T
D
B
A
N
K
G
R
O
U
P
2
0
1
8
A
N
N
U
A
L
R
E
P
O
R
T
Own the future
2018 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.
1
9
5
0
4
OUR STRATEGY
Proven business model
Purpose-driven
Forward-focused
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
6
8
9
13
118
127
215
219
221
For more information, see the interactive
TD Annual Report online by visiting
www.td.com/investor-relations/
ir-homepage/annual-reports/2018
For information on TD’s commitment to the
community and our environment, see the
Corporate Responsibility Report online by
visiting www.td.com/responsibility
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 2018
Ernst & Young LLP
DIVIDENDS
Direct dividend depositing: Registered
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. Beneficial shareholders
should contact their intermediary.
U.S. dollar dividends: For registered shareholders,
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. Registered shareholders
whose dividends are sent to non-U.S. addresses
can also 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. Beneficial shareholders should
contact their intermediary.
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/investor
Beneficially own TD shares that are held in the
name of an intermediary, such as a bank, a trust
company, a securities broker or other nominee
Your TD shares, including questions regarding
the dividend reinvestment plan and mailings
of shareholder materials
Your intermediary
TD SHAREHOLDER RELATIONS
For all other shareholder inquiries, please contact
TD Shareholder Relations at 416-944-6367 or
1-866-756-8936 or e-mail tdshinfo@td.com.
Please note that by leaving us an e-mail or
voicemail message you are providing your
consent for us to forward your inquiry to the
appropriate party for response.
Shareholders may communicate directly with
the independent directors through the
Chairman of the Board, by writing to:
Chairman of the Board
The Toronto-Dominion Bank
P.O. Box 1
Toronto-Dominion Centre
Toronto, Ontario M5K 1A2
or you may send an e-mail c/o TD Shareholder
Relations at tdshinfo@td.com. E-mails addressed
to the Chairman received from shareholders and
expressing an interest to communicate directly
with the independent directors via the Chairman
will be provided to Mr. Levitt.
HEAD OFFICE
The Toronto-Dominion Bank
P.O. Box 1
Toronto-Dominion Centre
King St. W. and Bay St.
Toronto, Ontario M5K 1A2
Product and service information 24 hours a day,
seven days a week:
In Canada contact TD Canada Trust
1-866-222-3456
In the U.S. contact TD Bank,
America’s Most Convenient Bank®
1-888-751-9000
French: 1-800-895-4463
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, April 4, 2019
9:30 a.m. (Eastern)
Design Exchange
Toronto, Ontario
SUBORDINATED NOTES SERVICES
Trustee for subordinated notes:
Computershare Trust Company of Canada
Attention: Manager,
Corporate Trust Services
100 University Avenue, 11th Floor
Toronto, Ontario M5J 2Y1
Vous pouvez vous procurer des exemplaires en
français du rapport annuel au service suivant :
Affaires internes et publiques
La Banque Toronto-Dominion
P.O. Box 1, Toronto-Dominion Centre
Toronto (Ontario) M5K 1A2
TD B ANK GR OUP ANNUAL REPORT 20 18 SHAREHO LDER AND INVESTOR INFO RMATI ON 221
g
n
i
t
n
i
r
P
l
a
t
n
e
n
i
t
n
o
c
s
n
a
r
T
C
T
:
g
n
i
t
n
i
r
P
,
.
c
n
i
n
g
i
s
e
d
0
3
q
:
n
g
i
s
e
D
Our strategy
As a top 10 North American bank, TD aims to stand out from its peers
by having a differentiated brand – anchored in our proven business model,
and rooted in a desire to give our customers, communities and colleagues
the confidence to thrive in a changing world.
Proven business model
Deliver consistent earnings
growth, underpinned
by a strong risk culture
Purpose-driven
Centre everything we do
on our vision, purpose, and
shared commitments
Forward-focused
Shape the future
of banking in the
digital age
This is brought to life by the TD Framework, which embodies our culture and
guides our behaviour as we execute on our business strategy of being a
premier Canadian retail bank, a top U.S. retail bank, and a leading Wholesale
business aligned with our retail franchise.
Execute
Own
Innovate
Think
Customer
Develop
Our vision
Be the better bank
Our purpose
Enrich the lives of our
customers, communities
and colleagues
TD Framework
Our shared commitments
Think like a customer;
provide legendary
experiences
and trusted advice
Act like an owner; lead
with integrity to drive
business results
and contribute to
communities
Execute with
speed and impact;
only take risks we
can understand
and manage
Innovate with
purpose; simplify
the way we work
Develop our
colleagues; embrace
diversity and respect
one another
TD BANK GROUP ANNUAL REP O RT 201 8 OUR STR ATEGY
1
OUR STRATEGY
Proven business model
Deliver consistent earnings growth, underpinned
by a strong risk culture
Our diversified, retail-focused business model and North American scale are powerful
enablers – delivering strong results today, while allowing us to reinvest in our competitive
advantages, as we build and operate businesses of the future. Our balanced approach to
managing risk is evident in strong balance sheet metrics and reflects our commitment to
sustaining the trust of those we serve.
TD’S PREMIUM RETAIL
EARNINGS MIX 1
TD’s premium earnings mix reflects
our North American retail focus –
lower-risk businesses with stable,
consistent earnings
58%
34%
8%
Canadian Retail
U.S. Retail
Wholesale
92% Retail
8% Wholesale
Record Reported
Earnings of
$11.3 billion in 2018
Total Shareholder
Return2
(5-year CAGR)
12.8%
Safest Bank in
North America,
according to
Global Finance
$12.2 billion Adjusted earnings
9.4% Canadian peers
DIVIDEND HISTORY
$ 3.00
2.50
2.00
1.50
1.00
0.50
0.00
$0.19
11% Annualized Growth
$2.61
3.5%
2018
Dividend
Yield
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
1 Reported basis excluding Corporate segment.
2 5-year CAGR is the compound annual growth rate calculated from 2013 to 2018. Source: Bloomberg. Canadian peers include Bank of Montreal,
Canadian Imperial Bank of Commerce, Royal Bank of Canada, and Scotiabank.
Refer to footnotes on page 14 for information on how the results on this page are calculated.
2
TD BANK GROU P AN NUAL REPO RT 20 18 OUR STR ATE GY
2018 Snapshot
NET INCOME
available to common shareholders
(millions of Canadian dollars)
Reported
Adjusted
DILUTED EARNINGS
PER SHARE
(Canadian dollars)
Reported
Adjusted
RETURN ON
COMMON EQUITY
(percent)
Reported
Adjusted
$12,000
10,000
8,000
6,000
4,000
2,000
0
$7
6
5
4
3
2
1
0
17.0%
16.0
15.0
14.0
13.0
12.0
11.0
10.0
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
TD’s 5-year CAGR
TD’s 5-year CAGR
TD’s 2018 ROE
11.7% Reported &
Adjusted
11.8% Reported &
Adjusted
15.7% Reported
16.9% Adjusted
Performance indicators focus effort, communicate our priorities, and benchmark
TD’s performance as we strive to be the even Better Bank.
2018 PERFORMANCE INDICATORS
RESULTS 1
• Deliver above-peer-average total shareholder return
• Grow earnings per share (EPS) by 7 to 10%
• Deliver above-peer-average return on risk-weighted assets
• Grow revenue2 faster than expenses
• 3.1% vs. Canadian peer average of -1.2%
• 16.8% EPS growth
• 2.75% vs. Canadian peer average of 2.36%
• Total revenue growth of 8% vs. total expense growth of 4%
Assets
$1.3 trillion
Deposits
$0.9 trillion
CET1 Ratio
12%
Up 4.4% YoY
Up 2.2% YoY
Up 130 bps YoY
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 14. For peers, earnings have been adjusted on a comparable basis to exclude identified non-underlying items.
2 Revenue is net of insurance claims and related expenses.
Refer to footnotes on page 14 for information on how the results on this page are calculated.
TD BANK GROUP ANNUAL REP O RT 201 8 OUR STR ATEGY
3
OUR STRATEGY
Purpose-driven
Centre everything we do on our vision, purpose,
and shared commitments
Our customers are at the heart of everything we do. It’s our job to make it easy for them
to bank with us – when and how they want. To deliver on this, we’re focused on providing
them personalized, connected, and seamless experiences; bringing the whole bank to them
with proactive advice and solutions that meet their needs and make them feel confident.
Customers are navigating an increasingly complex world.
We’re on a mission to deliver highly personalized advice
and services to help our customers thrive.
Customers now have the tools,
analytics, and resources they
need to make informed trading
decisions and execute
personalized trading strategies
with the launch of the TD Wealth
advanced trading dashboard
and income projection tool.
Making life easier for
Small Business Owners
With the launch of the Digital Application for Small
Business Loans up to $100K in the U.S., small
business owners who often are too pressed for time
to come into a store now have the convenience to
apply anytime, from any computer, tablet, or mobile
device. All submitted applications are assigned
immediately and customers receive a decision on
their application in two business days.
Buying a home is one
of the biggest life
decisions a customer
will make
Giving customers the confidence they need
to make such an important decision is
central to our end-to-end homeowner’s
journey. In Canada this year we launched
pre-approval and pre-qualification tools,
alongside a mortgage concierge service,
so we can be there for our customers from
beginning to end.
Our Legendary Experience Index
is the survey measurement
program we use to track
customers’ experiences with
TD. In 2018, Canadian Branch
Banking achieved a score of
70.2, 2 points above target.
4
TD BANK GROU P AN NUAL REPO RT 20 18 OUR STR ATE GY
When the community thrives, we all thrive. We continue to work together with
our communities to drive positive change and help make an impact in ways
both big and small.
Supporting the transition to
a low-carbon economy
Research shows that climate change
is a top concern across North America,
and for nearly a decade, TD has been
a leader in supporting the transition to
a low-carbon economy. We’ve set a
goal of targeting a total of $100 billion
by 2030 to support the transition to
a low-carbon economy through our
investing and financing activities, and
other programs. For the fifth consecutive
year, we’re proud to be listed in the
Dow Jones Sustainability World Index,
which benchmarks the sustainability
performance of leading companies
based on environmental, social and
economic performance, and we remain
the only Canadian bank in the index.
The Ready Commitment
TD Ready Challenge
Under The Ready Commitment, TD
established the TD Ready Challenge –
an annual initiative to identify and
support scalable solutions to help drive
social innovation. The inaugural
challenge focused on financial security,
providing a total of $10 million to ten
not-for-profit organizations in Canada
and the United States whose programs
seek to help workers transform their
existing skills and build new ones, help
reduce barriers to STEM (Science,
Technology, Engineering, Mathematics)
training for underrepresented groups,
and help harness the power of Artificial
Intelligence – all aimed at preparing
Canadians and Americans for the
economy of the future.
This year TD launched The Ready
Commitment, an ambitious multi-year
enterprise initiative to help open doors
for a more inclusive and sustainable
tomorrow. As part of this, TD is targeting
a total of $1 billion by 2030 toward four
critical areas: Financial Security, a more
Vibrant Planet, Connected Communities
and Better Health. TD aspires to link its
business, philanthropy and human
capital to help people feel more confident
about achieving their personal goals
in a changing world.
Financial Security
Helping increase access to the
opportunities people need to
improve their financial security
Vibrant Planet
Helping elevate the quality of our
environment to ensure both
people and economies can thrive
Connected Communities
Creating opportunities for
everyone to participate and be
included in their community
Better Health
Supporting more equitable health
outcomes through investing in
innovative solutions
Our unique and inclusive culture is what makes TD special. We know that our
people are key to our success. We aim to attract and retain the best employees,
and we invest in tools and resources to help simplify their lives so they can focus
on work that matters.
This year we launched
TD Thrive, an online
platform that curates
content, courses, and
training to help
colleagues develop skills
they need to succeed
in a changing world.
Named Best Workplace
in Canada 2018
by Great Place to Work
Scored 100% for the third
consecutive year on the
Disability Equality Index
TD recognized by the
Bloomberg Gender Equality
Index for the second
consecutive year
TD Bank named one of
Forbes’ Best Employers
for Diversity for 2018
TD BANK GROUP ANNUAL REP O RT 201 8 OUR STR ATEGY
5
OUR STRATEGY
Forward-focused
Shape the future of banking
in the digital age
Our goal is always to find the better way, adapting and reinventing ourselves to
add value for our customers. In today’s digital age we’re focused on re-imagining
the banking experience and driving engagement across our digital and physical
platforms to meet our customers’ needs and expectations.
Enhancing how customers get
information, interact with us, and
manage their money.
We are investing heavily in digital
platforms to deliver best-in-class
experiences and drive high levels
of engagement.
More than 12.5 million
digital customers on both
sides of the border
1.1 billion total
digital transactions
in North America
7.5 million total active
mobile customers
as at August 30, 2018
Advances in technology are changing our lives, creating
new opportunities for our customers, communities,
and colleagues. We continue to build a talented team
that has a deep understanding of technology’s potential.
TD expanded its collaboration this year with
University of Toronto’s Rotman School of
Management with an additional $4 million
to fund exploration of real-world data and
analytics, and announced the opening of the
TD Management Data and Analytics Lab.
The success of young,
innovative startups is key
to our economic future,
which is why TD launched
a Patents for Startups
Program, welcoming four
initial startups to join.
The patent program supports promising
organizations and is the latest step
towards helping young innovators thrive.
Tapping into the
power of Artificial
Intelligence
In 2018, TD acquired Layer 6, a world-renowned
artificial intelligence company to help us deploy
new solutions and deepen our relationship with
customers. We’re already seeing the benefits
and value to our community. This year we
announced that Layer 6 will collaborate with
University of Toronto medical researchers on
developing deep learning models for population
health data. Healthcare is one of the next frontiers
for artificial intelligence to make a meaningful
and positive impact on the lives of people across
North America.
6
TD BANK GROU P AN NUAL REPO RT 20 18 OUR STR ATE GY
Customers want to bank when
it’s convenient for them,
in the moment, and through
any channel, and with the
protection they’ve come to
trust from TD.
We take the trust customers place in us seriously, and work hard to protect their
privacy. But this shouldn’t come at the cost of their time. This year, TD became the
first bank in Canada to introduce Two-Step Verification, which provides an added
layer of security by sending customers a unique security code via SMS (text) or
voice message to their mobile device or landline when they need to verify their
identity online. With this, we’ve created a better deterrent for would-be hackers.
TD Voiceprint is a new technology that is
being rolled out across our contact centres,
using the customer’s voice to authenticate
their identity more quickly and securely.
Innovating to
improve the
experience for
colleagues
We’re reducing manual and repetitive tasks through
innovative automation and process enhancements.
For example, Financial Planners can now create client
information packages in less than a minute, compared
to what previously took about 20 minutes – giving
them more time to focus on advice and help clients
achieve their goals.
TD’s mobile banking
app #1
TD’s mobile banking app consistently
holds top spot in the finance
category on both the Google and
Apple App stores (Canada) and
ranks #1 among Canadian retail
banking apps according to Silicon
Valley-based app analytics and
market data firm, App Annie.
TD has the highest
digital reach of any
bank in Canada, the
U.K., France, Spain
and the U.S.1
Our mobile banking
audience is up 70% YoY2
Reshaping the
process to simplify
our customers’
online experience
Opening a direct investing account is now
faster and easier than ever. Our new online
account opening platform saves customers
time and eliminates the need to visit a branch –
onboarding a customer can now be done fully
online, within 24 hours, and trading can start
within 48 hours.
Delivering innovative experiences our
customers can trust and rely on.
We are building a forward-focused
bank for the modern customer.
As the digital landscape evolves, we will continue to invest
in technology partnerships and talent so we can deliver
innovative experiences that our customers can rely on. To
this end, TD announced this year it will become a founding
corporate member – and first Canadian bank – to join
the Canadian Institute for Cybersecurity, a hub for cyber
technology research and collaboration based at the
University of New Brunswick.
1 ComScore Media Metrix Multi-Platform, Canada, United States, Great Britain, Spain, France, 3 Mo. Avg. Ending July 2018.
2 Based on average monthly visitors and according to ComScore May to July third quarter 2017 vs. third quarter 2018.
TD BANK GROUP ANNUAL REP O RT 201 8 OUR STR ATEGY
7
Group President and
CEO’s Message
the very best people. Being recognized as one of Canada’s best
Diversity Employers, and home to some of the most powerful
women in U.S. banking according to American Banker, reflects the
results we are all aiming for at TD.
TD delivered record results in 2018.
Earnings surpassed $11 billion – up approximately 8 percent
from last year. Revenue growth was impressive. And, as a result,
we achieved nearly 16 percent in Return on Equity.1
Each business contributed to our overall success.
Canadian Retail earnings were up 10 per cent – surpassing
$7 billion for the first time. U.S. Retail earnings were over
US$3 billion – up 28 percent.1 And once again TD Securities
earned more than $1 billion.
We made substantial progress in areas of strategic importance.
We devoted significant investments to our omni channel strategy,
including building out our digital capabilities and end-to-end
customer journeys, facilitating seamless customer experiences
across the Bank. We made significant operational improvements,
simplifying processes to make it easier and faster for customers
to do business with us – and for our colleagues to serve them
better. And we improved delivery of our most significant projects,
adopting agile methodologies, and executing faster and with
greater impact.
Our shareholders benefited from TD’s performance. The Bank’s
dividend increased by 11 per cent on a full-year basis. We delivered
above-average total shareholder return for the current fiscal
year and lead our Canadian peers for Total Shareholder Return
over the 3, 5 and 10-year periods.
So, it was a terrific year for TD and for our shareholders.
What sets TD apart
TD has proven that it can grow year after year on a consistent
basis. I believe these factors help TD stand out in the marketplace.
Everything we do is centred on achieving our vision of being
the Better Bank and fulfilling our purpose to enrich the lives
of our customers, communities and colleagues.
Customers. We know, for example, our business is not built
around a mortgage; it’s built around a homeowner, who might also
be a parent, an entrepreneur and an avid traveller. By knowing our
customers better and understanding their needs more
comprehensively, we are in a better position to bring the whole
Bank to our customers and deliver real value for their entire needs.
Communities. Great people want to work for companies that
do great things. In 2018, we launched The Ready Commitment, our
corporate citizenship platform, which is helping people and
communities thrive in a changing world. This initiative is helping us
forge deeper community connections as we invest and actively
support a target of $1 billion in programs by 2030. We also
continued to move forward with existing commitments, such as
those focused on transitioning to the low-carbon economy of the
future. These initiatives include a target of $100 billion in
low-carbon lending, financing, asset management and other
programs by 2030.
Colleagues. We encourage and support our people to be their
best selves and do their best work. In 2018, we established a
learning platform aligned with how people develop and grow to
help ensure our people are armed with the know-how they need to
succeed well into the future. We also promote the principles and
practices of inclusion and diversity, so we can attract and retain
Our proven business model enables us to deliver consistent
earnings growth, underpinned by a strong risk culture.
As a top 10 bank in North America, we have diversification and
scale, in a unique geographic footprint. We have a strong balance
sheet, anchored by high quality assets and a rich base of customer
deposits that serve as a stable source of low-cost funding. And we
have a well-defined risk culture, grounded in our shared
commitment to sustaining the trust of those we serve.
We are forward focused, shaping the future of banking by
innovating, modernizing our operations, and investing in
new capabilities.
Staying power does not mean staying the same. We are
constantly looking for ways to adapt and reinvent ourselves while
always keeping the customer at the centre of what we do. And
while we have always been at the forefront of innovation, the
proliferation of digital technologies provides us with opportunities
to redefine how our customers see TD and the role we play in their
lives. As further described in our Annual Report, we are proud that
certain respected industry sources have ranked TD first in digital
banking in Canada as well as having the number one banking app.
We will continue to innovate across all our channels, not just
online and mobile but also in our contact centres and retail footprint
where we are re-imagining and re-designing the banking experience.
The aim is to provide our customers and clients with the support
and services they need, anytime, anywhere. We are also investing in
new tools and processes to enhance our capabilities and modernize
and simplify our operations, so we can make things faster, safer and
easier for both our customers and colleagues.
TD plans to build on our momentum in a number of ways. We will
accelerate the development of digital capabilities that enable TD to
deliver legendary customer experiences.
We will continue re-imagine the entire experience for key customer
journeys, from research to advice to fulfillment and servicing. And
we will continue to enhance our capabilities so that our business
decisions and processes are informed by our customers’ wants
and needs.
We will not only focus on what we deliver – but also on how we
deliver it. This includes optimizing and simplifying end-to-end
business processes and delivering business outcomes more quickly.
And, of course, we will continue to empower our colleagues, so that
they have the skills to adapt, develop and succeed.
Helping our customers own their future
All our efforts will help customers gain control of their finances,
fulfill their aspirations and look forward with confidence. We
are proud of the role we play in helping them own their future.
The skill and passion of our more than 85,000 TD bankers
around the globe was on full display in 2018. Together, we delivered
for our customers, colleagues and communities while, at the same
time, shaping the Better Bank of the future. We look forward to
finding new and exciting ways to create value for all our key
stakeholders, including our investors, in the new year and beyond.
Bharat Masrani
Group President and Chief Executive Officer
1 Total adjusted earnings of $12 billion, up 15 percent from 2017. Total adjusted return on equity of 17 percent. U.S. Retail adjusted earnings of US$3.4 billion, up
33 percent from 2017. Refer to footnote 1 on page 14 for information on how adjusted results are calculated.
8
TD BANK GROU P AN NUAL REPO RT 20 18 GROU P PR ESID ENT AND CE O’S M ESSA GE
Chairman of the
Board’s Message
TD demonstrated the strength of its business model by delivering
a strong financial performance this year, with reported earnings of
$11.3 billion. TD also continued to deliver shareholder value, raising
its dividend by more than 11% on a full-year basis, repurchasing
20 million common shares and delivering above peer average
Total Shareholder Return among its major competitors in fiscal
2018, and leading TSR for the last 3, 5 and 10 years. This year
TD was once again named the safest bank in North America by
Global Finance, a further testament to the soundness of its
business model, culture and risk management practices.
Committed to keeping customers top of mind in everything it
does, fostering a unique and inclusive employee culture, and
working to be an environmental leader, the Bank recognizes
that its success is directly tied to the success of the people and
communities it serves. This orientation is reflected in the launch
of The Ready Commitment; a multi-year program to help open
doors for a more inclusive tomorrow by targeting four critical
areas. The sustainability practices embedded in the Bank’s
business model, resulted in TD being listed on the Dow Jones
Sustainability World Index for the fifth consecutive year, and
we remain the only Canadian bank in the index.
In keeping with the Bank’s focus on customers and the Board’s
commitment to leadership in corporate governance, this year
TD became the first bank to consolidate oversight of conduct risk
policies and practices in a single board committee.
On behalf of the Board I would like to thank our Group President
and CEO, Bharat Masrani, and his leadership team, as well as
each of our more than 85,000 employees for their continued hard
work and commitment to providing legendary service to our
customers every year.
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 earn and sustain
your trust in 2019.
Brian M. Levitt
Chairman of the Board
THE BOARD OF DIRECTORS
AND ITS COMMITTEES
The Board of Directors as at November 28,
2018, 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, 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 retired Managing
Partner and Chief
Executive of
Deloitte LLP (Canada),
Oakville, Ontario
David E. Kepler
Corporate Director
and retired Executive
Vice President,
The Dow Chemical
Company,
Sanford, Michigan
Karen E. Maidment
Corporate Director
and former Chief
Financial and
Administrative Officer,
BMO Financial Group,
Cambridge, Ontario
Brian M. Levitt
Chairman of the Board,
The Toronto-Dominion
Bank
Lac Brome, Québec
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 RE POR T 2 0 18 CHA IR MA N OF THE BOARD’S MESSAGE
9
COMMITTEE
MEMBERS1
KEY RESPONSIBILITIES1
Corporate
Governance
Committee
Brian M. Levitt
(Chair)
William E. Bennett
Karen E. Maidment
Alan N. MacGibbon
Responsibility for corporate governance of TD:
•
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 the Bank;
• Satisfy itself that the Bank communicates effectively, both proactively and responsively, with its
shareholders, other interested parties, and the public;
• Oversee the Bank’s strategy and reporting on corporate responsibility for environmental and
social matters;
• Act as the conduct review committee for the Bank and certain of its Canadian subsidiaries that
are federally regulated financial institutions, including providing oversight of conduct risk; and
• Oversee the evaluation of the Board and Committees.
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 the Bank’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;
• Monitor the Bank’s compensation strategy, plans, policies, and practices for alignment to the
Financial Stability Board Principles for Sound Compensation Practices and Implementation
Standards, including the appropriate consideration of risk;
• 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 the Bank’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 the Bank:
• 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 the Bank is exposed;
• Review and recommend the Bank’s Enterprise Risk Appetite Statement and related measures for
approval by the Board and oversee the Bank’s major risks as set out in the ERF;
• Review the Bank’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 current and emerging risks.
Audit Committee
Alan N. MacGibbon2
(Chair)
William E. Bennett2
Brian C. Ferguson2
Jean-René Halde
Irene R. Miller2
Claude Mongeau2
Supervising the quality and integrity of the Bank’s financial reporting and
compliance requirements:
• Oversee reliable, accurate, and clear financial reporting to shareholders;
• Oversee the effectiveness of internal controls, including internal controls over financial reporting;
• 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 policies and programs reasonably designed to
achieve and maintain the Bank’s compliance with the laws and regulations that apply to it; and
• Act as the Audit Committee for certain subsidiaries of the Bank that are federally regulated
financial institutions.
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 2018 Annual Information Form.
1 As at November 28, 2018
2 Designated Audit Committee Financial Expert
10
TD BANK GROU P AN NUAL REPO RT 20 18 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 2012 to identify fundamental
disclosure principles, recommendations and leading practices to
enhance risk disclosures of banks. The index below includes the
recommendations (as published by the EDTF) and lists the
location of the related EDTF disclosures presented in the 2018
Annual Report or the 2018 fourth quarter Supplemental Financial
Information (SFI), or Supplemental Regulatory Disclosures (SRD).
Information on TD’s website, SFI, and SRD is not and should not
be considered incorporated herein by reference into the 2018
Annual Report, Management’s Discussion and Analysis, or the
Consolidated Financial Statements.
TYPE OF RISK
TOPIC EDTF DISCLOSURE
ANNUAL REPORT
PAGE
SFI
SRD
General
Risk Governance and
Risk Management
and Business Model
Capital Adequacy
and Risk Weighted
Assets
Liquidity
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Present all related risk information together
in any particular report.
Refer to below for location
of disclosures
The bank’s risk terminology and risk
measures and present key parameter
values used.
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.
71-76, 81, 87,
89-91, 101-103
67-71
62-63,
95-96, 98
72-75
71-72
61, 71, 76-103
60, 75-76,
84, 101
Pillar 1 capital requirements and the impact
for global systemically important banks.
57-59, 63, 211
Composition of capital and reconciliation of
accounting balance sheet to the regulatory
balance sheet.
57
Flow statement of the movements in
regulatory capital.
Discussion of capital planning within a more
general discussion of management’s
strategic planning.
58-60, 101
Analysis of how RWA relate to business
activities and related risks.
60-61
4-7
Analysis of capital requirements for each
method used for calculating RWA.
77-79, 81,
83-84
Tabulate credit risk in the banking book for
Basel asset classes and major portfolios.
Flow statement reconciling the movements
of RWA by risk type.
Discussion of Basel III back-testing
requirements.
The bank’s management of liquidity needs
and liquidity reserves.
80, 84, 89
91-93
1-2, 5
1-2, 4
3
6
15-18, 20
7-8
24-27
TD BANK GROUP ANNUAL RE POR T 2 0 18 ENH AN C ED DIS CLOSURE TASK FORCE
11
TYPE OF RISK
TOPIC EDTF DISCLOSURE
ANNUAL REPORT
PAGE
SFI
SRD
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 loans.
Reconciliation of the opening and closing
balances of 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, 204
98-100
97-98
82
82, 84-87
83-87, 89
83-87
44-57, 76-81,
162-169, 178,
180-182,
209-210
52, 130-131,
137-138, 168
15-33
1-27
49, 165-167
19, 23-24
79-80, 147,
174-175, 178,
180-182
80, 134, 147
87-90, 101-103
19, 21
32
Discuss publicly known risk events related
to other risks.
70-71, 202-204
12
TD BANK GROU P AN NUAL REPO RT 20 18 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, 2018, 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, 2018. This MD&A is dated November 28, 2018. 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
2017 FINANCIAL RESULTS OVERVIEW
Summary of 2017 Performance
2017 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
13
19
20
21
22
23
23
25
28
32
36
39
40
41
43
44
57
64
66
67
67
71
104
108
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 (“2018 MD&A”) in the Bank’s 2018 Annual
Report 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 2019”, and for the Corporate segment, “Focus for 2019”, and in other statements regarding the Bank’s objectives and priorities for 2019 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 long-term and shorter-term strategic priorities, including the successful completion of acquisitions and strategic plans;
the ability of the Bank 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, capital guidelines and liquidity regulatory guidance, and
the Bank recapitalization “bail-in” regime; exposure related to significant litigation and regulatory matters; increased competition from incumbents and non-traditional
competitors, including Fintech and big technology 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 2018 MD&A, as may be
updated in subsequently filed quarterly reports to shareholders and news releases (as applicable) related to any events or transactions or events discussed under the
heading “Significant and Subsequent Events, and Pending Acquisitions” 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 2018 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 2019”, and for the
Corporate segment, “Focus for 2019”, 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.
13
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 1
FINANCIAL HIGHLIGHTS
(millions of Canadian dollars, except where noted)
Results of operations
Total revenues – reported
Total revenues – adjusted1
Provision for credit losses2
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 assets3
Financial ratios
Return on common equity – reported
Return on common equity – adjusted1,4
Efficiency ratio – reported
Efficiency ratio – adjusted1
Provision for credit losses as a % of net average loans and acceptances5
Common share information – reported (Canadian dollars)
Per share earnings
Basic
Diluted
Dividends per common share
Book value per share
Closing share price6
Shares outstanding (millions)
Average basic
Average diluted
End of period
Market capitalization (billions of Canadian dollars)
Dividend yield7
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 ratio3
Tier 1 Capital ratio3
Total Capital ratio3
Leverage ratio
2018
2017
2016
$ 38,834
38,923
2,480
2,444
20,137
19,885
11,334
12,183
$ 646.4
1,334.9
851.4
80.0
435.6
$ 36,149
35,946
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
2,462
18,877
18,496
8,936
9,292
$ 585.7
1,177.0
773.7
74.2
405.8
15.7%
16.9
51.9%
51.1
0.39
14.9%
15.0
53.6%
53.1
0.37
13.3%
13.9
55.0%
53.9
0.41
$
6.02
6.01
2.61
40.50
73.03
1,835.4
1,839.5
1,828.3
$ 133.5
$
3.5%
43.3
12.2
3.1
6.48
6.47
40.2%
11.3
12.0%
13.7
16.2
4.2
$
5.51
5.50
2.35
37.76
73.34
1,850.6
1,854.8
1,839.6
$ 134.9
$
3.6%
42.6
13.3
24.8
5.55
5.54
42.3%
13.2
10.7%
12.3
14.9
3.9
$
4.68
4.67
2.16
36.71
60.86
1,853.4
1,856.8
1,857.2
$ 113.0
$
3.9%
46.1
13.0
17.9
4.88
4.87
44.3%
12.5
10.4%
12.2
15.2
4.0
1 The Toronto-Dominion Bank (“TD” or the “Bank”) prepares its Consolidated
Financial Statements in accordance with International Financial Reporting Standards
(IFRS), the current Generally Accepted Accounting Principles (GAAP), and refers to
results prepared in accordance with IFRS as the “reported” results. The Bank also
utilizes non-GAAP financial measures to arrive at “adjusted” results to assess each
of its businesses and to measure overall Bank performance. To arrive at adjusted
results, the Bank removes “items of note”, from reported results. Refer to the
“Financial Results Overview” in 2018 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.
2 Effective November 1, 2017, amounts were prepared in accordance with IFRS 9,
Financial Instruments (IFRS 9). Prior period comparatives were prepared in
accordance with IAS 39. Financial Instruments: Recognition and Measurement
(IAS 39) and have not been restated.
scalars for inclusion of CVA for Common Equity Tier 1 (CET1), Tier 1, and Total
Capital RWA are 80%, 83%, and 86%, respectively. For fiscal 2017, the scalars
were 72%, 77%, and 81%, respectively. For fiscal 2016, the scalars were 64%,
71%, and 77%, respectively. For fiscal 2016 and 2017, RWA for all ratios were the
same due to the regulatory floor which was based on Basel I risk weights. For fiscal
2018, the regulatory floor is based on Basel II standardized risk weights and is no
longer triggered resulting in a separate RWA for each ratio due to the CVA scalar.
4 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.
5 Excludes acquired credit-impaired (ACI) loans, debt securities classified as loans
(DSCL) under IAS 39, and debt securities at amortized cost (DSAC) and debt
securities at fair value through other comprehensive income (DSOCI) under IFRS 9.
6 Toronto Stock Exchange (TSX) closing market price.
7 Dividend yield is calculated as the dividend per common share paid during the year
3 Each capital ratio has its own risk-weighted assets (RWA) measure due to the
divided by the daily average closing stock price during the year.
