ 341,334
$ 165,325
$ 506,659
100%
$ 153,424
$ 353,235
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
$
2,879
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
$
–
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
$
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
October 31, 2016
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
1 Positions stated include gross asset values pertaining to secured borrowing/lending
2 Liquid assets include collateral received that can be re-hypothecated or
and reverse-repurchase/repurchase businesses.
otherwise redeployed.
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 4
SUMMARY OF AVERAGE UNENCUMBERED LIQUID ASSETS BY BANK, SUBSIDIARIES, AND BRANCHES
(millions of Canadian dollars)
The Toronto-Dominion Bank (Parent)
Bank subsidiaries
Foreign branches
Total
Average for the years ended
October 31
2017
$ 117,477
206,444
29,314
$ 353,235
October 31
2016
$ 116,541
200,966
22,944
$ 340,451
93
TD BANK GROUP ANNUAL REPORT 2017 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 5
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
–
$
3,708
62,803
–
–
21,949
–
–
–
–
–
–
434
$ 88,894
106,727
43,607
4,451
154,785
$ 243,679
$
Other4
–
41
12,105
–
–
55,179
–
–
–
–
–
–
–
$ 67,325
–
229
–
229
$ 67,554
Available as
collateral5
–
$
43,577
243,633
–
–
71,959
–
–
–
–
–
–
–
$ 359,169
28,973
13,960
18,534
61,467
$ 420,636
$
Other6
3,971
3,859
7,183
56,195
134,429
463,504
17,297
7,784
16,156
2,618
5,313
2,497
42,801
$ 763,607
(134,429)
–
(11,282)
(145,711)
$ 617,896
Total on-balance sheet assets
Total off-balance sheet items
Total
$ 81,705
104,407
$ 186,112
$ 66,329
569
$ 66,898
$ 335,959
49,748
$ 385,707
$ 692,974
(94,799)
$ 598,175
As at
October 31, 2017
Encumbered
Total
assets as a %
assets of total assets
$
3,971
51,185
325,724
56,195
134,429
612,591
17,297
7,784
16,156
2,618
5,313
2,497
43,235
$ 1,278,995
–%
0.3
5.9
–
–
6.0
–
–
–
–
–
–
–
12.2%
October 31, 2016
$ 1,176,967
12.6%
1 Certain comparative amounts have been restated to conform with the
6 Assets that cannot be used to support funding or collateral requirements
presentation adopted in the current period.
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.
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.
3 Represents assets that have been posted externally to support the Bank’s
8 Assets reported in Securities purchased under reverse repurchase
obligations in 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.
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
4 Assets supporting TD’s long-term 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.
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 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
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 designed to ensure TD is
able to provide additional collateral required by trading counterparties
in the event of a three-notch downgrade in the Bank’s credit ratings.
Severe downgrades 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 7
ADDITIONAL COLLATERAL REQUIREMENTS
FOR RATING DOWNGRADES 1
(millions of Canadian dollars)
One-notch downgrade
Two-notch downgrade
Three-notch downgrade
Average for the years ended
October 31 October 31
2016
2017
$ 112
141
382
$ 141
168
386
1 The above collateral requirements are based on trading counterparty Credit
Support Annex (CSA) and the Bank’s credit rating across applicable rating agencies.
LIQUIDITY COVERAGE RATIO
The Bank must maintain the LCR above 100% under normal operating
conditions in accordance with the OSFI LAR requirement. The Bank’s
LCR is calculated according to the scenario parameters in the LAR
guideline, including prescribed HQLA eligibility criteria and haircuts,
deposit run-off rates, and other outflow and inflow rates. HQLA eligible
for the LCR calculation under the LAR are primarily central bank
reserves, sovereign issued or guaranteed securities, and high quality
securities issued by non-financial entities.
LIQUIDITY STRESS TESTING AND CONTINGENCY
FUNDING PLANS
In addition to the SCSS, 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 6
CREDIT RATINGS1
Rating agency
Moody’s
S&P
DBRS
As at
October 31, 2017
Senior
Short-term
long-term
debt rating debt rating
P-1
A-1+
R-1 (high)
Aa2
AA-
AA
Outlook
Negative
Stable
Stable
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 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table summarizes the Bank’s daily LCR position for the
fourth quarter of 2017.
T A B L E 5 8
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 ratio
Average for the three months ended
October 31, 2017
Total
unweighted
value
(average)2
Total
weighted
value
(average)3
$
n/a4
$ 209,086
$ 420,674
184,410
236,264
233,788
94,611
108,482
30,695
n/a4
169,792
26,852
7,518
135,422
9,292
519,342
n/a4
$
$ 29,158
5,532
23,626
112,631
22,465
59,471
30,695
7,377
44,821
9,940
7,518
27,363
4,160
8,174
$ 206,321
$ 149,433
14,844
9,311
$ 173,588
$ 15,575
7,499
9,311
$ 32,385
Average for the three months ended
October 31
2017
July 31
2017
Total adjusted
value
$ 209,086
173,936
Total adjusted
value
$ 213,024
172,984
120%
124%
1 The LCR for the quarter ended October 31, 2017, is calculated as an average
7 Includes uncommitted credit and liquidity facilities, stable value money market
of the 63 daily data points in the 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
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.
or inflow and outflow rates, as prescribed by OSFI’s LAR guideline.
8 Adjusted HQLA includes both asset haircut and applicable caps, as prescribed
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.
by the 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 LAR (inflows are capped at 75% of outflows).
The Bank’s average LCR of 120% for quarter ended October 31, 2017,
continues to meet the regulatory requirement. The 4% change over
the prior quarter’s LCR was mainly due to normal balance sheet
growth and optimization of the Bank’s surplus liquidity
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, 2017, was $209 billion
(July 31, 2017 – $213 billion), with level 1 assets representing 80%
(July 31, 2017 – 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 2017 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 assets be funded to
the appropriate term and to a prudent diversification profile.
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.
T A B L E 5 9
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
2016
2017
$ 350,446 $ 324,606
336,302 318,503
99
795
$ 686,847 $ 643,904
The Bank actively maintains various registered 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 also raises term funding through
Canadian deposit Notes, Canadian NHA MBS, Canada Mortgage
Bonds, debt issued in Australia, and notes backed by credit card
receivables (Evergreen Credit Card Trust). The Bank’s wholesale
funding is diversified by geography, by currency, and by funding types.
The Bank raises short term (1 year and less) funding using certificates
of deposit and commercial paper.
The following table summarizes the registered term funding programs
by geography, with the related program size.
Canada
United States
Europe
Capital Securities Program ($10 billion)
Canadian Senior Medium Term Linked
Notes Program ($2 billion)
HELOC ABS Program (Genesis Trust II)
($7 billion)
U.S. SEC (F-3) Registered Capital and
Debt Program (US$40 billion)
United Kingdom Listing Authority (UKLA)
Registered Legislative Covered Bond
Program ($40 billion)
UKLA Registered European Medium Term
Note Program (US$20 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, 2017, was $109.3 billion (October 31, 2016 –
$112.4 billion).
T A B L E 6 0
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
2016
2017
37%
42
14
4
3
100%
53%
27
15
5
100%
40%
41
13
3
3
100%
53%
26
16
5
100%
1 Mortgage securitization excludes the residential mortgage trading business.
97
TD BANK GROUP ANNUAL REPORT 2017 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, 2017, and
October 31, 2016, based on remaining term to maturity.
T A B L E 6 1
WHOLESALE FUNDING
(millions of Canadian dollars)
Less than
1 to 3
1 month months months
3 to 6 6 months
to 1 year
As at
October 31 October 31
2016
2017
Up to Over 1 to
2 years
1 year
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
224 $ 17,990 $
2,119
10,279
5,200
–
–
52
–
–
–
5,433
$ 11,653 $ 4,605 $ 1,508 $
715
21,289
5,789
–
–
1,786
857
–
–
2,208
– $ 17,990 $ 13,133
2,814
–
54,544
–
21,411
–
–
–
28,855
26,920
30,406
18,220
60,259
28,264
10,891
9,528
5,469
1,395
3,566
11
$ 34,736 $ 37,249 $ 41,553 $ 31,031 $ 144,569 $ 23,057 $ 84,338 $ 251,964 $ 231,348
– $
–
97
840
–
2,399
4,892
12,407
–
2,419
3
80
13,261
6,766
–
–
2,681
7,026
–
731
262
786
20,539
6,686
–
–
1,202
9,016
–
1,290
526
3,700
65,465
25,281
–
29,319
28,833
57,570
9,528
5,835
8,443
3,700
65,368
24,441
–
–
5,721
16,899
–
2,021
8,429
$ 5,485 $ 3,994 $ 3,018 $ 3,674 $ 16,171 $ 9,713 $ 46,546 $ 72,430 $ 64,749
29,251
37,792 179,534 166,599
$ 34,736 $ 37,249 $ 41,553 $ 31,031 $ 144,569 $ 23,057 $ 84,338 $ 251,964 $ 231,348
27,357 128,398
38,535
13,344
33,255
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 $8.4 billion
(October 31, 2016 – $3.5 billion).
Excluding the Wholesale Banking mortgage aggregation business, the
Bank’s total 2017 mortgage-backed securities issuance was $2.4 billion
(2016 – $1.9 billion), and other asset-backed securities was $1.4 billion
(2016 – $2 billion). The Bank also issued $8.7 billion of unsecured
medium-term notes (2016 – $22.2 billion) and $4.6 billion of covered
bonds (2016 – $9.1 billion), in various currencies and markets during
the year ended October 31, 2017. This includes unsecured medium-term
notes and covered bonds issued but settling subsequent to year end.
REGULATORY DEVELOPMENTS CONCERNING LIQUIDITY
AND FUNDING
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. The Budget Implementation Act
providing amendments to the CDIC Act, Bank Act and other statutes
to allow for bail-in, was passed in June 2016. On June 16, 2017, the
Government of Canada published in draft for comment regulations
under the CDIC Act and the Bank Act (the Bail-in Regulations) setting
forth further details in respect of the bail-in regime. The Bail-in
Regulations will come into force 180 days following the publication
of the final version of the Bail-in Regulations. On June 16, 2017, OSFI
published for comment the draft TLAC guideline setting forth its
expectations in respect of D-SIB’s minimum capacity to absorb losses.
The TLAC guideline sets forth requirements for a risk-based TLAC ratio
and a TLAC leverage ratio beginning November 1, 2021.
In October 2014, the BCBS released the final standard for
“Basel III: the net stable funding ratio” with an implementation date
of January 1, 2018. 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 March 2017, OSFI provided notification that due to the
uncertainty of implementation in key foreign markets, the timeline of
domestic NSFR reporting for Canadian institutions has been extended
to January 2019. Relevant areas of the LAR guideline have been
updated to reflect the implementation delay, with OSFI planning to
meet with industry stakeholders in the coming months to discuss NSFR
standards as they relate to the Canadian market.
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 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.
98
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.
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 6 2
REMAINING CONTRACTUAL MATURITY
(millions of Canadian dollars)
As at
October 31, 2017
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
No
specific
5 years maturity
Over
$
3,971 $
– $
– $
49,825
721
6,358
232
652
83
742
3,433
7,744
269
4,020
824
13
3,178
5,016
402
1,794
2,709
– $
6
4,090
2,379
– $
7
4,007
2,657
– $
–
9,092
6,790
– $
–
22,611
13,500
– $
–
17,669
11,751
– $
592
39,117
–
353
3,867
2,583
233
3,121
1,874
370
15,622
12,805
1,059
72,964
22,697
897
42,083
27,788
217
2,288
–
Total
3,971
51,185
103,918
56,195
4,032
146,411
71,363
84,880
33,930
11,433
3,068
1,086
24
8
–
–
134,429
905
701
–
20,255
–
21,861
–
21,861
14,822
–
–
–
2,677
1,342
–
7,351
15
11,385
–
11,385
2,372
–
–
–
8,869
3,329
–
7,079
–
19,277
–
19,277
96
–
–
–
16,042
3,760
–
7,155
2
26,959
–
26,959
5
–
–
–
13,264
3,315
–
9,621
16
26,216
–
26,216
2
–
–
–
34,778
25,651
–
59,107
2,897
36,284 109,260
44,850
12,902
–
–
59,870
14,623
248
31
–
61,251
33,007
15,917
–
63,840 214,228 122,433 110,175
(3,783)
63,840 214,228 122,433 106,392
–
7,784
16,156
2,618
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
222,079
157,101
33,007
200,978
3,209
616,374
(3,783)
612,591
17,297
7,784
16,156
2,618
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,313
2,497
5,313
2,497
29,971
2,393
29,971
13,264
$ 215,769 $ 65,319 $ 44,970 $ 43,414 $ 39,302 $ 108,681 $ 347,365 $ 222,761 $ 191,414 $ 1,278,995
–
8,440
–
1,052
–
140
–
138
–
298
–
99
–
600
–
104
$ 10,349 $ 20,834 $ 25,071 $ 7,192 $ 12,820 $
4,587
139
1,981
–
2,200
709
7,230
1,118
5,307
4
1,494 $
6,868
1,832
1,469 $
711 $
11,111
5,966
11,930
2,989
3
3
1
–
–
–
–
1
– $
–
–
–
4,538
12,375
23,899
40,812
14,822
1,348
6,472
4,766
18,868
30,106
2,372
3,003
6,424
1,354
15,492
23,270
96
770
6,619
16
4,488
11,123
5
624
6,740
91
6,392
13,223
2
765
9,487
3
15,783
25,273
–
3,948
10,162
–
43,465
53,627
–
11,677
65 417,648
7,271
11
14,555 195,840
14,631 620,759
–
1,426
–
11,921
79,940
51,214
12,757
8
468,155
25,887
338,782
832,824
17,297
35,482
72,361
48
11,057
668
4,826
1,062
219
708
20
1,264
64
3,060
44
6,287
–
2,979
–
–
88,591
16,076
32,851
123
3,548
–
–
32,851
6,775
20,462
9,528
75,190
$ 181,576 $ 78,922 $ 61,941 $ 23,373 $ 31,782 $ 46,399 $ 93,476 $ 56,600 $ 704,926 $ 1,278,995
–
1,660
5,891
–
75,190
–
1,738
1,557
–
–
–
417
1,290
–
–
–
926
2,934
–
–
–
1,097
813
9,528
–
–
182
2,349
–
–
–
294
1,825
–
–
–
338
255
–
–
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
Credit and liquidity commitments6,7
Operating lease commitments
Other purchase obligations
Unconsolidated structured
entity commitments
Total off-balance sheet commitments
$ 20,007 $ 16,715 $ 14,945 $ 11,095 $ 8,626 $ 24,252 $ 87,616 $
6,733 $
$ 19,208 $ 15,961 $ 14,402 $ 10,536 $ 7,934 $ 22,423 $ 85,183 $
79
24
696
158
102
494
236
79
228
234
59
266
232
52
881
224
2,115
318
3,228 $
3,505
–
2,325 $ 181,200
7,440
858
–
–
408
724
–
–
–
2,816
2,325 $ 192,314
1 Amount has been recorded according to the remaining contractual maturity
5 Includes $89 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
$2 billion in ‘over 1 to 2 years’, $19 billion in ‘over 2 to 5 years’, and $8 billion
in ‘over 5 years’.
maturities of $2 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’, $26 million in ‘over 1 to 2 years’, $25 million
in ‘over 2 to 5 years’, and $10 million in ‘over 5 years’.
6 Includes $123 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.
99
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 6 2
REMAINING CONTRACTUAL MATURITY (continued)
(millions of Canadian dollars)
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
As at
October 31, 2016
No
specific
maturity
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
Credit and liquidity commitments6,7
Operating lease commitments
Other purchase obligations
Unconsolidated structured
entity commitments
$
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
–
–
–
31,066
24,058
–
59,006
1,409
52,123 108,256
35,505
14,724
–
–
59,765
16,402
78
66
–
60,856
31,914
14,294
–
83,315 203,604 115,539 107,064
(3,873)
83,315 203,604 115,539 103,191
–
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
17,436
12,790
$ 175,866 $ 49,751 $ 37,055 $ 32,254 $ 27,711 $ 120,587 $ 330,729 $ 217,429 $ 185,585 $ 1,176,967
–
8,301
–
150
–
269
–
153
–
97
–
686
–
128
–
518
3,846
5,741
14,654
24,241
13,589
1,066
39,986
–
$ 13,002 $ 14,604 $ 23,930 $ 13,070 $ 12,071 $
4,890
334
1,962
226
5,526
–
6,623
594
3,066
678
1,103 $
8,106
1,944
1,226 $
780 $
17,779
4,989
17,473
3,725
73
41
13
25
37
–
–
1
– $
–
–
–
6,024
3,056
15,307
24,387
2,046
1,118
7,794
231
8,064
16,089
67
1,127
6,038
77
7,563
13,678
3
1,311
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
12
132 389,052
8,068
12,492 189,645
12,636 586,765
–
1,096
–
11,869
79,786
65,425
12,490
190
439,232
17,201
317,227
773,660
15,706
33,115
5,315
141
2,545
481
540
570
507
1,108
40
3,989
40
8,597
–
3,032
–
–
48,973
17,918
17,857
145
2,960
–
–
17,857
7,046
19,696
10,891
74,214
$ 118,445 $ 57,332 $ 51,523 $ 33,595 $ 25,191 $ 51,263 $ 107,182 $ 62,272 $ 670,164 $ 1,176,967
–
1,057
808
10,891
–
–
1,700
6,389
–
74,214
–
1,891
2,551
–
–
–
974
2,535
–
–
–
216
2,247
–
–
–
313
1,734
–
–
–
372
196
–
–
–
378
276
–
–
Total off-balance sheet commitments
$ 17,558 $ 18,211 $ 13,721 $ 10,170 $ 8,614 $ 20,385 $ 84,312 $
7,427 $
$ 17,447 $ 16,756 $ 12,593 $ 9,479 $ 7,409 $ 19,097 $ 82,016 $
80
31
159
116
–
1,180
237
61
830
235
61
395
232
50
896
180
2,173
123
3,484 $
3,943
–
2,271 $ 170,552
7,955
622
–
–
923
212
–
–
–
3,540
2,271 $ 182,669
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 2017 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 works to ensure
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 in a manner designed 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.
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 RWA and Leverage
exposure limits. Capital generation and usage are 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.
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.
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.
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 and the risk associated with
failing to obtain and/or enforce contractual commitments from third
parties. 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, Economic Sanctions, and Bribery
and Corruption risk (“LRC requirements”). 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 are 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 interact regularly with senior
executives 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
are designed to ensure the Bank is in compliance with applicable
laws and regulations (as well as its own policies). In addition, senior
management of the Regulatory Risk group has established periodic
reporting to the Board and its committees.
101
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 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 oversight function;
assesses the adequacy of, adherence to and effectiveness of the
Bank’s regulatory compliance management controls; and supports
the Chief Compliance Officer in providing 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: acts as an independent regulatory
compliance and risk management oversight function and is responsible
for regulatory compliance and the broader prudential risk management
components of AML programs; monitors, evaluates, and reports on
AML program controls, design, and execution; and 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 and regulatory
findings remediation, 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 where
significant reputational risk profiles have been identified and escalated.
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, including climate change, 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.
102
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS 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.
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 Indigenous 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.
TD is a member of the United Nations Environment Programme-
Finance Initiative (UNEP-FI), and is participating in a working group
consisting of 16 member banks with the objective of piloting the
recommendations put forth by the Financial Stability Board’s (FSB)
Task-Force on Climate-Related Financial Disclosures (TCFD).
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, protocols and interaction guidelines 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, protocols and
guidelines are aligned between the Bank and TD Ameritrade to
coordinate necessary intercompany information flow. The Bank has
designated the Group Head and Chief Financial Officer to have
responsibility for the TD Ameritrade investment. The Group President
and Chief Executive Officer and the Group Head and Chief Financial
Officer have regular meetings with TD Ameritrade’s 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.
As required pursuant to the Federal Reserve Board’s “enhanced
prudential standards” under Regulation YY, TD’s investment in TD
Ameritrade is held by TDGUS, the IHC. The activities and interactions
described above are inclusive of those that fulfill TDGUS’ risk
management responsibilities under Regulation YY.
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.
103
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS ACCOUNTING STANDARDS AND POLICIES
Critical Accounting Policies and 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 2017 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.
ACCOUNTING POLICIES AND ESTIMATES
The Bank’s 2017 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 2017 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.
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
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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.
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.
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS 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
2017 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 accumulated 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. 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 recoverable amount 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 recoverable
amount of CGUs, and the use of different assumptions and estimates
in the 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. 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 22.
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TD BANK GROUP ANNUAL REPORT 2017 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, Financial
Instruments: Recognition and Measurement (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 as of the date of adoption, 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. In October 2017, the
IASB published amendments to IFRS 9 relating to prepayment features
with negative compensation. The amendments are to be applied
retrospectively to annual reporting periods beginning on or after
January 1, 2019, which will be November 1, 2019 for the Bank with
earlier application permitted. The Bank is continuing to assess the
impact of the amendments, however they are not expected to have
a material impact.
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 was 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 was
established with regular updates provided to the Executive Steering
Committee on key decisions. IFRS 9 overview sessions were held at
various levels within the Bank, including the Audit and Risk
Committees of the Board.
The Bank enhanced its governance framework and 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 includes representation from Risk Management, Finance,
and TD 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. Controls surrounding IFRS 9 processes continue
to be developed and refined. 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. Implementation of the
impairment solution is substantially complete.
As at October 31, 2017, the Bank’s current estimate of the adoption
of IFRS 9, subject to refinement, is an overall reduction to Shareholders’
Equity of approximately $36 million, of which $96 million is attributable
to the adoption of the expected credit loss methodology, partially offset
by $60 million due to classification and measurement changes. Based
on the current regulatory requirements, the expected impact to CET1
capital is a decrease of 15 bps almost exclusively due to the Basel I
regulatory floor.
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 has
assessed the cash flow characteristics for all financial assets under the
scope of IFRS 9. The classification and measurement of financial assets
remain largely unchanged under IFRS 9, except for equity securities
that are required to be measured at fair value under IFRS 9.
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TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS Impairment
Expected Credit Loss Model
IFRS 9 introduces a new impairment model based on 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, ECL 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.
The expected credit loss model requires the recognition of impairment
at an amount equal to the probability-weighted 12-month ECL or
lifetime ECL 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 ECL otherwise 12-month ECL
are measured, which represent the portion of lifetime ECL that are
expected to occur based on default events that are possible within
12 months after the reporting date. IFRS 9 introduces the rebuttable
presumption that credit risk has increased significantly since initial
recognition when contractual payments are more than 30 days past
due. The Bank does not expect to rebut this presumption. 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 ECL.
The movement between 12-month and lifetime ECL and incorporation
of forward-looking information may increase the volatility of provisions
across the product groups, under IFRS 9 compared to IAS 39. The IFRS 9
model consists of three stages: Stage 1 – 12-month ECL for performing
instruments, Stage 2 – Lifetime ECL for performing instruments that
have experienced a significant increase in credit risk, and Stage 3 –
Lifetime ECL for non-performing financial assets. The Stage 3 population
is expected to largely align with the impaired population under IAS 39
and the write-off policy is expected to remain the same.
Measurement of Expected Credit Losses
ECL 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 the Bank’s credit risk assessment.
Expected life is the maximum contractual period the Bank is exposed
to credit risk, including extension options for which the borrower has
unilateral right to exercise. For certain financial instruments that include
both a loan and an undrawn commitment and the Bank’s contractual
ability to demand repayment and cancel the undrawn commitment does
not limit the Bank’s exposure to credit losses to the contractual notice
period, ECL will be measured over the period the Bank is exposed to
credit risk. Forward-looking macroeconomic factors are incorporated
in the risk parameters as relevant. Examples of relevant macroeconomic
factors include unemployment rates, housing price index, interest rates,
and gross domestic product.