Office of the Superintendent of Financial Institutions Canada (OSFI)-prescribed
scalar for inclusion of the Credit Valuation Adjustment (CVA). For fiscal 2018, the
8 TSR is calculated based on share price movement and dividends reinvested over
a trailing one-year period.
14
TD BANK GROUP ANNUAL REPORT 2018 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, which includes the results
of the Canadian personal and commercial banking, wealth and
insurance businesses; U.S. Retail, which includes the results of the
U.S. personal and business banking operations, wealth management
services, and the Bank’s investment in TD Ameritrade; and Wholesale
Banking. TD also ranks among the world’s leading online financial
services firms, with more than 12 million active online and mobile
customers. TD had $1.3 trillion in assets on October 31, 2018, and
84,383 average full-time equivalent employees in fiscal 2018. 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
3. 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 Bank’s U.S. strategic cards portfolio comprises of agreements with
certain U.S. retailers pursuant to which TD is the U.S. issuer of private
label and co-branded consumer credit cards to their U.S. customers.
Under the terms of the individual agreements, the Bank and the
retailers share in the profits generated by the relevant portfolios after
credit losses. Under IFRS, TD is required to present the gross amount
of revenue and provisions for credit losses related to these portfolios
in the Bank’s Consolidated Statement of Income. At the segment level,
the retailer program partners’ share of revenues and credit losses
is presented in the Corporate segment, with an offsetting amount
(representing the partners’ net share) recorded in Non-interest
expenses, resulting in no impact to Corporate’s reported Net income
(loss). The Net income (loss) included in the U.S. Retail segment
includes only the portion of revenue and credit losses attributable
to TD under the agreements.
Effective November 1, 2017, the Bank adopted IFRS 9, which replaces
the guidance in IAS 39. Refer to Note 2 and Note 4 of the 2018
Consolidated Financial Statements for a summary of the Bank’s
accounting policies as it relates to IFRS 9. Under IFRS 9, the current
period provision for credit losses (PCL) for performing (Stage 1 and
Stage 2) and impaired (Stage 3) financial assets, loan commitments,
and financial guarantees is recorded within the respective segment.
Under IAS 39 and prior to November 1, 2017, the PCL related to the
collectively assessed allowance for incurred but not identified credit
losses that related to the Canadian Retail and Wholesale Banking
segments was recorded in the Corporate segment. Prior period results
have not been restated. PCL on impaired financial assets includes
Stage 3 PCL under IFRS 9 and counterparty-specific and individually
insignificant PCL under IAS 39. PCL on performing financial assets, loan
commitments, and financial guarantees include Stage 1 and Stage 2 PCL
under IFRS 9 and incurred but not identified losses under IAS 39.
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 has recognized any
measurement differences between the previous carrying amount and
the new carrying amount on November 1, 2017 through an adjustment
to opening retained earnings. As such, fiscal 2018 results reflect the
adoption of IFRS 9, while prior periods reflect results under IAS 39.
U.S. Tax Reform
On December 22, 2017, the U.S. government enacted comprehensive
tax legislation commonly referred to as the Tax Cuts and Jobs Act
(the “U.S. Tax Act”) which made broad and complex changes to the
U.S. tax code.
The reduction of the U.S. federal corporate tax rate enacted by the
U.S. Tax Act resulted in an adjustment during 2018 to the Bank’s U.S.
deferred tax assets and liabilities to the lower base rate of 21% as well
as an adjustment to the Bank’s carrying balances of certain tax credit-
related investments and its investment in TD Ameritrade. The Bank
finalized its assessment of the implications of the U.S. Tax Act during
2018 and recorded a net charge to earnings of $392 million
(US$319 million) for the year ended October 31, 2018.
The lower corporate tax rate had and will have a positive effect
on TD’s current year and future earnings. The amount of the benefit
may vary due to, among other things, changes in interpretations and
assumptions the Bank has made, guidance that may be issued by
applicable regulatory authorities, and actions the Bank may take to
reinvest some of the savings in its operations.
The following table provides the operating results on a reported basis
for the Bank.
T A B L E 2
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
2018
$ 22,239
16,595
38,834
2,480
2,444
20,137
13,773
3,182
743
11,334
214
$ 11,120
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
$ 11,048
72
$ 10,203
121
$ 8,680
115
15
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 3
NON-GAAP FINANCIAL MEASURES – Reconciliation of Adjusted to Reported Net Income
(millions of Canadian dollars)
2018
2017
2016
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
Impact from U.S. tax reform6
Dilution gain on the Scottrade transaction7
Loss on sale of the Direct Investing business in Europe8
Fair value of derivatives hedging the reclassified available-for-sale securities portfolio9
Impairment of goodwill, non-financial assets, and other charges10
Provision for (recovery of) income taxes for items of note
Amortization of intangibles4,11
Charges associated with the Scottrade transaction5
Impact from U.S. tax reform6
Dilution gain on the Scottrade transaction7
Loss on sale of the Direct Investing business in Europe8
Fair value of derivatives hedging the reclassified available-for-sale securities portfolio9
Impairment of goodwill, non-financial assets, and other charges10
Total adjustments for items of note
Net income available to common shareholders – reported
$ 22,239
16,684
38,923
2,480
2,444
19,885
14,114
2,898
967
12,183
214
11,969
72
11,897
(324)
(193)
(48)
–
–
–
–
(55)
(5)
344
–
–
–
–
(849)
$ 11,048
$ 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
1 Adjusted non-interest income excludes the following items of note: Adjustment to
6 The reduction of the U.S. federal corporate tax rate enacted by the U.S. Tax Act
the carrying balances of certain tax credit-related investments as explained in
footnote 6 – 2018 – $(89) million. Dilution gain on the Scottrade transaction, as
explained in footnote 7 – 2017 – $204 million. Loss on sale of the Direct Investing
business in Europe, as explained in footnote 8 – 2017 – $42 million. Gain on fair
value of derivatives hedging the reclassified available-for-sale (AFS) securities
portfolio, as explained in footnote 9 – 2017 – $41 million and 2016 – $7 million.
These amounts were reported in the Corporate segment.
2 Adjusted non-interest expenses exclude the following items of note: Amortization
of intangibles, as explained in footnote 4 – 2018 – $231 million, 2017 –
$248 million, 2016 – $270 million, reported in the Corporate segment. Charges
associated with the Bank’s acquisition of Scottrade Bank, as explained in
footnote 5 – 2018 – $21 million and 2017 – $26 million, reported in the U.S. Retail
segment. Impairment of goodwill, non-financial assets, and other charges as
explained in footnote 10 – 2016 – $111 million, reported in Corporate 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 –
2018 – $93 million, 2017 – $62 million and 2016 – $65 million; and the Bank’s
share of TD Ameritrade’s deferred tax balances adjustment, as explained in
footnote 6 – 2018 – $(41) million. The earnings impact of both of these items was
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 – 2018 – $172 million and 2017 – $20 million. This item
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, together with the Bank’s purchase of TD Ameritrade
shares issued in connection with TD Ameritrade’s acquisition of Scottrade (the
“Scottrade transaction”). 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 and include
charges associated with the Bank’s acquisition of Scottrade Bank and the after tax
amounts for the Bank’s share of charges associated with TD Ameritrade’s
acquisition of Scottrade. These amounts were reported in the U.S. Retail segment.
resulted in a net charge to earnings during 2018 of $392 million, comprising a net
$48 million pre-tax charge related to the write-down of certain tax credit-related
investments, partially offset by the favourable impact of the Bank’s share of
TD Ameritrade’s remeasurement of its deferred income tax balances, and a net
$344 million income tax expense resulting from the remeasurement of the Bank’s
deferred tax assets and liabilities to the lower base rate of 21% and other related
tax adjustments. The earnings impact was reported in the Corporate segment.
7 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 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.
8 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 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.
9 The Bank changed its trading strategy with respect to certain trading debt securities
and reclassified these securities from trading to AFS under IAS 39 (classified as fair
value through other comprehensive income (FVOCI) under IFRS 9) effective
August 1, 2008. These debt securities are economically hedged, primarily with credit
default swap (CDS) 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.
10 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.
11 The amount reported in 2018 excludes $31 million relating to the one-time
adjustment of associated deferred tax liability balances as a result of the U.S. Tax
Act. The impact of this adjustment is included in the Impact from U.S. tax reform
item of note.
16
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 4
RECONCILIATION OF REPORTED TO ADJUSTED EARNINGS PER SHARE (EPS)1
(Canadian dollars)
Basic earnings per share – reported
Adjustments for items of note2
Basic earnings per share – adjusted
Diluted earnings per share – reported
Adjustments for items of note2
Diluted earnings per share – adjusted
2018
$ 6.02
0.46
$ 6.48
$ 6.01
0.46
$ 6.47
2017
$ 5.51
0.04
$ 5.55
$ 5.50
0.04
$ 5.54
2016
$ 4.68
0.20
$ 4.88
$ 4.67
0.20
$ 4.87
1 EPS is computed by dividing net income available to common shareholders by the
2 For explanations of items of note, refer to the “Non-GAAP Financial Measures –
weighted-average number of shares outstanding during the period.
Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results
Overview” section of this document.
T A B L E 5
AMORTIZATION OF INTANGIBLES, NET OF INCOME TAXES1,2
(millions of Canadian dollars)
TD Bank, National Association (TD Bank, N.A.)
TD Ameritrade Holding Corporation (TD Ameritrade)3
MBNA Canada
Aeroplan
Other
Software and asset servicing rights
Amortization of intangibles, net of income taxes
2018
$ 87
93
49
17
23
269
464
$ 733
2017
$ 91
62
42
17
20
232
351
$ 583
2016
$ 108
65
36
17
20
246
340
$ 586
1 The amount reported in 2018 excludes $31 million relating to the one-time
2 Amortization of intangibles, with the exception of software and asset servicing
adjustment of associated deferred tax liability balances as a result of the U.S. Tax
Act. The impact of this adjustment is included in the Impact from U.S. tax reform
item of note.
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.
3 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% CET1 Capital.
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.
Adjusted ROE is adjusted net income available to common
shareholders as a percentage of average common equity.
T A B L E 6
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.
2018
$ 70,499
11,048
849
$ 11,897
2017
$ 68,349
10,203
70
$ 10,273
2016
$ 65,121
8,680
356
$ 9,036
15.7%
16.9
14.9%
15.0
13.3%
13.9
RETURN ON TANGIBLE COMMON EQUITY
Tangible common equity (TCE) is calculated as common shareholders’
equity less goodwill, imputed goodwill and intangibles on an investment
in TD Ameritrade and other acquired intangible assets, net of related
deferred tax liabilities. Return on tangible common equity (ROTCE) is
calculated as reported net income available to common shareholders
after adjusting for the after-tax amortization of acquired intangibles,
which are treated as an item of note, as a percentage of average TCE.
Adjusted ROTCE is calculated using reported net income available to
common shareholders, adjusted for items of note, as a percentage of
average TCE. Adjusted ROTCE provides a useful measure of the
performance of the Bank’s income producing assets, independent of
whether or not they were acquired or developed internally. TCE, ROTCE,
and adjusted ROTCE are each non-GAAP financial measures and are not
defined terms 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.
17
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 7
RETURN ON TANGIBLE COMMON EQUITY
(millions of Canadian dollars, except as noted)
Average common equity
Average goodwill
Average imputed goodwill and intangibles on an investment in TD Ameritrade
Average other acquired intangibles1
Average related deferred tax liabilities
Average tangible common equity
Net income available to common shareholders – reported
Amortization of acquired intangibles, net of income taxes2
Net income available to common shareholders after adjusting
for after-tax amortization of acquired intangibles
Other items of note, net of income taxes2
Net income available to common shareholders – adjusted
Return on tangible common equity
Return on tangible common equity – adjusted
2018
2017
$ 70,499
16,197
4,100
676
(240)
49,766
11,048
269
11,317
580
$ 11,897
$ 68,349
16,335
3,899
917
(343)
47,541
10,203
232
10,435
(162)
$ 10,273
2016
$ 65,121
16,489
3,996
1,141
(398)
43,893
8,680
246
8,926
110
$ 9,036
22.7%
23.9
21.9%
21.6
20.3%
20.6
1 Excludes intangibles relating to software and asset servicing rights.
2 For explanations of items of note, refer to the “Non-GAAP Financial Measures –
SIGNIFICANT AND SUBSEQUENT EVENTS, AND
PENDING ACQUISITIONS
Acquisition of Greystone Managed Investments Inc.
On November 1, 2018, the Bank acquired 100% of the outstanding
equity of Greystone Capital Management Inc., the parent company of
Greystone Managed Investments Inc. (Greystone) for consideration of
$817 million, of which $475 million was paid in cash and $342 million
was paid in the Bank’s common shares. The value of 4.7 million
common shares issued as consideration was based on the volume
weighted-average market price of the Bank’s common shares over the
10 trading day period immediately preceding the fifth business day prior
to the acquisition date and was recorded based on market price at
close. Common shares of $167 million issued to employee shareholders
in respect of the purchase price will be held in escrow for two years
post-acquisition, subject to their continued employment, and will be
recorded as a compensation expense over the two-year escrow period.
The acquisition is accounted for as a business combination under
the purchase method. As at November 1, 2018, the acquisition
contributed $169 million of assets and $55 million of liabilities.
The excess of accounting consideration over the fair value of the
identifiable net assets is allocated to customer relationship intangibles
of $140 million, deferred tax liability of $37 million and goodwill of
$433 million. Goodwill is not deductible for tax purposes. The results
of the acquisition will be consolidated from the acquisition date and
reported in the Canadian Retail segment. The purchase price allocation
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.
Agreement for Air Canada Credit Card Loyalty Program
On November 26, 2018, the Bank finalized a long-term loyalty program
agreement (the “Loyalty Agreement”) with Air Canada. Under the
terms of the Loyalty Agreement, the Bank will become the primary
credit card issuer for Air Canada’s new loyalty program when it
launches in 2020 through to 2030. The Loyalty Agreement was
finalized in conjunction with Air Canada entering into a definitive share
purchase agreement with Aimia Inc. (“Aimia”) for the acquisition of
Aimia Canada Inc., which operates the Aeroplan loyalty business (the
“Transaction”), for an aggregate purchase price of $450 million in cash
Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results
Overview” section of this document.
and the assumption of approximately $1.9 billion of Aeroplan Miles
liability. The closing of the Transaction is subject to the satisfaction
of certain conditions, including receipt of Aimia shareholder approval
and customary regulatory approvals. The Loyalty Agreement will
become effective upon the closing of the Transaction and TD Aeroplan
cardholders will become members of Air Canada’s new loyalty program
and their miles will be transitioned when Air Canada’s new loyalty
program launches in 2020.
If the proposed Transaction is completed, the Bank will pay
$622 million plus applicable sales tax to Air Canada, of which
$547 million ($446 million after sales and income taxes) will be
recognized as an expense during the first quarter of 2019 to be
reported in the Canadian Retail segment, and $75 million will
be recognized as an intangible asset amortized over the Loyalty
Agreement term, both of which are expected to be reported as items
of note. In addition, the Bank will prepay $308 million plus applicable
sales tax for the future purchase of loyalty points over a ten year
period. The Bank also expects to incur additional pre-tax costs of
approximately $100 million over two years to build the functionality
required to facilitate the new program. The proposed Transaction is
expected to reduce the Bank’s CET1 ratio on close by approximately
13 basis points (bps).
Normal Course Issuer Bid
As approved by the Board on November 28, 2018, the Bank
announced its intention to amend its normal course issuer bid (NCIB)
for up to an additional 20 million of its common shares, subject to
the approval of OSFI and the TSX. The timing and amount of any
purchases under the program are subject to regulatory approvals and
to management discretion based on factors such as market conditions
and capital adequacy.
Redemption of TD CaTS III Securities
On November 26, 2018, TD Capital Trust III announced its intention
to redeem all of the outstanding TD Capital Trust III Securities –
Series 2008 (TD CaTS III) on December 31, 2018, at a redemption
price per TD CaTS III of $1,000, plus the unpaid distribution payable
on the redemption date of December 31, 2018.
18
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL RESULTS OVERVIEW
Net Income
Reported net income for the year was $11,334 million, an increase
of $817 million, or 8%, compared with last year. The increase reflects
revenue growth and a higher contribution from TD Ameritrade,
partially offset by higher PCL, now reflecting the Bank’s adoption
of IFRS 9, an increase in non-interest expenses, and a higher effective
tax rate. The reported ROE for the year was 15.7%, compared with
14.9% last year. Adjusted net income of $12,183 million increased
$1,596 million, or 15%, compared with last year.
By segment, the increase in reported net income was due to an
increase in U.S. Retail of $866 million, or 26%, an increase in
Canadian Retail of $658 million, or 10%, and an increase in Wholesale
Banking2 of $15 million, or 1%, partially offset by a higher net loss in
the Corporate segment of $722 million.
Reported diluted EPS for the year was $6.01, an increase of 9%,
compared with $5.50 last year. Adjusted diluted EPS for the year was
$6.47, a 17% increase, compared with $5.54 last year.
Impact of Foreign Exchange Rate on U.S. Retail Segment
Translated Earnings
U.S. Retail segment earnings, including the contribution from
the Bank’s investment in TD Ameritrade, reflect fluctuations in the
U.S. dollar to Canadian dollar exchange rate compared with last year.
Depreciation of the Canadian dollar had a favourable impact on the
U.S. Retail segment earnings for the year ended October 31, 2018,
compared with last year, as shown in the following table.
T A B L E 8
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
2018
vs. 2017
Increase
(Decrease)
2017
vs. 2016
Increase
(Decrease)
$ (173)
(94)
(93)
(57)
(58)
$ (151)
(90)
(89)
(39)
(40)
(12)
(10)
(68)
(68)
(4)
(7)
(43)
(47)
$ (0.04)
(0.04)
(0.04)
(0.04)
$ (0.02)
(0.03)
(0.02)
(0.03)
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
$57 million.
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.
NET INCOME – REPORTED BY BUSINESS SEGMENT
(as a percentage of total net income)
1
70%
60
50
40
30
20
10
0
2016
2017
2018
2016
2017
2018
2016
2017
2018
NET INCOME – ADJUSTED BY BUSINESS SEGMENT
(as a percentage of total net income)
1
70%
60
50
40
30
20
10
0
2016
2017
2018
2016
2017
2018
2016
2017
2018
Canadian Retail
U.S. Retail
Wholesale Banking
19
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL RESULTS OVERVIEW
Revenue
Reported revenue was $38,834 million, an increase of $2,685 million,
or 7%, compared with last year. Adjusted revenue was $38,923 million,
an increase of $2,977 million, or 8%, compared with last year.
NET INTEREST INCOME
Net interest income for the year was $22,239 million, an increase of
$1,392 million, or 7%, compared with last year. The increase reflects
loan and deposit volume growth and higher margins in the Canadian
and U.S. Retail segments, and the benefit of the Scottrade transaction,
partially offset by the impact of foreign currency translation.
By segment, the increase in reported net interest income was due
to an increase in Canadian Retail of $965 million, or 9%, an increase
in U.S. Retail of $690 million, or 9%, and an increase in the Corporate
segment of $391 million, or 41%, partially offset by a decrease in
Wholesale Banking of $654 million, or 36%. The decrease in net
interest income taxable equivalent basis (TEB) in Wholesale Banking
reflects a change in business mix in the second quarter last year as
a result of an increase in client activity in equity trading. The TEB
adjustment is offset in Corporate segment.
NET INTEREST MARGIN
Net interest margin declined by 1 basis point during the year to
1.95%, compared with 1.96% last year, primarily due to changes
in non-retail product mix, partially offset by margin expansion
in the Canadian and U.S. Retail segments.
NON-INTEREST INCOME
Reported non-interest income for the year was $16,595 million, an
increase of $1,293 million, or 8%, compared with last year. The
increase reflects higher non-interest income in Wholesale Banking,
fee-based income in the Canadian and U.S. Retail segments, wealth
asset growth, an increase in revenues from the insurance business,
T A B L E 9
NON-INTEREST INCOME
(millions of Canadian dollars, except as noted)
Investment and securities services
Broker dealer fees and commissions
Full-service brokerage and other securities services
Underwriting and advisory
Investment management fees
Mutual fund management
Trust fees
Total investment and securities services
Credit fees
Net securities gains (losses)
Trading income (losses)
Service charges
Card services
Insurance revenue
Other income (loss)
Total
and higher trading volumes in the direct investing business in the
Canadian Retail segment. The increase was partially offset by the
dilution gain on the Scottrade transaction last year and losses on
certain tax credit-related investments in the current year.
By segment, the increase in reported non-interest income was due
to an increase in Wholesale of $842 million, or 57%, an increase in
Canadian Retail of $686 million, or 7%, and an increase in U.S. Retail
of $33 million, or 1%, partially offset by a decrease in Corporate of
$268 million, or 41%.
NET INTEREST INCOME
(millions of Canadian dollars)
$24,000
21,000
18,000
15,000
12,000
9,000
6,000
3,000
0
2016 2017 2018
2018
2017
2016
% change
2018 vs. 2017
$
577
1,041
566
546
1,790
136
4,656
1,210
111
1,052
2,716
2,376
4,045
429
$ 16,595
$
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
17
8
(4)
2
3
(6)
4
7
(13)
247
3
(1)
8
(12)
8
20
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
Trading-related income by product line depicts trading income for
each major trading category.
T A B L E 1 0
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.
FINANCIAL RESULTS OVERVIEW
Provision for Credit Losses
PCL for the year was $2,480 million, an increase of $264 million,
or 12%, compared with last year. PCL – impaired was $2,166 million,
an increase of $176 million, or 9%, primarily reflecting U.S. credit card
and U.S. auto portfolio volume growth, seasoning and mix, partially
offset by strong credit performance in Canadian Retail. PCL –
performing was $314 million, an increase of $88 million, or 39%,
primarily reflecting the impact of methodology changes related to the
adoption of IFRS 9 including where Stage 2 loans are now measured
based on a lifetime expected credit loss (ECL). Total PCL year to date
as an annualized percentage of credit volume was 0.39%.
By segment, the increase in PCL was due to an increase in U.S.
Retail of $125 million, or 16%, an increase in the Corporate segment
of $96 million, or 21% (largely reflecting PCL for the U.S. strategic
cards portfolio, which is offset in Corporate segment non-interest
expenses), an increase in Wholesale Banking of $31 million, and an
increase in Canadian Retail of $12 million, or 1%.
2018
$ 495
1,052
10
$ 1,557
$ 535
680
332
10
$ 1,557
For the years ended October 31
2017
$ 770
303
11
$ 1,084
$ 668
673
(268)
11
$ 1,084
2016
$ 934
395
6
$ 1,335
$ 742
622
(35)
6
$ 1,335
PROVISION FOR
CREDIT LOSSES
(millions of Canadian dollars)
$3,000
2,500
2,000
1,500
1,000
500
0
2016 2017 2018
21
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL RESULTS OVERVIEW
Expenses
NON-INTEREST EXPENSES
Reported non-interest expenses for the year were $20,137 million,
an increase of $771 million, or 4%, compared with last year. The
increase was primarily due to an increase in employee-related expenses
including revenue-based variable compensation expenses, business
and volume growth, and higher spend related to strategic initiatives,
partially offset by productivity savings.
By segment, the increase in non-interest expenses was due to
an increase in Canadian Retail of $539 million, or 6%, an increase
in U.S. Retail of $222 million, or 4%, an increase in Wholesale of
$138 million, or 7%, partially offset by a decrease in the Corporate
segment of $128 million, or 5%.
Adjusted non-interest expenses were $19,885 million, an increase
of $793 million, or 4%, compared with last year.
INSURANCE CLAIMS AND RELATED EXPENSES
Insurance claims and related expenses were $2,444 million, an increase
of $198 million, or 9%, compared with last year, reflecting an increase
in reinsurance liabilities assumed, more severe weather-related events,
higher current year claims, and changes in the fair value of investments
supporting claims liabilities which resulted in a similar increase to
non-interest income, partially offset by more favourable prior years’
claims development, and the impact of changes to forward-looking
actuarial assumptions.
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 51.9%, compared with 53.6%
last year.
T A B L E 1 1
NON-INTEREST EXPENSES AND EFFICIENCY RATIO
(millions of Canadian dollars, except as noted)
Salaries and employee benefits
Salaries
Incentive compensation
Pension and other employee benefits
Total salaries and employee benefits
Occupancy
Rent
Depreciation and impairment losses
Other
Total occupancy
Equipment
Rent
Depreciation and impairment losses
Other
Total equipment
Amortization of other intangibles
Marketing and business development
Restructuring charges
Brokerage-related fees
Professional and advisory services
Other expenses
Total expenses
Efficiency ratio – reported
Efficiency ratio – adjusted1
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.
22
NON-INTEREST EXPENSES
(millions of Canadian dollars)
EFFICIENCY RATIO
(percent)
$25,000
60%
20,000
15,000
10,000
5,000
0
50
40
30
20
10
0
2016
2017
2018
2016
2017
2018
Reported
Adjusted
Reported
Adjusted
2018
2017
2016
% change
2018 vs. 2017
$ 6,162
2,592
1,623
10,377
913
371
481
1,765
207
205
661
1,073
815
803
73
306
1,247
3,678
$ 20,137
$ 5,839
2,454
1,725
10,018
917
402
475
1,794
184
201
607
992
704
726
2
314
1,165
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
3,829
$ 18,877
6
6
(6)
4
–
(8)
1
(2)
13
2
9
8
16
11
3,550
(3)
7
1
4
51.9%
51.1
53.6%
53.1
55.0%
53.9
(170)bps
(200)
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL RESULTS OVERVIEW
Taxes
Reported total income and other taxes increased $1,022 million, or
28.6%, compared with last year, reflecting an increase in income tax
expense of $929 million, or 41.2%, and an increase in other taxes
of $93 million, or 7.1%. Adjusted total income and other taxes were
up $655 million from last year, or 17.9%, reflecting an increase in
income tax expense of $562 million.
The Bank’s reported effective tax rate was 23.1% for 2018,
compared with 18.3% last year. The year-over-year increase was
largely due to higher income before taxes, lower tax-exempt dividend
income, the impact of U.S. tax reform on U.S. deferred tax assets and
liabilities and a prior year non-taxable dilution gain on the Scottrade
transaction, partially offset by the lower U.S. federal tax rate
associated with U.S. tax reform. For a reconciliation of the Bank’s
effective income tax rate with the Canadian statutory income tax rate,
refer to Note 25 of the 2018 Consolidated Financial Statements.
The Bank’s adjusted effective income tax rate for 2018 was 20.5%,
compared with 18.9% last year. The year-over-year increase was
largely due to higher income before taxes and lower tax-exempt
dividend income, partially offset by the lower U.S. federal tax rate
associated with U.S. tax reform.
The Bank reports its investment in TD Ameritrade using the equity
method of accounting. TD Ameritrade’s tax expense of $206 million
in 2018, compared with $268 million last year, was not part of
the Bank’s effective tax rate.
T A B L E 1 2
NON-GAAP FINANCIAL MEASURES – Reconciliation of Reported to Adjusted Provision for Income Taxes
(millions of Canadian dollars, except as noted)
Provision for income taxes – reported
Total adjustments for items of note1,2
Provision for income taxes – adjusted
Other taxes
Payroll
Capital and premium
GST, HST, and provincial sales3
Municipal and business
Total other taxes
Total taxes – adjusted
Effective income tax rate – reported
Effective income tax rate – adjusted4
2018
$ 3,182
(284)
2,898
538
148
487
237
1,410
$ 4,308
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
23.1%
20.5
18.3%
18.9
20.1%
20.2
1 For explanations of items of note, refer to the “Non-GAAP Financial Measures –
Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results
Overview” section of this document.
2 The tax effect for each item of note is calculated using the statutory income tax
rate of the applicable legal entity.
3 Goods and services tax (GST) and Harmonized sales tax (HST).
4 Adjusted effective income tax rate is the adjusted provision for income taxes before
other taxes as a percentage of adjusted net income before taxes.
FINANCIAL RESULTS OVERVIEW
Quarterly Financial Information
FOURTH QUARTER 2018 PERFORMANCE SUMMARY
Reported net income for the quarter was $2,960 million, an increase
of $248 million, or 9%, compared with fourth quarter last year.
The increase reflects revenue growth, partially offset by growth in
non-interest expenses, higher PCL and higher insurance claims.
Adjusted net income for the quarter was $3,048 million, an increase
of $445 million, or 17%, compared with the fourth quarter last year.
Reported diluted EPS for the quarter was $1.58, an increase of 11%,
compared with $1.42 in the fourth quarter of last year. Adjusted
diluted EPS for the quarter was $1.63, an increase of 20%, compared
with $1.36 in the fourth quarter of last year.
Reported revenue for the quarter was $10,122 million, an increase
of $852 million, or 9%, compared with the fourth quarter last year.
Net interest income for the quarter was $5,756 million, an increase
of $426 million, or 8%, primarily due to loan and deposit volume
growth, and higher deposit margins due to a more favourable interest
rate environment in the Canadian and U.S. Retail segments, and the
impact of foreign currency translation. By segment, the increase in
reported net interest income was due to an increase in U.S. Retail
of $273 million, or 15%, and an increase in Canadian Retail of
$249 million, or 9%, partially offset by a decrease in the Corporate
segment of $92 million, or 23%, and a decrease in Wholesale Banking
of $4 million, or 1%. Adjusted net interest income for the quarter was
$5,756 million, an increase of $426 million, or 8%, compared with the
fourth quarter last year.
Non-interest income for the quarter was $4,366 million, an increase
of $426 million, or 11% reflecting higher trading-related revenue,
fee-based income growth in the Canadian and U.S. Retail segments,
and an increase in revenues from the insurance business, partially
offset by the dilution gain on the Scottrade transaction in the same
quarter last year. By segment, the increase in reported non-interest
income was due to an increase in Wholesale Banking of $227 million,
or 54%, an increase in Canadian Retail of $205 million, or 8%, an
increase in U.S. Retail of $44 million, or 7%, partially offset by a
decrease in the Corporate segment of $50 million, or 22%. Adjusted
non-interest income for the quarter was $4,366 million, an increase
of $630 million, or 17%, compared with fourth quarter last year.
PCL for the quarter was $670 million, an increase of $92 million,
or 16%, compared with the fourth quarter last year. PCL – impaired
was $559 million, an increase of $12 million, or 2%. PCL – performing
was $111 million, an increase of $80 million, reflecting the impact of
methodology changes related to the adoption of IFRS 9 including where
Stage 2 loans are now measured based on a lifetime ECL. Total PCL for
the quarter as an annualized percentage of credit volume was 0.40%.
23
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
By segment, the increase in PCL was due to an increase in U.S.
Retail of $41 million, or 20%, an increase in the Corporate segment
of $24 million, or 18%, an increase in Canadian Retail of $19 million,
or 8%, and an increase in Wholesale Banking of $8 million.
Insurance claims and related expenses for the quarter were
$684 million, an increase of $69 million, or 11%, compared with the
fourth quarter last year, reflecting an increase in reinsurance liabilities
assumed, more severe weather-related events, less favourable prior
years’ claims development, and the impact of changes to forward-
looking assumptions, partially offset by changes in the fair value of
investments supporting claims liabilities which resulted in a similar
decrease to non-interest income.
Reported non-interest expenses for the quarter were $5,352 million,
an increase of $524 million, or 11%, compared with the fourth quarter
last year, reflecting business and volume growth, higher spend related to
strategic initiatives, an increase in employee-related expenses including
revenue-based variable compensation expenses, and the impact of
foreign currency translation. By segment, the increase in reported
non-interest expenses was due to an increase in Canadian Retail of
$258 million, or 11%, an increase in Wholesale Banking of $117 million
or 28%, an increase in U.S. Retail of $108 million, or 7%, and an
increase in the Corporate segment of $41 million, or 7%. Adjusted
non-interest expenses for the quarter were $5,299 million, an increase
of $560 million, or 12%, compared with fourth quarter last year.
The Bank’s reported effective tax rate was 20.2% for the quarter,
compared with 19.7% in the same quarter last year. The increase was
largely due to higher income before taxes in the current period and
a non-taxable dilution gain on the Scottrade transaction included in
the prior period, partially offset by the lower U.S. federal tax rate
associated with U.S. tax reform and business mix. The Bank’s adjusted
effective tax rate was 20.3% for the quarter, compared with 21.3% in
the same quarter last year. The decrease was largely due to the lower
U.S. federal tax rate associated with U.S. tax reform, partially offset by
higher income before taxes.
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, fee income, and
advisory activity 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 3
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
Impact from U.S. tax reform
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
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)
2018
For the three months ended
2017
Oct. 31
Jul. 31
Apr. 30
Jan. 31
Oct. 31
Jul. 31
Apr. 30
Jan. 31
$ 5,756
4,366
10,122
670
684
5,352
691
235
2,960
$ 5,655
4,230
9,885
561
627
5,117
705
230
3,105
$ 5,398
4,069
9,467
556
558
4,822
746
131
2,916
$ 5,430
3,930
9,360
693
575
4,846
1,040
147
2,353
$ 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
76
25
–
–
–
–
101
13
3,048
51
77
18
–
–
–
–
95
73
3,127
59
86
77
–
–
–
–
163
17
3,062
52
85
73
48
–
–
–
206
(387)
2,946
52
78
46
–
(204)
–
–
(80)
29
2,603
50
74
–
–
–
42
–
116
20
2,865
47
78
–
–
–
–
–
78
20
2,561
48
80
–
–
–
–
(41)
39
14
2,558
48
$ 2,997
$ 3,068
$ 3,010
$ 2,894
$ 2,553
$ 2,818
$ 2,513
$ 2,510
$ 2,979
18
$ 3,050
18
$ 2,992
18
$ 2,876
18
$ 2,518
35
$ 2,789
29
$ 2,485
28
$ 2,481
29
$ 1.58
1.63
$ 1.65
1.67
$ 1.54
1.62
$ 1.24
1.56
$ 1.42
1.36
$ 1.46
1.51
$ 1.31
1.34
$ 1.32
1.34
1.58
1.63
15.8%
16.3
1.65
1.66
16.9%
17.1
1.54
1.62
16.8%
17.6
1.24
1.56
13.2%
16.6
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
Average earning assets
Net interest margin as a percentage of average earning assets
$ 1,183
$ 1,152
$ 1,124
$ 1,116
$ 1,077
$ 1,077
1.93%
1.95%
1.97%
1.93%
1.96%
1.94%
$ 1,056
1.98%
$ 1,041
1.96%
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.
24
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS SEGMENT ANALYSIS
Business Focus
For management reporting purposes, the Bank’s operations and activities are organized around the
following three key business segments: Canadian Retail, U.S. Retail, and Wholesale Banking. The Bank’s
other activities are grouped into the Corporate segment.
Canadian Retail serves over 15 million customers in the Canadian
personal and commercial banking, wealth, and insurance businesses.
Personal Banking provides a full range of financial products and
services through its network of 1,098 branches, 3,394 automated
teller machines (ATM), telephone, internet, and mobile banking. Auto
Finance provides flexible financing options to customers at point of
sale for automotive and recreational vehicle purchases. The credit cards
business provides a comprehensive line-up of credit cards including
proprietary, co-branded, and affinity credit card programs. Merchant
Solutions provides point-of-sale payment solutions for large and small
businesses. Business Banking offers 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. 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 1,257 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.
The Bank’s other business activities are not considered reportable
segments and are, therefore, grouped in the Corporate segment.
Corporate segment is comprised of a number of service and control
groups such as technology solutions, treasury and balance sheet
management, 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
2018 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.
Upon adoption of IFRS 9, the current period PCL related to performing
(Stage 1 and Stage 2) and impaired (Stage 3) financial assets, loan
commitments, and financial guarantees is recorded within the respective
segment. Under IAS 39 and prior to November 1, 2017, the PCL related
to the collectively assessed allowance for incurred but not identified
credit losses that related to Canadian Retail and Wholesale Banking
segments was recorded in the Corporate segment. Prior period results
have not been restated. PCL on impaired financial assets includes
Stage 3 PCL under IFRS 9 and counterparty-specific and individually
insignificant PCL under IAS 39. PCL on performing financial assets, loan
commitments, and financial guarantees include Stage 1 and Stage 2 PCL
under IFRS 9 and incurred but not identified credit losses under IAS 39.
The reduction of the U.S. federal corporate tax rate enacted by the
U.S. Tax Act resulted in an adjustment to the Bank’s U.S. deferred tax
assets and liabilities to the lower base rate of 21% as well as an
adjustment to the Bank’s carrying balances of certain tax credit-related
investments and its investment in TD Ameritrade. The earnings impact
of these adjustments was reported in the Corporate segment. The
lower corporate tax rate had, and will have, a positive effect on TD’s
current and future earnings, which are and will be reflected in the
results of the affected segments. The amount of the benefit may vary
due to, among other things, changes in interpretations and
assumptions the Bank has made, guidance that may be issued by
applicable regulatory authorities, and actions the Bank may take to
reinvest some of the savings in its operations. The effective tax rate
for the U.S. Retail Bank declined in proportion to the reduction in the
federal rate. For additional details, refer to “How the Bank Reports”
and “Non-GAAP Financial Measures – Reconciliation of Adjusted to
Reported Net Income” table in the “How We Performed” section of
this document.
Net interest income within Wholesale Banking is calculated on a 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 $176 million, compared with $654 million last year.
The “Business Outlook and Focus for 2019” 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.
25
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 1 4
RESULTS BY SEGMENT1
(millions of Canadian dollars)
Canadian
Retail
U.S. Retail
Net interest income (loss)
Non-interest income (loss)
Total revenue4
Provision for (recovery of) credit losses –
impaired5
Provision for (recovery of) credit losses –
performing6
Total 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 note7
Amortization of intangibles
Charges associated with the
Scottrade transaction
Impact from U.S. tax reform
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
Total pre-tax adjustments for items of note
Provision for (recovery of) income taxes
for items of note
Wholesale
Banking2,3
2017
Corporate2,3
2018
2017
2018
Total
2017
2018
2017
2018
2017
2018
$ 11,576 $ 10,611 $ 8,176 $ 7,486 $ 1,150 $ 1,804 $ 1,337 $
10,451
11,137
2,735
21,062 10,944 10,221
22,713
2,309
3,459
1,467
3,271
381
1,718
2,768
946 $ 22,239 $ 20,847
649 16,595 15,302
1,595 38,834 36,149
927
986
776
648
(8)
(28)
471
384
2,166
1,990
71
998
2,444
9,473
9,798
2,615
–
7,183
–
986
2,246
8,934
8,896
2,371
141
917
–
6,100
3,927
432
144
792
–
5,878
3,551
671
11
3
–
2,067
1,389
335
–
(28)
–
1,929
1,370
331
–
6,525
693
4,188
442
3,322
–
1,054
–
1,039
91
562
–
2,497
(1,341)
(200)
50
(1,091)
82
466
–
314
2,480
2,444
226
2,216
2,246
2,625 20,137 19,366
(1,496) 13,773 12,321
2,253
(1,120)
3,182
7
449
(369) 11,334 10,517
743
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
193
–
–
–
–
193
5
–
46
–
–
–
–
46
10
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
324
310
324
310
–
48
–
–
–
372
–
–
(204)
193
48
–
46
–
(204)
42
–
42
(41)
107
–
565
(41)
153
(289)
(430) $
73
83
(284)
(335) $ 12,183 $ 10,587
Net income (loss) – adjusted
$ 7,183 $ 6,525 $ 4,376 $ 3,358 $ 1,054 $ 1,039 $
Average common equity
CET1 Capital risk-weighted assets8
$ 15,018 $ 14,434 $ 34,260 $ 34,278 $ 5,954 $ 5,979 $ 15,267 $ 13,658 $ 70,499 $ 68,349
45,958 435,632 435,750
108,526
99,693 243,655 227,671
13,347
70,104
62,428
1 The retailer program partners’ share of revenues and credit losses is presented
5 PCL − impaired represents Stage 3 PCL under IFRS 9 and counterparty-specific and
in the Corporate segment, with an offsetting amount (representing the partners’
net share) recorded in Non-interest expenses, resulting in no impact to Corporate
reported Net income (loss). The Net income (loss) included in the U.S. Retail
segment includes only the portion of revenue and credit losses attributable
to the Bank under the agreements.
individually insignificant PCL under IAS 39 on financial assets.
6 PCL − performing represents Stage 1 and Stage 2 PCL under IFRS 9 and incurred
but not identified PCL under IAS 39 on financial assets, loan commitments, and
financial guarantees.
7 For explanations of items of note, refer to the “Non-GAAP Financial Measures −
2 Net interest income within Wholesale Banking is calculated on a 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
Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results
Overview” section of this document.
8 Each capital ratio has its own RWA measure due to OSFI-prescribed scalar for
value of the credit default swap and interest rate swap contracts hedging the
reclassified financial assets at FVOCI (available-for-sale securities under IAS 39)
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. Refer to Note 8 of the 2018 Consolidated Financial Statements for
additional details.
4 The impact from certain treasury and balance sheet management activities relating
to the U.S. Retail segment is recorded in the Corporate segment.
inclusion of the CVA. For fiscal 2018 the scalars for inclusion of CVA for CET1,
Tier 1 and Total Capital RWA are 80%, 83%, and 86%, respectively. For fiscal
2017, the scalars were 72%, 77%, and 81%, respectively. As at October 31, 2017,
RWA for all ratios were the same due to the regulatory floor which was based on
Basel I risk weights. As at October 31, 2018, the regulatory floor is based on
Basel II standardized risk weights and is no longer triggered resulting in a separate
RWA for each ratio due to the CVA scalar.
26
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
ECONOMIC SUMMARY AND OUTLOOK
Global economic growth is slowing and so far remains in line with
expectations. After peaking in the first half of calendar 2018 at 3.9%,
global growth is projected to average roughly 3.7% in both 2018 and
2019 calendar years. An important element of this deceleration is
China’s ongoing economic rebalancing, which is leaving a mark on
trading partners via supply chain effects, as well as financial market
volatility. For emerging markets, the challenges are enhanced by an
elevated U.S. dollar and rising U.S. interest rates that have prompted
investor capital outflows. In contrast, advanced economies continue
to perform well, although the pace of growth in the euro area has
moderated slightly. Nevertheless, the bias within these economies
remains tilted towards reducing monetary stimulus. The U.S. has been
leading the way, but as long as inflation continues to edge higher,
other major central banks are expected to follow at a gradual pace.
The United States has benefited from strong economic momentum
in calendar 2018, supported by tax cuts and increased government
spending. Together these are estimated to have added 0.6 percentage
points to growth. Real gross domestic product (GDP) advanced by
4.2% and 3.5% annualized in the second and third calendar quarters,
respectively. Robust consumer spending, in the neighborhood of 4%
annualized, was the main driver.
U.S. economic growth will likely remain above-trend in the coming
quarters, but should steadily decelerate closer to the 2% mark by the
latter half of calendar 2019, due to the impacts of fading fiscal
stimulus and higher interest rates. Still, rising incomes generated
by a tight labour market suggest that consumer spending should
remain a key underpinning for growth. With the unemployment rate
near a 50-year low and inflation hovering at the central bank’s 2%
target, the Federal Reserve is forecasted to increase its policy interest
rate from its current range of 2.0% to 2.25%, to 3.0% to 3.25% by
the end of the 2019 calendar year.
Canada’s economy produced a robust 2.9% expansion in the
second calendar quarter of 2018, but current indicators suggest a
more sustainable pace of roughly 2.0% unfolded in the third calendar
quarter. Both export and import volumes have pulled back, due in part
to supply chain disruptions in the energy and automotive sectors.
Fortunately, these disruptions appear mostly temporary and trade
flows may also benefit from the United States-Mexico-Canada
Agreement (USMCA) struck in early October. Although it remains to be
ratified by all three national governments, we consider that the
agreement marks an important and necessary step towards normalized
trading arrangements in North America. On a less positive note, recent
developments in oil markets have resulted in record price discounts for
Western Canadian energy products. Income impacts and announced
production cuts will weigh on near-term economic activity in the
western provinces. Some of the negative price dynamics, notably
refinery outages, should resolve over the first half of the 2019 calendar
year, thereby narrowing the magnitude of the discount and bring
shuttered production back online. However, other factors will persist,
such as limited transportation capacity. These pressures are expected to
maintain a wider-than-historical spread on Canadian producer prices.
Canadian housing markets continue to recover in the wake of
changes to mortgage underwriting rules implemented at the beginning
of calendar 2018. Activity in the Greater Toronto Area has stabilized,
albeit at a slower pace than the past several years. In contrast,
Vancouver activity remains modest, impacted by additional measures
enacted in the February 2018 provincial budget. Outside of these
areas, the housing data are mixed. Activity in oil-related provinces is
still negatively impacted by excess housing supply, while other major
urban centres like Montreal and Ottawa are proving resilient.
Housing demand should remain supported by the upswing in
population growth alongside solid household income and job growth.
However, rising borrowing costs are likely to temper the speed of
adjustment. On October 24, 2018, the Bank of Canada raised its policy
interest rate by 25 bps to 1.75%. This marked the fifth increase since
July 2017, and central bank communication maintains a bias towards
further rate increases. The Bank of Canada has indicated that it will
remain mindful of the risks posed by highly-indebted households that
can leave them more sensitive to rising interest rates. As such, the
central bank is expected to maintain a gradual approach to rate
increases. TD Economics anticipates only three more 25 bps increases
in the overnight rate by the end of calendar year 2019. This implies
a terminal rate of 2.50%, which is well below that of its U.S.
counterpart. Yields in Canada should thus remain lower than those
in the U.S., and the currency is forecasted to hold within a range of
US78 cents to US79 cents in calendar year 2019.
Downside risks remain. Should recent price developments in
Canadian heavy oil markets fail to improve as expected, further
declines in output may occur, imparting larger negative impacts on
Canadian incomes and spending. This outcome would moderate
expectations for the Bank of Canada’s policy interest rate path. Despite
achieving an important milestone with the USMCA, it must still be
ratified by all three countries, including new governments in both the
U.S. and Mexico. Canada’s central bank will also need to remain
watchful of the possibility of a renewed slowdown in housing activity
and a period of household deleveraging. In addition, trade tensions
have intensified between U.S. and China in recent months, with the
potential to disrupt globally integrated supply chains. Such an outcome
presents a downside risk to the outlook for both the U.S. and Canada.
Likewise, it is possible that inflationary pressures will unexpectedly
heat-up in light of escalating global trade tensions coupled with
greater labour scarcity within both countries. In addition, despite some
progress in recent weeks, a number of issues remain unresolved with
the United Kingdom’s exit from the European Union. Lastly, other
areas that continue to present a downside risk include ongoing
tensions in the Middle East, and populist threats to established political
and economic systems. These all keep global uncertainty elevated and
may drive periods of financial market volatility.
27
TD BANK GROUP ANNUAL REPORT 2018 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)
$8,000
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
2016
2017
2018
2016
2017
2018
2016
2017
2018
Personal
Business
Wealth
T A B L E 1 5
REVENUE
(millions of Canadian dollars)
Personal banking
Business banking
Wealth
Insurance
Total
2018
$ 11,463
2,990
4,185
4,075
$ 22,713
2017
$ 10,706
2,702
3,838
3,816
$ 21,062
2016
$ 10,157
2,454
3,640
3,958
$ 20,209
28
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS HIGHLIGHTS
• Continued to put our customers at the centre of everything
CHALLENGES IN 2018
• Competitive pressures contributed to lower margins on
we do by investing in our omni-channel experience,
optimizing our branch network, and enhancing the value
proposition of our products, including our mortgage
concierge service which connects customers with mobile
mortgage specialists who are nearby and available.
• Continued to shape the future of retail banking by
introducing new digital capabilities, including online
pre-approval in the real estate secured lending business, Easy
Apply for chequing and savings accounts, auto quoters in our
insurance business, and one-time password authentication
making login faster and easier, and reducing fraud.
• Recognized as a leader in customer service, including being
honored as an award winner among the Big 5 Canadian Retail
Banks3 for “Customer Service Excellence”4, “Recommend to
Friends & Family”5, “Branch Service”6, “ATM Banking”7, and
“Live Agent Telephone Banking”8 by the 2018 Ipsos Customer
Service Index (CSI) study9.
• Acknowledged for our forward focus in digital banking
by multiple independent providers of industry market
data including:
– #1 Canadian banking app according to Silicon Valley-based
firm App Annie10;
– #1 in Canadian digital banking with the highest number
of digital unique visitors and the most digital engagement
according to comScore11; and
– #1 digital reach of any bank in Canada, the United Kingdom,
Spain, France, and the United States, according to comScore11.
• Continued to win the trust of new and existing customers as
evidenced by strong volume growth across key businesses:
– Record originations in real estate secured lending and
auto finance;
– Personal chequing and savings deposit volume growth of 4%;
– Strong growth in credit cards with 9% growth in TD
proprietary cards and retail sales exceeding $100 billion;
– Strong Business Banking loan volume growth of 10%; and
– Record accumulation of assets across our wealth businesses
including record assets under management in TD Asset
Management (TDAM), record assets under administration
in TD Direct Investing and Advice businesses, and record net
asset acquisitions, trading volumes and accounts opened
during the year in TD Direct Investing.
• Advanced our proven business model maintaining strong
market share12 positions across all businesses including:
– #1 market share in personal deposit, credit card, and
Direct Investing;
lending products.
• Strong competition for new and existing customers from
the major Canadian banks and non-bank competitors.
• Housing market was impacted by changes to federal and
provincial policies and increases in interest rates.
• Heightened level of investment across all businesses to
respond to evolving customer needs and intense competition.
INDUSTRY PROFILE
The personal and business banking environment in Canada comprises
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. Market share growth in
the wealth management industry lies in the ability to differentiate by
providing an integrated wealth solution and keeping pace with
technological changes and the regulatory environment. This includes
providing the right products, and legendary and consistent
relationship-focused client experiences to serve their evolving needs
and goals. 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:
• Provide trusted advice to help our customers feel confident about
their financial future.
• Consistently deliver legendary personal connected customer
experiences across all channels.
• 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.
– #2 market share in real estate secured lending, personal loan,
• Contribute to the well-being of our communities.
mutual funds, and Business Banking deposits and loans;
– Largest direct distribution insurer13 and leader in the
affinity market13 in Canadian insurance; and
– Largest money manager in Canada (with the acquisition
of Greystone, which closed on November 1, 2018) 14.
3 Big 5 Canadian Retail Banks consist of Bank of Montreal, Canadian Imperial Bank of
Commerce, Royal Bank of Canada, Scotiabank, and The Toronto-Dominion Bank.
4 TD Canada Trust has shared in the award for Customer Service Excellence in the syndicated
11 Source: comScore MMX® Multi-Platform, Business/Finance – Banking, Total audience,
3 months average ending July 2018, Canada, United States, Great Britain, Spain,
and France.
Ipsos 2018 Financial Services Excellence Study (2018 Ipsos Study).
5 TD Canada Trust has shared in the award for Recommend to Family & Friends in the 2018
Ipsos Study.
6 TD Canada Trust has shared in the award for the Branch Service Excellence in the 2018
Ipsos Study.
7 TD Canada Trust has shared in the ATM Banking Excellence award in the 2018 Ipsos Study.
8 TD Canada Trust has shared in the Live Agent Telephone Banking Excellence award in the
2018 Ipsos Study.
9 Ipsos 2018 Financial Service Excellence Awards are based on continuous fielding CSI
survey results. Sample size for the total 2018 CSI program year ended with the September
2018 survey which yielded 75,334 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.
10 TD ranked first according to 2018 App Annie report, which measured smartphone monthly
active users, downloads, average sessions per user, open rate, average review score, and
average time spent for August 2018 among top retail banking apps by time spent on
Android phone.
12 Market share ranking is based on most current data available from OSFI for personal
deposits and loans as at August 2018, from The Nilson Report for credit cards as at
December 2017, from the Canadian Bankers Association for Real Estate Secured Lending as
at June 2018, from the Canadian Bankers Association for business deposits and loans as at
March 2018, from Strategic Insight for Direct Investing asset, trades, and revenue metrics
as at June 2018, and from Investment Funds Institute of Canada for mutual funds when
compared to the Big 6 Banks as at August 2018. The Big 6 Banks consist of Bank of
Montreal, Canadian Imperial Bank of Canada, National Bank of Canada, Royal Bank of
Canada, Scotiabank, and The Toronto-Dominion Bank.
13 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, 2017.
14 Strategic Insight Managed Money Advisory Service – Canada (Spring 2018 report,
AUM effective December 2017), Benefits Canada 2018 Top 40 Money Managers report
(May 2018 report, AUM effective December 2017); Assets under management as of
October 31, 2018 for Greystone.
29
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 1 6
CANADIAN RETAIL
(millions of Canadian dollars, except as noted)
Net interest income
Non-interest income
Total revenue
Provision for credit losses – impaired1
Provision for credit losses – performing2
Total provision for credit losses3
Insurance claims and related expenses
Non-interest expenses
Provision for (recovery of) income taxes
Net income
Selected volumes and ratios
Return on common equity4
Net interest margin (including on securitized assets)
Efficiency ratio
Assets under administration (billions of Canadian dollars)
Assets under management (billions of Canadian dollars)
Number of Canadian retail branches
Average number of full-time equivalent staff
2018
$ 11,576
11,137
22,713
927
71
998
2,444
9,473
2,615
$ 7,183
2017
$ 10,611
10,451
21,062
986
–
986
2,246
8,934
2,371
$ 6,525
2016
$ 9,979
10,230
20,209
1,011
–
1,011
2,462
8,557
2,191
$ 5,988
$
47.8%
2.91
41.7
389
289
1,098
38,560
$
45.2%
2.83
42.4
387
283
1,128
38,880
$
41.9%
2.78
42.3
379
271
1,156
38,575
1 PCL − impaired represents Stage 3 PCL under IFRS 9 and counterparty-specific and
individually insignificant PCL under IAS 39 on financial assets.
2 PCL − performing represents Stage 1 and Stage 2 PCL under IFRS 9 and incurred
but not identified PCL under IAS 39 on financial assets, loan commitments, and
financial guarantees.
3 Effective November 1, 2017, the PCL related to the allowances for credit losses for
all three stages are recorded within the respective segment. Under IAS 39 and prior
to November 1, 2017, the PCL related to the incurred but not identified allowance
for credit losses related to products in the Canadian Retail segment was recorded
in the Corporate segment.
4 Capital allocated to the business segment was based on 9% CET1 Capital in fiscal
2018, 2017, and 2016.
REVIEW OF FINANCIAL PERFORMANCE
Canadian Retail net income for the year was $7,183 million, an increase
of $658 million, or 10%, compared with last year. The increase in
earnings reflects revenue growth, partially offset by higher non-interest
expenses, insurance claims, and PCL. The ROE for the year was 47.8%,
compared with 45.2% last year.
Canadian Retail revenue is derived from Canadian personal and
commercial banking, wealth, and insurance businesses. Revenue for
the year was $22,713 million, an increase of $1,651 million, or 8%,
compared with last year.
Net interest income increased $965 million, or 9%, reflecting
volume growth and higher margins. Average loan volumes increased
$23 billion, or 6%, reflecting 5% growth in personal loans and
10% growth in business loans. Average deposit volumes increased
$15 billion, or 5%, reflecting 4% growth in personal deposits and
8% growth in business deposits. Net interest margin was 2.91%,
or an increase of 8 bps, reflecting rising interest rates, partially offset
by competitive pricing in loans.
Non-interest income increased $686 million, or 7%, reflecting
wealth asset growth, an increase in revenues from the insurance
business, higher fee-based revenue in the personal banking business,
and higher trading volumes in the direct investing business. An
increase in the fair value of investments supporting claims liabilities,
which resulted in a similar increase to insurance claims, increased
non-interest income by $41 million.
Assets under administration (AUA) were $389 billion as at
October 31, 2018, an increase of $2 billion, or 1%, compared with
last year, reflecting new asset growth, partially offset by decreases in
market value. Assets under management (AUM) were $289 billion as
at October 31, 2018, an increase of $6 billion, or 2%, compared with
last year, reflecting new asset growth.
PCL for the twelve months ended October 31, 2018 was $998
million, an increase of $12 million, or 1% compared with last year.
PCL – impaired was $927 million, a decrease of $59 million, or 6%,
reflecting strong credit performance across all business lines. PCL –
performing (recorded in the Corporate segment last year as incurred
but not identified credit losses under IAS 39) was $71 million primarily
reflecting the adoption of IFRS 9 including where Stage 2 loans are
measured on a lifetime ECL. Full year PCL as a percentage of credit
volume was 0.25%, a decrease of 1 basis point. Net impaired loans
were $664 million, an increase of $109 million, or 20%. Net impaired
loans as a percentage of total loans were 0.16%, compared with
0.15%, as at October 31, 2017.
Insurance claims and related expenses for the year were
$2,444 million, an increase of $198 million, or 9%, compared with
last year, reflecting an increase in reinsurance liabilities assumed,
more severe weather-related events, higher current year claims, and
an increase in the fair value of investments supporting claims liabilities
which resulted in a similar increase to non-interest income, partially
offset by more favourable prior years’ claims development, and the
impact of changes to forward-looking actuarial assumptions.
Non-interest expenses for the year were $9,473 million, an increase
of $539 million, or 6%, compared with last year, reflecting increased
employee-related expenses including revenue-based variable
compensation expenses in the wealth business, increased marketing
and promotion costs, increased spend related to strategic initiatives,
and restructuring costs across a number of businesses.
The efficiency ratio was 41.7%, compared with 42.4% last year.
30
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS OUTLOOK AND FOCUS FOR 2019
The pace of economic expansion in Canada is expected to
remain consistent with 2018. However, global uncertainties
underlying the outcome of various international trade disputes
and continued softness in Canadian oil prices could impact
growth in 2019. While many factors affect margins and they will
fluctuate from quarter-to-quarter, the environment 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 and possible normalization of credit conditions. Overall,
absent significant changes in the economic and operating
environment, we expect to deliver strong results in 2019.
Our key priorities for 2019 are as follows:
• Enhance end-to-end omni-channel capabilities to support key
customer journeys, enabling a seamless, 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.
• Expand our advisory capabilities by focusing on helping our
customers understand their financial needs and feel confident
about their financial future.
• 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, regulatory requirements,
and cyber risks.
• Continue to evolve our brand as an employer of choice, where
colleagues achieve their full potential and where diversity
and inclusiveness are valued.
KEY PRODUCT GROUPS
Personal Banking
• Personal Deposits – offers a comprehensive line-up of chequing,
savings, and investment products to retail clients.
• Consumer Lending – offers a diverse range of unsecured financing
products to suit the needs of retail clients.
• Real Estate Secured Lending – offers homeowners a wide range of
lending products secured by residential properties.
• Credit Cards and Merchant Solutions – offers a variety 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 including promotional rate loans offered in cooperation
with large automotive manufacturers.
Business Banking
• Commercial Banking – serves the borrowing, deposit and cash
management needs of businesses across a wide range of
industries including real estate, agriculture, automotive, and
commercial mortgages.
• Small Business Banking – offers a wide range of financial products
and services to small businesses.
Wealth
• Direct Investing – Canada’s first and largest online brokerage for
self-directed investors, Direct Investing empowers traders and
investors with innovative trading tools, industry-leading market
research, online education, and 24/7 telephone support.
• Advice-based business – offers investment advice, 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 – With the closing of the Greystone acquisition
on November 1, 2018, TDAM is Canada’s largest money manager15
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 insurer16
and the fourth largest personal insurer16 in Canada. It is also the
national leader in the affinity market16 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.
15 Strategic Insight Managed Money Advisory Service – Canada (Spring 2018 report,
AUM effective December 2017), Benefits Canada 2018 Top 40 Money Managers
report (May 2018 report, AUM effective December 2017); Assets under
management as of October 31, 2018 for Greystone.
16 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, 2017.
31
TD BANK GROUP ANNUAL REPORT 2018 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.
NET INCOME
(millions of Canadian dollars)
TOTAL REVENUE
(millions of Canadian dollars)
EFFICIENCY RATIO
(percent)
$4,800
4,200
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
62%
60
58
56
54
2016
2017
2018
2016
2017
2018
2016
2017
2018
Reported
Adjusted
Reported
Adjusted
Reported
Adjusted
T A B L E 1 7
REVENUE – Reported 1
(millions of dollars)
Personal Banking
Business Banking
Wealth
Other2
Total
Canadian dollars
2018
$ 6,140
3,527
511
766
$ 10,944
2017
$ 5,599
3,399
504
719
$ 10,221
2016
$ 5,153
3,173
455
678
$ 9,459
2018
$ 4,769
2,740
397
595
$ 8,501
2017
$ 4,283
2,600
386
549
$ 7,818
U.S. dollars
2016
$ 3,884
2,391
343
512
$ 7,130
1 Excludes equity in net income of an investment in TD Ameritrade.
2 Other revenue consists primarily of revenue from investing activities and an insured
deposit account (IDA) agreement with TD Ameritrade.
32
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS HIGHLIGHTS
• Record performance in:
– Reported earnings of US$3,253 million, an increase of 28%,
compared with last year;
– Reported return on equity of 12.2%, an increase of 250 bps,
compared with last year; and
– Reported efficiency ratio of 55.7%, an improvement
of 190 bps, compared with last year.
• Continued to provide legendary customer service
and convenience:
– “Ranked Highest in Dealer Satisfaction with Floor Planning
by J.D. Power”17.
• Recognized as an extraordinary and inclusive place to work:
– Named to DiversityInc.’s Top 50 Companies in the U.S. for
diversity for the sixth year in a row; and
– Recognized by American Banker – Most Powerful Women in
Banking, where two members of the TD team were named
to the Women to Watch list, and in addition, several of our
TD Bank leaders were recognized as a Top Team in Banking
this year for the first time.
• Led our peers in loan and deposit growth, as well as
household acquisition.
• Deepened relationships with new and existing customers.
• Continued focus on enhancements to our core capabilities
and infrastructure, as well as building out digital capabilities.
• TD Ameritrade had strong organic growth and successfully
completed the integration of Scottrade.
CHALLENGES IN 2018
• Moderating corporate loan growth.
• Moderating residential real estate loan originations in the
rising rate environment.
• Slower deposit growth as a result of competitive environment
and higher yielding alternatives.
• Ongoing industry trend of assets under management moving
from active to passive investment strategies.
• Competition from U.S. banks and non-bank competitors
(such as Fintech).
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, digital, 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.
•
Innovate with purpose to simplify processes and execute with speed
and excellence.
• Be a premier destination for top talent.
• Maintain prudent risk management.
• Actively support the communities where we operate.
17 TD Auto Finance received the highest score in the floor planning segment in the
J.D. Power 2018 Dealer Financing Satisfaction Study of dealers’ satisfaction with
automotive finance providers. Visit jdpower.com/awards.
33
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 1 8
U.S. RETAIL
(millions of dollars, except as noted)
Canadian Dollars
Net interest income
Non-interest income1
Total revenue – reported2
Provisions for credit losses – impaired3
Provisions for credit losses – performing4
Total provisions for credit losses
Non-interest expenses – reported
Non-interest expenses – adjusted5
Provisions for (recovery of) income taxes – reported1
Provisions for (recovery of) income taxes – adjusted1
U.S. Retail Bank net income – reported
U.S. Retail Bank net income – adjusted5
Equity in net income of an investment in TD Ameritrade – reported1
Equity in net income of an investment in TD Ameritrade – adjusted1,6
Net income – reported
Net income – adjusted
U.S. Dollars
Net interest income
Non-interest income1
Total revenue – reported2
Provision for credit losses – impaired3
Provision for credit losses – performing4
Total provision for credit losses
Non-interest expenses – reported
Non-interest expenses – adjusted5
Provisions for (recovery of) income taxes – reported1
Provisions for (recovery of) income taxes – adjusted1
U.S. Retail Bank net income – reported
U.S. Retail Bank net income – adjusted5
Equity in net income of an investment in TD Ameritrade – reported1
Equity in net income of an investment in TD Ameritrade – adjusted1,6
Net income – reported
Net income – adjusted
Selected volumes and ratios
Return on common equity – reported7
Return on common equity – adjusted7
Net interest margin1,2,8
Efficiency ratio – reported
Efficiency ratio – adjusted
Assets under administration (billions of U.S. dollars)
Assets under management (billions of U.S. dollars)
Number of U.S. retail stores
Average number of full-time equivalent staff
2018
2017
2016
$ 8,176
2,768
10,944
776
141
917
6,100
6,079
432
437
3,495
3,511
693
865
4,188
$ 4,376
$ 6,350
2,151
8,501
605
108
713
4,739
4,722
334
338
2,715
2,728
538
673
3,253
$ 3,401
$ 7,486
2,735
10,221
648
144
792
5,878
5,852
671
681
2,880
2,896
442
462
3,322
$ 3,358
$ 5,727
2,091
7,818
498
109
607
4,500
4,479
511
519
2,200
2,213
336
352
2,536
$ 2,565
$ 7,093
2,366
9,459
534
210
744
5,693
5,693
498
498
2,524
2,524
435
435
2,959
$ 2,959
$ 5,346
1,784
7,130
402
157
559
4,289
4,289
376
376
1,906
1,906
328
328
2,234
$ 2,234
12.2%
12.8
3.29
55.7
55.5
19
52
1,257
26,594
$
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
$
1 The reduction of the U.S. federal corporate tax rate enacted by the U.S. Tax Act
5 Adjusted non-interest expense excludes the following items of note: Charges
resulted in an adjustment during 2018 to the Bank’s U.S. deferred tax assets and
liabilities to the lower base rate of 21% as well as an adjustment to the Bank’s
carrying balances of certain tax credit-related investments and its investment in
TD Ameritrade. This earnings impact was reported in the Corporate segment. For
additional details, 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 Effective the first quarter of 2017, the impact from certain treasury and balance
sheet management activities relating to the U.S. Retail segment is recorded in the
Corporate segment.
3 PCL − impaired represents Stage 3 PCL under IFRS 9 and counterparty-specific and
individually insignificant PCL under IAS 39 on financial assets.
4 PCL − performing represents Stage 1 and Stage 2 PCL under IFRS 9 and incurred
but not identified PCL under IAS 39 on financial assets, loan commitments, and
financial guarantees.
associated with the Bank’s acquisition of Scottrade Bank in 2018 – $21 million
($16 million after tax) or US$17 million ($13 million after tax), 2017 – $26 million
($16 million after tax) or US$21 million (US$13 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.