IFRS 9 requires ECL 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 ECL, 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 ECL, particularly non-linearity and asymmetric sensitivities
within portfolios to estimate effects of changes in parameters on ECL.
The Bank will incorporate three forward-looking macroeconomic
scenarios from TD Economics in its ECL process: a base scenario, an
upside scenario, and a downside scenario. The base scenario will be
updated quarterly. Upside and downside scenarios will be generated
quarterly using realistically possible outcomes that are statistically
derived relative to the base scenario based on historical distribution.
TD Economics will apply judgment to determine and recommend
probability weights to each scenario on a quarterly basis. The proposed
macroeconomic scenarios and probability weightings will be subject
to robust management review by the added governance committee
overseeing forecasting multiple economic scenarios and associated
probabilities mentioned above. ECL calculated under each of the three
approved scenarios is applied against the respective probability
weightings to determine the probability-weighted ECL.
Assessment of Significant Increase in Credit Risk
For retail exposures, significant increase in credit risk will be assessed
based on changes in the 12-month 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. Criteria for
assessing significant increase in credit risk are defined at the product
or portfolio level and vary based on the exposure’s origination credit
risk. The criteria include relative changes in PD, absolute PD backstop,
and delinquency backstop when contractual payments are more than
30 days past due. Credit risk has increased significantly since initial
recognition when one of the criteria is met. Exposures are considered
credit-impaired when they are 90 days or more past due. ECL 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 (borrower risk
rating or “BRR”) since initial recognition, using a combination of
historical, current, and forward-looking information specific to the
borrower, industry, and sector. Criteria for assessing significant increase
in credit risk are defined at the portfolio level and vary based on the
internal risk rating of the exposure at origination. Criteria include
relative changes in internal risk rating, absolute risk rating backstop,
and delinquency backstop when contractual payments are more than
30 days past due. Credit risk has increased significantly since initial
recognition when one of the criteria is met. Default is defined as BRR 9
for non-retail exposures. ECL 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, ECL for
significant non-retail impaired exposures will be measured individually.
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TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS Incorporation of Experienced Credit Judgment
Management will exercise experienced credit judgment in assessing if
an exposure has experienced significant increase in credit risk and in
determining the amount of expected credit losses at each reporting
date by considering reasonable and supportable information that is not
already included in the quantitative models.
Comparison of Regulatory Expected Loss Model and IFRS 9 Expected
Credit Loss Model
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:
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.
PD
LGD
EAD
Other
Expected credit losses are discounted from the default date to the
reporting date.
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 has enhanced the qualitative hedge accounting
disclosures ahead of the required IFRS 7 related amendments.
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.
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. 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
plans to apply the standard on a modified retrospective basis,
recognizing the cumulative effect of initially applying the standard as
an adjustment to the opening balance of retained earnings as of
November 1, 2018. The Bank is continuing to assess the impact of the
new standard on its financial statements, including the presentation of
certain revenue and expense items, the timing and measurement of
revenue recognition, as well as additional qualitative and quantitative
disclosures. The Bank does not currently expect a significant impact as
a result of adopting the new standard.
Capital Impact
In October 2016, the BCBS issued a discussion paper, “Regulatory
treatment of accounting provisions”, which provides policy options
for long-term regulatory treatment of provisions. In March 2017, the
BCBS issued “Regulatory treatment of accounting provisions – interim
approach and transitional arrangements”. This standard retains, 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 Bank is
awaiting final guidance from OSFI as it relates to the BCBS standard.
In August 2017, OSFI released for public consultation revisions to the
CAR guideline for implementation in the first quarter of 2018.
Based on the current regulatory requirements, the expected impact to
CET1 capital is a decrease of 15 bps almost exclusively due to the Basel I
regulatory floor. The IFRS 9 impact from the adoption of the expected
credit loss methodology is offset by the decrease in the shortfall
deduction and by the IFRS 9 classification and measurement impact.
Scope
The new impairment model will apply to all financial assets measured
at amortized cost or FVOCI with the most significant impact 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.
IFRS 9 Impairment Program
The Bank has defined the functional requirements for the calculation
of ECL and has integrated 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. During fiscal 2017, the Bank developed,
tested, and validated its new impairment models and related processes
and controls, and assessed the quantitative impact of applying the ECL
approach. The Bank also updated its accounting and risk policies,
implemented changes to financial reporting systems and processes and
is developing its first quarter of 2018 transitional disclosures. The Bank
will continue to develop and implement remaining financial and
regulatory disclosures related to IFRS 9 in fiscal 2018.
108
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS Leases
In January 2016, the IASB issued IFRS 16, Leases (IFRS 16), which
will replace IAS 17, Leases (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
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 are 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.
Insurance Contracts
In May 2017, the IASB issued IFRS 17, Insurance Contracts (IFRS 17),
which replaces the guidance in IFRS 4, Insurance Contracts. IFRS 17
establishes a new model for recognizing and measuring insurance
policy obligations, premium revenue, and claims-related expenses, as
well as providing guidance on presentation and disclosure. IFRS 17 will
be effective for the Bank’s annual period beginning November 1, 2021.
The Bank is currently assessing the impact of adopting this standard.
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, 2017. Based
on that evaluation, except as outlined in the “Limitation on Scope of
Design” below, 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, 2017.
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, 2017. 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, 2017.
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, except as outlined
in the “Limitation on Scope of Design” below, management has
concluded that as at October 31, 2017, the Bank’s internal control
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the year and quarter ended October 31, 2017, 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.
LIMITATION ON SCOPE OF DESIGN
Management has limited the scope of the design of the Bank’s
disclosure controls and procedures (DC&P) and internal control
over financial reporting (ICFR) to exclude the controls, policies
and procedures of Scottrade Bank, the results of which are included
in the 2017 Consolidated Financial Statements of the Bank since the
acquisition date of September 18, 2017. The scope limitation is in
accordance with Canadian and U.S. securities laws, which allow an
issuer to limit its design of DC&P (in the case of Canadian securities
laws) and ICFR to exclude the controls, policies and procedures
of a company acquired not more than 365 days before the end of
the financial period to which the certificate relates. Scottrade Bank
constituted less than 2% of the total consolidated assets as at
October 31, 2017 and less than 1% of the total consolidated net income
for the year ended October 31, 2017. Additional information relating to
Scottrade Bank is provided in the “Significant Events in 2017” section.
109
TD BANK GROUP ANNUAL REPORT 2017 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 3
INVESTMENT PORTFOLIO – Securities Maturity Schedule 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
2015
2017
2016
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
$ 3,307 $ 7,712 $ 4,127 $
7,685
4,112
1.80% 2.07%
3,309
1.72%
595 $
590
2.47%
$
484
504
2.67%
– $ 16,225 $ 14,717 $ 14,431
–
14,450
–%
14,671
1.79%
16,200
1.91%
1.48%
946
944
2.06%
1,839
1,828
1,655
1,637
3,473
3,442
2.49% 2.76%
2.97%
9
8
4.44%
–
–
–%
7,063
7,020
17,433
17,312
2,762
2,755
1.07% 1.76%
1.74%
–
–
–%
253
252
2.18 %
4,109
4,045
1,706
1,671
2,628
2,629
12,326
12,398
2.07% 2.44%
2.22%
2.16%
4,178
4,180
0.07%
7,495
7,473
8,889
8,851
1.38% 1.87%
560
563
2.26%
1,185
1,179
2.29%
1,935
1,924
5,556
5,518
1.67%
1.61%
136
136
1.70%
–
–
–%
–
–
–%
1,157
1,158
1.09%
4,592
4,592
9,017
8,984
6,821
6,768
8,394
8,377
1.50% 1.64%
2.21%
2.07%
–
–
–%
–
–
–%
–
–
–%
1,715
1,706
–
–
–%
1,963
1,955
2.41%
2,995
2,973
2,928
2,905
1,882
1,890
2.62% 2.48%
2.31%
2.51%
22
30
1.19%
7,922
7,859
–
–
–%
2.71%
7,851
7,871
2.73%
7,185
7,233
1.98%
–
–
–%
–
–
–%
27,258
27,087
1.58%
21,022
20,995
2.17%
21,122
21,067
–
–
–%
1.35%
8,812
8,757
–
–
–%
1.72%
–
–
–%
–
–
–%
–
–
–%
29,981
29,879
1.85%
1,715
1,706
2.51%
9,790
9,753
2.48%
23,892
3,929
1.57%
10,636
10,711
1.81%
10,581
10,448
1.78%
11,949
11,815
1.73%
15,509
15,574
1.48%
11,655
11,713
1.26%
4,949
4,916
1.72%
4,060
4,021
2.01%
18,593
18,665
1.49%
16,762
16,921
1.28%
625
624
1.63%
916
921
2.13%
8,286
8,229
2.80%
8,765
8,770
2.96%
–
–
–%
–
–
–%
1
1
7.92%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
1,922
1,821
1,922
1,821
2.88%
2.88%
2,054
1,934
1.94%
1,858
1,770
–
–
–%
365
313
4.44%
365
313
4.44%
186
168
4.37%
5.42%
114
112
4.33%
203
187
5.72%
73
62
4.84%
–
–
–%
277
250
5.51%
328
301
6.01%
451
420
6.84%
$ 12,990 $ 37,740 $ 51,311 $ 19,060 $ 23,023
23,085
12,978 37,540 50,990
18,960
$ 2,287 $ 146,411 $ 107,571 $ 88,782
2,134 145,687 107,330
1.32%
1.66% 1.86%
2.28%
2.16%
3.11%
1.88%
1.78%
88,857
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, 2017, includes securities issued by Government of Japan of
$8.9 billion (as at October 31, 2016, includes securities issued by Federal Republic
of Germany of $9.8 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 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 6 3
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
2015
2017
2016
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 securities
Fair value
Amortized cost
Yield
$
– $
–
–%
661 $
661
1.87%
–
–
–%
–
–
–%
– $
–
–%
–
–
–%
– $
–
–%
–
–
–%
–
–
–%
–
–
–%
$ – $
–
–%
661 $
661
1.87%
812 $
802
1.84%
983
974
1.78%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
1,524
1,527
4,920
4,930
5,214
5,195
8,578
8,673
2,181
2,206
1.71%
1.92% 2.38%
2.19%
2.30%
4,553
4,528
11,187
11,076
5,468
5,410
1,421
1,417
0.64%
0.27% 0.66%
0.12%
–
–
–%
2,024
2,018
5,641
5,622
2,624
2,609
1,222
1,212
14,208
14,279
1.79%
1.56% 1.00%
1.55%
2.35%
$ 8,101 $ 22,409 $ 13,306 $ 11,221 $ 16,389
16,485
13,214
8,073
11,302
22,289
1.13%
1.01% 1.40%
1.86%
2.34%
–
–
–%
–
–
–%
22,417
22,531
22,119
21,845
2.15%
2.03%
18,847
18,648
2.03%
22,629
22,431
28,923
28,643
0.43%
0.29%
24,265
24,045
0.57%
–
–
–%
25,719
25,740
33,133
33,105
2.10%
1.81%
30,647
30,783
1.50%
$ – $ 71,426 $ 84,987 $ 74,742
74,450
1.33%
–
–%
1.35%
71,363
84,395
1.59%
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, 2017, includes securities issued by Government of Japan of
$8.9 billion (as at October 31, 2016, includes securities issued by Federal Republic
of Germany of $9.8 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 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 6 4
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
2013
2017
2014
2015
2016
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
$ 41,018 $ 145,466 $
3,841 $ 190,325 $ 189,299 $ 185,009 $ 175,125 $ 164,389
46,326 28,584
27 74,937 65,068 61,317 59,568 61,581
590 10,872 10,820 22,282 20,577 19,038 16,475 14,666
710 17,355 16,456 16,075 16,116 15,193
15,698
18,028
– 18,028 18,226 17,941 17,927 15,288
121,660 185,869 15,398 322,927 309,626 299,380 285,211 271,117
947
–
6,480
8,363
7,241
2,790
14,843 10,031
4,260 17,981 16,001 14,862 14,604 13,685
1,679 12,832 12,780 11,330
8,153
5,939 30,813 28,781 26,192 24,372 21,838
9,768
9,169 97,033 91,054 84,155 71,814 64,272
64,241 23,623
185,901 209,492 24,567 419,960 400,680 383,535 357,025 335,389
738
69 30,653 31,460 27,662 26,922 23,335 20,945
138
10,483
1,813 12,434 13,208 13,334 11,665 10,607
358 16,852 11,972 29,182 28,370 24,862 18,782 16,323
533
151
14,972
6,900
26,702 17,411 44,781 88,894 83,665 78,085 62,034 55,308
693
– 14,972 13,680 12,274
615
7,637
352
–
343
745
846
3,470
3,025
2,904
1,387
2,824 10,479
8,860 22,163 21,675 18,317 14,037 12,084
4,211 13,383 11,885 29,479 28,527 24,008 18,331 15,554
4,294
5,691
7,316
6,852
22,622 48,985 47,743 119,350 116,713 97,217 69,417 55,000
49,324 66,396 92,524 208,244 200,378 175,302 131,451 110,308
14
816
830
–
763
763
–
–
–
14
1,579
1,593
16
1,513
1,529
5
1,978
1,983
9
2,124
2,133
10
2,240
2,250
32
481
513
3,744
2,485
6,229
$ 236,568 $ 276,930 $ 120,173 $ 633,671 $ 605,235 $ 564,421 $ 495,017 $ 454,176
2,695
1,713
4,408
2,187
1,414
3,601
1,674
974
2,648
3,209
665
3,874
2,898
184
3,082
279
–
279
T A B L E 6 5
LOAN PORTFOLIO – Rate Sensitivity
(millions of Canadian dollars)
As at
October 31, 2017
October 31, 2016
October 31, 2015
October 31, 2014
October 31, 2013
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
$ 197,483 $ 84,080 $ 212,257 $ 82,507 $ 176,316 $ 66,949 $ 155,614 $ 59,555 $ 158,435 $ 45,395
23,065
$ 276,930 $ 120,173 $ 297,396 $ 116,767 $ 248,979 $ 99,157 $ 229,286 $ 84,546 $ 218,836 $ 68,460
79,447 36,093 85,139 34,260 72,663
32,208 73,672
24,991 60,401
Fixed rate
Variable rate
Total
112
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
The changes 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 6
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 2017 Consolidated Financial Statements.
2017
$ 3,873
2,216
2016
$ 3,434
2,330
2015
$ 3,028
1,683
2014
$ 2,855
1,557
2013
$ 2,644
1,631
22
18
23
21
20
11
337
216
595
1,181
1
2
3
75
1,256
19
39
315
152
777
1,302
3
6
9
91
1,393
–
–
–
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
–
–
–
9
1
10
2,659
14
4
18
2,351
13
6
19
2,157
5
20
25
1,967
2
1
90
41
98
232
1
–
1
20
$ 252
1
–
91
52
118
262
1
3
4
27
$ 289
1
2
78
58
124
263
1
1
2
33
$ 296
5
5
138
60
109
317
1
2
3
29
$ 346
18
160
274
543
1,015
2
3
5
104
1,119
33
65
231
74
56
459
16
59
75
191
650
–
–
–
11
38
49
1,818
3
2
35
55
101
196
1
1
2
28
$ 224
113
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 6 6
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
2017
2016
2015
2014
2013
$
4
$
9
$
11
$
10
$
17
11
100
24
154
293
2
8
10
58
351
–
–
–
–
22
22
625
(2,034)
(83)
(122)
3,850
67
$ 3,783
5
85
26
114
239
4
4
8
54
293
–
–
–
–
20
20
602
(1,749)
(2)
47
4,060
187
$ 3,873
5
83
23
113
235
9
9
18
50
285
–
1
1
–
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
0.33%
0.30%
0.30%
0.31%
4
64
22
5
112
8
10
18
49
161
–
–
–
–
9
9
394
(1,424)
(41)
46
2,856
1
$ 2,855
0.33%
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 2017 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 7
AVERAGE DEPOSITS
(millions of Canadian dollars, except as noted)
October 31, 2017
October 31, 2016
Average
balance
Total
interest
expense
Average
rate paid
Average
balance
Total
interest
expense
Average
rate paid
Average
balance
For the years ended
October 31, 2015
Total
interest
expense
Average
rate paid
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
$ 11,201 $
57,521
209,939
176,345
455,006
–
648
321
2,730
3,699
10,405
3,152
298,639
79,090
391,286
–
11
1,695
973
2,679
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
(7)
1,442
–
28,153
29,588
–
3
–
234
237
–% $
3,674 $
–% $
6,685 $
1.13
0.15
1.55
0.81
58,124
189,018
168,393
419,209
–
521
249
2,359
3,129
0.90
0.13
1.40
0.75
45,081
172,124
146,714
370,604
–
570
306
2,112
2,988
–
0.35
0.57
1.23
0.68
–
0.21
–
0.83
0.80
9,969
3,945
277,744
70,290
361,948
–
7
921
522
1,450
–
0.18
0.33
0.74
0.40
8,723
2,812
239,078
94,016
344,629
–
4
842
313
1,159
54
1,918
–
27,132
29,104
–
4
–
175
179
–
0.21
–
0.64
0.62
55
1,874
2
17,042
18,973
–
5
–
90
95
–%
1.26
0.18
1.44
0.81
–
0.14
0.35
0.33
0.34
–
0.27
–
0.53
0.50
Total average deposits
$ 875,880 $ 6,615
0.76% $ 810,261 $ 4,758
0.59% $ 734,206 $ 4,242
0.58%
1 As at October 31, 2017, deposits by foreign depositors in TD’s Canadian
bank offices amounted to $37 billion (October 31, 2016 – $17 billion,
October 31, 2015 – $13 billion).
114
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 6 8
DEPOSITS – Denominations of $100,000 or greater 1
(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 6 9
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
$ 41,862
34,955
20,037
$ 96,854
$ 19,392
15,607
9,058
$ 44,057
$ 20,623
11,821
3,714
$ 36,158
$ 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
October 31, 2017
$ 79,649
1,390
–
$ 81,039
$ 161,526
63,773
32,809
$ 258,108
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
2017
October 31
2016
As at
October 31
2015
$ 88,591
76,136
88,986
0.87%
0.92
$ 48,973
65,511
70,415
0.38%
0.51
$ 67,156
75,082
74,669
0.25%
0.37
115
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 7 0
NET INTEREST INCOME ON AVERAGE EARNING BALANCES1,2
(millions of Canadian dollars, except as noted)
Average
balance
Interest3
2017
Average
rate
Average
balance
Interest3
2016
Average
rate
Average
balance
Interest3
2015
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
$
5,629 $
42,899
21
405
0.37% $ 6,716 $
0.94
38,658
16
187
0.24% $
0.48
4,738 $
40,684
15
107
0.32%
0.26
47,985
20,186
1,332
403
2.78
2.00
45,102
22,605
1,187
401
2.63
1.77
50,234
23,790
1,297
454
48,109
130,611
949
2,378
1.97
1.82
41,531
112,147
614
1,802
1.48
1.61
31,639
90,552
479
1,525
2.58
1.91
1.51
1.68
33,725
43,087
371
496
1.10
1.15
42,981
31,824
254
189
0.59
0.59
39,384
36,074
249
78
0.63
0.22
200,251
27,982
4,916
1,041
2.45
3.72
197,925
27,331
4,726
1,029
2.39
3.76
188,048
26,336
4,924
984
106,614
41,263
4,704
1,455
4.41
3.53
97,881
40,471
4,604
1,285
4.70
3.18
93,943
35,609
4,600
1,144
2.62
3.74
4.90
3.21
18,571
13,771
2,270
2,213
12.22
16.07
18,414
12,598
2,223
1,999
12.07
15.87
18,096
8,778
2,235
1,450
12.35
16.52
80,673
112,416
88,963
2,187
3,795
896
$ 1,062,735 $ 29,832
71,869
105,929
77,001
1,929
2.71
3,348
3.38
1.01
767
2.81% $ 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
2.80
3.19
1.03
2.72%
$ 208,174 $
237,123
983
281
0.47% $ 193,643 $
0.12
206,813
974
218
0.50% $ 181,101 $ 1,158
218
0.11
178,287
12,323
9,467
71
115
0.58
1.21
11,601
6,514
55
47
234,509
144,696
9,045
2,645
2,283
391
1.13
1.58
4.32
213,965
148,621
8,769
2,100
1,185
395
34,719
56,587
29,761
540
696
472
1.56
1.23
1.59
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
5,306
34
48,780
92
4
412
$ 1,030,524 $ 8,985
4,225
35
45,579
82
1.73
4
11.76
0.84
367
0.87% $ 964,544 $ 6,637
79
4,889
1.94
4
33
11.43
0.81
257
35,693
0.69% $ 892,944 $ 6,106
0.64%
0.12
0.38
0.27
0.99
0.59
4.90
0.97
0.39
1.70
1.62
12.06
0.72
0.68%
$ 1,062,735 $ 20,847
1.96% $ 990,983 $ 19,923
2.01% $ 913,804 $ 18,724
2.05%
1 Net interest income includes dividends on securities.
2 Geographic classification of assets and liabilities is based on the domicile of the
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 $12 billion (2016 – $11 billion, 2015 – $10 billion).
5 Includes average trading deposits with a fair value of $87 billion (2016 – $77 billion,
2015 – $71 billion).
6 Includes marketing fees incurred on the TD Ameritrade Insured Deposit Accounts
(IDA) of $1.5 billion (2016 – $1.2 billion, 2015 – $1.1 billion).
7 Includes average securitization liabilities at fair value of $13 billion (2016 –
$12 billion, 2015 – $11 billion) and average securitization liabilities at amortized
cost of $17 billion (2016 –$20 billion, 2015 – $24 billion).
116
TD BANK GROUP ANNUAL REPORT 2017 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 7 1
ANALYSIS OF CHANGE IN NET INTEREST INCOME1,2
(millions of Canadian dollars)
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
2017 vs. 2016
2016 vs. 2015
Increase (decrease) due to changes in
Increase (decrease) due to changes in
Average
volume
Average
rate
Net
change
Average
volume
Average
rate
Net
change
$
(3)
21
$
8 $
197
5
218
$
7
(5)
$
(6)
85
$
1
80
75
(43)
97
297
(55)
67
56
25
411
25
19
186
70
45
238
279
172
240
134
(13)
(311)
145
28
28
145
2
335
576
117
307
190
12
100
170
47
214
(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
236
205
49
$ 1,668
22
242
80
258
447
129
$ 1,604 $ 3,272
251
651
25
$ 2,615
(81)
(33)
(58)
$ (885)
170
618
(33)
$ 1,730
$
73
32
3
21
202
(31)
12
(95)
65
(32)
$
(64) $
31
13
47
9
63
16
68
343
1,129
(16)
545
1,098
(4)
223
285
52
128
350
20
$
80
35
10
(14)
332
(35)
40
(12)
(1)
(50)
21
–
32
$ 303
$ 1,365
(11)
–
13
10
–
45
$ 2,045 $ 2,348
$ (441) $ 924
(11)
–
52
$ 426
$ 2,189
$ (264)
(35)
$
(184)
–
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
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.