6 Adjusted equity in net income of an investment in TD Ameritrade excludes the
following item of note: The Bank’s share of charges associated with TD Ameritrade’s
acquisition of Scottrade in 2018 – $172 million or US$135 million after tax, 2017 –
$20 million or US$16 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.
7 Capital allocated to the business segments was based on 9% CET1 Capital in fiscal
2018, 2017, and 2016.
8 Net interest margin 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.
34
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
REVIEW OF FINANCIAL PERFORMANCE
U.S. Retail reported net income for the year was $4,188 million
(US$3,253 million), an increase of $866 million (US$717 million), or
26% (28% in U.S. dollars), compared with last year. On an adjusted
basis, net income for the year was $4,376 million (US$3,401 million),
an increase of $1,018 million (US$836 million), or 30% (33% in
U.S. dollars). The reported and adjusted ROE for the year was
12.2% and 12.8%, respectively, compared with 9.7%, and 9.8%,
respectively, 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 $3,495 million (US$2,715 million) and $693 million
(US$538 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 $3,511 million (US$2,728 million) and
$865 million (US$673 million), respectively.
The reported contribution from TD Ameritrade of US$538 million
increased US$202 million, or 60%, compared with last year, primarily
due to the benefit of the Scottrade transaction, higher interest rates,
increased trading volumes, and a lower corporate tax rate, partially
offset by higher operating expenses and charges associated with the
Scottrade transaction. On an adjusted basis, the contribution from
TD Ameritrade increased US$321 million, or 91%.
U.S. Retail Bank reported net income for the year was
US$2,715 million, an increase of US$515 million, or 23%, compared
with last year, primarily due to higher loan and deposit volumes,
higher deposit margins, fee income growth, the benefit of the
Scottrade transaction, and a lower corporate tax rate, partially offset
by higher expenses and PCL. U.S. Retail Bank adjusted net income
increased US$515 million, or 23%.
U.S. Retail Bank revenue is derived from personal and business
banking, and wealth management. Revenue for the year was
US$8,501 million, an increase of US$683 million, or 9%, compared
with last year. Net interest income increased US$623 million, or 11%,
primarily due to a more favourable interest rate environment,
growth in loan and deposit volumes, and the benefit of the Scottrade
transaction. Net interest margin was 3.29%, an 18 bps increase
primarily due to higher deposit margins and balance sheet mix.
Non-interest income increased US$60 million, or 3%, reflecting fee
income growth in personal and commercial banking, partially offset
by losses on certain tax credit-related investments.
Average loan volumes increased US$6 billion, or 4%, compared
with last year, due to growth in personal and business loans of
6% and 3%, respectively. Average deposit volumes increased
US$19 billion, or 8%, reflecting 1% growth in business deposit
volumes, 4% growth in personal deposit volumes and a 15% increase
in sweep deposit volume primarily due to the Scottrade transaction.
AUA were US$19 billion as at October 31, 2018, relatively flat
compared with the prior year. AUM were US$52 billion as at
October 31, 2018, a decrease of 17%, reflecting net fund outflows.
PCL was US$713 million, an increase of US$106 million, or 17%,
compared with last year. PCL – impaired was US$605 million, an
increase of US$107 million, or 21%, primarily reflecting volume
growth, seasoning, and mix in the credit card and auto portfolios.
PCL – performing was US$108 million, relatively flat compared to
last year, primarily reflecting lower provisions for the commercial
portfolios, offset by the impact of methodology changes related to
the adoption of IFRS 9 where Stage 2 loans are now measured based
on a lifetime ECL. U.S. Retail PCL including only the Bank’s contractual
portion of credit losses in the U.S. strategic cards portfolio, as an
annualized percentage of credit volume was 0.48%, or an increase of
6 bps. Net impaired loans, excluding ACI loans, were US$1.4 billion,
a decrease of US$45 million, or 3%. Excluding ACI loans, net impaired
loans as a percentage of total loans were 1% as at October 31, 2018.
Reported non-interest expenses for the year were US$4,739 million,
an increase of US$239 million, or 5%, compared with last year,
reflecting higher investments in business initiatives, business and
volume growth, and employee-related costs, partially offset by
productivity savings. On an adjusted basis, non-interest expenses for
the year were US$4,722 million, an increase of US$243 million, or 5%.
The reported and adjusted efficiency ratios for the year were
55.7% and 55.5%, respectively, compared with 57.6% and 57.3%,
respectively, last year.
KEY PRODUCT GROUPS
Personal Banking
• Personal Deposits – offers a full suite of chequing and savings
products to retail customers through multiple delivery channels.
• Consumer Lending – offers a diverse range of financing products
to suit the needs of retail customers.
• Credit Cards Services – offers TD-branded credit cards for retail and
small business franchise customers. TD also offers private label and
co-brand credit cards through nationwide, retail partnerships to
provide credit card products to their U.S. customers.
• Auto Finance – offers indirect retail financing through a network
of auto dealers, along with floorplan financing to automotive
dealerships throughout the U.S.
Business Banking
• Small Business Banking – offers a range of financial products and
services to small businesses.
• Commercial Banking – serves the needs of U.S. businesses and
governments across a wide range of industries.
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 investment business.
BUSINESS OUTLOOK AND FOCUS FOR 2019
We anticipate the operating environment to remain stable in
2019, characterized by solid economic growth, continued rising
interest rates, and fierce competition. This should support
continuing loan and deposit growth and improving net interest
margins on a full year basis. Volume growth and continued
normalizing of credit conditions may lead to an increase in
credit losses in 2019. Uncertainties over trade and tariffs could
slow down growth and increase credit losses at the same time.
We expect to maintain a disciplined expense management
approach, while continuing to make strategic business
investments. We expect expense growth to be similar to 2018
while generating positive operating leverage for the year as
well as see further improvements in the efficiency ratio.
Our key priorities for 2019 are as follows:
• Deliver consistency and excellence in sales and service to
drive more meaningful interactions and better serve the
needs of our customers.
• Deepen customer engagement through delivering a
personalized and connected experience across all channels.
• Leverage our infrastructure and capabilities to simplify and
enhance the customer and employee experience.
• Grow our market share by deepening customer relationships,
growing underrepresented products, and expanding into
attractive markets.
• Continue to prudently manage risk and meet heightened
regulatory expectations.
• Continue to make progress on our talent strategy with
a continuing focus on diversity and inclusion.
TD AMERITRADE HOLDING CORPORATION
Refer to Note 12 of the 2018 Consolidated Financial Statements for
further information on TD Ameritrade.
35
TD BANK GROUP ANNUAL REPORT 2018 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)
$1,200
1,000
800
600
400
200
0
$3,500
3,000
2,500
2,000
1,500
1,000
500
0
19%
17
15
13
11
2016
2017
2018
2016
2017
2018
2016
2017
2018
T A B L E 1 9
REVENUE
(millions of Canadian dollars)
Global markets
Corporate and investment banking
Other
Total
2018
$ 2,387
996
76
$ 3,459
2017
$ 2,348
860
63
$ 3,271
2016
$ 2,239
767
24
$ 3,030
36
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
CHALLENGES IN 2018
• Rising interest rate environment contributing to challenges
in fixed income trading and equities markets.
• Significantly reduced capital markets activity in the Canadian
energy sector. Lower oil and gas pricing, and transportation
issues caused a meaningful slowdown in industry investment
and M&A activity.
• NAFTA and general tariff uncertainty resulted in reduced
global investor interest in Canada.
• Slow overall global industry growth pressuring margins.
• Investments and capital required to meet continued
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
• Solidify our leadership in Canada and be the top-ranked investment
dealer with global execution capabilities.
• Build our U.S. dollar capabilities by growing valued, trusted
relationships with our banking and markets clients in sectors where
we are well positioned and competitive.
• Expand the client franchise organically by deepening client
relationships, adding people, and investing in our products
and services.
• Leverage TD’s franchise, working to support our banking partners.
• Foster our strong risk culture to enable growth while remaining
within risk appetite.
• Adapt our infrastructure to enable the investment dealer for
tomorrow, focused on operational excellence to meet client and
stakeholder needs.
• Be an extraordinary and inclusive place to work by attracting,
developing, and retaining the best talent.
BUSINESS HIGHLIGHTS
• Earnings of $1,054 million and a ROE of 17.7%.
• Higher revenue, reflecting the strength in our business
in Canada and the continued growth in the U.S.
• Notable deals in the year:
– Advised Thomson Reuters on the sale of a 55% interest
in its Financial & Risk business to private equity funds
managed by Blackstone and the creation of a strategic
partnership for the business (now known as Refinitiv).
This deal represented the largest corporate carve-out and
leveraged buyout in Canadian history. The transaction
demonstrates our leadership in the communications, media,
and technology sector, and is important in building our
Mergers and Acquisitions (M&A) franchise;
– Demonstrated our leadership in the new Secured Overnight
Financing Rate (SOFR) Index market, having been one of
three managers on Fannie Mae’s US$6 billion floating rate
note issuance using the SOFR Index, the first major test of
this alternative to U.S. dollar London Interbank Offered
Rate (LIBOR). Subsequently, TD Securities continued to
play a leading role in this market’s growth, having been
involved in over US$13 billion, or 79%, of the market’s
SOFR-linked issuances; and
– Continued to gain traction on our U.S. dollar strategy,
delivering on some key mandates for both domestic and U.S.
clients demonstrating our capabilities and expertise in U.S.
markets. We were a joint book-runner on US$750 million
issuance of 30-year notes for each of Bell Canada and Telus.
We also delivered back-to-back mandates for Ford Motor
Company, first on its US$1.8 billion loan asset backed
securities (ABS) and second on its US$2 billion multi-tranche
seven-year offering.
• Continued to make investments to build our U.S. dollar
business, strategically hiring people in our investment
banking, underwriting, and trading teams, and enhancing
our product offerings.
• Continued to onboard clients to our TD Prime Services
platform, our prime brokerage business based in New York
that was acquired in 2017.
• Top-two dealer status in Canada (for the ten-month period
ended October 31, 2018)18:
– #1 in equity options block trading;
– #1 in syndicated loans (on a rolling twelve-month basis);
– #1 in M&A announced (on a rolling twelve-month basis);
– #1 in equity underwriting;
– #2 in equity block trading; and
– #2 in government debt and corporate debt underwriting.
• TD Securities was recognized with awards, demonstrating our
expertise and execution capabilities within Capital Markets:
– For the first time, TD Securities tied for #1 as 2018
Greenwich Share Leaders for Overall Canadian Fixed
Income Market Share and ranks #1 as the 2018 Greenwich
Quality Leader for Canadian Fixed Income Sales;
– TD Securities Equity Research was awarded the most
Thomson Reuters Analyst Awards of any Canadian Broker,
the fourth time within the last six years. These awards
celebrate the world’s top individual sell-side analysts and
sell-side firms; and
– Recognized as the 2018 GlobalCapital Award winner for
“Coming Force in FIG Bonds” and “Canada Derivatives
House of the Year”.
18 Rankings reflect TD Securities’ position among Canadian peers in Canadian
product markets. Equity options block trading: block trades by number of contracts
on the Montreal Stock Exchange, Source: Montreal Exchange. Syndicated loans:
deal volume awarded equally between the book-runners, Source: Bloomberg.
M&A announced: Canadian targets, Source: Thomson Reuters. Equity
underwriting, Source: Bloomberg. Equity block trading: block trades by value
on all Canadian exchanges, Source: IRESS. Government and corporate debt
underwriting: excludes self-led domestic bank deals and credit card deals, bonus
credit to lead, Source: Bloomberg.
37
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 2 0
WHOLESALE BANKING
(millions of Canadian dollars, except as noted)
Net interest income (TEB)
Non-interest income1,2
Total revenue
Provision for (recovery of) credit losses – impaired2,3
Provision for (recovery of) credit losses – performing4
Total provision for (recovery of) credit losses5
Non-interest expenses
Provision for (recovery of) income taxes (TEB)6
Net income
Selected volumes and ratios
Trading-related revenue (TEB)
Gross drawn (billions of Canadian dollars)7
Return on common equity8
Efficiency ratio
Average number of full-time equivalent staff
2018
$ 1,150
2,309
3,459
(8)
11
3
2,067
335
$ 1,054
2017
$ 1,804
1,467
3,271
(28)
–
(28)
1,929
331
$ 1,039
2016
$ 1,685
1,345
3,030
74
–
74
1,739
297
$ 920
$ 1,749
23.9
17.7%
59.8
4,187
$ 1,714
20.3
17.4%
59.0
3,989
$ 1,636
20.7
15.5%
57.4
3,766
1 Effective February 1, 2017, the total gains and losses on derivatives hedging the
reclassified securities portfolio (classified as FVOCI under IFRS 9 and AFS portfolio
under IAS 39) 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 Effective November 1, 2017, the accrual costs related to CDS used to manage
Wholesale Banking’s corporate lending exposure are recorded in non-interest
income, previously reported as a component of PCL. The change in market
value of the CDS, in excess of the accrual cost, continues to be reported in the
Corporate segment.
3 PCL − impaired represents Stage 3 PCL under IFRS 9 and counterparty-specific
and individually insignificant PCL under IAS 39 on financial assets.
4 PCL − performing represents Stage 1 and Stage 2 PCL under IFRS 9 and incurred
but not identified PCL under IAS 39 on financial assets, loan commitments, and
financial guarantees.
5 Effective November 1, 2017, the PCL related to the allowances for credit losses for
all three stages are recorded within the respective segment. Under IAS 39 and prior
to November 1, 2017, the PCL related to the incurred but not identified allowance
for credit losses related to products in Wholesale Banking was recorded in the
Corporate segment.
6 The reduction of the U.S. federal corporate tax rate enacted by the U.S. Tax Act
resulted in a one-time adjustment during 2018 to Wholesale Banking’s U.S.
deferred tax assets and liabilities to the lower base rate of 21%. The earnings
impact was reported in the Corporate segment. For additional details, refer to
the “Non-GAAP Financial Measures − Reconciliation of Adjusted to Reported Net
Income” table in the “Financial Results Overview” section of this document.
7 Includes gross loans and bankers’ acceptances, excluding letters of credit, cash
collateral, credit default swaps, and reserves for the corporate lending business.
8 Capital allocated to the business segments was based on 9% CET1 Capital in fiscal
2018, 2017, and 2016.
BUSINESS OUTLOOK AND FOCUS FOR 2019
We are cautiously optimistic that capital markets revenues may
improve in 2019, as we continue to build our U.S. dollar
businesses. However, we remain watchful of market sentiment
as a combination of global geo-political and trade uncertainties,
recent market volatility, increased competition, and evolving
capital and regulatory requirements, 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, and client-focused business model will continue
to deliver solid results and allow for growth in our business.
Our key priorities for 2019 are as follows:
• Continue to be a top-ranked investment dealer in Canada
by deepening client relationships.
• Grow our U.S. dollar business, focusing on opportunities in
areas such as TD Prime Services, Debt Capital Markets (DCM),
ABS, and Corporate and Investment Banking.
• Focus on productivity and seamless execution in our end-to-
end delivery of products and services.
• Invest in an efficient and agile infrastructure to support
growth and adapt to industry and regulatory changes.
• Maintain our focus on managing risk, capital, balance sheet,
and liquidity.
• Continue to be an extraordinary place to work with a focus
on inclusion and diversity.
REVIEW OF FINANCIAL PERFORMANCE
Wholesale Banking net income for the year was $1,054 million, an
increase of $15 million, or 1%, compared with the prior year reflecting
higher revenue, partially offset by higher non-interest expenses and PCL
for the year compared to a net recovery of PCL in the prior year. The
ROE for the year was 17.7%, compared with 17.4% in the prior year.
Revenue for the year was $3,459 million, an increase of $188 million,
or 6%, compared with the prior year reflecting increased corporate
lending, advisory fees, and trading-related revenue.
PCL for the year was $3 million, compared with a net recovery of
$28 million in the prior year. PCL – impaired was a net recovery of
$8 million, compared with a net recovery of $28 million in the prior
year, reflecting a lower recovery of provisions in the oil and gas sector.
PCL – performing (recorded in the Corporate segment last year as
incurred but not identified credit losses under IAS 39) for the year was
$11 million primarily reflecting the adoption of IFRS 9 including where
Stage 2 loans are measured on a lifetime ECL.
Non-interest expenses were $2,067 million, an increase of
$138 million, or 7%, compared with the prior year reflecting
continued investments in employees supporting the global expansion
of Wholesale Banking’s U.S. dollar strategy, higher initiative spend to
enhance new product capabilities and higher variable compensation
commensurate with increased revenue, partially offset by the
revaluation of certain liabilities for post-retirement benefits.
LINES OF BUSINESS
• Global Markets includes sales, trading and research, debt and
equity underwriting, client securitization, trade finance, cash
management, prime brokerage, and trade execution services19.
• Corporate and Investment Banking includes corporate
lending and syndications, debt and equity underwriting, and
advisory services19.
• Other includes the investment portfolio and other
accounting adjustments.
19 Revenue is shared between Global Markets and Corporate and Investment
Banking lines of business in accordance with an established agreement.
38
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS SEGMENT ANALYSIS
Corporate
Corporate segment is comprised 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 2 1
CORPORATE
(millions of Canadian dollars)
Net income (loss) – reported1,2,3,4
Pre-tax adjustments for items of note5
Amortization of intangibles
Impact from U.S. tax reform4
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 portfolio1
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 note4
Net income (loss) – adjusted
Decomposition of items included in net income (loss) – adjusted
Net corporate expenses
Other
Non-controlling interests
Net income (loss) – adjusted
Selected volumes
Average number of full-time equivalent staff
1 Effective February 1, 2017, the total gains and losses on derivatives hedging the
reclassified available-for-sale securities portfolio (classified as FVOCI under IFRS 9
and AFS under IAS 39) 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 “How We Performed” section of this document.
2 Effective the first quarter of 2017, the impact from certain treasury and balance
sheet management activities relating to the U.S. Retail segment is recorded in the
Corporate segment.
3 Effective November 1, 2017, the PCL related to the allowances for credit losses for
all three stages are recorded within the respective segment. Under IAS 39 and prior
to November 1, 2017, the PCL related to the incurred but not identified allowance
for credit losses related to products in the Canadian Retail and Wholesale Banking
segments were recorded in the Corporate segment.
Corporate segment results include unallocated revenue and expenses,
the impact of treasury and balance sheet management activities,
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
$1,091 million, compared with a reported net loss of $369 million last
year. The year-over-year increase in reported net loss was attributable
to the impact from U.S. tax reform this year, the dilution gain on the
Scottrade transaction last year, increased net corporate expenses
and decreased non-controlling interests this year and the gain on fair
value of derivatives hedging the reclassified available-for-sale securities
portfolio last year. Net corporate expenses increased primarily due
to the positive impact of tax adjustments last year, the impact of the
reduction of the U.S. corporate tax rate on current year expenses and
investments in advanced analytic and artificial intelligence capabilities
in the current year. The adjusted net loss for the year was $430 million,
compared with an adjusted net loss of $335 million last year.
2018
2017
2016
$ (1,091)
$
(369)
$
(931)
324
48
–
–
–
–
372
(289)
(430)
(822)
320
72
(430)
$
$
$
310
–
(204)
42
(41)
–
107
73
(335)
(767)
311
121
(335)
$
$
$
335
–
–
–
(7)
111
439
83
(575)
(836)
146
115
(575)
$
$
$
15,042
14,368
13,160
4 The reduction of the U.S. federal corporate tax rate enacted by the U.S. Tax Act
resulted in a net charge to earnings during 2018 of $392 million, comprising a net
$48 million pre-tax charge related to the write-down of certain tax credit-related
investments, partially offset by the favourable impact of the Bank’s share of
TD Ameritrade’s remeasurement of its deferred income tax balances and a net
$344 million income tax expense resulting from the remeasurement of the Bank’s
deferred tax assets and liabilities to the lower base rate of 21% and other related
tax adjustments.
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.
FOCUS FOR 2019
In 2019, service and control groups within the Corporate
segment will continue supporting our Business segments as well
as executing enterprise and regulatory initiatives and managing
the Bank’s balance sheet and funding activities. We will
continue to proactively address the complexities and challenges
from changing demands and expectations of our customers,
communities, colleagues, governments and regulators. We will
maintain 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, effectively, and to be in compliance with all
applicable regulatory requirements.
39
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
2017 FINANCIAL RESULTS OVERVIEW
Summary of 2017 Performance
T A B L E 2 2
REVIEW OF 2017 FINANCIAL PERFORMANCE1
(millions of Canadian dollars)
Net interest income
Non-interest income
Total revenue
Provision for (recovery of) credit losses – impaired2
Provision for (recovery of) credit losses – performing3
Total 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
Canadian
Retail
$ 10,611
10,451
21,062
986
–
986
2,246
8,934
8,896
2,371
–
6,525
–
$ 6,525
U.S.
Retail
$ 7,486
2,735
10,221
648
144
792
–
5,878
3,551
671
442
3,322
36
$ 3,358
Wholesale
Banking
Corporate
$ 1,804
1,467
3,271
(28)
–
(28)
–
1,929
1,370
331
–
1,039
–
$ 1,039
$ 946
649
1,595
384
82
466
–
2,625
(1,496)
(1,120)
7
(369)
34
(335)
$
Total
$ 20,847
15,302
36,149
1,990
226
2,216
2,246
19,366
12,321
2,253
449
10,517
70
$ 10,587
1 Certain comparative amounts have been recast to conform with presentation
adopted in the current period. For further details, refer to the “Business Focus”
section of this document.
3 PCL − performing represents Stage 1 and Stage 2 PCL under IFRS 9 and incurred
but not identified PCL under IAS 39 on financial assets, loan commitments, and
financial guarantees.
2 PCL − impaired represents Stage 3 PCL under IFRS 9 and counterparty-specific and
individually insignificant PCL under IAS 39 on financial assets.
NET INCOME
Reported net income for the year was $10,517 million, an increase of
$1,581 million, or 18%, compared with the prior year. The increase
reflects revenue growth, lower insurance claims, and PCL, partially
offset by higher non-interest expenses. Reported diluted EPS for the
year was $5.50, an increase of 18%, compared with $4.67 in the prior
year. Adjusted diluted EPS for the year was $5.54, a 14% increase,
compared with $4.87 in the prior year.
Reported revenue was $36,149 million, an increase of $1,834 million,
or 5%, compared with the prior year. Adjusted revenue was
$35,946 million, an increase of $1,638 million, or 5%, compared
with the prior year.
NET INTEREST INCOME
Net interest income for the year was $20,847 million, an increase
of $924 million, or 5%, compared with the prior 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%.
NON-INTEREST INCOME
Reported non-interest income for the year was $15,302 million, an
increase of $910 million, or 6%, compared with the prior 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 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 the prior year.
40
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%.
PROVISION FOR CREDIT LOSSES
PCL for the year was $2,216 million, a decrease of $114 million, or
5%, compared with the prior 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%.
INSURANCE CLAIMS AND RELATED EXPENSES
Insurance claims and related expenses were $2,246 million, a
decrease of $216 million, or 9%, compared with the prior 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
Reported non-interest expenses for the year were $19,366 million,
an increase of $489 million, or 3%, compared with the prior 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
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
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 the prior year.
PROVISION FOR INCOME TAXES
Reported total income and other taxes increased $92 million, or 3%,
compared with the prior 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 the prior 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% in the prior 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% in the prior 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 in the prior year, was not part
of the Bank’s effective tax rate.
BALANCE SHEET
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%.
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%.
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.
2017 FINANCIAL RESULTS OVERVIEW
2017 Financial Performance by Business Line
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 a decrease 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.
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 a decrease 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.
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 the prior 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.
41
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 the prior 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 the prior 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 the prior 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 the prior 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 the prior 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 the prior 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 the prior year.
Reported non-interest expenses for the year were US$4,500 million,
an increase of US$211 million, or 5%, compared with the prior 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%, in the prior year.
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.
Corporate segment reported net loss for the year was $369 million,
compared with a reported net loss of $931 million in the prior 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 in
the prior year.
42
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS GROUP FINANCIAL CONDITION
Balance Sheet Review
AT A GLANCE OVERVIEW
Total assets were $1,335 billion as at October 31, 2018, an
increase of $56 billion, or 4%, compared with November 1, 2017.
T A B L E 2 3
CONDENSED CONSOLIDATED BALANCE SHEET ITEMS1
(millions of Canadian dollars)
Assets
Cash and Interest-bearing deposits with banks
Trading loans, securities, and other
Non-trading financial assets at fair value through profit or loss
Derivatives
Financial assets designated at fair value through profit or loss
Financial assets at fair value through other comprehensive income
Available-for-sale securities
Debt securities at amortized cost, net of allowance for credit losses
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
1 Refer to Note 4 “Summary of impact upon adoption of IFRS 9” of the 2018
Consolidated Financial Statements for an explanation of changes to the balance
sheet between October 31, 2017 and November 1, 2017.
2 Not applicable.
Total assets were $1,335 billion as at October 31, 2018, an increase
of $56 billion, or 4%, from November 1, 2017. The increase was
primarily due to loans, net of allowance for loan losses of $43 billion,
debt securities at amortized cost, net of allowance for credit losses of
$31 billion, trading loans, securities, and other of $24 billion, and
derivatives of $1 billion. The increase was partially offset by decreases
in cash and interest-bearing deposits with banks of $20 billion,
financial assets at FVOCI of $13 billion, securities purchased under
reverse repurchase agreements of $7 billion, and non-trading financial
assets at fair value through profit and loss of $5 billion. The foreign
currency translation impact on total assets, primarily in the U.S. Retail
segment, was an increase of approximately $10 billion, or 1%.
Cash and interest-bearing deposits with banks decreased
$20 billion primarily due to lower volumes.
Trading loans, securities, and other increased by $24 billion primarily
due to an increase in trading volume and higher securities positions.
Non-trading financial assets at fair value through profit or loss
decreased $5 billion primarily due to maturities and sale of investments.
Derivatives increased $1 billion primarily due to the current interest
rate environment, partially offset by netting of positions.
October 31
2018
November 1
2017
October 31
2017
As at
$
35,455
127,897
4,015
56,996
3,618
130,600
n/a
107,171
n/a
127,379
646,393
95,379
$ 1,334,903
$ 114,704
48,270
851,439
93,389
8,740
138,321
1,254,863
80,040
$ 1,334,903
$
55,156
103,832
9,272
56,195
3,150
143,107
n/a
76,157
n/a
134,429
603,041
94,882
$ 1,279,221
$
79,940
51,214
832,824
88,591
9,528
141,958
1,204,055
75,166
$ 1,279,221
$
55,156
103,918
n/a2
56,195
4,032
n/a
146,411
n/a
71,363
134,429
612,591
94,900
$ 1,278,995
$
79,940
51,214
832,824
88,591
9,528
141,708
1,203,805
75,190
$ 1,278,995
Financial assets at fair value through other comprehensive
income decreased $13 billion primarily due to sales and maturities,
partially offset by new investments.
Debt securities at amortized cost (net of allowance for credit losses)
increased $31 billion primarily due to new investments, partially offset
by sales and maturities.
Securities purchased under reverse repurchase agreements
decreased $7 billion primarily due to a decrease in trading volume.
Loans (net of allowance for loan losses) increased $43 billion
primarily due to growth in business and government loans across all
segments, and consumer instalment and other personal loans in
Canadian Retail.
Total liabilities were $1,255 billion as at October 31, 2018, an
increase of $51 billion, or 4%, from November 1, 2017. The increase
was primarily due to trading deposits of $35 billion, deposits of
$19 billion, and obligations related to securities sold under repurchase
agreements of $5 billion. The increase was partially offset by decreases
in derivatives of $3 billion, subordinated notes and debentures of
$1 billion, and other liabilities of $4 billion. The foreign currency
translation impact on total liabilities, primarily in the U.S. Retail
segment, was an increase of approximately $10 billion, or 1%.
43
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
Trading deposits increased $35 billion primarily due to an increase
in issuance of commercial paper.
Derivatives decreased $3 billion primarily due to netting of positions,
partially offset by the current interest rate environment.
Deposits increased $19 billion primarily due to an increase in business
and government deposits reflecting the issuance of senior debt and
covered bonds, and an increase in personal deposits primarily in the
Canadian and U.S. Retail segments, partially offset by a decrease in
deposits with banks.
Obligations related to securities sold under repurchase
agreements increased $5 billion primarily due to an increase
in trading volume.
Subordinated notes and debentures decreased $1 billion primarily
due to the Bank’s redemption of $0.65 billion of 5.828% subordinated
debentures, and all of its outstanding $1.8 billion 5.763% subordinated
debentures, partially offset by an issuance of $1.75 billion of medium
term notes.
Other liabilities decreased $4 billion primarily due to amounts payable
to brokers, dealers, and clients due to unsettled and pending trades.
Equity was $80 billion as at October 31, 2018, an increase of
$5 billion, or 6%, from November 1, 2017. 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.
GROUP FINANCIAL CONDITION
Credit Portfolio Quality
AT A GLANCE OVERVIEW
• Loans and acceptances net of allowance for loan losses were
$666 billion, an increase of $37 billion compared with last year.
• Impaired loans net of Stage 3 allowances (counterparty-
specific and individually insignificant allowances under IAS 39)
were $2,468 million, an increase of $70 million compared
with last year.
• Provision for credit losses was $2,480 million, compared with
$2,216 million last year.
• Total allowance for loan losses decreased by $234 million
to $3,549 million.
Effective November 1, 2017, the Bank adopted IFRS 9, which replaces
the guidance in IAS 39. The Bank periodically reviews the methodology
for assessing significant increase in credit risk and ECLs. Forward-
looking information is incorporated as appropriate where
macroeconomic forecasts and associated probability weights are
updated quarterly and incorporated to determine the probability-
weighted ECLs. Refer to Notes 2, 3, and 4 of the Consolidated
Financial Statements for a summary of the Bank’s accounting policies
and significant accounting judgments, estimates, and assumptions
as it relates to IFRS 9. As part of periodic review and updates, certain
revisions may be made to reflect updates in statistically derived loss
estimates for the Bank’s recent loss experience of its credit portfolios
and forward-looking views, which may cause a change to the
allowance for ECLs. Since the Bank’s adoption of IFRS 9, certain
refinements were made to the methodology, the cumulative effect of
which was not material and was included in the change during 2018.
Allowance for credit losses are further described in Note 8 of the
Consolidated Financial Statements.
LOAN PORTFOLIO
The Bank increased its credit portfolio by $37 billion, or 6%, from
the prior year, largely due to volume growth in the business and
government, consumer instalment and other personal, and residential
mortgages portfolios in the Canadian Retail segment. The Bank’s
credit quality remained strong.
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 2018 Consolidated
Financial Statements.
44
CONCENTRATION OF CREDIT RISK
The Bank’s loan portfolio continued to be concentrated in Canadian
and U.S. residential mortgages, consumer instalment and other
personal loans, and credit card loans, representing 64% of total loans
net of Stage 3 allowances (counterparty-specific and individually
insignificant allowances under IAS 39), down by 1% from 2017.
During the year, these portfolios increased by $20 billion, or 5%, and
totalled $431 billion at year end. Residential mortgages represented
34% of the total loans net of Stage 3 allowances (counterparty-specific
and individually insignificant allowances under IAS 39) in 2018, down
1% from 2017. Consumer instalment and other personal loans, and
credit card loans were 31% of total loans net of Stage 3 allowances
(counterparty-specific and individually insignificant allowances under
IAS 39) in 2018, up 1% from 2017.
The Bank’s business and government credit exposure was 35% of
total loans net of Stage 3 allowances (counterparty-specific and
individually insignificant allowances under IAS 39), up 1% from 2017.
The largest business and government sector concentrations in Canada
were the Real estate and Financial sectors, which comprised 5% and
3%, respectively. Real estate, the Government, public sector entities
and education, and the Health and social services sectors were the
leading U.S. sectors of concentration in 2018 representing 5%, 2%,
and 2% of net loans, respectively.
Geographically, the credit portfolio remained concentrated in
Canada. In 2018, the percentage of loans net of Stage 3 allowances
held in Canada was 67%, up 1% from 2017. The largest Canadian
regional exposure was in Ontario, which represented 41% of total
loans net of Stage 3 allowances (counterparty-specific and individually
insignificant allowance for loan losses under IAS 39) for 2018,
consistent with 2017.
The balance of the credit portfolio was predominantly in the U.S.,
which represented 32% of loans net of Stage 3 allowances, down 1%
from 2017. Exposures to 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%, 5%, and
5% of total loans net of Stage 3 allowances (counterparty-specific and
individually insignificant allowances under IAS 39), respectively,
compared with 6%, 6% and 5%, respectively, in the prior year.
Under IFRS 9, the Bank now calculates allowances for expected
credit losses on debt securities measured at amortized cost and
FVOCI. The Bank has $232.9 billion in such debt securities of
which $232.7 billion are performing securities (Stage 1 and 2) and
$234 million are impaired (Stage 3). The allowance for credit losses
on debt securities at amortized cost and debt securities at FVOCI
was $75 million and $5 million, respectively.
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 2 4
LOANS AND ACCEPTANCES, NET OF STAGE 3 ALLOWANCE FOR LOAN LOSSES (NET OF COUNTERPARTY-SPECIFIC AND
INDIVIDUALLY INSIGNIFICANT ALLOWANCES UNDER IAS 39) BY INDUSTRY SECTOR 1,2,3
(millions of Canadian dollars,
except as noted)
October 31
2018
October 31
2017
October 31
2016
October 31
2018
October 31
2017
October 31
2016
As at
Percentage of total
Stage 3
allowances for
loan losses
impaired
Gross
loans
Net
loans
Net
loans
Net
loans
Canada
Residential mortgages
Consumer instalment and other personal
HELOC4
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
$ 193,829
$ 18
$ 193,811
$ 190,308
$ 189,284
28.9%
30.1%
31.3%
86,159
24,216
18,574
18,046
340,824
18,364
13,635
31,999
7,461
6,918
19,313
2,331
544
4,177
6,670
3,173
1,750
3,915
2,897
4,479
3,207
2,938
3,136
1,862
4,375
111,145
$ 451,969
12
46
34
77
187
6
2
8
2
–
–
1
–
–
6
86,147
24,170
18,540
17,969
340,637
18,358
13,633
31,991
7,459
6,918
19,313
2,330
544
4,177
6,664
74,931
22,245
17,326
17,935
322,745
17,974
12,830
30,804
6,674
6,657
13,102
1,968
500
4,251
5,837
65,059
20,537
16,424
18,120
309,424
15,994
12,778
28,772
6,015
5,481
10,198
2,076
523
6,589
5,476
3
10
14
–
5
7
13
2
2
4
77
$ 264
3,170
1,740
3,901
2,897
4,474
3,200
2,925
3,134
1,860
4,371
111,068
$ 451,705
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
12.8
3.6
2.8
2.7
50.8
2.7
2.0
4.7
1.1
1.0
2.9
0.3
0.1
0.6
1.0
0.5
0.3
0.6
0.4
0.7
0.5
0.4
0.5
0.3
0.7
16.6
67.4%
11.8
3.5
2.8
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%
1 Certain comparative amounts have been restated to conform with the presentation
adopted in the current period.
2 Primarily based on the geographic location of the customer’s address.
3 Includes loans that are measured at fair value through other comprehensive income.
4 Home Equity Line of Credit.
45
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 2 4
LOANS AND ACCEPTANCES, NET OF STAGE 3 ALLOWANCE FOR LOAN LOSSES (NET OF COUNTERPARTY-SPECIFIC AND
INDIVIDUALLY INSIGNIFICANT ALLOWANCES UNDER IAS 39) BY INDUSTRY SECTOR (continued) 1,2,3
(millions of Canadian dollars,
except as noted)
October 31
2018
October 31
2017
October 31
2016
October 31
2018
October 31
2017
October 31
2016
As at
Percentage of total
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 loans4
Total other loans
Total
Stage 1 and Stage 2 allowance
for loan losses – performing
(incurred but not identified
allowance under IAS 39)
Personal, business and government
Debt securities classified as loans
Total Stage 1 and Stage 2 allowance
for loan losses – performing
(incurred but not identified
allowance under IAS 39)
Total, net of allowance
Percentage change over previous year –
loans and acceptances, net of Stage 3
allowance for loan losses (impaired)
(counterparty-specific and individually
insignificant under IAS 39)
Percentage change over previous year –
loans and acceptances, net of allowance
Stage 3
allowances for
loan losses
impaired
Gross
loans
Net
loans
Net
loans
Net
loans
$ 31,128
$ 29
$ 31,099
$ 31,435
$ 27,628
4.6%
5.0%
4.6%
12,334
29,870
874
16,964
91,170
8,050
22,426
30,476
705
5,752
7,699
3,417
637
12,452
12,423
2,060
1,923
2,664
2,833
10,923
5,376
7,717
4,896
9,977
2,160
124,090
215,260
14
2,258
2,272
669,501
n/a
453
453
$ 669,954
59
25
2
264
379
5
7
12
–
2
1
2
–
1
1
2
1
1
–
3
2
4
–
1
10
43
422
–
–
–
686
12,275
29,845
872
16,700
90,791
8,045
22,419
30,464
705
5,750
7,698
3,415
637
12,451
12,422
2,058
1,922
2,663
2,833
10,920
5,374
7,713
4,896
9,976
2,150
124,047
214,838
14
2,258
2,272
668,815
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
1.8
4.5
0.1
2.5
13.5
1.2
3.3
4.5
0.1
0.9
1.2
0.5
0.1
1.9
1.9
0.3
0.3
0.4
0.4
1.6
0.8
1.2
0.7
1.5
0.3
18.6
32.1
–
0.4
0.4
99.9
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
n/a
18
18
$ 704
n/a
435
435
$ 669,250
3,083
630
3,713
$ 632,823
1,468
912
2,380
$ 604,243
–
0.1
0.1
100.0%
0.5
0.1
0.6
100.0%
0.2
0.2
0.4
100.0%
2,845
n/a
2,915
20
2,826
55
2,845
$ 666,405
2,935
$ 629,888
2,881
$ 601,362
5.8%
4.7%
7.2%
5.8
4.7
7.2
1 Certain comparative amounts have been restated to conform with the presentation
adopted in the current period.
3 Includes loans that are measured at fair value through other comprehensive income.
4 Includes all Federal Deposit Insurance Corporation (FDIC) covered loans and
2 Primarily based on the geographic location of the customer’s address.
other ACI loans.
46
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 2 5
LOANS AND ACCEPTANCES, NET OF STAGE 3 ALLOWANCE FOR LOAN LOSSES (NET OF COUNTERPARTY-SPECIFIC AND
INDIVIDUALLY INSIGNIFICANT ALLOWANCES UNDER IAS 39) BY GEOGRAPHY1,2
(millions of Canadian dollars,
except as noted)
Canada
Atlantic provinces
British Columbia3
Ontario3
Prairies3
Québec
Total Canada
United States
Carolinas (North and South)
Florida
New England4
New Jersey
New York
Pennsylvania
Other
Total United States
International
Europe
Other
Total international
Total excluding other loans
Other loans
Total
Stage 1 and Stage 2 allowances
(incurred but not identified
allowance under IAS 39)
Total, net of allowance
Percentage change over previous
year – loans and acceptances,
net of Stage 3 allowances
for loan losses (impaired)
(counterparty-specific and
individually insignificant
under IAS 39)
Canada
United States
International
Other loans
Total
October 31
2018
October 31
2017
October 31
2016
October 31
2018
October 31
2017
October 31
2016
As at
Percentage of total
Stage 3
allowances for
loan losses
impaired
Gross
loans
Net
loans
Net
loans
Net
loans
$ 11,754
63,372
272,836
70,316
33,691
451,969
11,528
17,582
41,533
33,374
36,389
11,905
62,949
215,260
1,059
1,213
2,272
669,501
453
$ 669,954
$ 13
27
142
58
24
264
$ 11,741
63,345
272,694
70,258
33,667
451,705
$ 11,378
57,924
249,508
68,879
31,996
419,685
$ 10,895
54,169
236,508
67,498
31,293
400,363
17
30
62
44
49
21
199
422
11,511
17,552
41,471
33,330
36,340
11,884
62,750
214,838
10,813
15,806
38,564
34,024
35,118
11,594
61,913
207,832
9,788
13,870
38,744
33,910
31,323
13,144
59,192
199,971
–
–
–
686
18
$ 704
1,059
1,213
2,272
668,815
435
$ 669,250
678
915
1,593
629,110
3,713
$ 632,823
500
1,029
1,529
601,863
2,380
$ 604,243
2,845
$ 666,405
2,935
$ 629,888
2,881
$ 601,362
1.8%
9.5
40.6
10.5
5.0
67.4
1.7
2.6
6.2
5.0
5.4
1.8
9.4
32.1
0.2
0.2
0.4
99.9
0.1
100.0%
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%
2018
7.6%
3.4
42.6
(88.3)
5.8%
2017
4.8%
3.9
4.2
56.0
4.7%
2016
4.5%
14.3
(22.9)
(28.1)
7.2%
1 Primarily based on the geographic location of the customer’s address.
2 Includes loans that are measured at fair value through other
comprehensive income.
3 The territories are included as follows: Yukon is included in British Columbia; Nunavut
is included in Ontario; and Northwest Territories is included in the Prairies region.
4 The states included in New England are as follows: Connecticut, Maine,
Massachusetts, New Hampshire, and Vermont.
REAL ESTATE SECURED LENDING
Retail real estate secured lending includes mortgages and lines of credit
to North American consumers to satisfy financing needs including
home purchases and refinancing. While the Bank retains first lien on
the majority of properties held as security, there is a small portion of
loans with second liens, which are largely 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.
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.
47
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 2 6
CANADIAN REAL ESTATE SECURED LENDING1
(millions of Canadian dollars)
Total
Total
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.
Total real estate
Amortizing Non-amortizing secured lending
As at
Residential
mortgages
Total amortizing
Home equity
real estate
lines of credit secured lending
Home equity
lines of credit
$ 193,829
$ 50,554
$ 244,383
$ 35,605
$ 279,988
October 31, 2018
$ 190,325
$ 38,792
$ 229,117
$ 36,145
$ 265,262
October 31, 2017
T A B L E 2 7
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, 2018
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
1.8% $ 2,544
$ 3,492
23,460
6.4
12,389
60,308
35,355 18.2
14,998
23,561 12.2
8,372
4.8
84,147 43.4% 109,682
30,462
$ 140,144
900
$ 85,047
9,350
2.0% $ 2,225
$ 3,749
19,774
7.7
14,561
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
1.3% $
12.1
31.1
7.7
4.3
56.6%
424
1,981
7,052
3,408
1,105
13,970
1
$ 13,971
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
0.5% $ 1,312
14,221
2.3
40,163
8.2
10,963
4.0
5,530
1.3
16.3% 72,189
12,367
$ 84,556
16.5
46.6
12.7
6.4
1.5% $ 3,916
14,370
42,407
26,969
10,455
83.7% 98,117
901
$ 99,018
1.4% $ 3,856
37,681
5.1
100,471
15.1
25,961
9.6
13,902
3.7
34.9% 181,871
42,829
$ 224,700
1.4%
13.5
35.9
9.3
5.0
65.1%
October 31, 2017
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%
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 8
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
1.0%
4.8
1.6%
3.8%
8.2
4.4%
6.7%
4.8
6.5%
15.1%
5.2
13.7%
42.7%
29.4
40.8%
30.1%
46.3
32.4%
0.6%
1.0
0.6%
–% 100.0%
0.3
100.0
–% 100.0%
October 31, 2018
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 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.
48
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 2 9
UNINSURED AVERAGE LOAN-TO-VALUE – Newly Originated and Newly Acquired 1,2,3
Canada
Atlantic provinces
British Columbia6
Ontario6
Prairies6
Québec
Total Canada
United States
Total
For the 12 months ended
October 31, 2018
For the 12 months ended
October 31, 2017
Residential Home equity
mortgages
lines of credit4,5
Total
Residential
mortgages
Home equity
lines of credit4,5
Total
74%
66
67
73
73
68
69
68%
70%
62
65
71
73
66
61
65%
73%
64
67
72
73
67
65
67%
73%
67
68
73
72
69
67
68%
70%
62
65
71
73
66
62
65%
72%
65
66
72
73
67
64
67%
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 HELOC loan-to-value includes first position collateral mortgage, if applicable.
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 and migrates to Stage 3 when it is
90 days or more past due for retail exposures, rated BRR 9 for
non-retail exposures, or 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. Gross impaired loans excluding
FDIC covered loans and other ACI loans increased $69 million, or 2%,
compared with the prior year.
In Canada, impaired loans net of Stage 3 allowances (counterparty-
specific and individually insignificant allowances under IAS 39)
increased by $98 million, or 18% in 2018. Residential mortgages,
consumer instalment and other personal loans, and credit cards, had
net impaired loans of $454 million, a decrease of $8 million, or 2%,
compared with the prior year. Business and government loans
net of Stage 3 allowances (counterparty-specific and individually
insignificant allowances under IAS 39) were $198 million, an increase
of $106 million, or 115%, compared with the prior year, largely
due to new formations in the Canadian Commercial portfolio.
In the U.S., net impaired loans decreased by $28 million, or 2% in
2018. Residential mortgages, consumer instalment and other personal
loans, and credit cards, had net impaired loans of $1,474 million, a
decrease of $26 million, or 2%, compared with the prior year. Business
and government net impaired loans were $342 million, a decrease of
$2 million, or 1%, compared with the prior year.
Geographically, 26% of total net impaired loans were located in
Canada and 74% in the U.S. The largest regional concentration of net
impaired loans in Canada was in Ontario, increasing to 13% of total
net impaired loans, compared with 8% in the prior year primarily
reflecting new formations in the Canadian Commercial portfolio. The
largest regional concentration of net impaired loans in the U.S. was in
New England representing 18% of total net impaired loans, stable
from the prior year.
T A B L E 3 0
CHANGES IN GROSS IMPAIRED LOANS AND ACCEPTANCES1,2,3
(millions of Canadian dollars)
Personal, Business and Government Loans
Impaired loans as at beginning of period
Classified as impaired during the period4
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
2018
2017
2016
$ 3,085
5,012
(864)
(1,360)
(21)
(2,748)
–
50
$ 3,154
$ 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
1 Includes customers’ liability under acceptances.
2 Excludes ACI loans, DSCL under IAS 39, and DSAC and DSOCI under IFRS 9.
3 Includes loans that are measured at FVOCI.
4 Under IFRS 9, loans are considered impaired and migrate to Stage 3 when they are
90 days or more past due for retail exposures (including Canadian government-
insured real estate personal loans), rated BRR 9 for non-retail exposures, or when
there is objective evidence that there has been a deterioration of credit quality to
the extent the Bank no longer has reasonable assurance as to the timely collection
of the full amount of principal and interest.
49
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 3 1
IMPAIRED LOANS NET OF STAGE 3 ALLOWANCE FOR LOAN LOSSES (NET OF COUNTERPARTY-SPECIFIC AND
INDIVIDUALLY INSIGNIFICANT ALLOWANCES UNDER IAS 39) BY INDUSTRY SECTOR1,2,3,4
(millions of Canadian dollars,
except as noted)
Oct. 31
2018
Oct. 31
2017
Oct. 31
2016
Oct. 31
2015
Oct. 31 Oct. 31
2018
2014
Oct. 31
2017
Oct. 31
2016
Oct. 31
2015
Oct. 31
2014
As at
Percentage of total
Stage 3
allowances
for loan
losses
impaired
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 card5
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
$ 264
$ 18
$ 246
$ 279
$ 385
$ 378
$ 427
10.0%
11.6%
13.9%
14.2%
19.0%
130
69
46
132
641
12
46
34
77
187
118
23
12
55
454
102
11
19
51
462
140
9
20
46
600
166
17
19
45
625
249
17
20
66
779
4.8
0.9
0.5
2.2
18.4
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
9
4
13
6
9
2
2
1
–
10
139
17
23
–
10
12
19
3
4
5
275
$ 916
6
2
8
2
–
–
1
–
–
6
3
10
14
–
5
7
13
2
2
4
77
$ 264
3
2
5
4
9
2
1
1
–
4
136
7
9
–
5
5
6
1
2
1
198
$ 652
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
0.1
0.1
0.2
0.2
0.4
0.1
–
–
–
0.2
5.5
0.3
0.4
–
0.2
0.2
0.2
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
–
5
2
92
$ 554
–
–
4
137
$ 737
2
2
3
121
$ 746
1
1
5
54
$ 833
–
0.1
–
8.0
26.4%
–
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%
1 Includes customers’ liability under acceptances.
2 Primarily based on the geographic location of the customer’s address.
3 Includes loans that are measured at FVOCI.
4 Excludes ACI loans, DSCL under IAS 39, and DSAC and DSOCI under IFRS 9.
5 Credit cards are considered impaired when they are 90 days past due and written
off at 180 days past due.
50
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 3 1
IMPAIRED LOANS NET OF STAGE 3 ALLOWANCE FOR LOAN LOSSES (NET OF COUNTERPARTY-SPECIFIC AND
INDIVIDUALLY INSIGNIFICANT ALLOWANCES UNDER IAS 39) BY INDUSTRY SECTOR (continued) 1,2,3,4
(millions of Canadian dollars,
except as noted)
Oct. 31
2018
Oct. 31
2017
Oct. 31
2016
Oct. 31
2015
Oct. 31 Oct. 31
2018
2014
Oct. 31
2017
Oct. 31
2016
Oct. 31
2015
Oct. 31
2014
As at
Percentage of total
Stage 3
allowances
for loan
losses
impaired
Gross
impaired
loans
Net
impaired
loans
Net
impaired
loans
Net
impaired
loans
Net
impaired
loans
Net
impaired
loans
$ 445
$ 29
$ 416 $ 429 $ 418
$ 361 $ 303
16.9%
17.9%
15.0%
13.6%
13.5%
855
223
8
322
1,853
29
104
133
2
10
29
12
1
8
12
21
4
12
1
47
39
19
3
16
16
385
2,238
–
–
$ 3,154
59
25
2
264
379
5
7
12
–
2
1
2
–
1
1
2
1
1
–
3
2
4
796
198
6
58
1,474
24
97
121
2
8
28
10
1
7
11
19
3
11
1
44
37
15
795
234
4
38
1,500
27
73
100
2
12
39
9
1
9
11
20
4
17
1
46
37
26
863
190
4
38
1,513
54
87
141
1
14
24
4
12
8
29
22
4
77
–
75
43
41
780
155
5
44
1,345
68
133
201
1
11
26
7
–
8
38
30
13
6
–
74
65
40
325
128
4
29
789
79
154
233
1
14
25
9
1
16
49
26
9
–
–
84
80
39
–
1
10
43
422
3
15
6
342
1,816
1
6
3
344
1,844
9
25
6
535
2,048
13
31
5
569
1,914
16
15
5
622
1,411
–
–
–
–
$ 686 $ 2,468 $ 2,398 $ 2,785 $ 2,660 $ 2,244
–
–
–
–
–
–
–
–
32.3
8.0
0.2
2.4
59.8
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
1.0
3.9
4.9
0.1
0.3
1.1
0.4
–
0.3
0.5
0.8
0.1
0.5
–
1.8
1.5
0.6
0.1
0.6
0.2
13.8
73.6
–
–
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
–
–
100.0% 100.0% 100.0% 100.0% 100.0%
3.33%
3.45%
4.09%
4.24%
4.28%
United States
Residential mortgages
Consumer instalment and
other personal
HELOC
Indirect Auto
Other
Credit card5
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
1 Includes customers’ liability under acceptances.
2 Primarily based on the geographic location of the customer’s address.
3 Includes loans that are measured at FVOCI.
4 Excludes ACI loans, DSCL under IAS 39, and DSAC and DSOCI under IFRS 9.
5 Credit cards are considered impaired when they are 90 days past due and written
off at 180 days past due.
51
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 3 2
IMPAIRED LOANS NET OF STAGE 3 ALLOWANCE FOR LOAN LOSSES (NET OF COUNTERPARTY-SPECIFIC AND
INDIVIDUALLY INSIGNIFICANT ALLOWANCES UNDER IAS 39) BY GEOGRAPHY1,2,3,4,5
(millions of Canadian dollars, except as noted)
As at
Percentage of total
October 31
2018
October 31
2017
October 31
2016
October 31
2018
October 31
2017
October 31
2016
Canada
Atlantic provinces
British Columbia6
Ontario6
Prairies6
Québec
Total Canada
United States
Carolinas (North and South)
Florida
New England7
New Jersey
New York
Pennsylvania
Other
Total United States
Total
Stage 3
Gross allowances for
loan losses
impaired
impaired
loans
Net
impaired
loans
Net
impaired
loans
Net
impaired
loans
$
43
79
457
235
102
916
125
186
504
377
403
134
509
2,238
$ 3,154
$ 13
27
142
58
24
264
17
30
62
44
49
21
199
422
$ 686
$
30
52
315
177
78
652
108
156
442
333
354
113
310
1,816
$ 2,468
$
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
1.2%
2.1
12.8
7.2
3.1
26.4
4.4
6.3
17.9
13.5
14.3
4.6
12.6
73.6
100.0%
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%
Net impaired loans as a % of net loans
0.37%
0.38%
0.46%
1 Includes customers’ liability under acceptances.
2 Primarily based on the geographic location of the customer’s address.
3 Includes loans that are measured at FVOCI.
4 Excludes ACI loans, DSCL under IAS 39, and DSAC and DSOCI under IFRS 9.
5 Credit cards are considered impaired when they are 90 days past due and written
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.
7 The states included in New England are as follows: Connecticut, Maine,
Massachusetts, New Hampshire, and Vermont.
off at 180 days past due.
ALLOWANCE FOR CREDIT LOSSES
The allowance for loan losses including off-balance sheet positions
of $4,578 million as at October 31, 2018, was comprised of Stage 3
allowance for impaired loans of $704 million, Stage 2 allowance of
$1,696 million, and Stage 1 allowance of $2,178 million collectively
for performing loans and off-balance sheet positions.
Stage 3 allowances (impaired)
The Stage 3 allowance for loan losses decreased $144 million, or 17%,
compared with the counterparty-specific and individually insignificant
allowances under IAS 39 last year primarily reflecting certain debt
securities classified as loans under IAS 39 now classified as debt
securities at amortized cost as a result of the adoption of IFRS 9.
Stage 1 and Stage 2 allowances (performing)
As at October 31, 2018, the Stage 1 and 2 allowances (allowance for
incurred but not identified credit losses under IAS 39) was $3,874 million,
up from $3,502 million as at October 31, 2017. The increase was
primarily due to the impact of methodology changes related to the
adoption of IFRS 9 including where Stage 2 loans are measured on
a lifetime ECL methodology, and the impact of foreign exchange.
PROVISION FOR CREDIT LOSSES
The PCL is the amount charged to income to bring the total allowance
for credit losses, including both Stage 1 and 2 allowances (performing)
and Stage 3 allowance (impaired), to a level that management
considers adequate to absorb expected and incurred credit-related
losses in the Bank’s loan portfolio. Provisions are reduced by any
recoveries in the year.
In Canada PCL – impaired relating to residential mortgages,
consumer instalment and other personal loans, and credit card loans
was $880 million, a decrease of $51 million, or 5%, compared to 2017
reflecting continued strong credit performance. PCL – impaired related
to business and government loans was $45 million, an increase of
$10 million, or 29%, primarily reflecting a lower recovery of provisions
in the oil and gas sector compared with prior year.
In the U.S. PCL – impaired related to residential mortgages,
consumer instalment and other personal loans, and credit card loans
was $1,260 million, an increase of $201 million, or 19%, compared to
2017, primarily reflecting volume growth, seasoning, and mix in the
credit card and auto portfolios and the impact of foreign exchange.
PCL – impaired related to business and government loans was
$7 million, an increase of $2 million compared to 2017.
Geographically, 43% of PCL – impaired were attributed to Canada
and 58% to the U.S. including recoveries in the acquired credit-impaired
loan portfolios. The largest regional concentration of PCL – impaired in
Canada was in Ontario, which represented 17% of total PCL – impaired,
down from 19% in 2017. The largest regional concentration of PCL –
impaired in the U.S. was in New England, representing 7% of total
PCL – impaired, remaining stable from the prior year.
52
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table provides a summary of provisions charged to the
Consolidated Statement of Income.
T A B L E 3 3
PROVISION FOR CREDIT LOSSES UNDER IFRS 9
(millions of Canadian dollars)
Provision for credit losses – Stage 3 (impaired)
Canadian Retail
U.S. Retail
Wholesale Banking
Corporate1
Total provision for credit losses – Stage 3
Provision for credit losses – Stage 1 and Stage 2 (performing)2
Canadian Retail
U.S. Retail
Wholesale Banking
Corporate1
Total provision for credit losses – Stage 1 and 2
Provision for credit losses
2018
$ 927
776
(8)
471
2,166
71
141
11
91
314
$ 2,480
T A B L E 3 4
PROVISION FOR CREDIT LOSSES UNDER IAS 39
(millions of Canadian dollars)
2017
2016
Provision for credit losses – counterparty-specific
and individually insignificant
Counterparty-specific
Individually insignificant
Recoveries
Total provision for credit losses for counterparty-specific
$
40
2,575
(625)
$ 139
2,334
(602)
and individually insignificant
1,990
1,871
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
–
144
82
165
210
84
226
$ 2,216
459
$ 2,330
1 The incurred but not identified PCL is included in the Corporate segment results
for management reporting.
1 Includes PCL on the retailer program partners’ share of the U.S. strategic
2 The retailer program partners’ share of the U.S. strategic cards portfolio.
cards portfolio.
2 Includes financial asset, loan commitments, and financial guarantees.
T A B L E 3 5
PROVISION FOR LOAN LOSSES BY INDUSTRY SECTOR1,2
(millions of Canadian dollars, except as noted)
For the years ended
Percentage of total
October 31
2018
October 31
2017
October 31
2016
October 31
2018
October 31
2017
October 31
2016
Stage 3 provision for loan losses (impaired)
(Counterparty-specific and individually
insignificant provision under IAS 39)
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
1 Primarily based on the geographic location of the customer’s address.
2 Includes loans that are measured at fair value through other comprehensive income.
$ 15
$ 22
$
15
0.7%
1.1%
0.8%
11
205
178
471
880
(2)
3
1
1
3
–
–
–
–
3
2
4
(2)
–
4
14
(2)
2
2
13
45
$ 925
7
245
172
485
931
–
1
1
–
–
–
–
1
–
4
9
5
(11)
–
6
11
1
1
2
5
35
$ 966
5
253
169
503
945
–
–
–
–
1
–
(3)
–
(1)
4
11
1
43
–
9
12
14
1
4
7
103
$ 1,048
0.5
9.5
8.2
21.7
40.6
(0.1)
0.1
–
–
0.1
–
–
–
–
0.1
0.1
0.2
(0.1)
–
0.2
0.7
(0.1)
0.1
0.1
0.7
2.1
42.7%
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%
0.3
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%
53
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 3 5
PROVISION FOR LOAN LOSSES BY INDUSTRY SECTOR (continued) 1,2
(millions of Canadian dollars, except as noted)
For the years ended
Percentage of total
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 loans3
Total other loans
Total Stage 3 provision for loan losses (impaired)
(Counterparty-specific and individually insignificant
provision under IAS 39)
Stage 1 and 2 provision for loan losses
(Incurred but not identified provision under IAS 39)
Personal, business, and government
Debt securities classified as loans
Total Stage 1 and 2 provision for loan losses
(Incurred but not identified provision under IAS 39)
Total provision for loan losses
October 31
2018
October 31
2017
October 31
2016
October 31
2018
October 31
2017
October 31
2016
$
13
$
7
$
16
0.7%
0.4%
0.9%
15
272
155
805
1,260
(2)
(4)
(6)
–
1
7
(1)
–
–
–
1
2
(7)
–
(1)
–
1
1
(4)
13
7
1,267
2,192
–
(26)
(26)
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)
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)
0.7
12.5
7.2
37.1
58.2
(0.1)
(0.2)
(0.3)
–
–
0.3
–
–
–
–
–
0.1
(0.3)
–
–
–
–
–
(0.2)
0.7
0.3
58.5
101.2
–
(1.2)
(1.2)
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)
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)
$ 2,166
$ 1,990
$ 1,871
100.0%
100.0%
100.0%
$ 306
–
306
$ 2,472
$ 237
(11)
226
$ 2,216
$ 463
(4)
459
$ 2,330
1 Primarily based on the geographic location of the customer’s address.
2 Includes loans that are measured at fair value through other comprehensive income.
3 Includes all FDIC covered loans and other ACI loans.
54
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 3 6
PROVISION FOR LOAN LOSSES BY GEOGRAPHY1,2,3
(millions of Canadian dollars, except as noted)
For the years ended
Percentage of total
October 31
2018
October 31
2017
October 31
2016
October 31
2018
October 31
2017
October 31
2016
Canada
Atlantic provinces
British Columbia4
Ontario4
Prairies4
Québec
Total Canada
United States
Carolinas (North and South)
Florida
New England5
New Jersey
New York
Pennsylvania
Other6
Total United States
Total excluding other loans
Other loans
Total Stage 3 provision for loan losses (impaired)
(Counterparty-specific and individually insignificant
provision under IAS 39)
Stage 1 and 2 provision for loan losses
(incurred but not identified provision under IAS 39)
Total provision for loan losses
Provision for loan losses as a % of average
net loans and acceptances6
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 Stage 3 provision for loan losses (impaired)
counterparty-specific and individually insignificant
provision (under IAS 39)
Stage 1 and 2 provision for loan losses
$
74
106
361
262
122
925
54
93
148
107
142
51
672
1,267
2,192
(26)
$
75
109
374
258
150
966
42
77
112
95
143
52
543
1,064
2,030
(40)
$
69
120
400
310
149
1,048
33
53
112
81
98
41
428
846
1,894
(23)
3.0%
4.3
14.6
10.6
4.9
37.4
2.2
3.8
6.0
4.3
5.7
2.1
27.2
51.3
88.7
(1.1)
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)
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)
2,166
1,990
1,871
87.6
89.8
80.3
306
$ 2,472
226
$ 2,216
459
$ 2,330
12.4
100.0%
10.2
100.0%
19.7
100.0%
October 31
2018
October 31
2017
October 31
2016
0.01%
0.63
0.04
0.21
0.04
2.18
0.01
0.63
–
0.34
(4.97)
0.01%
0.73
0.04
0.24
0.03
1.92
–
0.55
–
0.34
(1.47)
0.34
0.33
0.01%
0.81
0.12
0.27
0.06
1.50
0.04
0.46
–
0.33
(0.84)
0.32
0.08
(Incurred but not identified provision under IAS 39)
0.05
0.04
Total provision for loan losses as a % of average
net loans and acceptances
0.39%
0.36%
0.40%
1 Primarily based on the geographic location of the customer’s address.
2 Includes loans that are measured at fair value through other comprehensive income.
3 Includes customers’ liability under acceptances.
4 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.
5 The states included in New England are as follows: Connecticut, Maine,
Massachusetts, New Hampshire, and Vermont.
6 Other includes PCL attributable to other states/regions including those outside
TD’s core U.S. geographic footprint.
NON-PRIME LOANS
As at October 31, 2018, the Bank had approximately $2.8 billion
(October 31, 2017 – $2.5 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
3.77% on an annual basis (October 31, 2017 – 5.25%), remaining at
cyclically low levels. These loans are recorded at amortized cost.
55
TD BANK GROUP ANNUAL REPORT 2018 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 7
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
Belgium
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
Belgium
Finland
France
Germany
Luxembourg
Netherlands
Norway
Sweden
Switzerland
United Kingdom
Other7
Total Rest of Europe
Total Europe
$
– $
– $
–
–
–
–
–
178
–
–
30
208
– $
1
197
–
56
254
– $
179
197
–
86
462
– $
–
17
–
–
17
– $
–
–
139
–
139
– $
3
268
56
61
388
–
3
285
195
61
544
$
– $
– $
26
–
1
23
50
22
–
–
522
544
– $
5
–
–
–
5
– $
53
–
1
545
599
–
235
482
196
692
1,605
October 31, 2018
–
67
12
263
660
486
–
146
110
579
2,520
1,822
1,106
2,181
933
–
424
396
509
1,141
362
121
362
54
–
522
235
997
2,127
2,164
2,872
9,262 11,379
–
531
3,346 16,164 22,097
6,447
$ 6,447 $ 3,168 $ 1,330 $ 10,945 $ 2,604 $ 3,485 $ 16,552 $ 22,641
7
488
141
1,226
1,670
99
1,409
159
162
1,144
3,973
5
1,076 10,483
–
–
141
514
354
–
706
33
67
58
1,082
5
2,960
9
140
–
77
443
28
273
20
–
37
1,558
2
2,587
7
225
–
133
210
99
194
5
95
89
19
–
46
34
36
621
805
–
506
288
287
–
559
164
365
–
40
–
122
240
3
44
24
15
39
336
–
2
–
176
63
–
265
630
644
25
2,429
66
1,008
1,082
1,008
94
1,284
136
1,071
1,358
1,071
5,613
5,911
9,657
7,779
8,082 11,933
–
526
3,717
6,576
426
1,601
1,548
2,891
–
3,372
857
3,622 18,974
395
997
4,300 27,671 60,251
863 22,508
$ 913 $ 23,052 $ 4,305 $ 28,270 $ 61,856
3
4,026
1,080
2,207
64
461
–
$
– $
– $
–
–
–
–
–
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
24
–
220
258
41
6
3,202
602
2,193
1,259
1,173
–
1,370
548
355
–
606
–
635
975
9,086 10,502
2,511
313
–
6,159
20,634
$ 6,159 $ 4,917 $ 739 $ 11,815 $ 1,948 $ 3,688 $ 15,337 $ 20,973
11
23
40
604
901
–
727
311
361
–
580
130
3,688
–
–
134
636
522
–
339
67
105
58
2,784
5
4,650
12
188
–
66
419
35
320
22
–
34
836
5
1,937
–
258
141
1,355
1,809
–
1,048
71
227
1,075
5,315
5
11,304
–
–
1
117
28
–
161
4
122
42
20
–
495
1
9
1
2,532
873
1,138
323
22
245
601
178
15,009
–
42
–
78
233
6
72
1
5
55
269
51
–
–
275
45
–
313
457
788
59
1,744
11
1,073
90
1,066
5,337
7,568
–
4,109
327
1,189
–
2,082
282
23,123
1,148
1,124
610
132
1,066
1,248
5,690 10,247
7,846 11,848
1,179
6,912
1,211
2,815
1,824
4,095 19,912
611
–
761
3,743 27,627 59,565
$ 806 $ 24,435 $ 3,748 $ 28,989 $ 61,777
6
4,494
785
1,982
114
293
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 of October 31, 2017 and October 31, 2018.