117
TD BANK GROUP ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL RESULTS
Consolidated Financial Statements
PAGE
Management’s Responsibility for Financial Information
119
Independent Auditors’ Reports of Registered Public
Accounting Firm to Shareholders
Consolidated Financial Statements
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Comprehensive Income
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows
120
122
123
124
125
126
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE TOPIC
PAGE
NOTE TOPIC
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
127
127
Nature of Operations
Summary of Significant Accounting Policies
Significant Accounting Judgments,
135
Estimates, and Assumptions
138
Current and Future Changes in Accounting Policies
139
Fair Value Measurements
150
Offsetting Financial Assets and Financial Liabilities
151
Securities
154
Loans, Impaired Loans, and Allowance for Credit Losses
157
Transfers of Financial Assets
159
Structured Entities
162
Derivatives
169
Investment in Associates and Joint Ventures
170
Significant Acquisitions and Disposals
170
Goodwill and Other Intangibles
Land, Buildings, Equipment, and Other Depreciable Assets 172
172
Other Assets
172
Deposits
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
Other Liabilities
Subordinated Notes and Debentures
Capital Trust Securities
Equity
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
PAGE
173
174
175
175
178
180
181
186
188
188
191
192
194
196
200
201
201
118
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
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, 2017, 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, 2017, the Bank’s
internal control over financial reporting is effective.
The scope of management’s assessment of the effectiveness of the
Bank’s internal control over financial reporting as at October 31, 2017,
did not include the controls, policies and procedures of Scottrade
Bank, the results of which are included in the 2017 Consolidated
Financial Statements of the Bank since the acquisition date of
September 18, 2017. The scope limitation is in accordance with
Canadian and U.S. securities laws, which allow an issuer to limit its
design of disclosure controls and procedures (in the case of Canadian
securities laws) and internal control over financial reporting to exclude
the controls, policies and procedures of a company acquired not more
than 365 days before the end of the financial period to which the
certificate relates. Scottrade Bank constituted less than 2% of the total
consolidated assets as at October 31, 2017 and less than 1% of the
total consolidated net income for the year ended October 31, 2017.
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, 2017, 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 29, 2017
119
TD BANK GROUP ANNUAL REPORT 2017 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, 2017 and 2016, 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, 2017, 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, 2017 and 2016, and its financial performance
and its cash flows for each of the years in the three-year period ended
October 31, 2017, 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, 2017, 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 29, 2017, 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 29, 2017
120
TD BANK GROUP ANNUAL REPORT 2017 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, 2017, 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.
As indicated in the accompanying Management’s Responsibility for
Financial Information, management’s assessment of and conclusion
on the effectiveness of internal control over financial reporting as at
October 31, 2017 did not include the internal controls of Scottrade
Bank, the results of which are included in the 2017 consolidated
financial statements of The Toronto-Dominion Bank and constituted
less than 2% of the total consolidated assets as at October 31, 2017
and less than 1% of the total consolidated net income for the year
then ended. Our audit of internal control over financial reporting
of The Toronto-Dominion Bank also did not include an evaluation
of the internal control over financial reporting of Scottrade Bank.
In our opinion, The Toronto-Dominion Bank maintained, in all
material respects, effective internal control over financial reporting
as of October 31, 2017, 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, 2017 and
2016, 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, 2017, of The Toronto-Dominion
Bank and our report dated November 29, 2017, expressed an
unqualified opinion thereon.
Ernst & Young LLP
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
November 29, 2017
121
TD BANK GROUP ANNUAL REPORT 2017 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 25)
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
Shareholders’ 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.
122
October 31
2017
As at
October 31
2016
$
3,971
51,185
55,156
103,918
56,195
4,032
146,411
310,556
71,363
134,429
222,079
157,101
33,007
200,978
3,209
616,374
(3,783)
612,591
17,297
7,784
16,156
2,618
5,313
2,497
29,971
13,264
94,900
$ 1,278,995
$
79,940
51,214
12,757
8
143,919
468,155
25,887
338,782
832,824
17,297
35,482
88,591
16,076
32,851
6,775
20,462
217,534
9,528
1,203,805
20,931
4,750
(176)
(7)
214
40,489
8,006
74,207
983
75,190
$ 1,278,995
$
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
Bharat B. Masrani
Group President and
Chief Executive Officer
Alan N. MacGibbon
Chair, Audit Committee
TD BANK GROUP ANNUAL REPORT 2017 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)
Service charges
Card services
Insurance revenue (Note 22)
Other income (loss)
Total revenue
Provision for credit losses (Note 8)
Insurance claims and related expenses (Note 22)
Non-interest expenses
Salaries and employee benefits (Note 24)
Occupancy, including depreciation
Equipment, including depreciation
Amortization of other intangibles
Marketing and business development
Restructuring charges (recovery)
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 25)
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 (Canadian dollars) (Note 26)
Basic
Diluted
Dividends per common share (Canadian dollars)
The accompanying Notes are an integral part of these Consolidated
Financial Statements.
For the years ended October 31
2017
2016
2015
$ 23,663
$ 21,751
$ 20,319
4,595
1,128
446
29,832
6,615
472
391
1,507
8,985
20,847
4,459
1,130
128
303
2,648
2,388
3,760
486
15,302
36,149
2,216
2,246
10,018
1,794
992
704
726
2
314
1,165
3,651
19,366
12,321
2,253
449
10,517
193
$ 10,324
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
$ 10,203
121
$ 8,680
115
$ 7,813
112
$
5.51
5.50
2.35
$
4.68
4.67
2.16
$
4.22
4.21
2.00
123
TD BANK GROUP ANNUAL REPORT 2017 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
Net change in unrealized gains (losses) on available-for-sale securities
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, net of hedging activities
Unrealized gains (losses) on investments in foreign operations
Reclassification to earnings of net losses (gains) on investment in foreign operations3
Net gains (losses) on hedges of investments in foreign operations4
Reclassification to earnings of net losses (gains) on hedges of investments in foreign operations5
Net change in gains (losses) on derivatives designated as cash flow hedges
Change in gains (losses) on derivatives designated as cash flow hedges6
Reclassification to earnings of losses (gains) on cash flow hedges7
Items that will not be subsequently reclassified to net income
Actuarial gains (losses) on employee benefit plans8
Total other comprehensive income (loss), net of income taxes
Total comprehensive income (loss) for the year
Attributable to:
Common shareholders
Preferred shareholders
Non-controlling interests in subsidiaries
For the years ended October 31
2017
2016
$ 10,517
$ 8,936
2015
$ 8,024
467
(143)
324
(2,534)
(17)
659
4
(1,888)
(1,454)
(810)
(2,264)
325
(3,503)
$ 7,014
$ 6,700
193
121
274
(56)
218
1,290
–
34
–
1,324
835
(752)
83
(882)
743
$ 9,679
$ 9,423
141
115
(464)
(93)
(557)
8,090
–
(2,764)
–
5,326
4,805
(4,301)
504
400
5,673
$ 13,697
$ 13,486
99
112
1 Net of income tax provision in 2017 of $150 million (2016 – net of income tax
provision of $125 million; 2015 – net of income tax recovery of $210 million).
2 Net of income tax recovery in 2017 of $36 million (2016 – net of income tax
provision of $32 million; 2015 – net of income tax provision of $78 million).
3 Net of income tax provision in 2017 of nil (2016 – net of income tax provision
of nil; 2015 – net of income tax provision of nil).
4 Net of income tax provision in 2017 of $237 million (2016 – net of income tax
provision of $9 million; 2015 – net of income tax recovery of $985 million).
5 Net of income tax recovery in 2017 of $1 million (2016 – net of income tax
provision of nil; 2015 – net of income tax provision of nil).
6 Net of income tax recovery in 2017 of $789 million (2016 – net of income tax
provision of $599 million; 2015 – net of income tax provision of $2,926 million).
7 Net of income tax provision in 2017 of $258 million (2016 – net of income tax
provision of $533 million; 2015 – net of income tax provision of $2,744 million).
8 Net of income tax provision in 2017 of $129 million (2016 – net of income tax
recovery of $340 million; 2015 – net of income tax provision of $147 million).
The accompanying Notes are an integral part of these Consolidated Financial Statements.
124
TD BANK GROUP ANNUAL REPORT 2017 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 23)
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 of income taxes
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 accumulated other comprehensive income
Total shareholders’ equity
Non-controlling interests in subsidiaries (Note 21)
Balance at beginning of year
Net income attributable to non-controlling interests in subsidiaries
Redemption of REIT preferred shares
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
2017
2016
2015
$ 20,711
148
329
(257)
20,931
$ 20,294
186
335
(104)
20,711
$ 19,811
128
355
–
20,294
4,400
350
–
4,750
(31)
(9,654)
9,509
(176)
(5)
(175)
173
(7)
203
23
(8)
(4)
214
35,452
10,396
(4,347)
(193)
(4)
(1,140)
325
40,489
299
324
623
9,679
(1,888)
7,791
1,856
(2,264)
(408)
8,006
74,207
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
72,564
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
65,418
1,650
121
(617)
(171)
983
$ 75,190
1,610
115
–
(75)
1,650
$ 74,214
1,549
112
–
(51)
1,610
$ 67,028
125
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
For the years ended October 31
2017
2016
2015
$ 12,770
$ 11,079
$ 9,547
2,216
603
704
(128)
(449)
(204)
175
(283)
2,367
(4,661)
(22,332)
40,150
1,836
245
(1,575)
3,436
34,870
39,618
1,500
(2,520)
125
346
(1,397)
–
(626)
9,705
(9,829)
(4,211)
(112)
32,599
2,330
629
708
(54)
(433)
–
103
7
(5,688)
(4,100)
(44,158)
81,885
5,403
96
(3,321)
(193)
44,293
(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
(64,849)
108,446
(7,633)
371
(2,429)
(15,331)
35,307
14,044
2,500
(1,675)
108
1,184
–
(717)
–
5,541
(5,513)
(3,444)
(112)
11,916
2,529
(11,231)
1,290
(63,339)
30,775
4,977
(17,807)
27,729
452
(2,471)
337
447
(434)
(48,377)
(2,129)
(67,311)
(94)
64
3,907
$ 3,971
$ 2,866
8,957
28,393
1,153
(52,775)
28,454
4,665
(20,575)
15,193
–
(41)
654
1
(797)
11,312
–
(25,140)
51
753
3,154
$ 3,907
$ 1,182
6,559
25,577
921
(58,482)
27,004
6,631
(15,120)
9,375
–
(23)
912
–
(972)
(14,808)
(2,918)
(47,111)
261
373
2,781
$ 3,154
$
554
6,167
23,483
1,216
Consolidated Statement of Cash Flows
(millions of Canadian dollars)
Cash flows from (used in) operating activities
Net income before income taxes, including equity in net income of an investment in TD Ameritrade
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)
Dilution gain (Note 12)
Deferred taxes (Note 25)
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)
Redemption of non-controlling interests in subsidiaries (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
Proceeds from sales
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 purchase 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
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.
126
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
Notes to Consolidated Financial Statements
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.
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
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.
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 29, 2017.
Certain disclosures are included in the shaded sections of the
“Managing Risk” section of the accompanying 2017 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.
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.
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TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS 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. 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 on
initial recognition. 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 (also referred to as “an accounting
mismatch”); (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 generally 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
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TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS 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 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.
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
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TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS 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 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.
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
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 recorded in Other liabilities on the
Consolidated Balance Sheet.
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
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TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS 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 presented 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
presented 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
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 Non-interest income on the Consolidated
Statement of Income.
Cash Flow Hedges
The Bank is exposed to variability in future cash flows attributable
to interest rate, foreign exchange rate, and equity price risks. 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 in accumulated other comprehensive income attributable
to interest rate, foreign exchange rate, and equity price components,
as applicable, are reclassified to Net interest income or Non-interest
income 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.
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TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS 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 accumulated other comprehensive income at that
time remains in accumulated 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 accumulated 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 in
accumulated 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
accumulated 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 prevailing 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 in
accumulated 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
exchange rates prevailing at the balance sheet date 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.
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 trading
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
trading 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
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TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS 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,
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 accumulated 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 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 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
counterparty 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
income 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 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 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.
133
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS 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 of disposal 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 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
of disposal 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. Where it is not possible to estimate
the recoverable amount of an individual asset, the Bank estimates
the recoverable amount of the CGU to which the asset belongs.
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. Where it is not possible
to estimate the recoverable amount of an individual asset, the Bank
134
estimates the recoverable amount of the CGU to which the asset
belongs. 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
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 hedging activities,
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.
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
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
of premiums ceded to reinsurers which are recognized in other assets.
Premiums from life and health insurance policies are recognized as
income when earned in insurance revenue.
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 Consolidated
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.
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 provision for (recovery of) income taxes in
the period in which management determines they are no longer
required or as determined by statute.
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
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TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS 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.
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.
136
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 accumulated 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. 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 recoverable amount 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 recoverable
amount of CGUs, and the use of different assumptions and estimates
in the 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. 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
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS 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 22.
CONSOLIDATION OF STRUCTURED ENTITIES
Management judgment is required when assessing whether the Bank
should consolidate an entity. 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.
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.
If the Bank has decision-making power over and absorbs significant
variable returns from the entity it then determines if it is acting as
principal or agent when exercising its decision-making power. Key
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.
The decisions above are made with reference to the specific facts
and circumstances relevant for the structured entity and related
transaction(s) under consideration.
137
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS N O T E 4
CURRENT AND FUTURE CHANGES IN ACCOUNTING POLICIES
CURRENT CHANGES IN ACCOUNTING POLICIES
There are no new or amended significant accounting policies that are
effective for the Bank for the fiscal year ended October 31, 2017.
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, Financial
Instruments: Recognition and Measurement (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, Financial Instruments: Disclosures (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 as of the date of adoption, 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
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.
In October 2017, the IASB published amendments to IFRS 9 relating
to prepayment features with negative compensation. The amendments
are to be applied retrospectively to annual reporting periods beginning
on or after January 1, 2019, which will be November 1, 2019 for the
Bank with earlier application permitted. The Bank is continuing to
assess the impact of the amendments, however they are not expected
to have a material impact.
As at October 31, 2017, the Bank’s current estimate of the adoption
of IFRS 9, subject to refinement, is an overall reduction to Shareholders’
Equity of approximately $36 million, of which $96 million is attributable
to the adoption of the expected credit loss methodology, partially
offset by $60 million due to classification and measurement changes.
Based on the current regulatory requirements, the expected impact to
CET1 capital is a decrease of 15 bps almost exclusively due to the
Basel I regulatory floor.
138
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.
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. 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 plans to apply the standard on a modified retrospective basis,
recognizing the cumulative effect of initially applying the standard
as an adjustment to the opening balance of retained earnings as of
November 1, 2018. The Bank is continuing to assess the impact of the
new standard on its financial statements, including the presentation
of certain revenue and expense items, the timing and measurement of
revenue recognition, as well as additional qualitative and quantitative
disclosures. The Bank does not currently expect a significant impact
as a result of adopting the new standard.
Leases
In January 2016, the IASB issued IFRS 16, Leases (IFRS 16), which will
replace IAS 17, Leases (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 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 are 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.
Insurance Contracts
In May 2017, the IASB issued IFRS 17, Insurance Contracts (IFRS 17),
which replaces the guidance in IFRS 4, Insurance Contracts. IFRS 17
establishes a new model for recognizing and measuring insurance
policy obligations, premium revenue, and claims-related expenses,
as well as providing guidance on presentation and disclosure.
IFRS 17 will be effective for the Bank’s annual period beginning
November 1, 2021. The Bank is currently assessing the impact of
adopting this standard.
TD BANK GROUP ANNUAL REPORT 2017 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.
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. 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 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.
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
139
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS 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 through
Profit or Loss
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, Fair Value Measurement 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 carried at Fair Value
The fair value of assets and liabilities subsequently not carried at fair
value include most loans, most deposits, certain securitization liabilities,
most securities purchased under reverse repurchase agreements, most
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, Securities purchased
under reverse repurchase agreements, customers’ liability under
acceptances, amounts receivable from brokers, dealers and clients,
other assets, acceptances, obligations related to securities sold under
repurchase agreements, amounts payable to brokers, dealers and
clients and other liabilities.
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 to recognize the 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 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.
140
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS Carrying Value and Fair Value of Financial Instruments not
carried at Fair Value
The fair values in the following table exclude 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 Value
(millions of Canadian dollars)
FINANCIAL ASSETS
Cash and due from banks
Interest-bearing deposits with banks
Held-to-maturity securities1
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
1 Includes debt securities reclassified from available-for-sale to held-to-maturity.
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 for identical
assets or liabilities that are traded in an active exchange market or
highly liquid and 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.
October 31, 2017
October 31, 2016
Carrying value
Fair value
Carrying value
Fair value
As at
$
3,971
51,185
$
3,971
51,185
$
3,907
53,714
$
3,907
53,714
45,623
25,740
71,363
133,084
609,529
3,062
612,591
45,708
25,719
71,427
133,084
610,491
3,156
613,647
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
17,297
29,971
4,556
$ 924,018
17,297
29,971
4,556
$ 925,138
15,706
17,436
4,352
$ 849,490
15,706
17,436
4,352
$ 855,187
$ 832,824
17,297
86,527
16,076
32,851
9,926
9,528
$ 1,005,029
$ 833,475
17,297
86,527
16,203
32,851
9,932
10,100
$ 1,006,385
$ 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
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.
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.
141
TD BANK GROUP ANNUAL REPORT 2017 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, 2017
Total1
Level 3
Level 1
Level 2
As at
October 31, 2016
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
$
390 $ 8,678
6,524
–
$
– $ 9,068 $
6,524
–
70 $ 9,978
5,678
–
$
34 $ 10,082
5,678
–
605
–
–
16,862
5,047
1,906
– 17,467
5,047
–
1,906
–
724
–
–
17,246
4,424
1,472
–
73
–
17,970
4,497
1,472
–
–
3,337
10,007
6
3,343
8 10,015
–
–
2,697
7,572
15
148
2,712
7,720
31,921
68
–
7,139
–
40,123
21
–
11,235
132
32
63,781
– 31,942 29,054
27
–
68
–
– 11,235
7,271 8,071
–
–
–
14 103,918 37,946
32
96
–
11,606
176
–
60,945
65
–
–
–
31
366
29,215
27
11,606
8,247
31
99,257
21
9
–
–
96
126
15,324
37,817
34
1,303
677
55,155
– 15,345
1 37,827
34
–
2,211
908
778
5
914 56,195
4
44
–
–
51
99
27,364
41,828
–
1,391
816
71,399
–
9
–
729
6
744
27,368
41,881
–
2,120
873
72,242
220
220
3,699
3,699
113
113
4,032
4,032
80
80
4,046
4,046
157
157
4,283
4,283
–
–
16,225
7,922
–
–
–
–
–
–
48,280
21,122
8,812
29,428
1,715
9,768
– 16,225
7,922
–
– 48,280
– 21,122
8,812
–
553 29,981
1,715
9,790
–
22
–
–
–
–
–
–
–
–
14,717
7,851
34,473
15,503
4,949
18,593
625
8,266
–
–
14,717
7,851
–
6
–
34,473
15,509
4,949
–
–
20
18,593
625
8,286
341
242
–
583
3
–
2
143,277
1,572
123
275
1,916
365
277
2,545 146,405
231
88
–
319
223
–
49
105,249
1,594
98
279
1,997
2,048
186
328
107,565
–
1,345
–
1,345
–
1,728
–
1,728
$
– $ 77,419
$ 2,521 $ 79,940 $
– $ 77,572
$ 2,214 $ 79,786
15
10
–
–
97
122
–
12,730
33,599
356
1,999
534
49,218
12,757
70 12,815
– 33,609
356
–
3,800
1,801
634
3
1,874 51,214
– 12,757
3
16
–
–
75
94
–
22,092
39,535
257
1,351
587
63,822
12,490
95
5
–
1,408
1
1,509
–
22,190
39,556
257
2,759
663
65,425
12,490
–
2,068
1
33,414
7
–
– 35,482 1,396
8
177
31,705
13
14
190
33,115
–
2,064
–
2,064
–
3,657
–
3,657
1 Certain comparative amounts have been restated to conform with the presentation
5 As at October 31, 2017, common shares include the fair value of Federal Reserve
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, 2017, the carrying values of certain available-for-sale equity
securities of $6 million (October 31, 2016 – $6 million) are carried at cost in the
absence of quoted market prices in an active market and are excluded from
the table above.
142
stock and Federal Home Loan Bank stock of $1.4 billion (October 31, 2016 –
$1.3 billion) which are redeemable by the issuer at cost for which cost approximates
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.
TD BANK GROUP ANNUAL REPORT 2017 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.
During the year ended October 31, 2017, the Bank transferred
$164 million and $48 million of treasury securities designated at fair
value through profit and loss and Obligations related to securities sold
short respectively from Level 1 to Level 2 as they are now off-the-run
and traded less frequently. There were no significant transfers between
Level 1 and Level 2 during the year ended October 31, 2016.
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.
143
TD BANK GROUP ANNUAL REPORT 2017 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
2017
Fair value
as at
Nov. 1,
2016
$
34
–
73
15
148
65
–
–
–
31
366
157
–
157
6
–
20
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 thro ugh profit
or loss
Securities
Loans
Available-for-sale securities
Government and government-
related securities
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
$
(2)
–
$
7
–
2
–
–
–
–
6
13
(3)
–
(3)
–
–
–
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
3
–
17
1
253
–
–
–
–
–
274
13
–
13
–
–
2
–
553
–
$ (32)
–
$
–
7
$
(3) $
(7)
(58)
20
(59)
(15)
(312)
(65)
–
–
–
–
(482)
9
138
–
–
–
–
–
174
(4)
(221)
–
–
–
–
(37)
(331)
(54)
–
(54)
(6)
–
–
(185)
(11)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
6
8
–
–
–
–
–
14
113
–
113
–
553
22
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
–
–
–
–
1
–
–
–
–
–
1
(3)
–
(3)
–
–
2
(26)
26
3
$ 5
1,594
98
36
6
(26)
26
153
4
279
$ 1,997
(2)
$ 40
3
$ 5
–
$ 710
$
1,572
123
(3)
$ (205)
1
$ 1
(3)
275
(3) $ 2,545
$
Total realized and
unrealized losses (gains)
Movements
Transfers
Fair value
as at
Nov. 1,
2016
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
2017
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
$ 2,214
$ 212
$ –
$ (790) $ 1,380
$ (448)
$ 33
$ (80) $ 2,521
$ 195
95
(4)
–
679
(5)
765
(20)
4
–
321
2
307
13
54
14
–
–
–
–
–
–
–
–
–
–
–
–
(73)
–
(73)
–
–
–
174
–
174
(5)
–
–
(208)
–
(213)
–
119
(179)
(14)
–
–
–
(2)
–
–
–
(2)
–
–
–
1
–
–
1
2
–
–
70
(1)
–
893
(2)
960
(20)
(1)
–
330
–
309
7
–
47
–
1 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.
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.
5 Issuances and repurchases of trading deposits are reported on a gross basis.
6 As at October 31, 2017, consists of derivative assets of $0.9 billion
(November 1, 2016 – $0.7 billion) and derivative liabilities of $1.9 billion
(November 1, 2016 – $1.5 billion), which have been netted on this table
for presentation purposes only.
144
TD BANK GROUP ANNUAL REPORT 2017 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
Fair value
as at
Nov. 1,
2015
$
–
24
5
57
108
186
5
–
–
38
423
83
–
83
7
501
147
$ –
3
$
–
(1)
17
–
–
–
–
2
21
2
–
2
–
–
5
–
–
–
–
–
–
–
–
–
–
–
$
–
39
$
1
23
129
77
32
–
–
–
301
–
–
–
101
–
101
–
–
(3)
(32)
11
–
$ (24)
–
–
–
71
11
–
$ 82
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,575
94
53
(18)
282
$ 2,606
36
$ 76
Change in
unrealized
gains
(losses) on
instruments
still held4
Fair value
as at
Oct. 31,
2016
34
–
73
15
148
65
–
–
–
31
366
157
–
157
6
–
20
$
–
–
–
(1)
9
–
–
–
–
2
10
1
–
1
–
–
(1)
$
–
(67)
$ 34
3
$
–
73
$
–
(2)
(6)
(66)
(201)
3
340
(1)
(245)
(198)
(37)
–
–
(9)
(578)
–
–
–
–
–
453
–
–
–
–
–
(254)
(62)
–
(62)
53
–
53
(20)
–
(20)
(1)
(501)
(5)
(73)
–
–
–
3
–
–
–
–
(127)
–
–
1,594
98
(23)
11
(4)
$ (584)
–
3
$
(35)
$ (162)
279
$ 1,997
–
$ (13)
Total realized and
unrealized losses (gains)
Movements
Transfers
Fair value
as at
Nov. 1,
2015
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,
2016
$ 1,880
$ 145
$ –
$ (480)
$ 1,013 $ (343)
$ 11
$
(12)
$ 2,214
$ 166
88
(1)
(4)
397
3
483
11
(3)
4
258
3
273
13
(64)
59
–
–
–
–
–
–
–
–
–
–
–
–
(80)
–
(80)
–
–
–
209
–
209
(4)
(1)
–
(105)
(8)
(118)
–
130
(66)
(103)
–
58
–
–
–
1
(3)
(2)
–
–
–
1
–
(1)
–
–
–
–
95
(4)
–
679
(5)
765
9
(2)
4
258
(2)
267
13
(41)
14
–
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
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 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 Certain comparative amounts have been restated to conform with the presentation
5 Beginning February 1, 2016, issuances and repurchases of trading deposits are
adopted in the current period.
reported on a gross basis.
2 Gains (losses) on financial assets and liabilities are recognized in Net securities
6 As at October 31, 2016, consists of derivative assets of $0.7 billion
gains (losses), Trading income (loss), and Other income (loss) on the Consolidated
Statement of Income.
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.
(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.
145
TD BANK GROUP ANNUAL REPORT 2017 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.
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
loan 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.
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.
146
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS Valuation techniques and inputs used in the fair value
measurement of Level 3 assets and liabilities
The following table presents 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 Liabilities
Valuation
technique
Significant
unobservable
inputs (Level 3)
October 31, 2017
October 31, 2016
As at
Lower
range
Upper
range
Lower
range
Upper
range
Unit
Government and government-
related securities
Market comparable
Bond price equivalent
100
177
61
131
points
Other debt securities
Market comparable
Bond price equivalent
–
114
–
109
points
Equity securities1
Market comparable
Discounted cash flow
EBITDA multiple
Market comparable
New issue price
Discount rate
Earnings multiple
Price equivalent
Retained interests
Discounted cash flow
Discount rates
100
6
5.5
50
n/a2
100
9
20.5
118
100
7
4.5
54
100
18
20.5
117
%
%
times
%
n/a
287
324
bps3
Market comparable
Bond price equivalent
n/a
n/a
99
100
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
11
1
55
7
40
(9)
(38)
–
8
(65)
29
(9)
(38)
–
7
11
338
2
75
10
40
97
17
8
74
(45)
41
97
18
10
68
338
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
Other financial liabilities
designated at fair value
through profit or loss
Obligations related to
securities sold short
Option model
Funding ratio
5
67
2
72
Market comparable
New issue price
n/a
n/a
100
100
1 As at October 31, 2017, common shares exclude the fair value of
Federal Reserve stock and Federal Home Loan Bank stock of $1.4 billion
(October 31, 2016 – $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.
2 Not applicable.
3 Basis points.
%
%
%
%
bps3
%
%
%
%
%
%
%
%
%
%
%
%
%
147
TD BANK GROUP ANNUAL REPORT 2017 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 Liabilities1
(millions of Canadian dollars)
FINANCIAL ASSETS
Trading loans, securities, and other
Government and government-related securities
Canadian government debt
Federal
Retained interests
Derivatives
Equity contracts
Financial assets designated at fair value through profit or loss
Securities
Available-for-sale securities
Other debt securities
Asset-backed securities
Corporate and other debt
Equity securities
Common shares
Preferred shares
FINANCIAL LIABILITIES
Trading deposits
Derivatives
Interest rate contracts
Equity contracts
Other financial liabilities designated at fair value through
profit or loss
Total
1 Certain comparative amounts have been restated to conform with the
presentation adopted in the current period.
October 31, 2017
Impact to net assets
As at
October 31, 2016
Impact to net assets
Decrease in
fair value
Increase in
fair value
Decrease in
fair value
Increase in
fair value
$
–
–
–
12
12
6
6
11
2
26
21
60
$ –
–
–
10
10
6
6
11
2
8
6
27
$
1
2
3
14
14
5
5
–
2
$ 1
–
1
16
16
5
5
–
2
42
16
60
12
5
19
11
16
14
19
16
20
36
1
$ 126
14
22
36
1
$ 96
27
31
58
1
$ 155
18
27
45
1
$ 106
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 recognized 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
2017
$ 41
35
(57)
$ 19
2016
$ 30
69
(58)
$ 41
148
TD BANK GROUP ANNUAL REPORT 2017 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 to eliminate or significantly reduce an accounting
mismatch. 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 loan 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.
There are no deposits designated at fair value through profit or
loss outstanding as at October 31, 2017 (October 31, 2016 – the
contractual maturity amounts for the deposits designated at fair value
through profit or loss were not significantly more than the carrying
amount). Due to the short-term nature of the loan commitments,
changes in the Bank’s own credit risk 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, 2017, the income (loss)
representing net changes in the fair value of financial assets and
liabilities designated at fair value through profit or loss was
$(254) million (2016 – $(20) 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, 2017
As at
October 31, 2016
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
$ 3,971 $
– $
51,185
– $
3,971
– 51,185
$ 3,907 $
– $
–
53,714
–
–
–
–
–
–
–
–
45,708
25,719
71,427
– 45,708
– 25,719
– 71,427
133,084
– 133,084
204,695 405,796 610,491
3,156
207,182 406,465 613,647
2,487
669
–
–
–
–
–
–
–
51,855
33,135
84,990
84,324
205,455
304
205,759
– 84,324
383,625 589,080
1,678
384,999 590,758
1,374
– $
3,907
– 53,714
– 51,855
– 33,135
– 84,990
–
–
–
– 17,297
– 29,971
4,556
$ 3,971 $ 514,689 $ 406,478 $ 925,138
17,297
29,971
4,543
13
–
–
–
– 15,706
– 17,436
4,352
$ 3,907 $ 466,265 $ 385,015 $ 855,187
15,706
17,436
4,336
16
$
– $ 833,475 $
17,297
–
– $ 833,475
– 17,297
$
– $ 776,161 $
15,706
–
– $ 776,161
– 15,706
86,527
–
16,203
–
32,851
–
8,899
–
–
10,100
– $ 1,005,352 $
– 86,527
– 16,203
– 32,851
9,932
– 10,100
1,033 $ 1,006,385
1,033
45,316
–
18,276
–
17,857
–
8,329
–
–
11,331
– $ 892,976 $
– 45,316
– 18,276
– 17,857
9,288
– 11,331
959 $ 893,935
959
$
$
1 Certain comparative amounts have been reclassified to conform with the
presentation adopted in the current period.
149
TD BANK GROUP ANNUAL REPORT 2017 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 counterparties
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, 2017
Amounts subject to an enforceable
master netting arrangement or similar
agreement that are not offset in
the Consolidated Balance Sheet1,2
Gross amounts
of recognized
financial
instruments
before
balance sheet
netting
Gross amounts
of recognized
financial
instruments
offset 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
$ 82,219
$ 26,024
$ 56,195
149,402
231,621
14,973
40,997
134,429
190,624
77,238
26,024
51,214
103,564
$ 180,802
14,973
$ 40,997
88,591
$ 139,805
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
$ 36,522
8,595
45,117
36,522
8,595
$ 45,117
$ 45,646
309
45,955
45,646
309
$ 45,955
Collateral
Net Amount
$ 9,807
$ 9,866
125,479
135,286
355
10,221
12,899
1,793
79,697
$ 92,596
299
$ 2,092
October 31, 2016
$ 14,688
$ 11,908
83,902
98,590
1,841
13,749
14,911
4,868
48,663
$ 63,574
1
$ 4,869
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.
150
under the laws of the relevant jurisdiction.
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
N O T E 7
SECURITIES
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 other comprehensive
income. Subsequent to the date of reclassification, the net unrealized
gain or loss recognized in accumulated other comprehensive income
is amortized to net 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)
October 31, 2017
October 31, 2016
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
$
226
5,059
11,500
7,651
Carrying
value
$
225
5,051
11,486
7,698
Fair
value
$ 1,618
7,022
20,339
8,607
Carrying
value
$ 1,605
6,934
20,401
8,577
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
a decrease of $50 million during the year ended October 31, 2017
(October 31, 2016 – an increase of $156 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
2016
2017
$ 534
198
$ 336
$ 593
226
$ 367
1 Includes amortization of net unrealized loss of $16 million during the year
ended October 31, 2017 (October 31, 2016 – $20 million gain), 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.
151
TD BANK GROUP ANNUAL REPORT 2017 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 securities2
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 to
years maturity
10 years
Over 10
Total
Total
As at
October 31 October 31
2016
2017
$ 4,148 $ 1,987 $ 1,115 $
1,304
693
2,978
3,399
1,164
2,215
1,115
3,767
513
1,180
5,236
775
2,232
2,087
380
517 $ 1,301 $
6,524
– $ 9,068 $ 10,082
5,678
–
17,970
– 17,467
4,497
5,047
–
173
33
11,272
1,142
16
7,980
469
5
6,984
–
66
7,774
–
2
6,002
1,784
–
–
122
– 40,012
1,319
153
39,699
530
2,043
2,573
956
4,501
5,457
790
2,152
2,942
578
1,068
1,646
489
251
740
–
3,343
– 10,015
– 13,358
2,712
7,720
10,432
–
–
–
–
29,215
27
29,242
31
$ 13,845 $ 13,437 $ 9,932 $ 9,439 $ 6,749 $ 32,010 $ 85,412 $ 79,404
31,942 31,942
68
32,010 32,010
32
–
–
–
–
19
–
–
–
6
–
–
–
7
–
–
–
–
68
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
$
577 $
–
527
1,104
Other debt securities2
Canadian issuers
Other issuers
Total FVO securities
21
364
385
$ 1,489 $
– $
–
161
161
236
233
469
630 $
116 $
2 $
18 $
86
–
202
431
–
433
201
–
219
713 $
– $
718
–
–
688
– 2,119
560
708
859
2,127
544
55
599
801 $
210
–
210
643 $
27
–
27
246 $
150
73
1,291
1,188
865
725
223 1,913
2,156
223 $ 4,032 $ 4,283
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
$ 3,307 $ 7,712 $ 4,127 $
595 $
946
253
4,178
1,185
9,869
1,839
11,172
7,495
1,935
30,153
1,655
19,139
8,889
5,556
39,366
3,473
5,390
560
136
10,154
484 $
9
12,326
–
–
12,819
– $ 16,225 $ 14,717
7,851
–
7,922
34,473
– 48,280
15,509
– 21,122
4,949
– 8,812
77,499
– 102,361
1,157
4,592
9,017
6,821
8,394
– 29,981
18,593
–
1,963
3,120
–
2,995
7,587
–
2,928
11,945
–
1,882
8,703
1,715
22
10,131
–
1,715
– 9,790
– 41,486
625
8,286
27,504
–
–
–
1
2,054
186
2,240
328
$ 12,990 $ 37,740 $ 51,311 $ 19,060 $ 23,023 $ 2,287 $ 146,411 $ 107,571
1,922
365
2,287 2,287
277
–
1,922
365
–
–
–
203
–
–
–
73
–
–
–
–
–
–
–
–
1 Represents contractual maturities. Actual maturities may differ due to prepayment
2 Certain comparative amounts have been reclassified to conform with the
privileges in the applicable contract.
presentation adopted in the current period.
152
TD BANK GROUP ANNUAL REPORT 2017 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
years to
specific
years maturity
10 years
Over 10
Total
Total
As at
October 31 October 31
2016
2017
$
1,527
4,528
6,055
– $
661 $
– $
– $
– $
4,930
11,076
16,667
5,195
5,410
10,605
8,673
1,417
10,090
2,206
–
2,206
661 $
– $
– 22,531
– 22,431
– 45,623
802
21,845
28,643
51,290
17,295
–
9,436
–
6,374
2,018
33,105
2,018
8,073
84,395
$ 36,397 $ 74,096 $ 75,258 $ 40,444 $ 46,503 $ 34,520 $ 307,218 $ 275,653
–
8,837
– 10,728
– 6,175
– 25,740
– 71,363
3,205
–
2,417
5,622
22,289
3,551
10,728
–
14,279
16,485
1,276
–
1,333
2,609
13,214
805
–
407
1,212
11,302
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, 2017
As at
October 31, 2016
Cost/
Gross
amortized unrealized unrealized
(losses)
Gross
cost1
gains
Cost/
Gross
Fair amortized unrealized unrealized
(losses)
cost1
Gross
gains
value
Fair
value
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
$ 16,200
7,859
48,082
21,067
8,757
101,965
29,879
1,706
9,753
41,338
1,821
313
2,134
250
$ 145,687
$ 53
66
310
69
56
554
135
9
63
207
114
52
166
27
$ 954
1 Includes the foreign exchange translation of amortized cost balances at the
period-end spot rate.
$
(3)
(28) $ 16,225 $ 14,671
7,871
7,922
(112) 48,280 34,377
(14) 21,122 15,574
4,916
8,812
(158) 102,361 77,409
(1)
(33) 29,981 18,665
624
1,715
–
(26)
8,229
9,790
(59) 41,486 27,518
(13)
–
(13)
–
1,922
365
2,287
277
1,934
168
2,102
301
$ (230) $ 146,411 $ 107,330
$ 62
29
176
13
37
317
57
1
83
141
134
18
152
27
$ 637
$ (16) $ 14,717
(49) 7,851
(80) 34,473
(78) 15,509
(4) 4,949
(227) 77,499
–
(129) 18,593
625
(26) 8,286
(155) 27,504
–
(14) 2,054
186
(14) 2,240
328
–
$ (396) $ 107,571
Securities Gains (Losses)
During the year ended October 31, 2017, the net realized gains (losses)
on available-for-sale securities were $147 million (2016 – $81 million;
2015 – $124 million) and on held-to-maturity securities were
$(8) million (2016 – nil). During the year ended October 31,2017,
the Bank sold certain held-to-maturity securities with an amortized
cost of $460 million (2016 – nil), due to significant external credit
ratings deterioration, resulting in a significant increase in the Bank’s
risk-weighted assets (RWA). Impairment losses on available-for-sale
securities for the year ended October 31, 2017, were $11 million
(2016 – $27 million; 2015 – $45 million).
153
TD BANK GROUP ANNUAL REPORT 2017 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
$ 218,653 $ 2,382
6,258
149,473
1,800
30,783
198,893
1,173
$ 597,802 $ 11,613
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
$ 750 $ 221,785
1,312 157,043
424 33,007
599 200,665
$ 3,085 $ 612,500
3,209
665
$ 616,374
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
$ 213,586 $ 2,523
6,390
136,650
1,825
29,715
191,229
1,454
$ 571,180 $ 12,192
$ 852 $ 216,961
1,392 144,432
374 31,914
891 193,574
$ 3,509 $ 586,881
1,674
974
$ 589,529
As at
October 31, 2017
Individually
Counter- insignificant
impaired
loans
party
specific
Allowance for loan losses1
Incurred
Total
but not allowance
for loan
losses
identified
loan losses
Net
loans
$
–
–
–
134
$ 134
126
3
$ 263
$
–
–
–
189
$ 189
206
4
$ 399
$ 42
147
335
29
$ 553
–
32
$ 585
$ 49
166
290
30
$ 535
–
58
$ 593
$
36 $
78 $ 221,707
803 156,240
656
1,264 31,743
929
1,294
1,457 199,208
$ 2,915 $ 3,602 $ 608,898
3,063
630
$ 2,935 $ 3,783 $ 612,591
146
35
20
–
October 31, 2016
$
48 $
656
924
1,198
$ 2,826
55
–
$ 2,881
97 $ 216,864
822 143,610
1,214 30,700
1,417 192,157
$ 3,550 $ 583,331
1,413
912
$ 3,873 $ 585,656
261
62
1 Excludes allowance for off-balance sheet positions.
2 As at October 31, 2017, impaired loans exclude $0.6 billion (October 31, 2016 –
$1.1 billion) of gross impaired debt securities classified as loans.
3 Excludes trading loans with a fair value of $11 billion as at October 31, 2017
(October 31, 2016 – $12 billion), and amortized cost of $11 billion as at
October 31, 2017 (October 31, 2016 – $11 billion).
5 As at October 31, 2017, impaired loans with a balance of $99 million did not
have a related allowance for loan losses (October 31, 2016 – $448 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 $16 billion
4 Includes insured mortgages of $106 billion as at October 31, 2017
as at October 31, 2017 (October 31, 2016 – $18 billion).
(October 31, 2016 – $118 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
$78 million as at October 31, 2017 (October 31, 2016 – $106 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
$ 790
1,477
424
687
$ 3,378
Carrying
value
$ 750
1,312
424
599
$ 3,085
October 31, 2017
Related
allowance
for credit
losses
Average
gross
impaired
loans
$ 42
$ 801
147
335
163
$ 687
1,349
391
706
$ 3,247
Unpaid
principal
balance2
$ 909
1,557
374
984
$ 3,824
Carrying
value
$ 852
1,392
374
891
$ 3,509
As at
October 31, 2016
Related
allowance
for credit
losses
$ 49
166
290
219
$ 724
Average
gross
impaired
loans
$ 844
1,492
345
883
$ 3,564
1 Excludes ACI loans and debt securities classified as loans.
2 Represents contractual amount of principal owed.
154
TD BANK GROUP ANNUAL REPORT 2017 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
2016
Provision
for credit
losses
Write-offs
Recoveries
Disposals
Foreign
exchange
and other
adjustments
Balance
as at
October 31
2017
$ 189
206
$
$ 48
–
$
–
(63)
$
(9)
(6)
$ 134
126
(19)
(2)
(21)
(4)
(25)
$
(75)
(9)
(84)
–
(84)
29
788
1,173
59
(41)
(1,070)
(1,372)
(91)
395
4
399
49
166
290
30
48
17
65
6
267
252
30
535
58
2,049
(34)
(2,574)
(1)
555
5
593
2,015
(2,575)
560
48
685
1,169
1,424
55
3,381
97
851
1,459
1,643
261
4,311
62
4,373
500
$ 3,873
(11)
17
91
140
(11)
226
18
805
1,264
180
(13)
2,254
(38)
2,216
79
$ 2,137
–
–
–
–
–
–
(41)
(1,070)
(1,372)
(166)
(9)
(2,658)
(1)
(2,659)
–
$ (2,659)
–
–
–
–
–
–
6
267
252
78
–
603
22
625
–
$ 625
(63)
–
(63)
(15)
(14)
(29)
–
–
–
–
–
–
–
–
–
–
–
(20)
(1)
(4)
(8)
1
(12)
4
(8)
(1)
(13)
(29)
(38)
(4)
260
3
263
42
147
335
29
553
32
585
36
689
1,231
1,526
20
(20)
(85)
3,502
–
–
–
–
(83)
(83)
–
(83)
–
$ (83)
(2)
(17)
(37)
(46)
(10)
(112)
(10)
(122)
(12)
$ (110)
78
836
1,566
1,689
146
4,315
35
4,350
567
$ 3,783
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.
155
TD BANK GROUP ANNUAL REPORT 2017 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
2015
Provision
for credit
losses
Write-offs
Recoveries
Disposals
Foreign
exchange
and other
adjustments
Balance
as at
October 31
2016
$ 156
207
$
79
8
$
(85)
(14)
363
6
369
47
136
217
28
87
(6)
81
31
727
994
63
(99)
–
(99)
(40)
(957)
(1,153)
(98)
$ 44
–
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
(11)
20
121
333
(4)
2,873
459
–
–
–
–
–
–
–
–
–
–
–
–
105
793
1,246
1,256
264
3,664
83
3,747
313
$ 3,434
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
$ (1)
–
(1)
–
(1)
–
(1)
–
–
(1)
–
(1)
–
–
–
–
–
$ (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
–
(1)
–
(1)
–
(2)
–
(2)
–
$ (2)
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 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
$ 1,852
5,257
1,278
1,007
$ 9,394
31-60
days
$ 419
781
323
133
$ 1,656
October 31, 2017
61-89
days
Total
1-30
days
$ 111 $ 2,382 $ 1,876
5,364
220
1,340
199
33
1,270
$ 563 $ 11,613 $ 9,850
6,258
1,800
1,173
31-60
days
$ 486
812
303
138
$ 1,739
As at
October 31, 2016
61-89
days
Total
$ 161 $ 2,523
6,390
214
1,825
182
46
1,454
$ 603 $ 12,192
156
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
COLLATERAL
As at October 31, 2017, the fair value of financial collateral held
against loans that were past due but not impaired was $198 million
(October 31, 2016 – $455 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 contain commercial, retail, and FDIC covered loans
originating from The South Financial Group and FDIC-assisted
acquisitions. At acquisition date, outstanding unpaid principal
balances were $6.3 billion and $2.1 billion, respectively, and
related fair values were $5.6 billion and $1.9 billion, respectively.
Acquired Credit-Impaired Loans
(millions of Canadian dollars)
As at
October 31 October 31
2016
2017
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
Total carrying value net of related allowance –
$ 362
(14)
(13)
335
(1)
(19)
$ 508
(11)
(17)
480
(1)
(35)
315
444
359
(14)
(15)
330
(2)
(13)
315
529
(15)
(20)
494
(3)
(23)
468
Acquired credit-impaired loans
$ 630
$ 912
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.
FDIC COVERED LOANS
As at October 31, 2017, the balance of FDIC covered loans was
$335 million (October 31, 2016 – $480 million) and was recorded in
Loans on the Consolidated Balance Sheet. As at October 31, 2017, the
balance of indemnification assets was $12 million (October 31, 2016 –
$22 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
derecognition since in most 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.
157
TD BANK GROUP ANNUAL REPORT 2017 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 Programs1
(millions of Canadian dollars)
As at
Nature of transaction
Securitization of residential mortgage loans
Other financial assets transferred related to securitization2
Total
Associated liabilities3
October 31, 2017
October 31, 2016
Fair
value
Carrying
amount
Fair
value
Carrying
amount
$ 24,986
3,964
28,950
$ (28,960)
$ 24,985
3,969
28,954
$ (28,833)
$ 26,930
3,342
30,272
$ (30,766)
$ 26,742
3,342
30,084
$ (30,408)
1 Certain comparative amounts have been restated to conform with the presentation
3 Includes securitization liabilities carried at amortized cost of $16 billion as at
adopted in the current period.
2 Includes asset-backed securities, asset-backed commercial paper, cash, repurchase
agreements, and Government of Canada securities used to fulfill funding
requirements of the Bank’s securitization structures after the initial securitization
of mortgage loans.
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
2017
2016
$ 20,482 $ 18,610
16,386
34,996
22,015
42,497
$ 20,264 $ 17,859
1 Certain comparative amounts have been restated to conform with the
presentation adopted in the current period.
2 Includes $2.1 billion, as at October 31, 2017, of assets related to repurchase
agreements or swaps that are collateralized by physical precious metals
(October 31, 2016 – $3.7 billion).
3 Associated liabilities are all related to repurchase agreements.
October 31, 2017 (October 31, 2016 – $18 billion), and securitization liabilities
carried at fair value of $13 billion as at October 31, 2017 (October 31, 2016 –
$12 billion).
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, 2017, the fair value of retained
interests was $32 million (October 31, 2016 – $31 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, 2017, the trading income recognized on
the retained interest was $15 million (October 31, 2016 – $2 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, 2017, the carrying value of
these servicing rights was $31 million (October 31, 2016 – $25 million)
and the fair value was $40 million (October 31, 2016 – $28 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, 2017, was $21 million (October 31, 2016 – $24 million).