3 Exposures are calculated on a fair value basis and are net of collateral. Total market
value of pledged collateral is $0.4 billion (October 31, 2017 – $1.5 billion) for GIIPS
and $66 billion (October 31, 2017 – $67.4 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.
5 The fair values of the GIIPS exposures in Level 3 in the trading and investment
portfolio were not significant as at October 31, 2018, and October 31, 2017.
6 The reported exposures do not include $0.2 billion of protection the Bank
purchased through credit default swaps (October 31, 2017 – $0.2 billion).
7 Other European exposure is distributed across 9 countries (October 31, 2017 –
8 countries), each of which has a net exposure including loans and commitments,
derivatives, repos and securities lending, and trading and investment portfolio
below $1 billion as at October 31, 2018.
Of the Bank’s European exposure, approximately 96%
(October 31, 2017 – 96%) is to counterparties in countries rated AA
or better by either Moody’s Investor Services (Moody’s) or Aa3 or
better by 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 AA 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.
56
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
In addition to the European exposure identified above, the Bank
also has $11.2 billion (October 31, 2017 – $9.5 billion) of exposure
to supranational entities with European sponsorship and $1.0 billion
(October 31, 2017 – $2.3 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
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.
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 assets2,3
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 ratio4
2018
2017
$ 21,267
46,145
6,639
74,051
$ 20,967
40,489
8,006
69,462
(19,285)
(2,236)
(317)
2,568
(953)
(115)
(113)
(123)
(1,088)
(21,662)
52,389
4,996
2,455
245
7,696
(18,820)
(2,310)
(113)
506
(805)
(73)
(13)
–
(1,206)
(22,834)
46,628
4,247
3,229
–
7,476
–
(1)
(350)
(350)
7,346
59,735
8,927
198
–
1,734
10,859
(352)
(353)
7,123
53,751
7,156
2,648
–
1,668
11,472
–
(25)
(160)
(160)
10,699
$ 70,434
(160)
(185)
11,287
$ 65,038
$ 435,632
435,780
435,927
$ 435,750
435,750
435,750
12.0%
13.7
16.2
4.2
10.7%
12.3
14.9
3.9
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 2018, the scalars for inclusion of CVA for CET1,
Tier 1, and Total Capital RWA are 80%, 83%, and 86%, respectively. For fiscal
2017, the corresponding scalars were 72%, 77%, and 81%, respectively.
3 As at October 31, 2017, RWA for all ratios were the same due to the regulatory
floor which was based on Basel I risk weights. As at October 31, 2018, the
regulatory floor is based on Basel II standardized risk weights and is no longer
triggered resulting in a separate RWA for each ratio due to the CVA scalar.
4 The leverage ratio is calculated as Tier 1 Capital divided by leverage exposure,
as defined.
57
TD BANK GROUP ANNUAL REPORT 2018 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
The Treasury and Balance Sheet Management (TBSM) group 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 the Bank’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 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 regulatory
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 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
OSFI’s 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 2018,
the scalars for inclusion of the CVA for CET1, Tier 1, and Total Capital
RWA are 80%, 83%, and 86%, respectively. All of the above scalars
will increase to 100% in 2019 for the CET1, 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%, 6.0%, and 8.0%, 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 7.0%, 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 8.0%, 9.5%, and 11.5%, respectively.
58
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS At the discretion of OSFI, a common equity countercyclical capital
For accounting purposes, IFRS is followed for consolidation of
buffer (CCB) within a range of 0% to 2.5% may 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.
Effective November 1, 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 was capped at 1.25% of total RWA in the first quarter of
2017 and increases 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, 2018, 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, 2018.
On June 25, 2018, OSFI provided greater transparency related
to previously undisclosed Pillar 2 CET1 capital buffer through the
introduction of the public Domestic Stability Buffer (DSB). The DSB
is held by D-SIBs against Pillar 2 risks associated with systemic
vulnerabilities including, but not limited to: i) Canadian consumer
indebtedness; ii) asset imbalances in the Canadian market; and iii)
Canadian institutional indebtedness. The level of the buffer ranges
between 0% and 2.5% of total RWA and must be met with CET1
Capital. The current buffer is set at 1.5%, effectively raising the
CET1 target to 9.5%. At a minimum, OSFI will review the buffer
semi-annually and any changes will be made public. A breach of the
buffer will not automatically constrain capital distributions; however,
OSFI will require a remediation plan.
Effective in the second quarter of 2018, OSFI implemented a revised
methodology for calculating the regulatory capital floor. The revised
floor is based on the standardized approach (TSA), with the floor factor
transitioned in over three quarters. The factor increased from 70% in
the second quarter of 2018, to 72.5% in the third quarter, and 75%
in the current quarter. The Bank is not constrained by the capital floor.
The leverage ratio is calculated as per OSFI’s Leverage Requirements
guideline and has a regulatory minimum requirement of 3.0%.
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 TSA for credit risk.
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, 2018, the Bank’s CET1, Tier 1, and Total Capital
ratios were 12.0%, 13.7%, and 16.2%, respectively. Compared with
the Bank’s CET1 Capital ratio of 10.7% at October 31, 2017, the CET1
Capital ratio, as at October 31, 2018, increased due to organic capital
growth, implementation of the revised regulatory capital floor in the
second quarter of 2018, actuarial gains on employee benefit plans
primarily due to an increase in discount rates, partially offset by RWA
growth across all segments, common shares repurchased, and the
impact of the U.S. tax reform.
As at October 31, 2018, the Bank’s leverage ratio was 4.2%.
Compared with the Bank’s leverage ratio of 3.9% at October 31, 2017,
the leverage ratio, as at October 31, 2018, increased as capital
generation and preferred share issuances were partially offset by
business growth in all segments.
Common Equity Tier 1 Capital
CET1 Capital was $52.4 billion as at October 31, 2018. 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 $518 million under the
dividend reinvestment plan and from stock option exercises.
Tier 1 and Tier 2 Capital
Tier 1 Capital was $60 billion as at October 31, 2018, consisting of
CET1 Capital and Additional Tier 1 Capital of $52 billion and $8 billion,
respectively. Tier 1 Capital management activities during the year
consisted of the issuance of $350 million non-cumulative Rate Reset
Preferred Shares, Series 18 and $400 million non-cumulative Rate
Reset Preferred Shares, Series 20, both of which included NVCC
Provisions to ensure loss absorbency at the point of non-viability;
and the redemption of Class A Preferred Shares Series S, Series T,
Series Y, and Series Z, totalling $500 million. On November 26, 2018,
TD Capital Trust III (Trust III) announced its intention to redeem
all of the outstanding TD Capital Trust III Securities – Series 2008
(TD CaTS III) on December 31, 2018.
Tier 2 Capital was $10 billion as at October 31, 2018. Tier 2 Capital
management activities during the year consisted of the issuance of
$1.75 billion 3.589% subordinated debentures due September 14, 2028,
which included NVCC Provisions to ensure loss absorbency at the point
of non-viability, the redemption of $650 million 5.828% subordinated
debentures due July 9, 2023, and the redemption of $1.8 billion 5.763%
subordinated debentures due December 18, 2106.
59
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 TBSM 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. TBSM 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, 2018, the quarterly dividend was $0.67 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 $2.61 per share (2017 – $2.35). For cash dividends payable on
the Bank’s preferred shares, refer to Note 21 of the 2018 Consolidated
Financial Statements. As at October 31, 2018, 1,828 million common
shares were outstanding (2017 – 1,840 million). The Bank’s ability to
pay dividends is subject to the requirements of the Bank Act and OSFI.
Refer to Note 21 of the 2018 Consolidated Financial Statements for
further information on dividend restrictions.
NORMAL COURSE ISSUER BID
As approved by the Board on November 28, 2018, the Bank
announced its intention to amend its normal course issuer bid (NCIB)
for up to an additional 20 million of its common shares, subject to the
approval of OSFI and the Toronto Stock Exchange (TSX). The timing
and amount of any purchases under the program are subject to
regulatory approvals and to management discretion based on factors
such as market conditions and capital adequacy.
On April 19, 2018, the Bank announced that the TSX and OSFI
approved the Bank’s previously announced NCIB to repurchase for
cancellation up to 20 million of the Bank’s common shares. During
the year ended October 31, 2018, the Bank repurchased 20 million
common shares under its NCIB at an average price of $75.07 per
share for a total amount of $1.5 billion.
The Bank had repurchased 22.98 million common shares under
its previous NCIB announced in March 2017, as amended in
September 2017, at an average price of $60.78 per share for a total
amount of $1.4 billion.
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 ASSETS1,2
(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
2017
2018
$ 31,280 $ 30,500
19,432
45,300
29,276
44,564
182,685 168,119
7,618
8,275
14,442
805
8,370
9,001
13,142
1,173
319,491 294,491
8,615
10,189
40,364
36,687
370,044 339,793
14,020
13,213
48,392
52,375
–
33,545
$ 435,632 $ 435,750
1 Each capital ratio has its own RWA measure due to the OSFI-prescribed scalar
for inclusion of the CVA. For fiscal 2018, the scalars for inclusion of CVA for
CET1, Tier 1 and Total Capital RWA are 80%, 83%, and 86%, respectively.
For fiscal 2017, the scalars were 72%, 77%, and 81%, respectively.
2 As at October 31, 2017, RWA for all ratios were the same due to the regulatory
floor which was based on Basel I risk weights. As at October 31, 2018, the
regulatory floor is based on Basel II standardized risk weights and is no longer
triggered resulting in a separate RWA for each ratio due to the CVA.
60
TD BANK GROUP ANNUAL REPORT 2018 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, 2018. 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 (%)
Credit Risk
Market Risk
Operational Risk
Other Risks
65%
9%
9%
17%
TD Bank Group
CET1 RWA1
$ 370,044
Credit Risk:
Market Risk:
$ 13,213
Operational Risk: $ 52,375
Corporate
Canadian Retail
U.S. Retail2
Wholesale Banking
• Global Markets
• Corporate and
Investment Banking
• Other
• Treasury and Balance
Sheet Management
• Other Control Functions
• Personal Deposits
• Consumer Lending
• Credit Cards Services
• Auto Finance
• Commercial Banking
• Small Business Banking
• Advice-based
Wealth Business
• Asset Management
• TD Ameritrade
• Personal Deposits
• Consumer Lending
• Real Estate Secured Lending
• Credit Cards and
Merchant Solutions
• Auto Finance
• Commercial Banking
• Small Business Banking
• Direct Investing
• Advice-based
Wealth Business
• Asset Management
• Property and
Casualty Insurance
• Life and Health Insurance
Economic Capital (%)
Credit Risk
Market Risk
Operational Risk
Other Risks
73%
5%
6%
16%
Credit Risk
Market Risk
Operational Risk
Other Risks
59%
9%
11%
21%
Credit Risk
Market Risk
Operational Risk
Other Risks
75%
11%
8%
6%
Credit Risk
Market Risk
Operational Risk
Other Risks
28%
38%
13%
21%
CET1 RWA1
$ 98,753
Credit Risk
Market Risk
–
$
Operational Risk $ 9,773
$ 214,395
Credit Risk
Market Risk
–
$
Operational Risk $ 29,260
$ 48,689
Credit Risk
Market Risk
$ 13,213
Operational Risk $ 8,202
$ 8,207
Credit Risk
Market Risk
–
$
Operational Risk $ 5,140
1 Amounts are in millions of Canadian dollars
2 U.S. Retail includes TD Ameritrade in Other Risks for Economic Capital
61
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS Preferred shares Series 1, 3, 5, 7, 9, 11, 12, 14, 16, 18, and 20 include
NVCC provisions. If a NVCC trigger event were to occur, the maximum
number of common shares that could be issued, assuming there are
no declared and unpaid dividends on the respective series of preferred
shares at the time of conversion, would be 1.0 billion in aggregate.
For NVCC subordinated notes and debentures, if a NVCC trigger
event were to occur, the maximum number of common shares that
could be issued, assuming there is no accrued and unpaid interest on the
respective subordinated notes and debentures, would be 2,550 million
in aggregate. The following subordinated debentures contain NVCC
provisions: the 2.692% subordinated debentures due June 24, 2025,
2.982% subordinated debentures due September 30, 2025, 3.589%
subordinated debentures due September 14, 2028, 3.224%
subordinated debentures due July 25, 2029, 4.859% subordinated
debentures due March 4, 2031, and the 3.625% subordinated
debentures due September 15, 2031. Refer to Note 19 of the Bank’s
2018 Consolidated Financial Statements for additional details.
Future Regulatory Capital Developments
In October 2018, OSFI released the final revised CAR guideline for
implementation in the first quarter of 2019. The main revisions relate
to the domestic implementation of TSA to counterparty credit risk
(SA-CCR), capital requirements for bank exposures to central
counterparties, as well as revisions to the securitization framework.
SA-CCR includes a comprehensive, non-modelled approach for
measuring counterparty credit risk of derivatives and long settlement
transactions. The guideline allows a scalar of 0.7 to be applied to
SA-CCR exposures that impact the CVA risk capital charge from the
first quarter of 2019 to the fourth quarter of 2021. The revised
securitization framework includes a revised hierarchy to determine
capital treatment, and preferential capital treatment for transactions
that meet the simple, transparent, and comparable criteria. Upon
implementation, the securitization framework allows grandfathering
of the current capital treatment, for one year, through an adjustment
to risk-weighted assets that effectively eliminates the initial impact of
implementation of the revisions.
In October 2018, OSFI released the final Leverage Requirements
guideline, and in November 2019, OSFI issued the final Leverage Ratio
Disclosure Requirements. The revisions align the leverage requirements
and disclosures to changes made to the CAR guideline, and are
effective in the first quarter of 2019.
In October 2018, BCBS issued a consultative document seeking
views on whether a targeted and limited revision to the treatment
of client cleared derivatives in the calculation of the leverage ratio
exposure measure may be warranted. The BCBS is also seeking views
on the merits of introducing a requirement for initial margin, that
is eligible for offsetting client cleared derivative exposure, be subject
to segregation criteria.
In August 2018, OSFI provided notification to the Bank setting a
supervisory target Total Loss Absorbing Capacity (TLAC) ratio at 23.0%
of RWA, inclusive of the DSB, and the minimum TLAC leverage ratio at
6.75%. This is pursuant to the final guideline on TLAC issued by OSFI in
April 2018. Beginning the first quarter of 2022, D-SIBs will be expected
to meet the supervisory target TLAC requirements. Investments in TLAC
issued by global systemically important banks (G-SIBs) or Canadian
D-SIBs may be required to be deducted from capital.
T A B L E 4 0
EQUITY AND OTHER SECURITIES1
(millions of shares/units, except as noted)
Common shares outstanding
Treasury shares – common
Total common shares
Stock options
Vested
Non-vested
Preferred shares – Class A
Series S2
Series T3
Series Y4
Series Z5
Series 1
Series 3
Series 5
Series 7
Series 9
Series 11
Series 12
Series 14
Series 16
Series 186
Series 207
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 20088
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
2017
2018
Number of Number of
shares/units shares/units
1,830.4 1,842.5
(2.9)
1,828.3 1,839.6
(2.1)
4.7
8.4
5.4
8.9
–
–
–
–
20.0
20.0
20.0
14.0
8.0
6.0
28.0
40.0
14.0
14.0
16.0
200.0
(0.3)
199.7
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
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 2018 Consolidated
Financial Statements.
2 On July 31, 2018, the Bank redeemed all of its 5.4 million outstanding Class A First
Preferred Shares, Series S (“Series S Shares”), at the redemption price of $25.00
per Series S Share, for total redemption costs of approximately $135 million.
3 On July 31, 2018, the Bank redeemed all of its 4.6 million outstanding Class A First
Preferred Shares, Series T (“Series T Shares”), at the redemption price of $25.00
per Series T Share, for total redemption costs of approximately $115 million.
4 On October 31, 2018, the Bank redeemed all of its 5.5 million outstanding Class A
First Preferred Shares, Series Y (“Series Y Shares”), at a redemption price of $25.00
per Series Y Share, for total redemption costs of approximately $137 million.
5 On October 31, 2018, the Bank redeemed all of its 4.5 million outstanding Class A
First Preferred Shares, Series Z (“Series Z Shares”), at a redemption price of $25.00
per Series Z Share, for total redemption costs of approximately $113 million.
6 Non-Cumulative 5-Year Rate Reset Preferred Shares (NVCC), Series 18 (the “Series 18
Shares”) issued by the Bank on March 14, 2018, at a price of $25 per share, with
quarterly non-cumulative cash dividends on these shares, if declared, payable at a per
annum rate of 4.7% for the initial period ending April 30, 2023. Thereafter, the
dividend rate will reset every five years equal to the then five-year Government of
Canada bond yield plus 2.7%. Holders of these shares will have the right to convert
their shares into non-cumulative NVCC Floating Rate Preferred Shares, Series 19,
subject to certain conditions, on April 30, 2023, and on April 30 every five years
thereafter. Holders of the Series 19 Shares will be entitled to receive quarterly
floating rate dividends, if declared, at a rate equal to the three-month Government
of Canada Treasury Bill yield plus 2.7%. The Series 18 Shares are redeemable by
the Bank, subject to regulatory consent, at $25 per share on April 30, 2023, and
on April 30 every five years thereafter.
7 Non-Cumulative 5-Year Rate Reset Preferred Shares (NVCC), Series 20 (the “Series 20
Shares”) issued by the Bank on September 13, 2018, at a price of $25 per share,
with quarterly non-cumulative cash dividends on these shares, if declared, payable
at a per annum rate of 4.75% for the initial period ending October 31, 2023.
Thereafter, the dividend rate will reset every five years equal to the then five-year
Government of Canada bond yield plus 2.59%. Holders of these shares will have
the right to convert their shares into non-cumulative NVCC Floating Rate Preferred
Shares, Series 21, subject to certain conditions, on October 31, 2023, and on
October 31 every five years thereafter. Holders of the Series 21 Shares will be
entitled to receive quarterly floating rate dividends, if declared, at a rate equal to the
three-month Government of Canada Treasury Bill yield plus 2.59%. The Series 20
Shares are redeemable by the Bank, subject to regulatory consent, at $25 per share
on October 31, 2023, and on October 31 every five years thereafter.
8 On November 26, 2018, Trust III announced its intention to redeem all of the
outstanding TD CaTS III on December 31, 2018.
62
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
In July 2018, OSFI released a discussion paper on the proposed
implementation of the Basel III reforms for public consultation.
The discussion paper sets out OSFI’s proposed policy direction and
timelines for domestic implementation. The BCBS issued the finalized
Basel III reforms in December 2017. The reforms include: i) a revised
internal ratings-based approach for credit risk where the use of the
internal models are constrained by placing limits on certain inputs and
the option to use AIRB for certain asset classes has been removed;
ii) a revised standardized approach for credit risk that is more granular
and risk-sensitive; iii) replacement of the CVA framework with new
standardized and basic approaches; iv) streamlining the existing
operational risk framework to a risk-sensitive standardized approach
which will replace existing methodologies; v) revisions to the
measurement of the leverage ratio and introduction of a leverage
ratio buffer for G-SIBs; vi) the implementation of the adoption of the
minimum capital requirements for market risk (Fundamental Review
of the Trading Book); and vii) an aggregate output floor based on the
revised Basel III standardized approaches. The reforms are effective the
first quarter of 2022, with the standardized output floor having an
added five-year phased implementation period until 2027.
In May 2018 OSFI issued final guidelines on TLAC Disclosure
Requirements and Capital Disclosure Requirements. Together, these
guidelines set out the TLAC disclosure requirements for Canadian D-SIBs.
The disclosure requirements are effective in the first quarter of 2019.
In March 2018, BCBS issued a consultative document on revisions
to the minimum capital requirements for market risk. The key aspects
of the proposal include changes to the measurement of TSA, and
recalibration of standardized approach risk weights for general interest
rate risk, equity risk, and foreign exchange risk. The proposal also
includes revisions to the assessment process to determine whether
internal risk management models appropriately reflect the risks of
trading desks.
In February 2018, BCBS issued a consultative document “Pillar 3
disclosure requirements – updated framework”. Proposed disclosure
changes arising from the finalization of the Basel III reforms include
credit risk, operational risk, the leverage ratio, key metrics, and
benchmarking RWA internal model outcomes. The proposal also
contains new disclosure requirements on asset encumbrance and
capital distribution constraints. The proposal seeks views on the
scope of application of the disclosure requirement on the composition
of regulatory capital that was introduced in the final standard on
Phase 2 of the Pillar 3 Disclosure Requirements. Together with the first
phase and second phase of the revised Pillar 3 disclosure requirements,
the proposed disclosure requirements would comprise the single
Pillar 3 framework.
In December 2017, BCBS issued a discussion paper on the
regulatory treatment of sovereign exposures. The purpose of the
discussion paper is to seek views of stakeholders to inform the BCBS
analysis on the treatment of sovereign exposures. The discussion
paper clarifies the definitions of different sovereign entities, addresses
inherent sovereign risk, and presents various ideas related to the
treatment of sovereign exposures. The BCBS has not reached a
consensus on the changes to the treatment of sovereign exposures
and has therefore not issued a consultative document at this time.
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.
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.
Global Systemically Important Banks Disclosures
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 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. The update also provided clarity on the public
disclosure requirements of the twelve indicators used in the assessment
methodology. As per OSFI’s revised Advisory issued September 2015,
the Canadian banks that have been designated as D-SIBs are also
required by OSFI to publish, at a minimum, the twelve indicators used
in the G-SIB indicator-based assessment framework. Public disclosure
of financial year-end data is required annually, no later than the date
of a bank’s first quarter public disclosure of shareholder financial data
in the following year.
In July 2018, BCBS issued a revised G-SIB framework; G-SIBs: revised
assessment methodology and the higher loss absorbency requirement.
The new assessment methodology introduces a trading volume indicator
and modifies the weights in the substitutability category, amends the
definition of cross-jurisdictional indicators, extends the scope of
consolidation to insurance subsidiaries, and provides further guidance
on bucket migration and associated loss absorbency surcharges. The
revised methodology is expected to be implemented in 2021.
Based on 2017 fiscal year indicators, the Bank was not designated
a G-SIB in November 2018. TD’s 2018 fiscal year indicators will be
included in the Bank’s first quarter of 2019 Report to Shareholders.
63
TD BANK GROUP ANNUAL REPORT 2018 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 2018 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 the mortgages 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 2018 Consolidated Financial
Statements for further information.
T A B L E 4 1
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
$ 22,516
–
–
–
$ 22,516
$ 22,733
–
–
–
$ 22,733
Carrying
value of
retained
interests
Securitized
assets
Securitized
assets
Carrying
value of
retained
interests
$ –
–
–
–
$ –
$ –
–
–
–
$ –
$
–
1,749
3,884
–
$ 5,633
$
–
2,481
3,354
–
$ 5,835
October 31, 2018
$ 818
–
–
1,206
$ 2,024
$ –
–
–
25
$ 25
October 31, 2017
$ 2,252
–
–
1,428
$ 3,680
$ –
–
–
32
$ 32
1 Includes all assets securitized by the Bank, irrespective of whether they are
on-balance or off-balance sheet for accounting purposes, except for securitizations
through U.S. government-sponsored entities.
2 In securitization transactions that the Bank has undertaken for its own assets
it has acted as an originating bank and retained securitization exposure from
a capital perspective.
Residential Mortgage Loans
The Bank securitizes residential mortgage loans through significant
unconsolidated SPEs and Canadian non-SPE third-parties. Residential
mortgage loans securitized by the Bank may give rise to full
derecognition of the financial assets depending on the individual
arrangement of each transaction. In instances where the Bank fully
derecognizes residential mortgage loans, the Bank may be exposed
to the risks of transferred loans through retained interests.
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, 2018, the SPE had
$2 billion of issued notes outstanding (October 31, 2017 – $2 billion).
As at October 31, 2018, the Bank’s maximum potential exposure to loss
for these conduits was $2 billion (October 31, 2017 – $2 billion) with
a fair value of $2 billion (October 31, 2017 – $2 billion).
64
TD BANK GROUP ANNUAL REPORT 2018 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, 2018, the Bank had $4 billion of securitized
credit card receivables outstanding (October 31, 2017 – $3 billion).
As at October 31, 2018, the consolidated SPE had US$3 billion variable
rate notes outstanding (October 31, 2017 – US$3 billion). The notes
are issued to third party investors and have a fair value of US$3 billion
as at October 31, 2018 (October 31, 2017 – US$3 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 $10.4 billion as at
October 31, 2018 (October 31, 2017 – $13.2 billion). Further, as at
October 31, 2018, the Bank had committed to provide an additional
$2.8 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, 2017 – $2.9 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 2
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, 2018
October 31, 2017
As at
Exposure and
ratings profile of
unconsolidated
SPEs
AAA1
$ 6,002
3,803
413
143
$ 10,361
Expected
weighted-
average life
(years)2
2.9
1.5
1.5
2.5
2.3
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
As at October 31, 2018, the Bank held $0.3 billion of ABCP issued
by Bank-sponsored multi-seller conduits within the Trading loans,
securities, and other category on its Consolidated Balance Sheet
(October 31, 2017 – $1 billion).
control processes in place to mitigate these risks. Certain commitments
still remain off-balance sheet. Note 27 of the 2018 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 $3 billion as at October 31, 2018 (October 31, 2017 –
$1.5 billion). The assets within these conduits are comprised of individual
notes backed by automotive loan receivables, credit card receivables,
equipment receivables and trade receivables. As at October 31, 2018,
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
2018 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, 2018,
the Bank’s exposure to leveraged finance credit commitments, including
funded and unfunded amounts, was $24.5 billion (October 31, 2017 –
$22.7 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 2018 Consolidated Financial Statements
for further information.
65
TD BANK GROUP ANNUAL REPORT 2018 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 2018 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, 2018, other than as described in
the following sections and in Note 12 of the 2018 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 Agreement
The Bank is party to an IDA agreement with TD Ameritrade, pursuant
to which the Bank makes available to clients of TD Ameritrade,
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 fees of $1.9 billion in 2018 (2017 – $1.5 billion; 2016 –
$1.2 billion) to TD Ameritrade related to deposit accounts. The amount
paid by the Bank is based on the average insured deposit balance
of $140 billion in 2018 (2017 – $124 billion; 2016 – $112 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, with the balance tied to 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, 2018, amounts receivable from TD Ameritrade were
$137 million (October 31, 2017 – $68 million). As at October 31, 2018,
amounts payable to TD Ameritrade were $174 million (October 31, 2017 –
$167 million).
The Bank and other financial institutions provided TD Ameritrade
with unsecured revolving loan facilities. The total commitment
provided by the Bank was $338 million, which was undrawn as at
October 31, 2018, and October 31, 2017.
(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, 2018, the Bank paid $86 million (October 31, 2017 –
$93 million; October 31, 2016 – $97 million) for these services. As at
October 31, 2018, the amount payable to Symcor was $14 million
(October 31, 2017 – $15 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, 2018, and October 31, 2017.
66
TD BANK GROUP ANNUAL REPORT 2018 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, non-trading financial instruments at fair value
through profit or loss, financial instruments designated at fair value
through profit or loss, financial assets at fair value through other
comprehensive income, and all derivatives are measured at fair value
in the Bank’s Consolidated Financial Statements. Debt Securities at
amortized cost, loans, 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
Judgments, 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, evolving consumer trends
and business models, 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.
Executing on Long-Term Strategies and Shorter-Term Key
Strategic Priorities
The Bank has a number of strategies and priorities, 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 the Bank 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 2019”, “Focus for 2019”, 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 successfully executed, there could be an impact on the Bank’s
operations and financial performance and the Bank’s earnings could
grow more slowly or decline.
67
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS Technology and Cyber Security Risk
Technology and cyber 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 the Bank, continue to
be subject to cyber-attacks, and may be subject to disruption of
services, breaches or other compromises. Although the Bank has not
experienced any material financial losses relating to technology failure,
cyber-attacks or security breaches, there is no assurance that the Bank
will not experience loss or damage in the future. 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, any of which could
result in the fraudulent use or theft of data or amounts that customers
hold with the Bank. Attempts to fraudulently induce employees,
customers, third party service providers or other users of the Bank’s
systems will likely continue, in an effort to obtain sensitive information
and gain access to the Bank’s or its customers’ data or amounts that
the Bank holds or that its customers hold with the Bank. 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
cyber security risks through enterprise-wide programs, using industry
leading practices, and robust threat and vulnerability assessments
and responses. The Bank continues to make investments to mature
its cyber defences in accordance with industry accepted standards
and practices to enable rapid detection and response to internal and
external cyber incidents. It is possible that the Bank, or those with
whom the Bank does business, may not anticipate or implement
effective measures against all such cyber 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, and the Bank’s cyber insurance purchased
to mitigate risk may not be sufficient to materially cover against all
financial losses. As such, with any attack, breach, disruption 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. If the Bank were
to experience such an incident, it may take a significant amount of
time and effort to investigate the incident to obtain full and reliable
information necessary to assess the impact.
Evolution of Fraud and Criminal Behaviour
As a financial institution, the Bank 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 methods which could
be subject to fraud. In addition to the risk of material loss (financial
loss, misappropriation of confidential information or other assets of
the Bank or its customers and counterparties) 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 impacted. The Bank 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.
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
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, cyber-attacks or other criminal or terrorist
acts, 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
68
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS reputation. The global anti-money laundering and economic sanctions
landscape continues to experience regulatory change, with significant,
complex new laws and regulations anticipated to come into force
in the jurisdictions in which the Bank does business in the short-
and medium-term. In addition, the global privacy landscape has
and continues to experience regulatory change, with significant
new legislation having recently been implemented in some of the
jurisdictions in which the Bank does business and additional new
legislation that is anticipated to come into force in the 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.
In addition, the Canadian Securities Administrators has proposed
regulations relating to over-the-counter derivatives reform. The Bank
is closely monitoring this regulatory initiative which, if implemented,
could result in increased compliance costs, and compliance with these
standards may impact the Bank’s businesses, operations and results.
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, open
banking, and consumer protection. In addition, changes relating to
interchange in Canada, which will become effective May 2020, may
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 enacted on July 21, 2010, 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 so-called “Volcker Rule”, which generally
restricts banking entities from engaging in proprietary trading and
from sponsoring or holding ownership interests in or having certain
relationships with certain hedge funds and private equity funds; requires
capital planning and stress testing requirements for our top-tier U.S.
bank holding company; requires stress testing for TD Bank, N.A.; and
establishes various “enhanced prudential standards” as adopted by the
Federal Reserve including the requirement to establish a separately
capitalized top-tier U.S. intermediate holding company (IHC) to hold,
subject to limited exceptions, the ownership interests in all U.S.
subsidiaries including the Bank’s investment in TD Ameritrade
Holding Corporation. The Bank has incurred, and will continue to
incur, operational, capital, liquidity, and compliance costs, and
compliance with these standards may impact the Bank’s businesses,
operations, and results in the U.S. and overall.
The current U.S. regulatory environment for banking organizations
may be impacted by recent and future legislative or regulatory
developments. For example, the recently enacted Economic Growth,
Regulatory Relief and Consumer Protection Act (Reform Act) included
modifications to the Volcker Rule, testing and other aspects of
Dodd-Frank. The applicable U.S. Federal regulatory agencies have also
proposed regulatory amendments to certain of these requirements,
including with respect to the Volcker Rule regulations and capital
planning and stress testing requirements. The ultimate consequences
of these developments and their impact on the Bank remain uncertain,
and it remains unclear whether any other legislative or regulatory
proposals relating to these requirements will be enacted or adopted.
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 D-SIBs, which include the Bank, was approved. On April 18,
2018, the Government of Canada (GOC) published regulations under
the CDIC Act and the Bank Act providing the final details of conversion
and issuance regimes for bail-in instruments issued by D-SIBs
(collectively, the Bail-in Regulations). The Bail-in Regulations came into
force on September 23, 2018.
Pursuant to the CDIC Act, 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 CDIC Act, the conversion powers of CDIC would
not apply to shares and liabilities issued or originated before
September 23, 2018 (the date on which the Bail-in Regulations came
into force) unless, on or after such date, they are amended or in the
case of liabilities, their term is extended.
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, ISIN, or similar identification number would be
subject to a Bail-in Conversion. Shares, other than common shares,
and subordinated debt, that are not NVCC instruments, would also
be subject to a Bail-in Conversion. 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.
The 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
the Bank 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 fines and penalties when
compliance breaches occur. The Bank 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 the Bank 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.
69
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS 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
acquisition can be influenced by many factors, including the Bank’s
reputation as well as the pricing, market differentiation, and overall
customer experience of our products and services. Enhanced
competition from incumbents and new entrants may impact the Bank’s
pricing of products and services and may cause us to lose revenue and/
or market share. Increased competition requires 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 and emerging competitors, which could include the domestic
institutions in jurisdictions outside of Canada or non-traditional
providers (such as Fintech, big technology competitors) 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 compete with banks in offering digital financial
solutions (primarily mobile or web-based services), without facing the
same regulatory requirements or oversight. These evolving distribution
methods 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. To mitigate these effects, stakeholders
across each of the business segments constantly seek to understand
emerging technologies and trends. This includes monitoring the
competitive environment in which they operate and reviewing or
amending their customer acquisition, management, and retention
strategies as appropriate and building optionality and flexibility into
the products and services offered to keep pace with evolving customer
expectations. The Bank is committed to investing in differentiated and
personalized experiences for our customers, putting a particular
emphasis on mobile technologies, enabling customers to transact
seamlessly across their preferred channels. To keep pace with customer
expectations, the Bank considers all various options to accelerate
innovation, including making strategic investments in innovative
companies, exploring partnership opportunities, and experimenting
with new technologies and concepts internally.