158
TD BANK GROUP ANNUAL REPORT 2017 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 27, 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.
159
TD BANK GROUP ANNUAL REPORT 2017 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
(Legislative) Guarantor Limited Partnership (the “Covered Bond Entity”).
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 program
where the principal and interest payments of the notes are guaranteed
by the Covered Bond Entity. The Bank sold a portfolio of assets to the
Covered Bond Entity and provided a loan to the Covered Bond Entity
to facilitate the purchase. The Bank is restricted from accessing the
Covered Bond Entity’s assets under the relevant agreement. 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 Entity as it
has power over the key economic activities and retains all the variable
returns in this entity.
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.
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 and commitments
to certain U.S. municipal funds. Amounts in Other are predominantly
related to investments in community-based U.S. tax-advantage entities
described in Note 12. These holdings do not result in the consolidation
of these entities as TD does not have power over these entities.
160
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS Carrying Amount and Maximum Exposure to Unconsolidated Structured Entities
(millions of Canadian dollars)
Securitizations
Investment
funds and
trusts
Other
Total
Securitizations
October 31, 2017
Investment
funds and
trusts
As at
October 31, 2016
Other
Total
FINANCIAL ASSETS
Trading loans, securities,
and other
Derivatives1
Financial assets designated at
fair value through profit or loss
Available-for-sale securities
Held-to-maturity securities
Loans
Other
Total assets
FINANCIAL LIABILITIES
Derivatives1
Obligations related to securities
sold short
Total liabilities
Off-balance sheet exposure2
Maximum exposure to loss from
involvement with unconsolidated
structured entities
Size of sponsored unconsolidated
structured entities3
$ 7,395
–
$ 609
13
$
14
–
$ 8,018
13
$ 5,793
–
$ 642
30
$
–
–
$ 6,435
30
–
63,615
42,095
4,174
8
117,287
163
2,622
–
–
–
3,407
30
–
–
–
2,872
2,916
193
66,237
42,095
4,174
2,880
123,610
16
42,083
48,575
2,891
9
99,367
–
493
2,330
2,330
14,702
1,005
1,498
3,094
–
–
–
493
3,335
3,828
–
3,002
3,002
935
18,731
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
–
–
–
346
3,267
3,613
3,776
20,181
129,659
5,003
3,851
138,513
112,639
873
6,800
120,312
$ 13,020
$ 1,860
$ 1,750
$ 16,630
$ 14,215
$ 1,005
$ 1,750
$ 16,970
1 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.
2 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.
3 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 $1.8 billion (October 31, 2016 − $1.7 billion) for the
year ended October 31, 2017. The total AUM in these entities as
at October 31, 2017, was $196.8 billion (October 31, 2016 −
$191.6 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.
161
TD BANK GROUP ANNUAL REPORT 2017 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 bilaterally 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 certain options and futures.
The Bank’s derivative transactions relate to trading and non-trading
activities. The purpose of derivatives held for non-trading activities
is primarily for managing interest rate, foreign exchange and equity
risk related to the Bank’s funding, lending, investment activities,
and other asset/liability management activities. The Bank’s risk
management strategy for these risks is discussed in shaded sections
of the ‘Managing Risk’ section of the MD&A. The Bank also enters
into derivative transactions to economically hedge certain exposures
that do not otherwise qualify for hedge accounting, or where
hedge accounting is not considered feasible.
Where hedge accounting is applied, only a specific or a combination
of risk components are hedged, including benchmark interest rate,
foreign exchange rate, and equity price components. All these risk
components are observable in the relevant market environment and
the change in the fair value or the variability in cash flows attributable
to these risk components can be reliably measured for hedged items.
Where the derivatives are in hedge relationships, the main sources
of ineffectiveness can be attributed to differences between hedging
instruments and hedged items:
• Differences in fixed rates, when contractual coupons of the fixed
rate hedged items are designated;
• Differences in the discounting factors, when hedging derivatives are
collateralized and discounted using Overnight Indexed Swaps (OIS)
curves, which are not applied to the fixed rate hedged items;
• CRVA on the hedging derivatives; and
• Mismatch in critical terms.
To mitigate a portion of the ineffectiveness, the Bank designates the
benchmark risk component of contractual cash flows of hedged items
and executes hedging derivatives with high quality counterparties.
The majority of the Bank’s hedging derivatives are collateralized.
Interest Rate Derivatives
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.
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 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
162
rate agreements in that they are in standard amounts with standard
settlement dates and are transacted on an exchange.
The Bank uses interest rate swaps to hedge its exposure to benchmark
interest rate risk by modifying the repricing or maturity characteristics
of existing and/or forecasted assets and liabilities, including funding
and investment activities. These swaps are designated in either fair
value hedge against fixed rate asset/liability or cash flow hedge against
floating rate asset/liability. For fair value hedges, the Bank assesses
and measures the hedge effectiveness based on the change in the fair
value or cash flows of the derivative hedging instrument relative to the
change in the fair value or cash flows of the hedged item attributable
to benchmark interest rate risk. For cash flow hedges, the Bank
uses the hypothetical derivative having terms that identically match
the critical terms of the hedged item as the proxy for measuring
the change in fair value or cash flows of the hedged item.
Foreign Exchange Derivatives
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.
Where hedge accounting is applied, the Bank assesses and measures
the hedge effectiveness based on the change in the fair value of the
hedging instrument relative to translation gains and losses of net
investment in foreign operations or the change in cash flows of the
foreign currency denominated asset/liability attributable to foreign
exchange risk, using the hypothetical derivative method.
The Bank uses non-derivative instruments such as foreign currency
deposit liabilities and derivative instruments such as cross-currency
swaps and foreign exchange forwards to hedge its foreign currency
exposure. These hedging instruments are designated in either net
investment hedges or cash flow hedges.
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
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS in specified credit rating 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.
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.
Where hedge accounting is applied, the Bank uses equity forwards
and total return swaps to hedge its exposure to equity price risk. These
derivatives are designated as cash flow hedges. The Bank assesses
and measures the hedge effectiveness based on the change in the fair
value of the hedging instrument relative to the change in the cash
flows of the hedged item attributable to movement in equity price,
using the hypothetical derivative method.
Fair Value of Derivatives
(millions of Canadian dollars)
Derivatives held or issued for trading purposes
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
Derivatives held or issued for non-trading purposes
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
Total fair value
October 31, 2017
Fair value as at
balance sheet date
October 31, 2016
Fair value as at
balance sheet date
Positive
Negative
Positive
Negative
$
1
69
13,861
–
358
14,289
–
16,461
–
16,621
–
330
33,412
–
34
34
534
778
1,312
49,047
1
1,023
–
32
1,056
647
–
3,768
4,415
$
–
72
11,120
326
–
11,518
–
14,589
–
15,619
310
–
30,518
250
1
251
2,093
634
2,727
45,014
–
1,296
1
–
1,297
639
–
2,452
3,091
$
1
122
24,069
–
452
24,644
–
16,087
–
17,470
–
542
34,099
–
–
–
798
873
1,671
60,414
1
2,676
–
47
2,724
1,870
–
5,912
7,782
–
–
105
105
–
–
1,677
1,677
7,148
$ 56,195
1,707
1,707
6,200
$ 51,214
1,322
1,322
11,828
$ 72,242
$
–
49
20,232
414
–
20,695
–
16,743
–
18,613
568
–
35,924
101
2
103
1,413
663
2,076
58,798
–
1,492
3
–
1,495
393
–
3,239
3,632
154
154
1,346
1,346
6,627
$ 65,425
163
TD BANK GROUP ANNUAL REPORT 2017 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 Derivatives1
(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
Cash
flow
Net
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
$ 129
–
–
–
$ 129
$
39
4,376
–
760
$ 5,175
$ 495
–
–
–
$ 495
$ 529
7,676
–
525
$ 8,730
$ –
2
–
–
$ 2
$ –
66
–
–
$ 66
$ 888 $ 1,056
4,415
–
1,677
$ 1,842 $ 7,148
37
–
917
$ 56
–
–
–
$ 56
$ 777
2,733
–
5
$ 3,515
$ 12
316
–
–
$ 328
$ 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
$ 748
142
154
1,341
$ 2,385
$ 1,495
3,632
154
1,346
$ 6,627
As at
October 31, 2017
Derivative Liabilities
Derivatives
not in
qualifying
hedging
relationships
Total
$ 452
42
105
1,702
$ 2,301
$ 1,297
3,091
105
1,707
$ 6,200
October 31, 2016
1 Certain 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
2017
2016
2015
$
914
(933)
(19)
$
23
(4)
19
$
(773)
776
3
(2,229)
1,077
(2)
890
(8)
–
1,448
1,285
(11)
36
–
–
7,725
7,047
(4)
(3,732)
–
–
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 $24 billion as at October 31, 2017
(October 31, 2016 – $21 billion).
164
TD BANK GROUP ANNUAL REPORT 2017 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, 2017
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
$ 15,674
(18,249)
$ (2,575)
$ 18,375
(20,458)
$ (2,083)
$ 9,856
(14,388)
$ (4,532)
$ 3,048
(6,831)
$ (3,783)
$ 85
–
$ 85
$ 47,038
(59,926)
$ (12,888)
October 31, 2016
$ 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)
$
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, 2017, and October 31, 2016,
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
Total
1 Amounts are recorded in non-interest income.
2017
2016
$ 93
54
(45)
16
$ 118
$ (147)
7
(70)
2
$ (208)
2015
$ (108)
(23)
(35)
2
$ (164)
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.
165
TD BANK GROUP ANNUAL REPORT 2017 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)
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
Over-the-Counter1
Non
clearing
house
Clearing
house2
$
– $
392,742
5,534,758
–
–
5,927,500
–
136,008
506,189
17,629
13,163
672,989
–
–
– 1,457,790
–
–
592,222
–
–
22,272
22,713
–
– 2,094,997
8,973
1,427
10,400
581
267
848
–
210
210
51,535
22,869
74,404
$ 5,938,110 $ 2,843,238
October 31
2017
As at
October 31
2016
Trading
Exchange-
traded
Total
Non-
trading3
Total
Total
$ 445,848 $ 445,848 $
–
–
90,214
112,087
648,149
528,750
6,040,947
107,843
125,250
7,248,638
– $
195
445,848 $ 438,709
507,485
528,945
6,063,466
1,336,421 7,377,368
57,724
108,135
87,787
126,785
7,155,171
1,338,443 8,587,081
292
1,535
3
–
–
–
–
–
3
–
–
–
3
1,457,790
–
592,222
22,272
22,713
2,095,000
–
3
27,162 1,484,952
–
674,533
22,272
22,713
109,473 2,204,473
–
82,311
–
–
7
1,160,653
–
645,783
32,097
32,683
1,871,223
9,554
1,694
11,248
2,673
–
2,673
12,227
1,694
13,921
9,433
858
10,291
120,884
58,367
46,287
24,719
83,086
167,171
$ 731,238 $ 9,512,586 $ 1,483,091 $ 10,995,677 $ 9,203,856
32,502
–
32,502
142,404
47,798
190,202
109,902
47,798
157,700
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 $1,173 billion of over-the-counter derivatives that are transacted
with clearing houses (October 31, 2016 – $894 billion) and $310 billion of
over-the-counter derivatives that are transacted with non-clearing houses
(October 31, 2016 – $340 billion) as at October 31, 2017. There were
no exchange-traded derivatives both as at October 31, 2017 and
October 31, 2016.
166
TD BANK GROUP ANNUAL REPORT 2017 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
2017
As at
October 31
2016
Remaining term to maturity
Within
1 year
$ 360,820
493,160
2,844,182
90,566
110,874
3,899,602
3
1,431,623
–
173,881
18,629
19,519
1,643,655
1,888
116
2,004
Over
1 year to
5 years
$
85,028
35,785
3,535,464
15,718
14,309
3,686,304
–
50,181
–
382,707
3,613
3,156
439,657
3,536
1,578
5,114
Over
5 years
$
–
–
997,722
1,851
1,602
1,001,175
–
3,148
–
117,945
30
38
121,161
6,803
–
6,803
Total
Total
$
445,848
528,945
7,377,368
108,135
126,785
8,587,081
3
1,484,952
–
674,533
22,272
22,713
2,204,473
$ 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
12,227
1,694
13,921
9,433
858
10,291
92,567
39,609
132,176
$ 5,677,437
49,804
7,577
57,381
$ 4,188,456
33
612
645
$ 1,129,784
142,404
47,798
190,202
$ 10,995,677
120,884
46,287
167,171
$ 9,203,856
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 and non-trading businesses 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 group 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.
167
TD BANK GROUP ANNUAL REPORT 2017 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
2017
$ 32,494
7,031
1,811
$ 41,336
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, 2017
As at
October 31, 2016
Current
replacement
cost
Credit
equivalent
amount
Risk-
weighted
amount
Current
replacement
cost
Credit
equivalent
amount
$
22
13,516
370
13,908
16,816
20,388
330
37,534
5
1,553
645
2,203
53,645
36,522
17,123
6,889
10,234
1,566
$ 11,800
$
202
17,710
433
18,345
32,408
37,415
685
70,508
360
5,152
1,779
7,291
96,144
54,970
41,174
7,672
33,502
16,322
$ 49,824
$
86
6,493
167
6,746
4,156
7,041
153
11,350
148
952
371
1,471
19,567
13,606
5,961
1,141
4,820
1,864
$ 6,684
$
132
21,542
495
22,169
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
$
256
26,041
569
26,866
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
Canada1
October 31
2016
$ 38,574
9,198
2,336
$ 50,108
October 31
2017
$ 2,355
16
433
$ 2,804
United States1
October 31
2016
Other International1
October 31
2016
October 31
2017
$ 4,374
80
1,128
$ 5,582
$ 5,159
3,420
926
$ 9,505
$ 6,420
2,193
1,611
$ 10,224
October 31
2017
$ 40,008
10,467
3,170
$ 53,645
Risk-
weighted
amount
$
64
11,577
278
11,919
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
As at
Total
October 31
2016
$ 49,368
11,471
5,075
$ 65,914
October 31
2017
$ 3,749
3,312
October 31
2016
$ 4,913
4,009
712
1,671
790
3,173
$ 10,234
903
1,002
908
2,813
$ 11,735
43,411
$ 10,234
54,179
$ 11,735
October 31
2017
% mix
October 31
2016
% mix
36.6%
32.4
7.0
16.3
7.7
31.0
100.0%
41.9%
34.2
7.7
8.5
7.7
23.9
100.0%
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
rating of the Bank, either as counterparty or as guarantor of one of the
Bank’s subsidiaries. At October 31, 2017, the aggregate net liability
position of those contracts would require: (1) the posting of collateral
or other acceptable remedy totalling $193 million (October 31, 2016 –
$233 million) in the event of a one-notch or two-notch downgrade
in the Bank’s senior debt rating; and (2) funding totalling $26 million
(October 31, 2016 – 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 rating.
168
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 credit rating of the Bank, to post additional collateral. As at
October 31, 2017, the fair value of all derivative instruments with credit
risk related contingent features in a net liability position was $9 billion
(October 31, 2016 – $15 billion). The Bank has posted $13 billion
(October 31, 2016 – $18 billion) of collateral for this exposure in the
normal course of business. As at October 31, 2017, the impact of a
one-notch downgrade in the Bank’s credit rating would require the Bank
to post an additional $121 million (October 31, 2016 – $111 million) of
collateral to that posted in the normal course of business. A two-notch
down grade in the Bank’s credit rating would require the Bank to post
an additional $156 million (October 31, 2016 – $123 million) of
collateral to that posted in the normal course of business.
TD BANK GROUP ANNUAL REPORT 2017 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.
In connection with TD Ameritrade’s acquisition of Scottrade Financial
Services, Inc. (Scottrade) on September 18, 2017, TD Ameritrade issued
38.8 million shares, of which the Bank purchased 11.1 million pursuant
to its pre-emptive rights. The Bank purchased the shares at a price of
US$36.12. As a result of the share issuance, the Bank’s common stock
ownership percentage in TD Ameritrade decreased and the Bank
realized a dilution gain of $204 million recorded in Other Income on the
Consolidated Statement of Income. Refer to Note 13 for a discussion on
the acquisition of Scottrade Bank.
As at October 31, 2017, the Bank’s reported investment in
TD Ameritrade was 41.27% (October 31, 2016 – 42.38%) of the
outstanding shares of TD Ameritrade with a fair value of $15 billion
(US$12 billion) (October 31, 2016 – $10 billion (US$8 billion)) based
on the closing price of US$49.99 (October 31, 2016 – US$34.21)
on the New York Stock Exchange.
During the year ended October 31, 2017, TD Ameritrade repurchased
nil shares (for the year ended October 31, 2016 – 12.0 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, 2017, and
October 31, 2016, TD Ameritrade did not experience any significant
restrictions to transfer funds in the form of cash dividends, or
repayment of loans or advances.
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
September 30
2017
September 30
2016
As at
$ 1,721
22,127
25,985
$ 49,833
$ 3,230
32,391
4,862
40,483
9,350
$ 49,833
$ 1,596
16,014
21,038
$ 38,648
$ 2,736
25,555
3,583
31,874
6,774
$ 38,648
1 Customers’ securities are reported on a settlement date basis whereas the Bank
2 The difference between the carrying value of the Bank’s investment in TD Ameritrade
reports customers’ securities on a trade date basis.
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 (Canadian dollars)
Earnings per share – diluted (Canadian dollars)
1 The Bank’s equity share of net income of TD Ameritrade is based on the published
consolidated financial statements of TD Ameritrade after converting into Canadian
dollars. The Bank’s equity share of net income of TD Ameritrade is also subject to
adjustments relating to the amortization of certain intangibles, which are
not included.
For the years ended September 30
2017
2016
2015
$ 903
3,923
4,826
1,260
1,639
2,899
95
1,832
686
$ 1,146
$ 2.17
2.16
$ 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
169
TD BANK GROUP ANNUAL REPORT 2017 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, 2017,
or October 31, 2016. The carrying amount of the Bank’s investment in
individually immaterial associates and joint ventures during the period
was $3 billion (October 31, 2016 – $3 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 Scottrade Bank
On September 18, 2017, the Bank acquired 100% of the outstanding
equity of Scottrade Bank, a federal savings bank wholly-owned by
Scottrade, for cash consideration of approximately $1.6 billion
(US$1.4 billion). Scottrade Bank merged with TD Bank, N.A. In
connection with the acquisition, TD has agreed to accept sweep
deposits from Scottrade clients, expanding the Bank’s existing sweep
deposit activities. The acquisition is consistent with the Bank’s
U.S. strategy.
The acquisition was accounted for as a business combination under
the purchase method. Goodwill of $34 million reflects the excess of
the consideration paid over the fair value of the identifiable net assets.
Goodwill will be deductible for tax purposes. The results of the
acquisition have been consolidated with the Bank’s results and are
reported in the U.S. Retail segment. Since the acquisition date,
the contribution of Scottrade Bank to the Bank’s revenue and net
income was not significant nor would it have been significant if
the acquisition had occurred as of November 1, 2016.
The following table presents the estimated fair values of the assets
and liabilities acquired as of the date of acquisition. The valuation
of assets acquired and liabilities assumed is subject to refinement
and may be adjusted to reflect new information about facts and
circumstances that existed at the acquisition date during the
measurement period.
Fair Value of Identifiable Net Assets Acquired
(millions of Canadian dollars)
Assets acquired
Cash and due from banks
Securities
Loans
Other assets
Less: Liabilities assumed
Deposits
Other liabilities
Fair value of identifiable net assets acquired
Goodwill
Total purchase consideration
Amount
$
750
14,474
5,284
149
20,657
18,992
57
1,608
34
$ 1,642
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.
N O T E 1 4
GOODWILL AND OTHER INTANGIBLES
The recoverable amount 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 recoverable amount of
CGUs, and the use of different assumptions and estimates in the
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 $14 billion and primarily related
to treasury assets and excess capital 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 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.
170
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
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 10 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 their 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 had been
experiencing continued losses. The impairment losses on intangibles
are reported in the Corporate segment as other non-interest expenses.
Goodwill by Segment
(millions of Canadian dollars)
Carrying amount of goodwill as at November 1, 2015
Impairment losses2
Foreign currency translation adjustments and other
Carrying amount of goodwill as at October 31, 2016
Impairment losses2
Additions
Foreign currency translation adjustments and other
Carrying amount of goodwill as at October 31, 2017
Pre-tax discount rates
2016
2017
1 Goodwill predominantly relates to U.S. personal and commercial banking.
2 Accumulated impairment as at October 31, 2017, was nil
(October 31, 2016 – $52 million).
OTHER INTANGIBLES
The following table presents details of other intangibles as at October 31.
Canadian
Retail
$ 2,369
(52)
20
2,337
–
–
(34)
$ 2,303
U.S. Retail1
$ 13,818
–
357
14,175
–
34
(516)
$ 13,693
Wholesale
Banking
$ 150
–
–
150
–
10
–
$ 160
Total
$ 16,337
(52)
377
16,662
–
44
(550)
$ 16,156
9.1–10.7%
9.1–10.7
9.9–10.5%
10.1–10.5
12.4%
12.2
Other Intangibles
(millions of Canadian dollars)
Cost
As at November 1, 2015
Additions
Disposals
Fully amortized intangibles
Foreign currency translation adjustments and other
As at October 31, 2016
Additions
Disposals
Fully amortized intangibles
Foreign currency translation adjustments and other
At October 31, 2017
Amortization and impairment
As at November 1, 2015
Disposals
Impairment losses
Amortization charge for the year
Fully amortized intangibles
Foreign currency translation adjustments and other
As at October 31, 2016
Disposals
Impairment losses
Amortization charge for the year
Fully amortized intangibles
Foreign currency translation adjustments and other
As at October 31, 2017
Net Book Value:
As at October 31, 2016
As at October 31, 2017
Core deposit
intangibles
Credit card
related
intangibles
Internally
generated
software
Other
software
Other
intangibles
$ 2,557
–
–
–
66
2,623
–
–
–
(100)
$ 2,523
$ 2,024
–
–
147
–
54
2,225
–
–
121
–
(86)
$ 2,260
$ 758
–
–
–
4
762
–
–
–
(6)
$ 756
$ 270
–
–
85
–
1
356
–
–
90
–
(4)
$ 442
$ 1,938
598
(42)
(226)
(2)
2,266
576
(93)
(171)
(29)
$ 2,549
$ 683
(37)
36
333
(226)
(3)
786
(91)
1
368
(171)
(5)
$ 888
$ 301
64
(7)
(3)
32
387
82
(16)
(142)
(3)
$ 308
$ 187
(6)
3
82
(3)
(2)
261
(16)
–
80
(142)
(3)
$ 180
$ 660
9
–
–
6
675
74
(58)
(110)
(16)
$ 565
$ 379
–
22
44
–
1
446
(58)
–
44
(110)
(9)
$ 313
Total
$ 6,214
671
(49)
(229)
106
6,713
732
(167)
(423)
(154)
$ 6,701
$ 3,543
(43)
61
691
(229)
51
4,074
(165)
1
703
(423)
(107)
$ 4,083
$ 398
263
$ 406
314
$ 1,480
1,661
$ 126
128
$ 229
252
$ 2,639
2,618
171
TD BANK GROUP ANNUAL REPORT 2017 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
Cost
As at November 1, 2015
Additions
Disposals
Fully depreciated assets
Foreign currency translation adjustments and other
As at October 31, 2016
Additions
Disposals
Fully depreciated assets
Foreign currency translation adjustments and other
As at October 31, 2017
Accumulated depreciation and impairment/losses
As at November 1, 2015
Depreciation charge for the year
Disposals
Impairment losses
Fully depreciated assets
Foreign currency translation adjustments and other
As at October 31, 2016
Depreciation charge for the year
Disposals
Impairment losses
Fully depreciated assets
Foreign currency translation adjustments and other
As at October 31, 2017
Net Book Value:
As at October 31, 2016
As at October 31, 2017
N O T E 1 6
OTHER ASSETS
Other Assets
(millions of Canadian dollars)
Accounts receivable and other items
Accrued interest
Current income tax receivable
Defined benefit asset
Insurance-related assets, excluding investments
Prepaid expenses
Total
N O T E 1 7
DEPOSITS
$ 1,018
–
–
–
(6)
1,012
–
(2)
–
(41)
$ 969
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
$ 3,256
175
(72)
(68)
58
3,349
168
(19)
(73)
(110)
$ 3,315
$ 1,135
148
(42)
–
(68)
(26)
1,147
132
(15)
–
(73)
(40)
$ 1,151
$ 790
265
(4)
(195)
3
859
153
(21)
(122)
(16)
$ 853
$ 419
172
(4)
2
(195)
12
406
175
(22)
–
(122)
(4)
$ 433
$ 1,443
163
(34)
(241)
(11)
1,320
145
(30)
(101)
(49)
$ 1,285
$ 681
154
(32)
–
(241)
4
566
142
(29)
–
(101)
(26)
$ 552
$ 1,754
143
(27)
(47)
35
1,858
114
(31)
(48)
(9)
$ 1,884
$ 712
147
(27)
6
(47)
6
797
154
(30)
–
(48)
(16)
$ 857
$ 8,261
746
(137)
(551)
79
8,398
580
(103)
(344)
(225)
$ 8,306
$ 2,947
621
(105)
8
(551)
(4)
2,916
603
(96)
–
(344)
(86)
$ 2,993
$ 1,012
969
$ 2,202
2,164
$ 453
420
$ 754
733
$ 1,061
1,027
$ 5,482
5,313
October 31
2017
$ 7,932
1,945
832
13
1,536
1,006
$ 13,264
As at
October 31
2016
$ 8,092
1,634
389
11
1,758
906
$ 12,790
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, 2017, was $258 billion (October 31, 2016 –
$231 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.
172
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
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 offices
In foreign offices
Interest-bearing deposits included above
In domestic offices
In foreign offices
U.S. federal funds deposited1
Total2,4
By Type
By Country
October 31 October 31
2016
2017
As at
Demand
Notice
Term
Canada United States
International
Total
Total
$ 13,664 $ 403,984 $ 50,507 $ 213,890
11,576
7,223
237,706
76,066
–
–
19,770
–
$ 96,953 $ 523,806 $ 292,005 $ 482,942
18,616
142,942
–
79,940
48
119,774
–
–
$ 254,160
5,168
93,023
–
43,707
$ 396,058
105 $ 468,155 $ 439,232
$
17,201
25,887
9,143
317,227
338,782
8,053
–
176
–
79,786
79,940
16,463
$ 33,764 $ 912,764 $ 853,622
$ 39,547 $ 35,401
53,089
52,915
443,395
371,728
5,179
409,657
355,456
19
$ 912,764 $ 853,622
1 Includes deposits and advances with the Federal Home Loan Bank.
2 As at October 31, 2017, includes $29 billion in Deposits on the Consolidated
Balance Sheet relating to covered bondholders (October 31, 2016 – $29 billion)
and $2 billion (October 31, 2016 – $2 billion) due to TD Capital Trust IV.
3 Included in Other financial liabilities designated at fair value through profit or
loss on the Consolidated Balance Sheet.
4 As at October 31, 2017, includes deposits of $522 billion (October 31, 2016 –
$474 billion) denominated in U.S. dollars and $44 billion (October 31, 2016 –
$48 billion) denominated in other foreign currencies.
Term Deposits by Remaining Term to Maturity
(millions of Canadian dollars)
As at
October 31 October 31
2016
2017
Within
1 year
Personal
Banks
Business and government
Designated at fair value through profit or loss1
Trading
Total
$ 30,793
18,602
69,139
–
76,266
$ 194,800
Over
1 year to
2 years
$ 9,487
3
15,783
–
1,494
$ 26,767
Over
2 years to
3 years
Over
3 years to
4 years
$ 5,094
–
16,354
–
289
$ 21,737
$ 2,585
–
15,025
–
546
$ 18,156
Over
4 years to
5 years
$ 2,483
–
12,086
–
634
$ 15,203
Over
5 years
Total
Total
$
65 $ 50,507 $ 50,180
11
9,133
18,616
127,582
14,555
142,942
–
176
–
79,786
711
79,940
$ 15,342 $ 292,005 $ 266,857
1 Included in Other financial liabilities designated at fair value through profit or
loss on the Consolidated Balance Sheet.
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.
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
2017
As at
October 31
2016
Within
3 months
$ 11,010
17,141
42,767
–
31,183
$ 102,101
Over 3
months to
6 months
Over 6
months to
12 months
Total
Total
$ 6,424
1,354
15,492
–
25,071
$ 48,341
$ 13,359
107
10,880
–
20,012
$ 44,358
$ 30,793
18,602
69,139
–
76,266
$ 194,800
$ 28,897
9,115
48,211
176
76,677
$ 163,076
October 31
2017
$ 4,492
988
3,348
2,060
82
178
2,463
5,835
1,016
$ 20,462
As at
October 31
2016
$ 4,401
960
2,829
1,598
58
345
3,011
5,469
1,025
$ 19,696
173
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
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
September 20, 2022
July 9, 2023
May 26, 2025
June 24, 20254
September 30, 20254
July 25, 20294
March 4, 20314
September 15, 20314
December 14, 2105
December 18, 2106
Total
Interest
rate (%)
Reset
spread (%)
Earliest par
redemption
date
October 31
2017
October 31
2016
As at
4.6441
5.8281
9.150
2.6921
2.9821
3.2241
4.8591
3.6256
4.7797
5.7637
1.0001 September 20, 20172
2.5501
July 9, 2018
n/a3
–
1.2101
June 24, 2020
1.8301 September 30, 2020
July 25, 20245
1.2501
3.4901
March 4, 2026
2.2056 September 15, 2026
1.7407 December 14, 20168
1.9907 December 18, 20179
$
–
650
199
1,492
987
1,460
1,164
1,776
–
1,800
$ 9,528
$
260
650
200
1,517
1,004
–
1,242
1,968
2,250
1,800
$ 10,891
1 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.
2 On September 20, 2017 (the “Redemption Date”), TD Bank, N.A., an indirect
subsidiary of the Bank, redeemed all of its outstanding $270 million 4.644% fixed
rate/floating rate subordinated notes due September 20, 2022, at a redemption
price of 100% of the principal amount, together with any accrued and unpaid
interest thereon up to the Redemption Date.
3 Not applicable.
4 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, 450 million for the 3.224% subordinated debentures
due July 25, 2029, 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.
5 On July 25, 2017, the Bank issued $1.5 billion of NVCC medium term notes
constituting subordinated indebtedness of the Bank (the “Notes”). The Notes
will bear interest at a fixed rate of 3.224% per annum (paid semi-annually) until
July 25, 2024, and at the three-month Bankers’ Acceptance rate plus 1.25%
thereafter (paid quarterly) until maturity on July 25, 2029. With the prior approval
of OSFI, the Bank may, at its option, redeem the Notes on or after July 25, 2024,
in whole or in part, at par plus accrued and unpaid interest. Not more than 60
nor less than 30 days’ notice is required to be given to the Notes’ holders for
such redemptions.
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 December 14, 2016, the Bank redeemed all of its outstanding $2.25 billion
4.779% subordinated debentures due December 14, 2105, at a redemption price
of 100% of the principal amount.
9 Subsequent to year end, on November 7, 2017, the Bank announced its intention to
exercise its right to redeem on December 18, 2017, all of its outstanding $1.8 billion
5.763% subordinated debentures due December 18, 2106, at a redemption price of
100% of the principal amount.
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
As at
October 31 October 31
2016
2017
$
– $ 2,250
–
–
–
–
–
–
8,641
9,528
$ 9,528 $ 10,891
174
TD BANK GROUP ANNUAL REPORT 2017 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, 2017, there was $450 million (October 31, 2016 –
$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
2016
of the issuer
yield
2017
Redemption
date
As at
1,000
June 30, Dec. 31
7.243%1 Dec. 31, 20132
$ 983
$ 989
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.
175
TD BANK GROUP ANNUAL REPORT 2017 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, 2017
October 31, 2016
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
Series 161
Balance as at end of year – preferred shares
Treasury shares – common2
Balance as at beginning of year
Purchase of shares
Sale of shares
Balance as at end of year – treasury shares – common
Treasury shares – preferred2
Balance as at beginning of year
Purchase of shares
Sale of shares
Balance as at end of year – treasury shares – preferred
Number
of shares
1,857.6
3.0
4.9
(23.0)
1,842.5
5.4
4.6
5.5
4.5
20.0
20.0
20.0
14.0
8.0
6.0
28.0
40.0
14.0
190.0
0.4
148.3
(145.8)
2.9
0.2
7.3
(7.2)
0.3
Amount
$ 20,711
148
329
(257)
$ 20,931
$
135
115
137
113
500
500
500
350
200
150
700
1,000
350
$ 4,750
$
$
$
$
(31)
(9,654)
9,509
(176)
(5)
(175)
173
(7)
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)
1 NVCC Series 1, 3, 5, 7, 9, 11, 12, 14, and 16 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, 200 million, and
70 million, respectively.
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.
Preferred Shares Terms and Conditions
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
Series 162
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 14, 2017
July 31, 2013
October 31, 2013
3.371
3.5595
3.9
3.8
3.75
3.6
3.7
5.5
4.85
4.50
n/a
n/a
1.60
1.68
2.24
2.27
2.25
2.79
2.87
4.66
4.12
3.01
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
October 31, 2022
Series T
Series Z
Series 2
Series 4
Series 6
Series 8
Series 10
Series 13
Series 15
Series 17
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.
176
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
NORMAL COURSE ISSUER BID
On September 18, 2017, the Bank announced that the Toronto Stock
Exchange (TSX) and OSFI approved the Bank’s amended normal course
issuer bid (NCIB) to repurchase for cancellation up to an additional
20 million of the Bank’s common shares. On October 4, 2017, in
connection with its amended NCIB, the Bank announced its intention
to purchase for cancellation up to 7.98 million of its common shares
pursuant to specific share repurchase programs. During the quarter
ended October 31, 2017, the Bank completed the purchase of
common shares pursuant to the specific share repurchase programs,
which shares were purchased at a discount to the prevailing market
price of the Bank’s common shares on the TSX at the time of purchase.
During the three months ended October 31, 2017, the Bank repurchased
7.98 million common shares under its amended NCIB at an average
price of $64.80 per share for a total amount of $517 million.
On March 16, 2017, the Bank announced that the TSX and OSFI
approved the Bank’s previously announced NCIB to repurchase for
cancellation up to 15 million of the Bank’s common shares. On
March 28, 2017, in connection with its NCIB, the Bank announced its
intention to purchase for cancellation up to 14.5 million of its common
shares pursuant to a specific share repurchase program. During the
quarter ended April 30, 2017, the Bank completed the purchase of
common shares pursuant to the specific share repurchase program,
which shares were purchased at a discount to the prevailing market
price of the Bank’s common shares on the TSX at the time of purchase.
During the three months ended April 30, 2017, the Bank repurchased
15 million common shares under its NCIB at an average price of
$58.65 per share for a total amount of $880 million.
On December 9, 2015, the Bank announced that the TSX and OSFI
approved the Bank’s previously announced NCIB to repurchase for
cancellation up to 9.5 million of the Bank’s common shares. On
January 11, 2016, in connection with its NCIB, the Bank announced its
intention to purchase for cancellation up to 3 million of its common
shares pursuant to private agreements between the Bank and an arm’s
length third party seller. During the quarter ended January 31, 2016,
the Bank completed the purchase of common shares by way of private
agreements, which shares were purchased at a discount to the
prevailing market price of the Bank’s common shares on the TSX at the
time of purchase. During the three months ended January 31, 2016,
the Bank repurchased 9.5 million common shares under its NCIB 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, 4.9 million common shares at a discount of 0% were issued from
the Bank’s treasury (2016 – 6.0 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.
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 shares, Series A1
TD Capital Trust III Securities – Series 20082
Total
As at
October 31 October 31
2016
2017
$
–
983
$ 983
$ 661
989
$ 1,650
1 On October 15, 2017, Northgroup Preferred Capital Corporation, a subsidiary
of TD Bank, N.A., redeemed all of its 500,000 outstanding fixed-to-floating rate
exchangeable non-cumulative perpetual preferred stock, Series A (“REIT Preferred
Shares”) at the cash redemption price of US$1,000 per REIT Preferred Share,
for total redemption proceeds of US$500 million.
2 Refer to Note 20 for a description of the TD Capital Trust III securities.
177
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
N O T E 2 2
INSURANCE
INSURANCE REVENUE AND EXPENSES
IInsurance revenue and expenses are presented on the Consolidated
Statement of Income under insurance revenue and insurance claims
and related expenses, respectively, net of impact of reinsurance.
Insurance Revenue and Insurance Claims and Related Expenses
(millions of Canadian dollars)
Insurance Revenue
Earned Premiums
Gross
Reinsurance ceded
Net earned premiums
Fee income and other revenue1
Insurance Revenue
Insurance Claims and Related Expenses
Gross
Reinsurance ceded
Insurance Claims and Related Expenses
1 Ceding commissions received and paid are included within fee income and other
revenue. Ceding commissions paid and netted against fee income in 2017 were
$127 million (2016 – $142 million; 2015 – $177 million).
RECONCILIATION OF CHANGES IN LIABILITIES FOR PROPERTY
AND CASUALTY INSURANCE
For property and casualty insurance, the recognized liabilities are
comprised of provision for unpaid claims (section (a) below), unearned
premiums (section (b) below) and other liabilities (section (c) below).
For the years ended October 31
2017
2016
2015
$ 4,132
915
3,217
543
3,760
2,381
135
$ 2,246
$ 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
(a) Movement in Provision for Unpaid Claims
The following table presents movements in the property and casualty
insurance 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 reinsurance/other recoverables
Balance as at end of year
October 31, 2017
October 31, 2016
Reinsurance/
Other
recoverable
$ 388
–
(52)
1
(6)
(57)
–
(134)
(134)
(5)
$ 192
Gross
$ 5,214
2,425
(370)
(83)
(11)
1,961
(1,052)
(1,153)
(2,205)
(5)
$ 4,965
Net
$ 4,826
2,425
(318)
(84)
(5)
2,018
(1,052)
(1,019)
(2,071)
–
$ 4,773
Gross
$ 4,757
2,804
(264)
(4)
30
2,566
(1,189)
(960)
(2,149)
40
$ 5,214
Reinsurance/
Other
recoverable
$ 138
366
(16)
(3)
6
353
(135)
(8)
(143)
40
$ 388
Net
$ 4,619
2,438
(248)
(1)
24
2,213
(1,054)
(952)
(2,006)
–
$ 4,826
(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, 2017
October 31, 2016
Gross
Reinsurance
Net
Gross
Reinsurance
$ 1,575
2,993
(2,987)
$ 1,581
$
–
92
(92)
–
$
$ 1,575
2,901
(2,895)
$ 1,581
$ 1,590
3,039
(3,054)
$ 1,575
$
–
105
(105)
–
$
Net
$ 1,590
2,934
(2,949)
$ 1,575
178
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
(c) Other Movements in Insurance Liabilities
Other insurance liabilities were $229 million as at October 31, 2017
(October 31, 2016 – $257 million). The decrease of $28 million
(2016 – increase of $85 million) is due to settlement of property
and casualty insurance payable to reinsurers, partially offset by
changes in life and health insurance policy benefit liabilities 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 claims incurred,
including IBNR, 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
Nine 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
2017
Total
Accident year
$ 3,335 $ 1,598 $ 1,742 $ 1,724 $ 1,830 $ 2,245 $ 2,465 $ 2,409 $ 2,438 $ 2,425
1,627
3,366
1,663
3,359
1,720
3,423
1,763
3,527
1,753
3,631
1,756
3,612
1,740
3,646
1,732
3,623
–
3,602
1,732
3,602
(3,465) (1,674)
58
137
1,764
1,851
1,921
1,926
1,931
1,904
1,884
–
–
1,884
(1,795)
89
1,728
1,823
1,779
1,768
1,739
1,702
–
–
–
1,702
(1,601)
101
1,930
1,922
1,884
1,860
1,818
–
–
–
–
1,818
(1,597)
221
2,227
2,191
2,158
2,097
–
–
–
–
–
2,097
(1,745)
352
–
2,334 2,367 2,421
–
–
2,280 2,310
–
–
–
2,225
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,425
2,225 2,310 2,421
(1,672) (1,514) (1,426) (1,052)
553
796
995
1,373 $ 4,675
(334)
432
$ 4,773
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, 2017
October 31, 2016
Impact on net
income (loss)
before
income taxes
Impact on
equity
Impact on net
income (loss)
before
income taxes
Impact on
equity
Impact of a 1% change in key assumptions
Discount rate
Increase in assumption
Decrease in assumption
Margin for adverse deviation
Increase in assumption
Decrease in assumption
Impact of a 5% change in key assumptions
Frequency of claims
Increase in assumption
Decrease in assumption
Severity of claims
Increase in assumption
Decrease in assumption
$ 117
(125)
(46)
46
(31)
31
(218)
218
$ 85
(91)
(34)
34
(23)
23
(159)
159
$ 135
(145)
(47)
47
(32)
32
(240)
240
$ 98
(106)
(35)
35
(23)
23
(175)
175
179
TD BANK GROUP ANNUAL REPORT 2017 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, 2017, for the property and casualty insurance
business, 65.9% of net written premiums were derived from automobile
policies (October 31, 2016 – 67.3%) followed by residential with
33.6% (October 31, 2016 – 32.2%). The distribution by provinces
show that business is mostly concentrated in Ontario with 55.7%
of net written premiums (October 31, 2016 – 57.6%). The Western
provinces represented 30% (October 31, 2016 – 28.6%), followed
by the Atlantic provinces with 8.3% (October 31, 2016 – 7.8%),
and Québec at 6.0% (October 31, 2016 – 6.0%).
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 3
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, 19.8 million common
shares have been reserved for future issuance (October 31, 2016 –
21.7 million). The outstanding options expire on various dates to
December 12, 2026. 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
2017
Weighted-
average
of shares exercise price
Number
15.4
2.0
(3.0)
(0.1)
14.3
$ 44.18
65.75
38.59
54.58
$ 48.17
2016
Weighted-
average
exercise price
$ 40.65
53.15
35.21
48.29
$ 44.18
Number
of shares
18.4
2.5
(4.9)
(0.6)
15.4
5.4
$ 38.00
5.5
$ 37.19
2015
Weighted-
average
exercise price
$ 36.72
52.46
30.31
44.25
$ 40.65
$ 35.90
Number
of shares
19.4
2.6
(3.3)
(0.3)
18.4
7.0
The weighted average share price for the options exercised in 2017 was
$67.79 (2016 – $54.69; 2015 – $53.98).
The following table summarizes information relating to stock options
outstanding and exercisable as at October 31, 2017.
Range of Exercise Prices
(millions of shares and Canadian dollars)
$32.99 – $36.63
$36.64 – $40.54
$43.04 – $47.59
$52.46 – $53.15
$65.75
180
Options outstanding
Options exercisable
Number of
shares
outstanding
Weighted-
average
remaining
contractual
Weighted-
average
life (years) exercise price
1.6
3.5
2.6
4.6
2.0
2.6
4.6
5.5
7.5
9.0
35.20
38.81
47.09
52.80
65.75
Number of
shares
Weighted-
average
exercisable exercise price
1.6
3.5
0.3
–
–
35.20
38.81
43.04
–
–
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
For the year ended October 31, 2017, the Bank recognized
compensation expense for stock option awards of $14.8 million
(October 31, 2016 – $6.5 million; October 31, 2015 – $19.8 million).
For the year ended October 31, 2017, 2.0 million (October 31, 2016 –
2.5 million; October 31, 2015 – 2.6 million) options were granted
by the Bank at a weighted-average fair value of $5.81 per option
(2016 – $4.93 per option; 2015 – $9.06 per option).
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 the Fair Value of Options
(in Canadian dollars, except as noted)
2017
2016
2015
Risk-free interest rate
Expected option life
Expected volatility1
Expected dividend yield
Exercise price/share price
1.24%
1.00%
1.44%
6.3 years
14.92%
3.47%
$ 65.75
6.3 years
15.82%
3.45%
$ 53.15
6.3 years
25.06%
3.65%
$ 52.46
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, 2017, was
25 million (2016 – 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 4
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 2017 were $565 million (2016 – $384 million). The 2017
and 2016 contributions were made in accordance with the actuarial
valuation reports for funding purposes as at October 31, 2016 and
October 31, 2015, respectively, for both of the principal pension plans.
The next valuation date for funding purposes is as at October 31, 2017,
for both of the principal pension plans.
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, 2017,
6.4 million deferred share units were outstanding (October 31, 2016 –
6.2 million).
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, 2017, the Bank recognized compensation
expense, net of the effects of hedges, for these plans of $490 million
(2016 – $467 million; 2015 – $441 million). The compensation
expense recognized before the effects of hedges was $917 million
(2016 – $720 million; 2015 – $471 million). The carrying amount
of the liability relating to these plans, based on the closing share price,
was $2.2 billion at October 31, 2017 (October 31, 2016 – $1.8 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, 2017,
the Bank’s contributions totaled $70 million (2016 – $66 million; 2015 –
$67 million) and were expensed as salaries and employee benefits.
As at October 31, 2017, an aggregate of 20 million common shares
were held under the Employee Ownership Plan (October 31, 2016 –
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 unfunded. 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. Effective June 1, 2017, the Bank’s
principal non-pension post-retirement benefit plan was closed to
new employees hired on or after that date.
INVESTMENT STRATEGY AND ASSET ALLOCATION
The primary objective of each of the Society and the TDPP is to achieve
a rate of return that meets or exceeds the change in value of the plan’s
respective liabilities over rolling five-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
generally do not apply to the Pension Enhancement Account (PEA)
assets which are invested at the members’ discretion in certain
mutual funds.
181
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
Public debt instruments of both the Society and the TDPP must meet
or exceed a credit rating of BBB- at the time of purchase. There are no
limitations on the maximum amount allocated to each credit rating
above BBB+ for the total public debt portfolio.
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 50%; 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
are as follows:
Plan Asset Allocation
(millions of Canadian dollars,
except as noted)
As at October 31, 2017
Debt
Equity
Alternative investments2
Other3
Total
As at October 31, 2016
Debt
Equity
Alternative investments2
Other3
Total
As at October 31, 2015
Debt
Equity
Alternative investments2
Other3
Total
Acceptable
range
40-70%
24-42
0-35
n/a
40-70%
24-42
0-35
n/a
58-76%
24-42
0-10
n/a
% of
total
57%
35
8
n/a
100%
62%
33
5
n/a
100%
64%
30
6
n/a
100%
Society1
Fair value
Quoted
Unquoted
$
–
1,248
42
–
$ 1,290
$
–
1,165
31
–
$ 1,196
–
$
1,015
37
–
$ 1,052
$ 2,903
511
376
46
$ 3,836
$ 2,962
407
208
43
$ 3,620
$ 2,852
346
227
74
$ 3,499
Acceptable
range
25-56%
30-65
0-20
n/a
25-56%
44-65
0-20
n/a
44-56%
44-56
n/a
n/a
% of
total
36%
59
5
n/a
100%
43%
56
1
n/a
100%
50%
50
n/a
n/a
100%
TDPP1
Fair value
Unquoted
$ 484
478
68
56
$ 1,086
$ 413
488
11
44
$ 956
$ 369
374
n/a
33
$ 776
Quoted
$
–
324
–
–
$ 324
$
–
51
–
–
$ 51
$
–
–
n/a
–
–
$
1 The principal pension plans invest in investment vehicles which may hold shares
3 Consists mainly of PEA assets, interest and dividends receivable, and amounts due
or debt issued by the Bank.
to and due from brokers for securities traded but not yet settled.