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
often 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 2018 Consolidated Financial Statements.
Acquisitions
The Bank regularly explores opportunities to acquire other companies,
or parts of their businesses, directly or indirectly through the acquisition
strategies of its subsidiaries. The Bank undertakes due diligence before
completing an acquisition and closely monitors integration activities
and performance post acquisition. However, 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. If the Bank does
not achieve its financial or strategic objectives of an acquisition, or if
the Bank does not successfully complete an acquisition, 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 is dependent on the availability of
qualified talent and the Bank’s ability to attract, develop, and retain it.
The Bank’s management understands that the competition for talent
continues to increase across geographies, industries, and emerging
capabilities in the financial services sector. As a result, the Bank
undertakes an annual resource planning process that assesses critical
capability requirements for all areas of the business each year. Through
this process, an assessment of current executive leadership, technical
and core capabilities, as well as talent development opportunities is
completed against both near term and future business needs. The
outcomes from the process inform plans at both the enterprise and
business level to retain, develop, or acquire the talent which are then
actioned throughout the course of the year. In addition to the resource
planning process, the Bank has initiated an enterprise level critical
capability and capacity planning process with the objective of
improving the organization’s ability to forecast talent demand and
workforce scenarios. The outcomes of this process are coupled with
resource planning to further define broader capability and talent
investments. 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.
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.
70
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS IBOR Transition
Following the announcement by the U.K. Financial Conduct Authority
(FCA) on July 27, 2017, indicating that the FCA would no longer
compel banks to submit rates for the calculation of the LIBOR post
December 31, 2021, efforts to transition away from interbank offered
rate (IBOR) benchmarks to alternative reference rates have been
continuing in various jurisdictions. These developments, and the related
uncertainty over the potential variance in the timing and manner of
implementation in each jurisdiction, introduce risks that may have
adverse consequences on the Bank, its clients and the financial services
industry. As the Bank has significant contractual rights and obligations
referenced to IBOR benchmarks, discontinuance of, or changes to,
benchmark rates could adversely affect our business and results of
operations. The Bank is evaluating the impact on its products, services,
systems and processes with the intention of minimizing the impact
through appropriate mitigating actions.
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 2018 Consolidated Financial Statements.
RISK FACTORS AND MANAGEMENT
Managing Risk
EXECUTIVE SUMMARY
Growing profitability in financial results based on balanced revenue,
expense and capital growth services involves selectively taking and
managing risks within the Bank’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 its businesses
to meet its future strategic objectives.
The Bank’s Enterprise Risk Framework (ERF) reinforces the Bank’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 the Bank’s risk appetite.
RISKS INVOLVED IN TD’S BUSINESSES
The Bank’s Risk Inventory sets out the Bank’s 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. The Bank’s major risk categories are:
Strategic Risk; Credit Risk; Market Risk; Operational Risk; Model Risk;
Insurance Risk; Liquidity Risk; Capital Adequacy Risk; Legal, Regulatory
Compliance and Conduct 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,
Regulatory
Compliance
and Conduct
Risk
Reputational
Risk
RISK APPETITE
The Bank’s RAS is the primary means used to communicate how
the Bank views risk and determines the type and amount of risk it is
willing to take to deliver on its strategy and enhance shareholder value.
In defining its risk appetite, the Bank takes into account its vision,
purpose, strategy, shared commitments, risk philosophy, and capacity
to bear risk. The core risk principles for the Bank’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.
The Bank 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. The Bank’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 the Bank’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
the Bank’s RAS measures.
RISK CULTURE
The Bank’s risk culture starts with the “tone at the top” set by the
Board, Chief Executive Officer (CEO), and the Senior Executive Team
(SET), and is supported by its 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. The Bank’s
71
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS risk culture promotes accountability, learning from past experiences, and
encourages open communication and transparency on all aspects of risk
taking. The Bank’s 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 the Bank’s risk culture.
The Bank’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 Bank 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. The Bank’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.
In addition, governance, risk, and oversight functions operate
independently from business segments supported by an organizational
structure that provides objective oversight and independent 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 the Bank’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 the Bank’s risk culture by increasing the knowledge and
understanding of the Bank’s expectations for risk taking.
WHO MANAGES RISK
The Bank’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.
The Bank’s risk governance model includes a senior management
committee structure that is designed to support transparent risk
reporting and discussions. The Bank’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 the Bank’s long-term
direction which is then carried out by business segments within
the Bank’s risk appetite. 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
Canadian Retail
U.S. Retail
Wholesale Banking
Internal
Audit
Internal
Audit
72
TD BANK GROUP ANNUAL REPORT 2018 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, the Audit Committee and
Risk Committee, as well as the Human Resources and Corporate
Governance Committees. The Board reviews and approves the Bank’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 (GAML) group, Compliance group, and Internal Audit.
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, including a
code of conduct and ethics, aimed at fostering a healthy governance
culture at the Bank, and also acts as the conduct review committee
for the Bank, including providing oversight of conduct risk.
Chief Executive Officer and Senior Executive Team
The CEO and the SET develop and recommend to the Board the Bank’s
long-term strategic direction and also develop and recommend for
Board approval TD’s risk appetite. The SET members set the “tone at
the top” and manage risk in accordance with the Bank’s risk appetite
while considering 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 the Bank’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
(CFO), 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 the Bank’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 the Bank’s operational
risk profile.
• Disclosure Committee – chaired by the Group Head and CFO, 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 the Bank’s risk appetite
and monitors and reports on existing and emerging risks and
compliance with the Bank’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 the Bank’s risk appetite and manage risk within
approved risk limits.
Internal Audit
The Bank’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, ethics, and compliance throughout the Bank; delivering
independent regulatory compliance and conduct risk management and
oversight throughout the Bank globally to protect its reputation and
operate within its risk appetite; and assessing the adequacy of,
adherence to, and effectiveness of the Bank’s Regulatory Compliance
Management controls, enterprise-wide.
Global Anti-Money Laundering
The GAML Department is responsible for Anti-Money Laundering,
Anti-Terrorist Financing, Economic Sanctions, and anti-bribery/anti-
corruption regulatory compliance and prudential risk management
across the Bank in alignment with enterprise policies so that the
money laundering, terrorist financing, economic sanctions, and bribery/
corruption risks are appropriately identified and mitigated.
73
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS Treasury and Balance Sheet Management
The 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 the Bank’s non-trading banking 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
Risk Owner
Identify and Control
• Own, identify, manage, measure, and monitor current and emerging risks in day-to-day activities,
operations, products, and services.
• Design, implement, and maintain appropriate mitigating controls, and assess the design and
operating effectiveness of those controls.
Implement risk based approval processes for all new products, activities, processes, and systems.
• Assess activities to maintain compliance with applicable laws and regulations.
• Monitor and report on risk profile to ensure activities are within TD’s risk appetite and policies.
•
• Escalate risk issues and develop and implement action plans in a timely manner.
• Deliver training, tools, and advice to support its accountabilities.
• Promote a strong risk management culture.
Second Line
Risk Oversight
Set Standards and Challenge
• Establish and communicate enterprise governance, risk, and control strategies, frameworks,
and policies.
• Provide oversight and independent challenge to the first line through an effective objective
assessment, that is evidenced and documented where material, including:
– Challenge the quality and sufficiency of the first line’s risk activities;
– Identify and assess current and emerging risks and controls, using a risk-based approach,
as appropriate;
– Monitor the adequacy and effectiveness of internal control activities;
– Review and discuss assumptions, material risk decisions and outcomes; and
– Aggregate and share results across business lines and control areas to identify similar events,
patterns, or broad trends.
Identify and assess, and communicate relevant regulatory changes.
•
• Develop and implement risk measurement tools so that activities are within TD’s Risk Appetite.
• Monitor and report on compliance with TD’s Risk Appetite and policies.
• Escalate risk issues in a timely manner.
• Report on the risks of the Bank on an enterprise-wide and disaggregated level to the Board and/or
Senior Management, independently of the business lines or operational management.
• Provide training, tools, and advice to support the first line in carrying out its accountabilities.
• Promote a strong risk management culture.
Third Line
Internal Audit
Independent Assurance
• Verify independently that TD’s ERF is designed and 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, the Bank applies the following
principles in governing how it manages risks:
• Enterprise-Wide in Scope – Risk Management will span all areas
of the Bank, including third-party alliances and joint venture
undertakings to the extent they may impact the Bank, 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 the Bank’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
The Bank’s comprehensive and proactive approach to risk management
is comprised of four 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, the Bank’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.
74
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS Risk Measurement
The ability to quantify risks is a key component of the Bank’s risk
management process. The Bank’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 business segments and
corporate oversight functions to assess key risks and internal controls
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.
Risk Control
The Bank’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 its risk appetite and risk tolerances.
The Bank’s approach to risk control also includes risk and capital
assessments to appropriately capture key risks in its 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. The Bank’s 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
its 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. 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 the Bank 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. The Bank’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 the Bank’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 2018 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 the Bank’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 2018 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.
• Stress emanates from China where the authorities are unable to
contain the fallout from a series of major domestic debt defaults.
Financial support for state-owned banks and non-financial
enterprises is strained by limited fiscal resources, raising concerns
about fiscal sustainability and undermining investor confidence in
the Chinese economy. Property prices decline sharply, following
years of rapid growth and mounting household debt. To make
domestic debt payments and meet higher margin requirements
Chinese investors are forced to sell foreign assets, accentuating
the decline in global real estate prices.
• The financial turmoil in China spills over to countries with close
trade and financial linkages, and leads to a major downturn in
world commodity prices. Risk appetite retrenches and financial
markets worldwide are destabilized. Distress in international
financial markets and the deterioration in global growth prospects
reinforce the downward spiral in investor sentiment.
• Growing fiscal imbalances in the U.S. undermine confidence
in the U.S. dollar, raising the risk premium on Treasury bonds.
• 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.
75
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS 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, the Federal Reserve Board’s capital plan rule and
related Comprehensive Capital Analysis and Review (CCAR)
requirements for the holding company.
The Bank 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 the Bank
reaching the point of non-viability in order to consider meaningful
remedial actions for replenishing its capital and liquidity position.
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 CFO, is charged with developing the Bank’s overall
long-term strategy and shorter-term strategic priorities with input and
support from senior executives across the Bank.
Each member of the SET is responsible for establishing and
managing long-term strategy and shorter-term priorities for their areas
of responsibility (business and corporate function), and for ensuring
such strategies are aligned with the Bank’s overall long-term strategy
and short-term strategic priorities, and the enterprise 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 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 those risks
are managed.
The ERMC oversees the identification and monitoring of significant
and emerging risks related to the Bank’s strategies and seeks to ensure
that mitigating actions are taken where appropriate.
HOW TD MANAGES STRATEGIC RISK
The Bank’s enterprise-wide strategies and operating performance,
and the strategies and operating performance of significant business
segments and corporate functions, are assessed regularly by the CEO and
the members of the SET through an integrated financial and strategic
planning process, operating results reviews and strategic business plans.
The Bank’s annual integrated financial and strategic planning
process establishes enterprise and segment-level long-term and
shorter-term strategies, designs strategies to be consistent with
the risk appetite, evaluates concurrence among strategies, and
sets enterprise and segment-level strategic risk limits including
asset concentration limits.
Operating results reviews are conducted on a periodic basis during
the year to monitor segment-level performance against the integrated
financial and strategic plan. These reviews include an evaluation of the
long-term strategy and short-term strategic priorities of each business
segment, including but not limited to: the operating environment,
competitive position, performance assessment, initiatives for strategy
execution and key business risks. The frequency of the operating
results reviews depends on the risk profile and size of the business
segment or corporate function.
Strategic business plans are prepared at the business line-level;
business lines are subsets of business segments. The plans assess the
strategy for each business line, including but not limited to: mission,
current position, key operating trends, long-term strategy, target
metrics, key risks and mitigants, and alignment with enterprise strategy
and risk appetite. The frequency of preparation depends on the risk
profile and size of the business line.
The Bank’s strategic risk, and adherence to its risk appetite, is
reviewed by the ERMC in the normal course, as well as by the Board.
Additionally, material acquisitions are assessed for their 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.
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, 2018
and 2017. Effective November 1, 2017, the Bank adopted IFRS 9, which
replaces the guidance in IAS 39. The Bank continues to manage credit
risk using the existing framework as detailed in this section but applies
the IFRS 9 ECL model to measure and report allowance for credit losses
and provision for credit losses on in-scope financial assets. Refer to
Note 2 and Note 3 of the 2018 Consolidated Financial Statements for
a summary of the Bank’s accounting policies and significant accounting
judgments, estimates, and assumptions as it relates to IFRS 9.
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 report directly 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 its 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.
76
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 the Bank’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.
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 provide
for a diversified loan portfolio and to reduce the risk of undue
concentration. 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
assess whether internal 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 TSA 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 TSA 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, the Bank 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).
77
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 1994–2017,
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 judgment, 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.
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.
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:
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
Risk Assessment
Low Risk
Normal Risk
Medium Risk
High Risk
Default
78
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
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
judgment 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.
Credit Risk Exposures Subject to the Standardized Approach
Currently TSA 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 TSA, 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. The Bank 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 TSA:
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
the Bank. 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
ongoing stress testing to identify and quantify exposure to extreme
events. The Bank establishes various limits, including gross notional
limits, to manage business volumes and concentrations. It also 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.
79
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
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, 2018, after taking into account risk mitigation
strategies, the Bank 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.
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
the Bank’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.
80
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 3
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, 2018
As at
October 31, 2017
Standardized
AIRB
Total
Standardized
AIRB
Total
$
3,091
–
12,835
15,926
$ 371,450
112,388
80,513
564,351
$ 374,541
112,388
93,348
580,277
132,030
95,411
18,019
245,460
$ 261,386
346,751
136,951
110,295
593,997
$ 1,158,348
478,781
232,362
128,314
839,457
$ 1,419,734
$
5,862
–
19,011
24,873
125,621
91,567
18,195
235,383
$ 260,256
$ 349,749
93,527
75,566
518,842
$ 355,611
93,527
94,577
543,715
305,867
157,947
94,181
557,995
$ 1,076,837
431,488
249,514
112,376
793,378
$ 1,337,093
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
The Bank’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 TSA
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.
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 held in
trading positions due to adverse movements in market factors. These
market factors include interest rates, foreign exchange rates, equity
prices, commodity prices, credit spreads, and their respective volatilities.
Non-Trading Market Risk is the risk of loss on the balance sheet or
volatility in earnings from non-trading activities such as asset-liability
management or investments, due to adverse movements in market
factors. These market factors are predominantly interest rate, credit
spread, foreign exchange rates and equity prices.
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, 2018, using the Internal Models Approach.
81
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
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 4
MARKET RISK LINKAGE TO THE BALANCE SHEET1
(millions of Canadian dollars)
October 31, 2018
October 31, 2017
Balance
Trading Non-trading
sheet market risk market risk
Other
Balance
Trading
sheet market risk
Non-trading
market risk
Other
As at
Non-trading market
risk – primary
risk sensitivity
Assets subject to market risk
Interest-bearing deposits with banks
Trading loans, securities, and other
Non-trading financial assets at
fair value through profit or loss
$
30,720 $
729 $
127,897
125,437
29,991 $
2,460
4,015
–
4,015
– $
–
–
51,185 $
194 $
103,918 99,168
50,991 $
4,750
–
–
Interest rate
Interest rate
n/a
n/a
n/a
n/a
Derivatives
56,996
53,087
3,909
–
56,195 51,492
4,703
Financial assets designated at
fair value through profit or loss
Financial assets at fair value through
3,618
–
3,618
other comprehensive income
130,600
–
130,600
–
–
4,032
–
4,032
n/a
n/a
n/a
n/a
Available-for-sale securities
n/a
n/a
n/a
–
146,411
–
146,411
–
Debt securities at amortized cost,
net of allowance for credit losses
107,171
–
107,171
–
n/a
n/a
n/a
Held-to-maturity securities
n/a
n/a
n/a
–
71,363
–
71,363
n/a
–
Foreign exchange,
interest rate
Foreign exchange,
interest rate
Securities purchased under
reverse repurchase agreements
Loans, net of allowance for loan losses
Customers’ liability under acceptances
Investment in TD Ameritrade
Other assets2
Assets not exposed to market risk
Total Assets
Liabilities subject to market risk
Trading deposits
Derivatives
127,379
646,393
17,267
8,445
1,751
72,651
–
–
–
–
–
68,458
$ 1,334,903 $ 183,173 $ 1,079,079 $ 72,651 $ 1,278,995 $ 152,199 $ 1,058,338 $ 68,458
–
–
–
–
–
72,651
134,429
616,374
17,297
7,784
1,549
68,458
123,459
646,393
17,267
8,445
1,751
–
133,084
616,374
17,297
7,784
1,549
–
3,920
–
–
–
–
–
1,345
–
–
–
–
–
Interest rate
Interest rate
Interest rate
Equity
Interest rate
114,704
48,270
6,202
44,119
108,502
4,151
–
–
79,940
3,539
51,214 46,206
76,401
5,008
Securitization liabilities at fair value
Deposits
12,618
851,439
12,618
–
–
851,439
–
–
12,757 12,757
–
832,824
–
832,824
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 liabilities2
17,269
–
17,269
–
17,297
–
17,297
39,478
37,323
2,155
–
35,482 32,124
3,358
93,389
14,683
8,740
16,150
3,797
–
–
2
89,592
14,683
8,740
16,148
–
–
–
–
88,591
16,076
9,528
17,281
2,064
–
–
1
86,527
16,076
9,528
17,280
Liabilities and Equity not exposed
to market risk
Total Liabilities and Equity
118,163
118,005
$ 1,334,903 $ 104,061 $ 1,112,679 $ 118,163 $ 1,278,995 $ 96,691 $ 1,064,299 $ 118,005
118,163
118,005
–
–
–
–
1 Certain comparative amounts have been restated to conform with the presentation
adopted in the current period.
2 Relates to retirement benefits, insurance, and structured entity liabilities.
82
–
–
Equity,
foreign exchange,
interest rate
Equity,
foreign exchange,
interest rate
Interest rate
Equity,
foreign exchange,
interest rate
Foreign exchange,
interest rate
–
–
–
–
–
–
–
–
–
–
Interest rate
Equity
foreign exchange,
interest rate
Interest rate
Equity,
interest rate
Interest rate
Interest rate
Interest rate
Interest rate
Interest rate
Equity
Interest rate
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
MARKET RISK IN TRADING ACTIVITIES
The overall objective of the Bank’s trading businesses is to provide
wholesale banking services, including facilitation and liquidity, to
clients of the Bank. The Bank 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, 2018.
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 the Bank’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
The Bank computes total VaR on a daily basis by combining the
General Market Risk (GMR) and Idiosyncratic Debt Specific Risk (IDSR)
associated with its 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. Trading net revenue includes trading income and net interest
income related to positions within the Bank’s market risk capital
trading books. For the year ending October 31, 2018, there were
14 days of trading losses and trading net revenue was positive for
95% 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
$40
30
20
10
0
(10)
(20)
(30)
(40)
7
1
0
2
/
1
/
1
1
7
1
0
2
/
8
/
1
1
7
1
0
2
/
5
1
/
1
1
7
1
0
2
/
2
2
/
1
1
7
1
0
2
/
9
2
/
1
1
7
1
0
2
/
6
/
2
1
7
1
0
2
/
3
1
/
2
1
7
1
0
2
/
0
2
/
2
1
7
1
0
2
/
8
2
/
2
1
8
1
0
2
/
5
/
1
8
1
0
2
/
2
1
/
1
8
1
0
2
/
9
1
/
1
8
1
0
2
/
6
2
/
1
8
1
0
2
/
2
/
2
8
1
0
2
/
9
/
2
8
1
0
2
/
6
1
/
2
8
1
0
2
/
3
2
/
2
8
1
0
2
/
2
/
3
8
1
0
2
/
9
/
3
8
1
0
2
/
6
1
/
3
8
1
0
2
/
3
2
/
3
8
1
0
2
/
0
3
/
3
8
1
0
2
/
6
/
4
8
1
0
2
/
3
1
/
4
8
1
0
2
/
0
2
/
4
8
1
0
2
/
7
2
/
4
8
1
0
2
/
4
/
5
8
1
0
2
/
1
1
/
5
8
1
0
2
/
8
1
/
5
8
1
0
2
/
5
2
/
5
8
1
0
2
/
1
/
6
8
1
0
2
/
8
/
6
8
1
0
2
/
5
1
/
6
8
1
0
2
/
2
2
/
6
8
1
0
2
/
9
2
/
6
8
1
0
2
/
6
/
7
8
1
0
2
/
3
1
/
7
8
1
0
2
/
0
2
/
7
8
1
0
2
/
7
2
/
7
8
1
0
2
/
3
/
8
8
1
0
2
/
0
1
/
8
8
1
0
2
/
7
1
/
8
8
1
0
2
/
4
2
/
8
8
1
0
2
/
1
3
/
8
8
1
0
2
/
7
/
9
8
1
0
2
/
4
1
/
9
8
1
0
2
/
1
2
/
9
8
1
0
2
/
8
2
/
9
8
1
0
2
/
5
/
0
1
8
1
0
2
/
2
1
/
0
1
8
1
0
2
/
9
1
/
0
1
8
1
0
2
/
6
2
/
0
1
83
TD BANK GROUP ANNUAL REPORT 2018 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 2018, 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. The Bank 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 5
PORTFOLIO MARKET RISK MEASURES
(millions of Canadian dollars)
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)
As at Average
High
$ 14.2
17.2
6.1
8.7
3.0
17.2
(41.9)
24.5
54.2
237.1
$ 14.0
11.8
7.2
4.4
2.6
16.5
(32.7)
23.8
49.8
205.8
$ 25.7
18.2
12.9
8.7
6.8
22.4
n/m2
33.1
84.8
269.8
2018
Low
$ 5.3
7.7
4.0
2.2
1.3
11.3
n/m
16.9
28.8
156.2
As at
Average
High
$ 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/m
36.4
51.1
330.2
2017
Low
$ 6.2
6.0
5.8
2.2
0.7
10.1
n/m
15.1
28.1
171.3
1 The aggregate VaR is less than the sum of the VaR of the different risk types due
2 Not meaningful. It is not meaningful to compute a diversification effect because
to risk offsets resulting from portfolio diversification.
the high and low may occur on different days for different risk types.
Average VaR increased marginally year-over-year due to an increase
in debt specific risk driven by positions in financial bonds. Average
Stressed VaR increased year-over-year driven by an increase in the
U.S. interest rate risk 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
The average IRC decreased year-over-year driven by 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 verify 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
Risk Control Committee.
MARKET RISK IN OTHER WHOLESALE BANKING ACTIVITIES
The Bank is also exposed to market risk arising from a legacy portfolio
of bonds and preferred shares held in TD Securities and in its remaining
merchant banking investments. Risk Management reviews and
approves policies and procedures, which are established to monitor,
measure, and mitigate these risks.
Asset/Liability Management
Asset/liability management deals with managing the market risks of
TD’s traditional banking activities. 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
The TBSM group measures and manages the market risks of the Bank’s
non-trading banking activities, with oversight from the Asset/Liability
and Capital Committee, which is chaired by the Group Head and CFO,
and includes other senior executives. The Market Risk Control function
provides independent oversight, governance, and control over these
market risks. The Risk Committee periodically reviews and approves
key asset/liability management and non-trading market risk policies
and receives reports on compliance with approved risk limits.
84
TD BANK GROUP ANNUAL REPORT 2018 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” and impact the Bank’s earnings when
its interest-sensitive assets and liabilities reprice as interest rates
change and when there are: final maturities, normal amortizations,
or option exercises (such as prepayment, redemption, or conversion).
The Bank’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.
The Bank 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 judgment. 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 the Bank 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.
85
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 demand
deposit accounts.
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 – The Bank is exposed to equity risk through its
equity-linked guaranteed investment certificate product offering.
The exposure is managed by purchasing options to replicate the
equity payoff. 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 graph 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.
ALL INSTRUMENTS PORTFOLIO
Economic Value at Risk After Tax –
October 31, 2018 and October 31, 2017
(millions of Canadian dollars)
October 31, 2017
October 31, 2018
)
s
n
o
i
l
l
i
m
(
e
u
a
v
l
t
n
e
s
e
r
p
n
i
e
g
n
a
h
C
$150
50
(50)
(150)
(250)
(350)
(450)
(550)
October 31, 2017: $(235)
October 31, 2018: $(238)
(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, 2018, an immediate and sustained 100 bps increase in
interest rates would have decreased the economic value of shareholders’
equity by $238 million (October 31, 2017 – $235 million decrease)
after tax. An immediate and sustained 100 bps decrease in interest rates
would have increased the economic value of shareholders’ equity by
$2 million (October 31, 2017 – $225 million decrease) 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
the Bank has material exposure.
T A B L E 4 6
SENSITIVITY OF AFTER-TAX ECONOMIC VALUE AT RISK BY CURRENCY
(millions of Canadian dollars)
Currency
Canadian dollar
U.S. dollar
October 31, 2018
October 31, 2017
100 bps
increase
$ (41)
(197)
$ (238)
100 bps
decrease
$ (17)
19
$ 2
100 bps
increase
$
(24)
(211)
$ (235)
100 bps
decrease
$
(43)
(182)
$ (225)
For the NIIS measure (not shown on the graph), a 100 bps increase
in interest rates on October 31, 2018, would have decreased pre-tax
net interest income by $73 million (October 31, 2017 – $116 million
increase) in the next twelve months due to the mismatched
positions. A 100 bps decrease in interest rates on October 31, 2018,
would have decreased pre-tax net interest income by $114 million
(October 31, 2017 – $152 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.
86
TD BANK GROUP ANNUAL REPORT 2018 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 4 7
SENSITIVITY OF PRE-TAX NET INTEREST INCOME SENSITIVITY BY CURRENCY
(millions of Canadian dollars)
Currency
Canadian dollar
U.S. dollar
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. The Risk
Committee reviews and approves the Enterprise Investment Policy
that sets out limits for the Bank’s investment portfolio.
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 financial loss (direct or indirect), 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 2018, operational risk losses remain within the Bank’s risk
appetite. Refer to Note 27 of the 2018 Consolidated Financial Statements
for further information on material legal or regulatory actions.
October 31, 2018
October 31, 2017
100 bps
increase
$ (49)
(24)
$ (73)
100 bps
decrease
$ 49
(163)
$ (114)
100 bps
increase
$
(9)
125
$ 116
100 bps
decrease
$
9
(161)
$ (152)
WHY NET INTEREST MARGIN FLUCTUATES 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 options
granted to customers. This approach also creates margin certainty on
fixed rate loans and deposits as they are booked. Despite this approach
however, the Bank’s net interest margin on average earning assets is
subject to change over time for the following reasons:
• Differences in margins earned on new and renewing
fixed-rate products relative to the margin previously earned
on matured products;
• 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 to managing these factors tends to moderate
their impact over time, resulting in a more stable and predictable
earnings stream.
WHO MANAGES OPERATIONAL RISK
Operational Risk Management is an independent function that owns
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
owns and maintains, or has oversight of 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 and cyber security management.
87
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
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
framework and policies and the three lines of defence model. An
independent risk management oversight 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 operational risk appetite, governance processes, and policies.
The Operational Risk Management Framework is maintained by Risk
Management and supports alignment with the Bank’s ERF and
risk appetite. The framework incorporates sound industry practices
and meets regulatory requirements. Key components of the
framework include:
Governance and Policy
Management reporting and organizational structures emphasize
accountability, ownership, and effective oversight of each business unit
and each corporate area’s operational risk exposures. In addition, the
expectations of the Risk Committee and senior management for managing
operational risk are set out by enterprise-wide policies and practices.
Risk and Control Self-Assessment
Internal controls are one of the primary methods of safeguarding
the Bank’s employees, customers, assets, and information, and in
preventing and detecting errors and fraud. Management undertakes
comprehensive assessments of key risk exposures and the internal
controls in place to reduce or offset these risks. Senior management
reviews the results of these evaluations to 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 itself 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 and infrequent
operational risk events (tail risks). 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 new scenarios and 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
TD’s Corporate Insurance team, with oversight from TD Risk
Management, utilizes insurance and other risk transfer arrangements
to mitigate and reduce potential future losses related to operational risk.
Risk Management includes oversight of the effective use of insurance
aligned with the Bank’s risk management strategy and risk appetite.
Insurance terms and provisions, including types and amounts of
coverage, are regularly assessed so that 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 the Bank’s risk
to third parties where appropriate. The Bank transacts with external
insurers that satisfy its minimum financial rating requirements.
Technology 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 protect against
unauthorized 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 cyber 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 and cyber security programs also
include enhanced resiliency planning and testing, as well as disciplined
change management practices.
Data Asset Management
The Bank’s data is a strategic asset that is governed and managed
to preserve value and support business objectives. Inconsistent data
governance and management practices may compromise the Bank’s
critical data and information assets which could result in financial and
reputational impacts. The Bank’s Office of the Chief Data Officer
(OCDO), Corporate and Technology partners develop and implement
enterprise wide standards and 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 the Bank’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
formal incident management measures 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 third-party risk
management program that is designed to manage third-party
activities throughout the life cycle of an arrangement and provide
an appropriate level of risk management and senior management
oversight which is appropriate to the size, risk, and criticality of the
third-party arrangement.
88
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS Project Management
The Bank has established a disciplined approach to project management
across the enterprise coordinated by the Bank’s Enterprise Project
Delivery Excellence Group. This approach involves senior management
governance and oversight of the Bank’s project portfolio and leverages
leading industry practices to guide the Bank’s use of standardized
project management methodology, defined project management
accountabilities and capabilities, and project portfolio reporting and
management tools to support successful project delivery.
Financial Crime and Fraud Management
The Financial Crime and Fraud Management Group leads the
development and implementation of enterprise-wide financial crime
and fraud management strategies, policies, and practices. The Bank
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 (AMA), a risk-sensitive capital model, along
with TSA. Effective the third quarter of 2016, OSFI approved the Bank to
use AMA. Entities not reported under AMA, use the TSA methodology.
The Bank’s AMA Capital Model uses a Loss Distribution Approach
(LDA) and incorporates Internal Loss Data and Scenario Analysis results.
External Loss Data is indirectly considered through the identification
and assessment of Scenario Analysis estimations. Business,
Environment and Internal Control Factors (BEICF) are used as a post-
model adjustment to capital estimates to reflect forward-looking
indicators of risk exposure.
The Bank’s AMA model includes the incorporation of a diversification
benefit, which considers correlations across risk types and business
lines as extreme loss events may not occur simultaneously across all
categories. The capital is estimated at the 99.9% confidence level.
Although the Bank manages a comprehensive portfolio of insurance
and other risk mitigating arrangements to provide additional
protection from loss, the Bank’s AMA model does not consider risk
mitigation through insurance.
Model Risk
Model risk is the potential for adverse consequences arising from
decisions based on incorrect or misused models and other estimation
approaches 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 and
Model Risk Policy.
HOW TD MANAGES MODEL RISK
The Bank manages model risk in accordance with management
approved model risk policies and supervisory guidance which encompass
the life cycle of a model, including proof of concept, development,
validation, implementation, usage, and ongoing model performance
monitoring. The Bank’s Model Risk Management Framework 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 model complexity and
materiality, set model performance monitoring standards, and provide
training to all stakeholders. The validation process varies in rigour,
depending on the model risk rating, 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 an
alternative modeling 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. As with
traditional model approaches, machine-learning models are also
subject to the same rigorous standards and risk management practices.
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.
89
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 and life and health reserving policies.
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 insurance legislation,
the regulatory environment, 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 concentration risk associated with general
insurance and life and health 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 2018 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 the Bank’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 bi-annually and the related
policies annually.
The Bank maintains an internal view for measuring and managing
liquidity that uses an assumed “Severe Combined Stress Scenario”
(SCSS). The SCSS models potential liquidity requirements during a crisis
resulting in a loss of confidence in the Bank’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 and a decrease in the marketability of assets. The Bank’s
liquidity policy stipulates that the Bank must maintain a sufficient
level of liquid assets to cover identified liquidity requirements at all
times under the SCSS up to 90 days. The Bank calculates liquidity
requirements for the SCSS related to the following conditions:
• wholesale funding maturing in the next 90 days (assumes maturing
Pursuant to the Enhanced Prudential Standards for Bank Holding
debt will be repaid instead of rolled over);
Companies and Foreign Banking Organizations, the Bank 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. Capital Markets Risk Management is responsible for
daily liquidity risk reporting.
• TBSM Liquidity Management manages the liquidity position of
the Canadian Retail (including wealth businesses), Corporate, and
the Wholesale Banking businesses. U.S. TBSM is responsible for
managing the liquidity position of the 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 the Bank’s access to funding or destabilize
its deposit base.