2 The principal pension plans’ alternative investments primarily include private equity,
infrastructure, and real estate funds, none of which are invested in the Bank and
its affiliates.
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, price risks, credit
spread and credit 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
• Monitoring the return on the plans’ assets relative to the
plans’ liabilities
182
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.
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 and 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.
.
TD BANK GROUP ANNUAL REPORT 2017 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, 2017, were $124 million
(October 31, 2016 – $121 million; October 31, 2015 – $103 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 unfunded 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 merger
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)3,4
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 merger
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)3,4
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
2017
2016
2015
$ 6,805 $ 5,377
–
331
191
1,179
–
8
66
(347)
–
–
6,805
–
439
196
(148)
25
(15)
80
(291)
–
(9)
7,082
$ 5,321
–
359
219
(279)
18
(71)
69
(259)
–
–
5,377
5,823
–
174
5,327
–
195
4,805
–
205
195
80
565
(291)
–
(10)
6,536
(546)
207
66
384
(347)
–
(9)
5,823
(982)
158
69
357
(259)
–
(8)
5,327
(50)
Principal non-pension
post-retirement
benefit plan1
2015
2016
2017
Other pension and
retirement plans2
2015
2016
2017
$ 568
–
16
17
–
(42)
15
–
(16)
–
–
558
–
–
–
–
–
16
(16)
–
–
–
(558)
$ 553
–
17
21
(9)
–
2
–
(16)
–
–
568
–
–
–
–
–
16
(16)
–
–
–
(568)
$ 557 $ 2,863
–
11
95
(27)
13
1
–
(138)
(68)
–
2,750
–
20
23
(12)
–
(21)
–
(14)
–
–
553
$ 2,743
–
10
105
259
(11)
(12)
–
(265)
45
(11)
2,863
$ 2,644
19
13
113
(35)
(11)
17
–
(251)
264
(30)
2,743
–
–
–
1,895
–
64
1,910
–
74
1,734
18
76
–
–
14
(14)
–
–
–
(553)
59
–
37
(138)
(58)
(4)
1,855
(895)
40
–
101
(265)
39
(4)
1,895
(968)
(31)
–
153
(251)
216
(5)
1,910
(833)
439
331
359
16
17
20
22
(9)
10
(4)
–
9
$ 462 $ 336
14
–
8
$ 381
17
–
–
$ 33
21
–
–
$ 38
23
–
–
$ 43 $
11
31
–
4
46
$
10
31
(11)
7
37
$
13
37
(30)
8
28
3.60%
2.54
3.52%
2.66
4.42%
2.63
3.60%
3.00
3.60%
3.25
4.40%
3.25
3.74%
3.65%
1.14
1.18
4.39%
1.20
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 4.59%. The rate is assumed to decrease gradually to 3.12% 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 Includes a settlement gain of $12 million related to a portion of the TDAF defined
benefit pension plan that was settled during 2016.
4 Includes a settlement gain of $35 million related to a portion of the TD Banknorth
defined benefit pension plan that was settled during 2015.
183
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
During the year ended October 31, 2018, the Bank expects to contribute
$485 million to its principal pension plans, $16 million to its principal
non-pension post-retirement benefit plan, and $39 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)
Principal
pension plans
Principal non-pension
post-retirement
benefit plan
Male aged 65 at measurement date
Female aged 65 at measurement date
Male aged 40 at measurement date
Female aged 40 at measurement date
2017
23.2
24.0
24.5
25.2
2016
22.1
24.0
23.4
25.1
2015
22.1
23.9
23.3
25.1
2017
2016
2015
23.2
24.0
24.5
25.2
22.1
24.0
23.4
25.1
22.1
23.9
23.3
25.1
2017
21.8
23.4
22.9
25.1
Other pension and
retirement plans
As at October 31
2016
21.4
23.4
22.5
25.0
2015
22.0
24.0
22.5
25.0
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 15 years (2016 – 16 years, 2015 – 16 years),
18 years (2016 – 17 years, 2015 – 17 years), and 13 years (2016 –
13 years, 2015 – 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, 2017
Principal
non-pension
post-
retirement
benefit plan
Principal
pension
plans
Obligation
Other
pension
and
retirement
plans
$ 1,165
(903)
(264)
265
(132)
129
n/a
n/a
$ 103
(81)
n/a1
n/a1
(18)
19
(76)
96
$ 387
(313)
–
–
(84)
83
(3)
4
184
TD BANK GROUP ANNUAL REPORT 2017 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 plans
Other employee benefit plans1
Total other assets
Other liabilities
Principal pension plans
Principal non-pension post-retirement benefit plan
Other pension and retirement plans
Other employee benefit plans1
Total other liabilities
Net amount recognized
1 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.
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 plans
Other employee benefit plans2
Total actuarial gains (losses) recognized in Other Comprehensive Income
1 Amounts are presented on pre-tax basis.
2 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.
October 31
2017
October 31
2016
$
–
7
6
13
546
558
902
457
2,463
$ (2,450)
$
–
3
8
11
982
568
971
490
3,011
$ (3,000)
As at
October 31
2015
$
95
–
9
104
145
553
833
416
1,947
$ (1,843)
For the years ended
October 31
2017
October 31
2016
October 31
2015
$ 333
27
72
22
$ 454
$
(980)
7
(193)
(56)
$ (1,222)
$ 490
33
1
23
$ 547
185
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
N O T E 2 5
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
Provision for (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
For the years ended October 31
2017
2016
2015
$ 2,073
5
2,078
$ 2,106
(66)
2,040
$ 1,881
(6)
1,875
215
13
–
(53)
175
2,253
244
(755)
(511)
29
–
29
1,771
1,115
797
439
2,351
(233)
(156)
(191)
(580)
$ 1,771
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
220
134
(241)
113
$ 723
2017
$ 3,262
26.5%
$ 2,819
(498)
(515)
4
$ 2,253
(4.0)
(4.2)
–
18.3%
(233)
(439)
(4)
$ 2,143
2016
26.5%
(2.2)
(4.1)
(0.1)
20.1%
$ 2,409
(319)
(556)
(11)
$ 1,523
2015
26.3%
(3.5)
(6.1)
(0.1)
16.6%
During the year ended October 31, 2017, the Canada Revenue
Agency (CRA) reassessed the Bank approximately $151 million and
$189 million of additional income tax and interest in respect of
the 2011 and 2012 taxation years, respectively. The CRA is denying
certain dividend deductions claimed by the Bank. The Bank expects
the CRA to reassess subsequent years on the same basis and that
Alberta and Québec will also reassess all open years. The Bank is of
the view that its tax filing positions were appropriate and intends
to challenge all reassessments.
186
TD BANK GROUP ANNUAL REPORT 2017 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
Securities
Other
Total deferred tax assets
Deferred tax liabilities
Land, buildings, equipment, and other depreciable assets
Securities
Intangibles
Goodwill
Total deferred tax liabilities
Net deferred tax assets
Reflected on the Consolidated Balance Sheet as follows:
Deferred tax assets
Deferred tax liabilities1
Net deferred tax assets
1 Included in Other liabilities on the Consolidated Balance Sheet.
October 31
2017
As at
October 31
2016
$ 924
–
83
90
814
269
131
22
215
144
2,692
7
–
244
122
373
2,319
2,497
178
$ 2,319
$ 865
29
31
114
841
424
154
165
–
346
2,969
–
793
331
106
1,230
1,739
2,084
345
$ 1,739
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
2017
Total
Consolidated
statement of
income
Other
comprehensive
income
Business
combinations
and other
2016
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
Goodwill
Total deferred income tax
expense (recovery)
$ (59)
$
–
$ –
$ (59)
$ (128)
$
–
$ –
$ (128)
36
(52)
24
27
20
23
143
202
(118)
(87)
16
–
–
–
128
7
–
–
–
(890)
–
–
–
–
–
–
–
–
–
–
–
–
–
36
(52)
24
155
27
23
143
202
(1,008)
(87)
16
(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
$ 175
$ (755)
$ –
$ (580)
$ 103
$ (229)
$
(5)
$ (131)
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 $633 million as at
October 31, 2017 (October 31, 2016 – $884 million), of which
$2 million (October 31, 2016 – $8 million) is scheduled to expire
within five years.
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, 2017. The total amount of these
temporary differences was $55 billion as at October 31, 2017
(October 31, 2016 – $51 billion).
187
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
N O T E 2 6
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 (Canadian 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 (Canadian dollars)1
1 For the years ended October 31, 2017, October 31, 2016, and October 31, 2015,
no outstanding options were excluded from the computation of diluted earnings
per share.
The following table presents the Bank’s basic and diluted earnings per
share for the years ended October 31.
For the years ended October 31
2017
2016
2015
$ 10,203
1,850.6
5.51
$
$ 8,680
1,853.4
4.68
$
$ 10,203
10,203
1,850.6
4.2
1,854.8
5.50
$
$ 8,680
8,680
1,853.4
3.4
1,856.8
4.67
$
$ 7,813
1,849.2
4.22
$
$ 7,813
7,813
1,849.2
4.9
1,854.1
4.21
$
N O T E 2 7
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, 2016
Additions
Amounts used
Release of unused amounts
Foreign currency translation adjustments and other
Balance as of October 31, 2017, before allowance for
credit losses for off-balance sheet instruments
Add: allowance for credit losses for off-balance sheet instruments2
Balance as of October 31, 2017
1 Includes provisions for onerous lease contracts.
2 Refer to Note 8 for further details.
Restructuring1
Litigation
and Other
$ 198
25
(79)
(23)
(4)
$ 327
152
(108)
(33)
(6)
$ 117
$ 332
Total
$ 525
177
(187)
(56)
(10)
$ 449
567
$ 1,016
LITIGATION
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, 2017, the Bank’s
RPL is from zero to approximately $559 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 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 actions seek very large or indeterminate damages.
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
188
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
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 legal or regulatory actions
may be material to the Bank’s consolidated results of operations for
any particular reporting period.
TD Bank, N.A. was 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 and the overdraft
practices of Carolina First Bank prior to its merger into TD Bank,
N.A. in September 2010.
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 (OSIC), 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.
The class 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 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 OSIC’s complaint. TD filed its answer to the class
plaintiffs’ complaint on August 26, 2016. OSIC filed an amended
intervenor complaint against the Bank on November 4, 2016 and the
Bank filed its answer to this amended complaint on December 19, 2016.
On November 7, 2017, the Court issued a decision denying the class
certification motion. The court found that the plaintiffs failed to show
that common issues of fact would predominate given the varying sales
presentations they allegedly received.
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 two cases filed in the Ontario Superior
Court of Justice are being managed jointly, and discovery is ongoing.
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. The
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,
October 2014, and September 2016. The Court issued an order in
August 2016 stating that the third distribution marks the completion
of the payments required by TD Bank, N.A., and TD Bank, N.A.
has no obligation to oversee or monitor any remaining funds.
These actions have been consolidated for pretrial proceedings as
MDL 2613 in the United States District Court for the District of South
Carolina: In re TD Bank, N.A. Debit Card Overdraft Fee Litigation,
No. 6:15-MN-02613 (D.S.C.). On December 10, 2015, TD Bank,
N.A.’s motion to dismiss the consolidated class action was granted
in part and denied in part. Discovery, briefing, and a hearing on class
certification were complete as of May 24, 2017. On January 5, 2017,
TD Bank, N.A. was named as a defendant in a twelfth class action
complaint challenging an overdraft practice that is already the subject
of the consolidated amended class action complaint. This action has
been consolidated into MDL 2613, and TD Bank, N.A. has moved to
dismiss the claims.
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 have
the effect of increasing the merchant fees. The five actions that remain
include claims of civil conspiracy, breach of the Competition Act,
interference with economic relations, and unjust enrichment. Plaintiffs
seek general and punitive damages. 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 was shortened significantly. At a hearing in
October 2016, the plaintiffs sought to amend their claims to reinstate
the extended class period. The plaintiffs’ motion to amend their claims
to reinstate the extended class period was denied by the motions judge
and subsequently by the B.C. Court of Appeal. The plaintiffs have
sought leave to appeal to the Supreme Court of Canada. The trial of
the British Columbia action is scheduled to proceed in September 2018.
In Québec, the motion for authorization is scheduled to proceed on
November 6-7, 2017.
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.
189
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS 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
2016
2017
$ 23,723 $ 22,747
436
198
41,096
41,587
106,274
115,692
$ 181,200 $ 170,553
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, 2017, the Bank is committed to
fund $123 million (October 31, 2016 – $131 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 $939 million for 2018;
$881 million for 2019; $788 million for 2020, $704 million for 2021,
$623 million for 2022, and $3,505 million for 2023, and thereafter.
Future minimum finance lease commitments where the annual
payment is in excess of $100 thousand, is estimated at $28 million for
2018; $26 million for 2019; $12 million for 2020, $8 million for 2021,
$5 million for 2022, and $10 million for 2023, 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, 2017 (October 31, 2016 –
$1.1 billion; October 31, 2015 – $1.1 billion).
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.
190
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
2016
2017
Sources of pledged assets and collateral
Bank assets
Cash and due from banks
Interest-bearing deposits with banks
Loans
Securities
Other assets
$
442 $
3,329
77,107
74,706
187
6,106
76,150
64,843
635
751
156,219 148,037
Third-party assets2
Collateral received and available for sale or repledging 216,252
Less: Collateral not repledged
152,440
(61,467) (48,034)
154,785 104,406
311,004 252,443
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
8,340
12,595
94,945
61,856
35,281
35,147
30,273
5,686
1,222
63,223
39,194
30,301
34,601
28,668
4,521
1,480
38,254 37,860
$ 311,004 $ 252,443
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 $39.3 billion of on-balance sheet assets that the Bank has pledged
and that the counterparty can subsequently repledge as at October 31, 2017
(October 31, 2016 – $30.4 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,
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.
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
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.
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.
N O T E 2 8
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, 2017, $180 million (October 31, 2016 –
$231 million) of related party loans were outstanding from 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
2017
$ 33
3
32
$ 68
2016
$ 25
3
32
$ 60
2015
$ 22
3
31
$ 56
In addition, the Bank offers deferred share and other plans to
non-employee directors, executives, and certain other key employees.
Refer to Note 23 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.
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
2016
2017
$ 23,723 $ 22,747
39
15
$ 23,738 $ 22,786
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.
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, 2017, other than as described in
the following sections and in Note 12.
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 and Scottrade, FDIC-insured money market deposit
accounts as either designated sweep vehicles or as non-sweep deposit
accounts. TD Ameritrade provides marketing and support services with
respect to the IDA. The Bank paid $1.5 billion during the year ended
October 31, 2017 (October 31, 2016 – $1.2 billion; October 31, 2015 –
$1.1 billion) to TD Ameritrade related to deposit accounts. The amount
paid by the Bank is based on the average insured deposit balance of
$124 billion for the year ended October 31, 2017 (October 31, 2016 –
$112 billion; October 31, 2015 – $95 billion) with a portion of the
amount tied to the actual yield earned by the Bank on the investments,
less the actual interest paid to clients of TD Ameritrade and Scottrade,
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, 2017, amounts receivable from TD Ameritrade
were $68 million (October 31, 2016 – $72 million). As at
October 31, 2017, amounts payable to TD Ameritrade were
$167 million (October 31, 2016 – $141 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, 2017, the Bank paid $93 million
(October 31, 2016 – $97 million; October 31, 2015 – $124 million)
for these services. As at October 31, 2017, the amount payable to
Symcor was $15 million (October 31, 2016 – $16 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, 2017, and October 31, 2016.
191
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
N O T E 2 9
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 business banking operations, 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 business 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.
Effective February 1, 2017, the total gains and losses as a result of
changes in fair value of the CDS and interest rate swap contracts
hedging the reclassified available-for-sale securities portfolio are
recorded in Wholesale Banking. Previously, these derivatives were
accounted for on an accrual basis in the Wholesale Banking segment
and the gains and losses related to the derivatives, in excess of the
accrued costs were reported in the Corporate segment.
192
TD BANK GROUP ANNUAL REPORT 2017 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 revenue4
Provision for (recovery 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)
Canadian
Retail
$ 10,611
10,451
21,062
986
2,246
8,934
8,896
2,371
–
6,525
$
U.S.
Retail
$
7,486
2,735
10,221
792
–
5,878
3,551
671
442
3,322
$
$
Wholesale
Banking2,3
1,804
1,467
3,271
(28)
–
1,929
1,370
331
–
1,039
$
For the years ended October 31
Corporate2,3
$
946 $
649
1,595
466
–
2,625
(1,496)
(1,120)
7
(369) $
$
2017
Total
20,847
15,302
36,149
2,216
2,246
19,366
12,321
2,253
449
10,517
Total assets as at October 31
$ 404,444
$ 403,937
$ 406,138
$ 64,476 $ 1,278,995
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 income taxes
Provision for (recovery of) income taxes
Equity in net income of an investment in TD Ameritrade
Net income (loss)
$
9,979
10,230
20,209
1,011
2,462
8,557
8,179
2,191
–
5,988
$
$
$
7,093
2,366
9,459
744
–
5,693
3,022
498
435
2,959
$
$
1,685
1,345
3,030
74
–
1,739
1,217
297
–
920
$ 1,166 $
451
1,617
501
–
2,888
(1,772)
(843)
(2)
(931) $
$
2016
19,923
14,392
34,315
2,330
2,462
18,877
10,646
2,143
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 (recovery 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
1 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.
2 Net interest income within Wholesale Banking is calculated on a taxable equivalent
basis. The TEB adjustment reflected in Wholesale Banking is reversed in the
Corporate segment.
3 Effective February 1, 2017, the total gains and losses as a result of changes in fair
value of the credit default swap (CDS) and interest rate swap contracts hedging
the reclassified available-for-sale securities portfolio are recorded in Wholesale
Banking. Previously, these derivatives were accounted for on an accrual basis in
Wholesale Banking and the gains and losses related to the derivatives, in excess
of the accrued costs were reported in Corporate Segment.
4 Effective fiscal 2017, the impact from certain treasury and balance sheet
management activities relating to the U.S. Retail segment is recorded in the
Corporate segment.
193
TD BANK GROUP ANNUAL REPORT 2017 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)
Canada
United States
Other international
Total
Canada
United States
Other international
Total
Canada
United States
Other international
Total
For the years ended October 31
As at October 31
2017
2017
Total revenue
Income before
income taxes
$ 20,862
13,371
1,916
$ 36,149
$ 7,250
3,677
1,394
$ 12,321
$ 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
Net income
Total assets
$ 5,660
3,075
1,782
$ 10,517
2016
$ 5,133
2,436
1,367
$ 8,936
2015
$ 5,361
1,802
861
$ 8,024
$ 648,924
515,478
114,593
$ 1,278,995
2016
$ 632,215
462,330
82,422
$ 1,176,967
2015
$ 623,061
417,186
64,126
$ 1,104,373
N O T E 3 0
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.
194
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
Interest Rate Risk
(millions of Canadian dollars,
except as noted)
Assets
Cash resources and other
Trading loans, securities, and other
Financial assets designated at fair
value through profits 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, 2017
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
$ 25,159
1,300
$ 29,886
4,360
$
18
11,271
$ 55,063
16,931
$
–
30,506
$
–
17,209
$
93
39,272
$
55,156
103,918
745
282
–
6,776
30,326
73,493
138,081
836
34,637
9,627
111,941
240,969
–
432,256
551
12,277
9,500
14,367
82,482
–
130,466
2,132
47,196
19,127
133,084
353,777
73,493
700,803
1,024
83,467
39,456
–
204,697
–
359,150
766
15,224
12,780
–
38,353
–
84,332
110
524
–
4,032
146,411
71,363
1,345
15,764
77,602
134,710
134,429
612,591
151,095
1,278,995
20
39,249
37,107
76,376
498
334
2,732
79,940
at fair value through profit or loss
Other deposits
Securitization liabilities at fair value
Obligations related to securities
7
276,083
–
–
95,841
1,122
–
52,574
849
7
424,498
1,971
–
136,040
7,797
1
35,068
2,989
–
237,218
–
8
832,824
12,757
sold short
Obligations related to securities
35,482
–
–
35,482
sold under repurchase agreements
1,147
81,136
4,244
86,527
–
–
–
–
–
35,482
2,064
88,591
Securitization liabilities
at amortized cost
Subordinated notes and debentures
Other
Equity
Total liabilities and equity
Net position
–
–
68,511
–
381,250
$ (243,169)
6,025
1,535
–
–
224,908
$ 207,348
1,309
650
–
250
96,983
$ 33,483
7,334
2,185
68,511
250
703,141
(2,338)
$
5,803
2,500
–
4,150
156,788
$ 202,362
2,939
4,843
–
350
46,524
$ 37,808
–
–
60,088
70,440
372,542
$ (237,832)
16,076
9,528
128,599
75,190
1,278,995
–
$
Total assets
Total liabilities and equity
Net position
$ 143,698
398,358
$ (254,660)
$ 395,620
155,752
$ 239,868
$ 105,529
93,650
$ 11,879
$ 644,847
647,760
(2,913)
$
$ 331,331
150,731
$ 180,600
$ 80,255
42,832
$ 37,423
$ 120,534
335,644
$ (215,110)
$ 1,176,967
1,176,967
–
$
October 31, 2016
Interest Rate Risk by Category
(millions of Canadian dollars)
As at
October 31, 2017
Canadian currency
Foreign currency
Net position
Canadian currency
Foreign currency
Net position
Floating
rate
$ (229,801)
(13,368)
$ (243,169)
Within
3 months
$ 116,720
90,628
$ 207,348
3 months
to 1 year
$ 51,293
(17,810)
$ 33,483
Total
within
1 year
Over 1
year to
5 years
$ (61,788)
59,450
$ (2,338)
$ 132,913
69,449
$ 202,362
Over
5 years
$ 8,978
28,830
$ 37,808
Non-
interest
sensitive
$ (126,313)
(111,519)
$ (237,832)
Total
$ (46,210)
46,210
–
$
$ (226,294)
(28,366)
$ (254,660)
$ 119,905
119,963
$ 239,868
$ 35,798
(23,919)
$ 11,879
$ (70,591)
67,678
(2,913)
$
$ 132,887
47,713
$ 180,600
$ 5,992
31,431
$ 37,423
$ (121,817)
(93,293)
$ (215,110)
$ (53,529)
53,529
$
–
October 31, 2016
195
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
N O T E 3 1
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)
Canada6
United States7
United Kingdom
Europe – other
Other international
Total
Loans and customers’ liability
under acceptances1
October 31
2016
October 31
2017
Credit instruments2,3
October 31
2017
October 31
2016
66%
33
–
–
1
100%
$ 629,888
66%
33
–
–
1
100%
$ 601,362
42%
55
1
1
1
100%
$ 181,200
41%
56
1
1
1
100%
$ 170,553
As at
Derivative financial
instruments4,5
October 31
2016
October 31
2017
29%
26
17
21
7
100%
30%
28
18
18
6
100%
$ 53,645
$ 65,914
1 Of the total loans and customers’ liability under acceptances, the only industry
4 As at October 31, 2017, the current replacement cost of derivative financial
segment which equalled or exceeded 5% of the total concentration as at
October 31, 2017, was: real estate 10% (October 31, 2016 – 10%).
2 As at October 31, 2017, the Bank had commitments and contingent liability
instruments amounted to $54 billion (October 31, 2016 – $66 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 $181 billion (October 31, 2016 – $171 billion). Included
are commitments to extend credit totalling $157 billion (October 31, 2016 –
$147 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, 2017:
financial institutions 19% (October 31, 2016 – 19%); pipelines, oil and gas 10%
(October 31, 2016 – 10%); power and utilities 10% (October 31, 2016 – 9%);
sundry manufacturing and wholesale 7% (October 31, 2016 – 7%); automotive
7% (October 31, 2016 – 7%); telecommunications, cable and media 6%
(October 31, 2016 – 6%); professional and other services 6% (October 31, 2016 –
6%); government, public sector entities, and education 5% (October 31, 2016 –
5%); non-residential real estate development 5% (October 31, 2016 – 5%).
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, 2017 (October 31, 2016 – 75%). The second largest
concentration was with governments, which accounted for 20% of the total as
at October 31, 2017 (October 31, 2016 – 17%). No other industry segment
exceeded 5% of the total.
6 Debt securities classified as loans were 0.4% as at October 31, 2017
(October 31, 2016 – nil), of the total loans and customers’ liability under
acceptances.
7 Debt securities classified as loans were 0.1% as at October 31, 2017
(October 31, 2016 – 0.2%), of the total loans and customers’ liability under
acceptances.
196
TD BANK GROUP ANNUAL REPORT 2017 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
2017
As at
October 31
2016
$
3,971
51,185
$
3,907
53,714
2,119
1,913
40,012
13,358
32
102,361
41,763
45,623
25,740
134,429
70,120
221,990
156,293
31,743
199,503
3,062
11,235
17,297
29,971
4,556
1,208,276
181,200
2,127
2,156
39,699
10,432
31
77,499
27,832
51,290
33,105
86,052
75,249
217,220
143,701
30,700
192,622
1,413
11,606
15,706
17,436
4,352
1,097,849
170,553
290,123
$ 1,679,599
269,912
$ 1,538,314
1 Certain comparative amounts have been reclassified to conform with the
presentation adopted in the current period.
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 27
for further details.
197
TD BANK GROUP ANNUAL REPORT 2017 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-Weights
(millions of Canadian dollars)
As at
October 31, 2017
0%
20%
35%
50%
75%1
100%2
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 assets3
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 assets3
Total assets
Off-balance sheet credit instruments
Total
$
– $
411
–
10,079
–
10,490
1,867
10 $ 4,626
11
–
–
–
4,637
–
8
–
9,247
–
9,265
31,741
23 $
$
– $
883 $
982
16,072
–
–
–
–
783 82,941
–
–
4
– 18,720 82,968
–
–
–
–
–
98
269
265
–
632
–
–
–
9,639
21,996
276
–
–
–
–
–
1,099
4,637
42,105
–
3,976
$ 22,272 $ 46,081 $ 4,637
–
–
–
–
–
–
–
2
–
–
–
–
632
– 18,720 82,970
428 27,481
–
–
– $ 19,148 $ 110,451 $ 632
$
$
22 $
488
–
11,208
–
11,718
1,683
207 $
49
–
8,542
29
8,827
47,104
–
–
–
–
917
56,848
4,012
13,165
26,566
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
–
815
1 18,341 83,097
–
394 27,383
–
1 $ 18,735 $ 110,480 $ 815
$
$
$
5,542
– $
–
1,510
– 16,341
– 103,315
–
4
– 126,712
– 33,608
–
–
–
2
– 10,738
– 171,060
– 32,161
– $ 203,221
October 31, 2016
$
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
1 Based on the Bank’s internal risk ratings, 26% of retail exposures are rated
2 Based on the Bank’s internal risk ratings, 42% of non-retail exposures are
‘low risk’ or ‘normal risk’, 37% are rated ‘medium risk’ and 37% are rated ‘high
risk’ or ‘default’ as at October 31, 2017 (October 31, 2016 – 27%, 39% and
34%, respectively).
rated ‘investment grade’, 56% are rated ‘non-investment grade’ and 2% are
rated ‘watch/classified’ or ‘impaired/defaulted’ as at October 31, 2017
(October 31, 2016 – 39%, 59% and 2% respectively).
3 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 Advanced Internal Ratings Based (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.
198
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
Non-Retail Financial Assets Subject to the AIRB Approach by Risk Rating
(millions of Canadian dollars)
As at
October 31, 2017
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
$ 78,917
15,897
44,111
2,334
141,259
37,755
121,127
8,706
41,053
349,900
101,889
$ 451,789
$ 90,124
17,925
39,468
1,024
148,541
34,865
75,441
8,411
40,421
307,679
75,364
$ 383,043
$
–
1
40,751
36
40,788
–
13,302
8,402
115
62,607
12,639
$ 75,246
$
–
1
38,134
82
38,217
–
10,611
7,080
72
55,980
10,840
$ 66,820
$
–
–
1,734
395
2,129
–
–
187
–
2,316
816
$ 3,132
$
–
–
1,776
72
1,848
–
–
214
–
2,062
1,039
$ 3,101
Total
$ 78,917
15,898
86,780
2,996
184,591
37,755
134,429
17,295
41,168
415,238
115,349
$ 530,587
$
–
–
184
231
415
–
–
–
–
415
5
$ 420
October 31, 2016
$
–
–
333
250
583
–
–
–
–
583
18
$ 601
$ 90,124
17,926
79,711
1,428
189,189
34,865
86,052
15,705
40,493
366,304
87,261
$ 453,565
1 Includes CMHC insured exposures classified as sovereign exposure under Basel III
2 Other assets include amounts due from banks and interest-bearing deposits
and therefore included in the non-retail category under the AIRB Approach.
with banks.
Retail Financial Assets Subject to the AIRB Approach by Risk Rating1
(millions of Canadian dollars)
As at
October 31, 2017
Loans
Residential mortgages2
Consumer instalment and other personal2
Credit card
Business and government3
Total loans
Held-to-maturity
Off-balance sheet credit instruments
Total
Loans
Residential mortgages2
Consumer instalment and other personal2
Credit card
Business and government3
Total loans
Held-to-maturity
Off-balance sheet credit instruments
Total
Low risk
Normal risk Medium risk
High risk
Default
Total
$ 76,900
53,166
3,800
1,510
135,376
–
89,706
$ 225,082
$ 51,055
52,598
4,571
4,262
112,486
–
20,347
$ 132,833
$ 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
$ 7,024
22,411
5,236
3,348
38,019
–
4,804
$ 42,823
$ 7,902
20,898
4,402
3,967
37,169
–
5,258
$ 42,427
$ 2,060
10,831
2,989
1,589
17,469
–
1,113
$ 18,582
$ 2,185
9,336
2,530
1,896
15,947
–
1,272
$ 17,219
$ 581
687
70
174
1,512
–
4
$ 1,516
$ 137,620
139,693
16,666
10,883
304,862
–
115,974
$ 420,836
October 31, 2016
$ 643
729
70
212
1,654
–
4
$ 1,658
$ 126,166
125,065
15,695
10,576
277,502
–
108,663
$ 386,165
1 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.
2 Excludes CMHC insured exposures classified as sovereign exposure under Basel III
and therefore included in the non-retail category under the AIRB Approach.
3 Business and government loans in the retail portfolio include small business loans.
199
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
N O T E 3 2
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.
• 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; 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
shareholders’ 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 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.
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.
During the year ended October 31, 2017, the Bank complied with
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
2016
2017
$ 46,628 $ 42,328
53,751 49,397
65,038 61,816
$ 435,750 $ 405,844
435,750 405,844
435,750 405,844
10.7%
12.3
14.9
3.9
10.4%
12.2
15.2
4.0
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. For fiscal 2016, the scalars for inclusion of CVA for CET1, Tier 1, and Total
Capital RWA were 64%, 71%, and 77%, respectively. For fiscal 2017, the scalars
are 72%, 77%, and 81%, respectively. As the Bank is constrained by the Basel 1
regulatory floor, the RWA as it relates to the regulatory floor is calculated based
on the Basel 1 risk weights which are the same for all capital ratios.
200
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
N O T E 3 3
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 2017 Consolidated Financial Statements.
N O T E 3 4
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 Prime Services LLC
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.
TDAM USA 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 Luxembourg International Holdings
TD Ameritrade Holding Corporation3
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.
Address of Head
or Principal Office2
Montréal, Québec
Montreal, 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
New York, New York
Cherry Hill, New Jersey
New York, New York
New York, New York
Cherry Hill, New Jersey
Cherry Hill, New Jersey
Farmington Hills, Michigan
Cherry Hill, New Jersey
New York, New York
Cherry Hill, New Jersey
Luxembourg, Luxembourg
Omaha, Nebraska
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
Description
As at October 31, 2017
Carrying value of shares
owned by the Bank
Holding Company
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
Securities Dealer
Financial Services Entity
Financial Services Entity
Small Business Investment Company
Holding Company
Investment Counselling and Portfolio Management
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
Holding Company
Securities Dealer
Mutual Fund Dealer
Insurance Company
Deposit Taking Entity
Deposit Taking Entity
Trust, Loans, and Deposits Entity
Investment Dealer and Broker
Holding Company
Holding Company
Reinsurance Company
Intragroup Lending Company
Investment Dealer
$ 1,387
403
2,224
1,332
46
165
65,717
40
67
12,605
2,223
21,133
2,417
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, 2017, the Bank’s reported investment in TD Ameritrade Holding
Corporation was 41.27% (October 31, 2016 – 42.38%) 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.
201
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
Significant Subsidiaries (continued)1
(millions of Canadian dollars)
International
TD Bank N.V.
TD Ireland Unlimited Company
TD Global Finance Unlimited Company
TD Securities (Japan) Co. Ltd.
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
Amsterdam, The Netherlands
Dublin, Ireland
Dublin, Ireland
Tokyo, Japan
Sydney, Australia
London, England
London, England
London, England
London, England
Singapore, Singapore
Description
Dutch Bank
Holding Company
Securities Dealer
Securities Dealer
Securities Dealer
Holding Company
UK Bank
Holding Company
Securities Dealer
Financial Institution
As at October 31, 2017
Carrying value of shares
owned by the Bank
$ 719
1,068
7
232
1,079
1,399
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.
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, 2017, the net assets of subsidiaries subject to
regulatory or capital adequacy requirements was $77.2 billion
(October 31, 2016 – $73.1 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 27.
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.
202
TD BANK GROUP ANNUAL REPORT 2017 FINANCIAL RESULTS
Ten-year Statistical Review – IFRS
Condensed Consolidated Balance Sheet
(millions of Canadian dollars)
ASSETS
Cash resources and other
Trading loans, securities, and other1
Derivatives
Held-to-maturity securities
Securities purchased under reverse repurchase agreements
Loans, net of allowance for loan losses
Other
$
2017
2016
2015
2014
2013
2012
2011
55,156
254,361
56,195
71,363
134,429
612,591
94,900
$
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
$ 46,554
168,926
55,796
56,977
82,556
478,909
70,793
$ 32,164
188,016
49,461
29,961
64,283
444,922
53,214
$ 25,128
199,280
60,919
–
69,198
408,848
47,680
$ 24,112
171,109
59,845
–
56,981
377,187
46,259
Total assets
LIABILITIES
Trading deposits
Derivatives
Deposits
Other
Subordinated notes and debentures
Total liabilities
EQUITY
Shareholders’ Equity
Common shares
Preferred shares
Treasury shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income (loss)
Non-controlling interests in subsidiaries
Total equity
1,278,995
1,176,967
1,104,373
960,511
862,021
811,053
735,493
79,940
51,214
832,824
230,299
9,528
79,786
65,425
773,660
172,991
10,891
74,759
57,218
695,576
201,155
8,637
59,334
51,209
600,716
185,236
7,785
50,967
49,471
541,605
160,613
7,982
38,774
64,997
487,754
160,105
11,318
29,613
61,715
449,428
139,190
11,543
1,203,805
1,102,753
1,037,345
904,280
810,638
762,948
691,489
20,931
4,750
(183)
214
40,489
8,006
74,207
983
75,190
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
19,811
2,200
(55)
205
27,585
4,936
54,682
1,549
56,231
19,316
3,395
(147)
170
23,982
3,159
49,875
1,508
18,691
3,395
(167)
196
20,868
3,645
46,628
1,477
51,383
48,105
17,491
3,395
(116)
212
18,213
3,326
42,521
1,483
44,004
Total liabilities and equity
$ 1,278,995
$ 1,176,967
$ 1,104,373
$ 960,511
$ 862,021
$ 811,053
$ 735,493
Condensed Consolidated Statement of Income – Reported
(millions of Canadian dollars)
2017
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
$
$
20,847
15,302
36,149
2,216
2,246
19,366
12,321
2,253
449
10,517
193
2016
19,923
14,392
34,315
2,330
2,462
18,877
10,646
2,143
433
8,936
141
$
2015
18,724
12,702
31,426
1,683
2,500
18,073
9,170
1,523
377
8,024
99
2014
2013
2012
2011
$ 17,584
12,377
$ 16,074
11,185
$ 15,026
10,520
$ 13,661
10,179
29,961
1,557
2,833
16,496
9,075
1,512
320
7,883
143
27,259
1,631
3,056
15,069
7,503
1,135
272
6,640
185
25,546
1,795
2,424
14,016
7,311
1,085
234
6,460
196
23,840
1,490
2,178
13,047
7,125
1,326
246
6,045
180
$
10,324
$
8,795
$
7,925
$
7,740
$
6,455
$
6,264
$
5,865
$
10,203
121
$
8,680
115
$
7,813
112
$
7,633
107
$
6,350
105
$
6,160
104
$
5,761
104
Condensed Consolidated Statement of Changes in Equity
(millions of Canadian dollars)
2017
2016
2015
2014
2013
2012
2011
Shareholders’ Equity
Common shares
Preferred shares
Treasury shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income (loss)
$
20,931
4,750
(183)
214
40,489
8,006
$
20,711
4,400
(36)
203
35,452
11,834
$
20,294
2,700
(52)
214
32,053
10,209
$ 19,811
2,200
(55)
205
27,585
4,936
$ 19,316
3,395
(147)
170
23,982
3,159
$ 18,691
3,395
(167)
196
20,868
3,645
$ 17,491
3,395
(116)
212
18,213
3,326
Total
$
74,207
$
72,564
$
65,418
$ 54,682
$ 49,875
$ 46,628
$ 42,521
Non-controlling interests in subsidiaries
983
1,650
1,610
1,549
1,508
1,477
1,483
Total equity
$
75,190
$
74,214
$
67,028
$ 56,231
$ 51,383
$ 48,105
$ 44,004
1 Includes available-for-sale securities and financial assets designated at fair value
through profit or loss.
TD BANK GROUP ANNUAL REP O RT 20 1 7 TEN -YEA R S TATISTI CAL REV IEW 203
Ten-year Statistical Review – Canadian GAAP
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 shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income (loss)
2011
2010
2009
2008
$ 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
686,360
619,545
557,219
563,214
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
639,508
577,243
518,499
531,540
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
13,278
1,875
(79)
392
17,857
(1,649)
38,720
31,674
Total liabilities and shareholders’ equity
$ 686,360
$ 619,545
$ 557,219
$ 563,214
Condensed Consolidated Statement of Income – Reported
(millions of Canadian dollars)
2011
2010
2009
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
$ 12,831
8,763
21,594
1,465
13,083
7,046
1,299
104
246
5,889
180
$ 11,543
8,022
$ 11,326
6,534
$
2008
8,532
6,137
19,565
1,625
12,163
5,777
1,262
106
235
4,644
194
17,860
2,480
12,211
14,669
1,063
9,502
3,169
241
111
303
3,120
167
4,104
537
43
309
3,833
59
Net income available to common shareholders
$
5,709
$
4,450
$
2,953
$
3,774
Condensed Consolidated Statement of Changes in Equity
(millions of Canadian dollars)
Common shares
Preferred shares
Treasury shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income (loss)
Total equity
2011
2010
2009
2008
$ 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)
$ 46,852
$ 42,302
$ 38,720
$ 31,674
204
TD BANK GROU P AN NUAL REPO RT 20 17 TEN- YEAR S TATIS TICAL RE VIEW
Ten-year Statistical Review
Other Statistics – IFRS 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’ investment1
Performance
ratios
9 Return on common equity
10 Return on Common Equity Tier 1
Capital risk-weighted assets2,3
11 Efficiency ratio
12 Net interest margin as a % of average earning assets
13 Common dividend payout ratio
14 Dividend yield4,5
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 ratio3,9
20 Tier 1 Capital ratio2,3
21 Total Capital ratio2,3
22 Common equity to total assets
23 Number of common shares outstanding (millions)
24 Market capitalization
(millions of Canadian dollars)
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
$
5.51
5.50
2.35
37.76
73.34
1.94
20.5%
24.8
14.9%
2.46
53.6
1.96
42.6
3.6
13.3
0.38%
3.45
0.37
10.7%
12.3
14.9
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
2017
2016
2015
2014
2013
$
$
$
4.22 $
4.21
2.00
33.81
53.68
1.59
(3.2)%
4.15
4.14
1.84
28.45
55.47
1.95
16.0%
3.46
3.44
1.62
25.33
47.82
1.89
17.7%
2012
3.40
3.38
1.45
23.60
40.62
1.72
$
2011
3.25
3.21
1.31
21.72
37.62
1.73
8.0%
2.4%
0.4
20.1
22.3
11.9
5.7
13.4%
15.4%
14.2%
15.0%
16.2%
2.20
57.5
2.05
47.4
3.7
12.8
2.45
55.1
2.18
44.3
3.5
13.4
2.32
55.3
2.20
46.9
3.8
13.9
2.58
54.9
2.23
42.5
3.7
12.0
0.48%
4.24
0.34
0.46%
4.28
0.34
0.50%
4.83
0.38
9.9%
9.4%
9.0%
11.3
14.0
10.9
13.4
11.0
14.2
0.52%
4.86
0.43
n/a%
12.6
15.7
2.78
60.2
2.30
40.2
3.4
11.7
0.56%
5.27
0.39
n/a%
13.0
16.0
5.4
1,839.6
5.8
1,857.2
5.7
5.5
1,855.1 1,844.6
5.4
1,835.0
5.3
1,832.3
5.3
1,802.0
$ 134,915
83,160
2,446
109
5,322
$ 113,028
81,233
2,476
111
5,263
$ 99,584 $ 102,322
81,137
2,534
111
4,833
81,483
2,514
108
5,171
$ 87,748
78,748
2,547
110
4,734
$ 74,417
78,397
2,535
112
4,739
$ 67,782
75,631
2,483
108
4,650
1. Return is calculated based on share price movement and dividends reinvested
8 Excludes acquired credit-impaired loans and debt securities classified as loans.
over the trailing twelve month period.
2 Effective fiscal 2013, amounts are calculated in accordance with the Basel III
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.
3 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 were 57%, 65% and
77% respectively. For fiscal 2015 and 2016, the scalars for inclusion of CVA for
CET1, Tier 1, and Total Capital RWA were 64%, 71%, and 77%, respectively.
For fiscal 2017, the corresponding scalars are 72%, 77%, and 81%, respectively.
4 Dividend yield is calculated as the dividend per common share paid during the
year divided by the daily average closing stock price during the year.
For additional information on acquired credit-impaired loans, refer to the “Credit
Portfolio Quality” section of the 2017 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 2017 MD&A.
9 Effective fiscal 2013, the Bank implemented the Basel III regulatory framework.
As a result, the Bank began reporting the measures, CET1 and CET1 Capital ratio,
in accordance with the “all-in” methodology. Accordingly, amounts for years
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
years prior to fiscal 2014 have not been restated.
5 Certain comparative amounts have been recast to conform with the presentation
11 Includes retail bank outlets, private client centre branches, and estate and trust
adopted in the current period.
branches.
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.
TD BANK GROUP ANNUAL REP O RT 20 1 7 TEN -YEA R S TATISTI CAL REV IEW 205
Ten-year Statistical Review (continued)
Other Statistics – Canadian GAAP 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’ investment1
Performance
ratios
9 Return on common equity
10 Return on risk-weighted assets
11 Efficiency ratio2
12 Net interest margin
13 Common dividend payout ratio
14 Dividend yield3,4
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
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
$
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
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
4.7
17.8
0.62%
4.41
0.92
11.3%
14.9
$
2008
2.45
2.44
1.18
18.39
28.46
1.55
(20.2)%
(17.1)
14.4%
2.19
64.8
2.22
49.0
3.7
11.7
0.35%
2.70
0.50
9.8%
12.0
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
1 Return is calculated based on share price movement and dividends reinvested
7 Excludes acquired credit-impaired loans and debt securities classified as loans.
over the trailing twelve month period.
2 The efficiency ratios under Canadian GAAP are based on the presentation of
insurance revenues being reported net of claims and expenses.
3 Dividend yield is calculated as the dividend per common share paid during the
year divided by the daily average closing stock price during the year.
For additional information on acquired credit-impaired loans, refer to the “Credit
Portfolio Quality” section of the 2017 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 2017 MD&A.
4 Certain comparative amounts have been recast to conform with the presentation
8 In fiscal 2014, the Bank conformed to a standardized definition of full-time
adopted in the current period.
5 The price-earnings ratio is computed using diluted net income per common share
over the trailing 4 quarters.
6 Includes customers’ liability under acceptances.
equivalent staff across all segments. The definition includes, among other things,
hours for overtime and contractors as part of its calculations. Comparatives for
years prior to fiscal 2014 have not been restated.
9 Includes retail bank outlets, private client centre branches, and estate and
trust branches.
206206
TD BANK GROU P AN NUAL REPO RT 20 17 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 has
discretion to make 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. Some assets under management
that are also administered by the Bank are included in assets
under administration.
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 Earning 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: Dividend per common share paid during the year
divided by the daily average closing stock price during 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.
TD BANK GROUP ANNUAL RE POR T 2 017 GLOSSAR Y
207207
GLOSSARY (continued)
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.
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.
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 Tier 1 (CET1) Capital Risk-weighted
Assets: Net income available to common shareholders as a percentage
of average CET1 Capital risk-weighted assets.
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 17 GLOSSA RY
2017 Snapshot
Year at a Glance
Performance Indicators
TD Framework and Strategy
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
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For more information, see the interactive
TD Annual Report online by visiting
td.com/annual-report/ar2017
For information on TD’s commitments
to the community see the TD Corporate
Responsibility Report online by visiting
td.com/corporate-responsibility
(2017 report available April 2018)
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 2017
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. 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)
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
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,
eliminating duplicate mailings of shareholder
materials or stopping (and resuming) receiving
annual and quarterly reports
Transfer Agent:
AST Trust Company (Canada)
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@astfinancial.com or
www.astfinancial.com/ca-en
Co-Transfer Agent and Registrar:
Computershare
P.O. Box 505000
Louisville, KY 40233 or
462 South 4th Street, Suite 1600
Louisville, KY 40202
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
NORMAL COURSE ISSUER BID
On September 18, 2017, the Bank announced that the TSX and OSFI approved the Bank’s amended NCIB to repurchase for cancellation up to an additional
20 million of the Bank’s common shares. Pursuant to the amended Notice of Intention filed with the TSX, the NCIB ends on March 20, 2018, such earlier date
as the Bank may determine or such earlier date as the Bank may complete its purchases. A copy of the Notice may be obtained without charge by contacting
TD Shareholder Relations by phone at 416-944-6367 or 1-866-756-8936 or by e-mail at tdshinfo@td.com.
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: 1-800-895-4463
Cantonese/Mandarin: 1-800-387-2828
Telephone device for the hearing impaired:
1-800-361-1180
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 29, 2018
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
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2017 Annual Report
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