•
• accelerated attrition or “run-off” of deposit balances;
•
increased utilization of available credit and liquidity facilities; and
increased collateral requirements associated with downgrades in
the Bank’s credit rating and adverse movement in reference rates
for derivative and securities financing transactions.
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 minimum liquidity coverage of 100% over a 30-day stress
period. As a result, the Bank’s liquidity is managed to the higher
of its 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 business 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 Bank’s Funds Transfer Pricing process considers liquidity risk
as a key determinant of the cost or credit of funds to the retail and
wholesale bank businesses. Liquidity costs applied to loans and trading
assets are determined based on the cash flow or stressed liquidity
profile, while deposits are assessed based on the required liquidity
reserves and balance stability. Liquidity costs are also applied to other
contingent obligations like undrawn lines of credit provided to
customers based on expected duration of the draw.
LIQUID ASSETS
The unencumbered liquid assets the Bank holds to meet 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.
91
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS Assets held by the Bank to meet 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 4 8
SUMMARY OF LIQUID ASSETS BY TYPE AND CURRENCY1,2
(millions of Canadian dollars, except as noted)
As at
Cash and due from banks
Canadian government obligations
NHA MBS
Provincial government obligations
Corporate issuer obligations
Equities
Other marketable securities and/or loans
Total Canadian dollar-denominated
Cash and due from banks
U.S. government obligations
U.S. federal agency obligations, including U.S.
federal agency mortgage-backed obligations
Other sovereign obligations
Corporate issuer obligations
Equities
Other marketable securities and/or loans
Total non-Canadian dollar-denominated
Total
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
Total
Securities
received as
collateral from
securities
financing and
derivative
transactions
Bank-owned
liquid assets
$
3,002
18,256
39,649
12,720
6,622
10,554
2,655
93,458
24,046
30,163
47,150
56,034
78,160
33,514
4,786
273,853
$ 367,311
$
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
5,556
264,272
$ 345,000
$
–
63,463
42
19,241
3,767
1,637
349
88,499
–
37,691
927
45,912
1,576
37,666
4
123,776
$ 212,275
$
–
46,203
45
15,346
3,362
2,518
222
67,696
–
33,090
494
62,720
1,945
21,124
1,374
120,747
$ 188,443
Total
liquid assets
% of
total
Encumbered Unencumbered
liquid assets
liquid assets
October 31, 2018
$
3,002
81,719
39,691
31,961
10,389
12,191
3,004
181,957
24,046
67,854
48,077
101,946
79,736
71,180
4,790
397,629
$ 579,586
$
2,202
61,727
37,223
25,211
7,710
12,152
2,199
148,424
44,886
63,848
44,197
117,992
64,812
42,354
6,930
385,019
$ 533,443
1%
$
14
6
5
2
2
1
31
4
12
1,098
47,572
3,057
23,651
3,769
6,028
277
85,452
28
32,918
8
18
14
12
1
69
100%
7,522
41,993
7,234
32,206
191
122,092
$ 207,544
$
1,904
34,147
36,634
8,310
6,620
6,163
2,727
96,505
24,018
34,936
40,555
59,953
72,502
38,974
4,599
275,537
$ 372,042
October 31, 2017
–%
$
12
7
5
2
2
–
28
9
12
421
35,522
3,888
18,177
1,173
4,930
133
64,244
42
32,074
8
22
12
8
1
72
100%
9,560
39,233
6,101
16,741
80
103,831
$ 168,075
$
1,781
26,205
33,335
7,034
6,537
7,222
2,066
84,180
44,844
31,774
34,637
78,759
58,711
25,613
6,850
281,188
$ 365,368
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 $7 billion in total unencumbered liquid assets from
October 31, 2017, 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 4 9
SUMMARY OF UNENCUMBERED LIQUID ASSETS BY BANK, SUBSIDIARIES, AND BRANCHES1
(millions of Canadian dollars)
The Toronto-Dominion Bank (Parent)
Bank subsidiaries
Foreign branches
Total
1 Certain comparative amounts have been restated to conform with the presentation
adopted in the current period.
October 31
2018
$ 136,544
217,565
17,933
$ 372,042
As at
October 31
2017
$ 111,797
217,098
36,473
$ 365,368
92
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
The Bank’s monthly average liquid assets (excluding those held in
insurance subsidiaries) for the years ended October 31, 2018, and
October 31, 2017, are summarized in the following table.
T A B L E 5 0
SUMMARY OF AVERAGE LIQUID ASSETS BY TYPE AND CURRENCY1,2
(millions of Canadian dollars, except as noted)
Average for the years ended
Cash and due from banks
Canadian government obligations
NHA MBS
Provincial government obligations
Corporate issuer obligations
Equities
Other marketable securities and/or loans
Total Canadian dollar-denominated
Cash and due from banks
U.S. government obligations
U.S. federal agency obligations, including U.S.
federal agency mortgage-backed obligations
Other sovereign obligations
Corporate issuer obligations
Equities
Other marketable securities and/or loans
Total non-Canadian dollar-denominated
Total
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
Total
Securities
received as
collateral from
securities
financing and
derivative
Total
transactions3 liquid assets
Bank-owned
liquid assets
$
3,115
15,548
41,365
11,160
6,347
10,360
2,216
90,111
34,805
30,349
44,929
53,068
71,142
29,341
4,977
268,611
$ 358,722
$
3,204
16,550
37,464
9,065
4,544
15,509
2,646
88,982
45,708
29,478
36,079
52,176
60,603
17,937
6,283
248,264
$ 337,246
$
–
54,782
48
17,390
3,729
2,279
348
78,576
–
40,533
677
55,008
1,579
30,034
14
127,845
$ 206,421
$
–
40,278
250
12,585
3,894
2,746
667
60,420
–
41,231
721
48,726
912
10,201
11,631
113,422
$ 173,842
$
3,115
70,330
41,413
28,550
10,076
12,639
2,564
168,687
34,805
70,882
45,606
108,076
72,721
59,375
4,991
396,456
$ 565,143
$
3,204
56,828
37,714
21,650
8,438
18,255
3,313
149,402
45,708
70,709
36,800
100,902
61,515
28,138
17,914
361,686
$ 511,088
% of
total
Encumbered Unencumbered
liquid assets3
liquid assets
October 31, 2018
1%
$
12
7
5
2
2
1
30
6
13
573
42,407
4,517
21,266
2,018
4,965
278
76,024
127
38,668
8
19
13
10
1
70
100%
8,731
38,663
5,864
24,974
557
117,584
$ 193,608
$
2,542
27,923
36,896
7,284
8,058
7,674
2,286
92,663
34,678
32,214
36,875
69,413
66,857
34,401
4,434
278,872
$ 371,535
October 31, 2017
–%
$
11
7
4
2
4
1
29
9
14
363
29,310
3,609
13,566
1,532
6,054
643
55,077
46
37,390
7
20
12
6
3
71
100%
10,423
34,310
4,908
5,798
6,884
99,759
$ 154,836
$
2,841
27,518
34,105
8,084
6,906
12,201
2,670
94,325
45,662
33,319
26,377
66,592
56,607
22,340
11,030
261,927
$ 356,252
1 Certain comparative amounts have been restated to conform with the presentation
3 Liquid assets include collateral received that can be re-hypothecated or
adopted in the current period.
otherwise redeployed.
2 Positions stated include gross asset values pertaining to secured borrowing/lending
and reverse-repurchase/repurchase businesses.
Average liquid assets held in The Toronto-Dominion Bank and multiple
domestic and foreign subsidiaries (excluding insurance subsidiaries)
and branches are summarized in the following table.
T A B L E 5 1
SUMMARY OF AVERAGE UNENCUMBERED LIQUID ASSETS BY BANK, SUBSIDIARIES, AND BRANCHES1
(millions of Canadian dollars)
The Toronto-Dominion Bank (Parent)
Bank subsidiaries
Foreign branches
Total
1 Certain comparative amounts have been restated to conform with the presentation
adopted in the current period.
Average for the years ended
October 31
2018
$ 124,181
217,036
30,318
$ 371,535
October 31
2017
$ 117,963
209,745
28,544
$ 356,252
93
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
ASSET ENCUMBRANCE
In the course of the Bank’s day-to-day operations, assets are pledged
to obtain funding, support trading and brokerage businesses, and
participate in clearing and/or settlement systems. 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 2
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
72
$
4,310
71,676
–
–
23,648
–
–
–
–
–
–
1,013
$ 100,719
131,484
44,793
9,046
185,323
$ 286,042
$
Other4
33
89
11,959
–
–
60,005
–
–
–
–
–
–
–
$ 72,086
–
559
–
559
$ 72,645
Available as
collateral5
–
$
23,125
274,504
–
–
79,439
–
–
–
–
–
–
–
$ 377,068
23,035
14,733
20,077
57,845
$ 434,913
$
Other6
4,630
3,196
15,162
56,996
127,379
483,301
17,267
8,445
16,536
2,459
5,324
2,812
41,523
$ 785,030
(127,379)
–
(14,693)
(142,072)
$ 642,958
Total on-balance sheet assets
Total off-balance sheet items
Total
$ 88,894
154,350
$ 243,244
$ 65,705
229
$ 65,934
$ 359,169
61,328
$ 420,497
$ 765,227
(145,711)
$ 619,516
As at
October 31, 2018
Encumbered
Total
assets as a %
assets of total assets
$
4,735
30,720
373,301
56,996
127,379
646,393
17,267
8,445
16,536
2,459
5,324
2,812
42,536
$ 1,334,903
–%
0.3
6.2
–
–
6.3
–
–
–
–
–
–
0.1
12.9%
October 31, 2017
$ 1,278,995
12.1%
1 Certain comparative amounts have been restated to conform with the 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.
3 Represents assets that have been posted externally to support the Bank’s day-to-
day operations, including securities financing transactions, clearing and payments,
and derivative transactions. Also includes assets that have been pledged supporting
Federal Home Loan Bank (FHLB) activity.
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.
6 Assets that cannot be used to support funding or collateral requirements in their
current form. This category includes those assets that are potentially eligible as
funding program collateral (for example, CMHC insured mortgages that can be
securitized into NHA MBS).
7 Securities include trading loans, securities, non-trading financial assets at fair value
through profit or loss and other financial assets designated at fair value through
profit or loss, securities at FVOCI, and DSAC.
8 Assets reported in Securities purchased under reverse repurchase agreements
represent the value of the loans extended and not the value of the collateral received.
9 Other assets include amounts receivable from brokers, dealers, and clients.
10 Off-balance sheet items include the collateral value from the securities received
under reverse repurchase agreements, securities borrowing, margin loans, and
other client activity. The loan value from the reverse repurchase transactions and
margin loans/client activity is deducted from the on-balance sheet Unencumbered –
Other category.
94
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
LIQUIDITY STRESS TESTING AND CONTINGENCY
FUNDING PLANS
In addition to the SCSS, the Bank performs liquidity stress testing on
multiple alternate scenarios. These scenarios are a mix of TD-specific
events and market-wide stress events designed to test the impact from
risk factors material to the Bank’s risk profile. Liquidity assessments are
also part of the Bank’s EWST program. Results from these stress event
scenarios are used to inform 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
levels based on the severity and duration of the liquidity situation, and
identifies recovery actions appropriate for each level. For each recovery
action, it provides key operational steps required to execute the action.
Regional CFPs identify recovery actions to address region-specific stress
events. 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 the Bank’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 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 3
CREDIT RATINGS1
Rating agency
Moody’s
S&P
DBRS
As at
October 31, 2018
Short-term
debt rating
P-1
A-1+
R-1 (high)
Legacy
senior
debt rating2
Aa1
AA-
AA
Long-term
senior
debt rating3
Aa3
A
Aa (low)
Outlook
Stable
Stable
Positive
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.
2 Includes (a) Senior debt issued prior to September 23, 2018; and (b) Senior debt
issued on or after September 23, 2018 which is excluded from the bank
recapitalization “bail-in” regime, including debt with an original term-to-maturity
of less than 400 days and most structured notes.
3 Subject to conversion under the bank recapitalization “bail-in” regime.
The Bank regularly reviews the level of increased collateral its trading
counterparties would require in the event of a downgrade of TD’s
credit rating. The Bank holds liquid assets to ensure it is able to provide
additional collateral required by trading counterparties in the event
of a three-notch downgrades in the Bank’s senior long-term credit
ratings. The following table presents the additional collateral that
could have been contractually required to be posted to the derivative
counterparties 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 4
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
2017
2018
$ 92
120
462
$ 112
141
382
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 LCR is a Basel III metric calculated as the ratio of the stock of
unencumbered HQLA over the net cash outflow requirements in the
next 30 days under a hypothetical liquidity stress event.
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.
95
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table summarizes the Bank’s daily LCR position for
the fourth quarter of 2018.
T A B L E 5 5
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 deposits4
Less stable deposits
Unsecured wholesale funding, of which:
Operational deposits (all counterparties) and deposits in networks of cooperative banks5
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 obligations6
Total cash outflows
Cash inflows
Secured lending
Inflows from fully performing exposures
Other cash inflows
Total cash inflows
Total high-quality liquid assets7
Total net cash outflows8
Liquidity coverage ratio
Average for the three months ended
October 31, 2018
Total
unweighted
value
(average)2
Total
weighted
value
(average)3
$
n/a
$ 206,490
$ 460,169
194,680
265,489
238,977
96,213
108,902
33,862
n/a
189,274
24,337
5,975
158,962
10,098
568,621
n/a
$
$ 32,389
5,840
26,549
116,623
22,902
59,859
33,862
14,613
50,548
12,763
5,975
31,810
4,881
8,745
$ 227,799
$ 187,279
15,014
35,780
$ 238,073
$ 24,106
7,487
35,780
$ 67,373
Average for the three months ended
October 31
2018
July 31
2018
Total adjusted
value
Total adjusted
value
$ 206,490
160,426
$ 211,757
166,729
129%
127%
1 The LCR for the quarter ended October 31, 2018, is calculated as an average
6 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.
7 Adjusted HQLA includes both asset haircut and applicable caps, as prescribed
4 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.
5 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).
8 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 129% for quarter ended October 31, 2018,
continues to meet the regulatory requirement. The 2% change over
the prior quarter’s LCR was mainly due to normal business and
pre-funding activities.
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, 2018, was $206 billion (July 31, 2018 –
$212 billion), with level 1 assets representing 80% (July 31, 2018 –
80%). 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 2018 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 risk appetite 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 70% of
the Bank’s total funding.
T A B L E 5 6
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
2017
2018
$ 359,473 $ 350,446
346,624 336,302
99
36
$ 706,133 $ 686,847
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 Senior 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 ($4 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 ($50 billion)
UKLA Registered European Medium Term
Note Program (US$20 billion)
The Bank 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, 2018, was $127.7 billion (October 31, 2017 – $109.3 billion).
The Bank maintains depositor concentration limits in respect of
short-term wholesale deposits so that it does not depend on small
groups of large wholesale depositors for funding. The Bank also
limits short-term wholesale funding maturity concentration in an
effort to mitigate exposures to refinancing risk during a stress event.
T A B L E 5 7
LONG-TERM FUNDING
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
2018
2017
32%
39
19
7
3
100%
55%
29
12
4
100%
37%
42
14
4
3
100%
53%
27
15
5
100%
1 Mortgage securitization excludes the residential mortgage trading business.
97
TD BANK GROUP ANNUAL REPORT 2018 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, 2018, and
October 31, 2017, based on remaining term-to-maturity.
T A B L E 5 8
WHOLESALE FUNDING1
(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
2017
2018
Up to Over 1 to
2 years
1 year
Over
2 years
Total
Total
Deposits from banks2
Bearer deposit note
Certificates of deposit
Commercial paper
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
741 $
71 $ 14,176 $
$ 8,358 $ 5,006 $
– $ 14,176 $ 17,990
–
3,700
51,401 65,465
–
55,570 25,281
–
36,284 29,319
25,797
27,301 28,833
17,911
69,518 57,570
34,194
9,528
8,740
5,835
1,447
8,443
804
$ 28,935 $ 52,112 $ 36,423 $ 45,764 $ 163,234 $ 26,895 $ 88,893 $ 279,022 $ 251,964
3,872
11,610 51,262
12,731 55,570
5,508
5,072
11,647 19,626
–
–
2,444
1,787
5,704
849
– $
–
139
–
4,979
4,318
15,698
–
1,735
26
1,250
15,642
14,298
673
819
2,269
–
–
731
1,253
17,381
19,150
–
2,221
5,710
–
–
1,391
1,145
6,629
9,391
–
22
–
–
657
2,733
8,740
5,626
6,534
4,835
2,010
3,872
679 $ 2,221 $ 1,495 $ 8,632 $ 13,027 $ 11,032 $ 45,166 $ 69,225 $ 64,003
$
28,256
43,727 209,797 187,961
$ 28,935 $ 52,112 $ 36,423 $ 45,764 $ 163,234 $ 26,895 $ 88,893 $ 279,022 $ 251,964
37,132 150,207
34,928
15,863
49,891
1 Certain comparative amounts have been restated to conform with the presentation
3 Subordinated notes and debentures are not considered wholesale funding as they
adopted in the current period.
2 Includes fixed-term deposits with banks.
may be raised primarily for capital management purposes.
4 Includes fixed-term deposits from non-bank institutions (unsecured) of $6.5 billion
(October 31, 2017 – $8.4 billion).
Excluding the Wholesale Banking mortgage aggregation business, the
Bank’s total 2018 mortgage-backed securities issuance was $2.6 billion
(2017 – $2.4 billion), and other asset-backed securities was $1.8 billion
(2017 – $1.4 billion). The Bank also issued $29.1 billion of unsecured
medium-term notes (2017 – $8.7 billion) and $9.9 billion of covered
bonds (2017 – $4.6 billion), in various currencies and markets during the
year ended October 31, 2018. This includes unsecured medium-term
notes and covered bonds issued but settling subsequent to year-end.
REGULATORY DEVELOPMENTS CONCERNING LIQUIDITY
AND FUNDING
On April 18, 2018, the Government of Canada published the final
regulations under the Bank Act and the CDIC Act providing details of
the bank recapitalization “bail-in” regime. The issuance regulations
under the Bank Act and the conversion regulations under the CDIC
Act came into force on September 23, 2018, while the compensation
regulations under the CDIC Act were brought into force immediately
upon registration on March 27, 2018. The bail-in regulations represent
the final step in the implementation of the bail-in regime which
provides the Canada Deposit Insurance Corporation (CDIC) with the
power to convert specified eligible liabilities of D-SIBs into common
shares in the unlikely event the D-SIB becomes 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.
In October 2014, the BCBS released the final standard for “Basel III:
the net stable funding ratio.” The net stable funding ratio (NSFR)
requires that the ratio of available stable funding over required stable
funding be greater than 100%. The NSFR is designed to reduce
structural funding risk by requiring banks to have sufficient stable
sources of funding and lower reliance on funding maturing in one year
to support their businesses.
Based on implementation progress at the international level, OSFI
has determined that it will target a revised NSFR implementation date
of January 2020. Relevant areas of the LAR guideline have been
updated to reflect the implementation delay.
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.
The maturity analysis presented does not depict the degree of
the Bank’s maturity transformation or the Bank’s 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.
98
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 5 9
REMAINING CONTRACTUAL MATURITY1
(millions of Canadian dollars)
As at
October 31, 2018
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
Assets
Cash and due from banks
Interest-bearing deposits with banks
Trading loans, securities, and other2
Non-trading financial assets at fair value
through profit or loss
Derivatives
Financial assets designated at fair value
through profit or loss
Financial assets at fair value through
other comprehensive income
Debt securities at amortized cost,
net of allowance for credit losses
Securities purchased under reverse
$ 4,733 $
28,332
1,971
–
7,343
924
5,244
12
9,263
2 $
– $
– $
– $
154
2,111
21
3,653
16
3,998
1,273
9,683 25,772 25,895 49,570
– $
–
– $
–
– $
–
– $
99
5,275
460
3,276
906
2,321
227
841
7,130 12,436
848
9,952
622
–
4,015
56,996
30
95
535
243
90
297
1,532
796
–
3,618
1,111
4,214
4,150
5,354
3,962 19,777 57,922 31,936
2,174
130,600
881
2,577
3,010
3,594
4,059
8,103 34,032 50,990
(75)
107,171
Total
4,735
30,720
127,897
repurchase agreements
77,612
30,047
14,426
3,807
1,458
29
–
–
–
127,379
Loans
Residential mortgages
Consumer instalment and other personal
Credit card
Business and government
Total loans
Allowance for loan losses
Loans, net of allowance for loan losses
Customers’ liability under acceptances
Investment in TD Ameritrade
Goodwill3
Other intangibles3
Land, buildings, equipment, and other
depreciable assets3
Deferred tax assets
Amounts receivable from brokers,
dealers, and clients
Other assets
Total assets
Liabilities
Trading deposits
Derivatives
Securitization liabilities at fair value
Deposits4,5
Personal
Banks
Business and government
Total deposits
Acceptances
Obligations related to securities sold short2
Obligations related to securities sold
under repurchase agreements
Securitization liabilities at amortized cost
Amounts payable to brokers,
dealers, and clients
Insurance-related liabilities
Other liabilities6
Subordinated notes and debentures
Equity
Total liabilities and equity
Off-balance sheet commitments
Credit and liquidity commitments7,8
Operating lease commitments
Other purchase obligations
Unconsolidated structured
entity commitments
Total off-balance sheet commitments
908
753
–
23,052
24,713
–
24,713
14,984
–
–
–
–
–
3,234
1,332
–
4,320
8,886
–
8,886
2,145
–
–
–
–
–
6,614
2,628
–
5,539
14,781
–
14,781
132
–
–
–
11,166
3,724
–
7,131
22,021
–
22,021
6
–
–
–
–
–
–
11,061 43,063 113,852 35,293
–
4,131 14,313 56,632 26,321 62,245
– 35,018
9,269 19,637 67,922 59,251 21,533
24,461 77,013 238,406 120,865 118,796
(3,549)
24,461 77,013 238,406 120,865 115,247
–
–
–
8,445
– 16,536
2,459
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
225,191
172,079
35,018
217,654
649,942
(3,549)
646,393
17,267
8,445
16,536
2,459
–
–
–
–
–
–
–
–
–
–
–
–
5,324
2,812
5,324
2,812
26,940
3,432
26,940
15,596
$ 192,082 $ 64,263 $ 46,599 $ 42,555 $ 41,413 $ 122,395 $ 371,242 $ 241,372 $ 212,982 $ 1,334,903
–
8,595
–
1,926
–
301
–
136
–
142
–
90
–
854
–
120
$ 16,145 $ 37,337 $ 31,081 $ 12,954 $ 11,739 $ 1,183 $ 3,260 $ 1,005 $
6,195
–
8,684
981
4,230
194
3,103
661
2,263
272
5,510
1,822
9,282
6,719
9,003
1,969
– $ 114,704
48,270
–
12,618
–
4,330
6,499
18,840
29,669
14,986
2,621
7,094
1,941
19,337
28,372
2,145
3,679
7,541
255
7,033
14,829
132
1,500
6,245
24
9,984
16,253
6
387
54
7,718 10,222
–
9,876
3
11,299 21,345 54,780
19,071 31,567 64,659
–
–
904
–
–
4,330 13,771 11,474
8
38 424,580
7,928
8,000 206,465
8,046 638,973
–
812
477,644
16,712
357,083
851,439
17,269
39,478
73,759
22
15,508
1,240
3,516
625
428
503
108
575
43
2,496
27
6,232
–
2,990
–
–
93,389
14,683
28,385
213
2,926
–
–
28,385
6,698
19,190
8,740
80,040
$ 174,921 $ 100,876 $ 56,998 $ 35,930 $ 36,636 $ 50,093 $ 107,882 $ 44,283 $ 727,284 $ 1,334,903
–
1,755
5,704
–
– 80,040
–
309
1,326
–
–
–
1,624
2,308
–
–
–
310
1,394
–
–
–
937
2,205
–
–
–
294
2,636
–
–
–
903
153
8,740
–
353
538
–
–
$ 18,339 $ 16,728 $ 17,217 $ 13,098 $ 9,152 $ 25,691 $ 101,120 $ 4,034 $ 2,663 $ 208,042
7,267
1,643
2,188
641
3,229
128
233
106
902
366
240
109
159
146
237
106
–
–
79
41
–
2,763
$ 18,459 $ 18,112 $ 18,506 $ 13,770 $ 9,491 $ 26,966 $ 104,357 $ 7,391 $ 2,663 $ 219,715
1,079
408
940
329
7
–
–
–
1 Balances as at October 31, 2018 are prepared in accordance with IFRS 9. Prior
period comparatives have not been restated. Refer to Note 4 of the 2018
Consolidated Financial Statements for further details.
$2 billion in ‘9 months to 1 year’, $5 billion in ‘over 1 to 2 years’, $22 billion
in ‘over 2 to 5 years’, and $3 billion in ‘over 5 years’.
6 Includes $60 million of capital lease commitments with remaining contractual
2 Amount has been recorded according to the remaining contractual maturity of the
underlying security.
3 For the purposes of this table, non-financial assets have been recorded as having
‘no specific maturity’.
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’, $6 million in ‘6 months to 9 months’,
$6 million in ‘9 months to 1 year’, $12 million in ‘over 1 to 2 years’, $17 million
in ‘over 2 to 5 years’, and $5 million in ‘over 5 years’.
4 As the timing of demand deposits and notice deposits is non-specific and callable
by the depositor, obligations have been included as having ‘no specific maturity’.
7 Includes $205 million in commitments to extend credit to private equity investments.
8 Commitments to extend credit exclude personal lines of credit and credit card lines,
5 Includes $36 billion of covered bonds with remaining contractual maturities of
which are unconditionally cancellable at the Bank’s discretion at any time.
$1 billion in ‘3 months to 6 months’, $3 billion in ‘6 months to 9 months’,
99
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 5 9
REMAINING CONTRACTUAL MATURITY (continued) 1
(millions of Canadian dollars)
As at
October 31, 2017
Assets
Cash and due from banks
Interest-bearing deposits with banks
Trading loans, securities, and other2
Derivatives
Financial assets designated at fair value
through profit or loss
Available-for-sale securities
Held-to-maturity securities
Securities purchased under
$ 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
Less than
1 month
1 to 3
months
3 to 6
months
6 to 9
months
9 months
to 1 year
Over 1 to
2 years
Over 2 to
5 years
Over
5 years
No
specific
maturity
– $
Total
3,971
51,185
103,918
56,195
– $
6
4,090
2,379
– $
7
4,007
2,657
– $
–
9,092
6,790
– $
–
22,611
13,500
– $
–
592
17,669 39,117
–
11,751
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
–
4,032
146,411
71,363
reverse repurchase agreements
84,880
33,930
11,433
3,068
1,086
24
8
–
–
134,429
Loans
Residential mortgages
Consumer instalment and other personal
Credit card
Business and government
Debt securities classified as loans
Total loans
Allowance for loan losses
Loans, net of allowance for loan losses
Customers’ liability under acceptances
Investment in TD Ameritrade
Goodwill3
Other intangibles3
Land, buildings, equipment, and
other depreciable assets3
Deferred tax assets
Amounts receivable from brokers,
dealers, and clients
Other assets
Total assets
Liabilities
Trading deposits
Derivatives
Securitization liabilities at fair value
Deposits4,5
Personal
Banks
Business and government
Total deposits
Acceptances
Obligations related to securities sold short2
Obligations related to securities sold
under repurchase agreements
Securitization liabilities at amortized cost
Amounts payable to brokers,
dealers, and clients
Insurance-related liabilities
Other liabilities6
Subordinated notes and debentures
Equity
Total liabilities and equity
Off-balance sheet commitments
Credit and liquidity commitments7,8
Operating lease commitments
Other purchase obligations
Unconsolidated structured
entity commitments
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
–
–
–
2,897
36,284 109,260
44,850
12,902
–
–
59,870
14,623
248
31
34,778
–
25,651 61,251
– 33,007
59,107 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
–
298
–
138
–
99
–
104
–
600
$ 10,349 $ 20,834 $ 25,071 $ 7,192 $ 12,820 $
4,587
139
1,981
–
5,307
4
7,230
1,118
2,200
709
1,494 $
6,868
1,832
1,469 $
711 $
11,111
5,966
11,930
2,989
– $
–
–
79,940
51,214
12,757
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
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
3,551
–
–
32,851
6,775
20,470
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
–
–
–
926
2,934
–
–
–
417
1,290
–
–
–
294
1,826
–
–
–
182
2,352
–
–
–
1,097
814
9,528
–
338
255
–
–
Total off-balance sheet commitments
$ 20,007 $ 16,715 $ 14,945 $ 11,173 $ 8,626 $ 24,252 $ 87,616 $
$ 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
344
232
52
881
224
2,115
318
408
724
–
3,228 $ 2,325 $ 181,200
7,440
3,505
858
–
–
–
–
2,894
6,733 $ 2,325 $ 192,392
–
1 Certain comparative amounts have been reclassified to conform with the
6 Includes $89 million of capital lease commitments with remaining contractual
presentation adopted in the current period.
2 Amount has been recorded according to the remaining contractual maturity
of the underlying security.
3 For the purposes of this table, non-financial assets have been recorded as having
‘no specific maturity’.
4 As the timing of demand deposits and notice deposits is non-specific and callable
by the depositor, obligations have been included as having ‘no specific maturity’.
5 Includes $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’.
7 Includes $123 million in commitments to extend credit to private equity investments.
8 Commitments to extend credit exclude personal lines of credit and credit card lines,
which are unconditionally cancellable at the Bank’s discretion at any time.
100
TD BANK GROUP ANNUAL REPORT 2018 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 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.
TBSM is responsible for forecasting and monitoring compliance with
capital targets, on a consolidated basis, with oversight provided by
ALCO. TBSM updates the capital forecast and makes recommendations
to the ALCO regarding capital issuance, repurchase and redemption.
TBSM also leads the ICAAP and EWST processes. The Bank’s business
segments are responsible for managing to the 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, Regulatory Compliance and Conduct Risk
Legal, Regulatory Compliance and Conduct (LRCC) risk is the risk
associated with the failure to meet the Bank’s legal obligations from
legislative, regulatory or contractual perspectives, obligations under
the Code of Conduct and Ethics, or requirements of fair business
conduct or market conduct practices. This includes risks associated
with the failure to identify, communicate, and comply with current and
changing laws, regulations, rules, regulatory guidance or self-
regulatory organization standards, and codes, including the prudential
risk management of Money Laundering, Terrorist Financing, Economic
Sanctions, and Bribery and Corruption risk (the “LRCC Requirements”).
Potential consequences of failing to mitigate LRCC risk include financial
loss, regulatory sanctions, and loss of reputation, which could be
material to the Bank.
The Bank is exposed to LRCC risk in virtually all of its activities.
Failure to meet regulatory and legal requirements can impact the
Bank’s ability to meet strategic objectives, poses a risk of censure or
penalty, may lead to litigation, and puts the Bank’s reputation at risk.
Financial penalties, reputational damage, and other costs associated
with legal proceedings, and unfavourable judicial or regulatory
determinations may also adversely affect the Bank’s business, results
of operations and financial condition. LRCC 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. LRCC risk can occur as part of the normal
course of operating the Bank’s businesses.
WHO MANAGES LEGAL AND REGULATORY COMPLIANCE RISK
The proactive and effective management of LRCC risk is complex given
the breadth and pervasiveness of exposure. The LRCC Risk Management
Framework applies enterprise-wide to the Bank and to all of its corporate
functions, business segments, its governance, risk, and oversight
functions. Each of the Bank’s businesses is responsible for compliance
with LRCC requirements applicable to their jurisdiction and specific
business requirements, and for adhering to LRCC requirements in
their business operations, including setting the appropriate tone for
legal, regulatory compliance, and conduct risk management. 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 the Bank’s risk
appetite. The Legal, Compliance, and Global Anti-Money Laundering
departments, together with the Regulatory Risk (including Regulatory
Relationships and Government Affairs) group, provide objective
guidance, advice, and oversight with respect to managing LRCC risk.
Representatives of these groups interact regularly with senior executives
of the Bank’s businesses. Also, the senior management of the Legal,
101
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS Reputational Risk
Reputational risk is the potential that stakeholder perceptions, 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 perceptions
about the Bank’s business practices involving any aspect of the Bank’s
operations however, usually involves concerns about business ethics
and integrity, competence, or the quality or suitability of products and
services. Since all risk categories can have an impact on a company’s
reputation, reputational risk is not managed in isolation from the Bank’s
other major risk categories and can ultimately impact its 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 that
every Bank employee is responsible for 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 its reputation.
HOW TD MANAGES REPUTATIONAL RISK
The Bank’s approach to the management of reputational risk combines
the experience and knowledge of individual business segments,
corporate shared service areas 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. The Bank’s Reputational Risk Management
Framework provides a comprehensive overview of its approach to the
management of this risk. Amongst other significant policies, the Bank’s
Enterprise Reputational Risk Management Policy is approved by the
Group Head and CRO and sets out the requirements under which
business segments and corporate shared services are required to
manage reputational risk. These requirements include implementing
procedures and designating a business-level committee to review and
recommend reputational risks and escalation to the RRC as appropriate.
The Bank also has an enterprise-wide New Business and Product
Approval (NBPA) Policy that is approved by the CRO and establishes
standard practices to support consistent processes for approving new
businesses, products, and services across the Bank. The policy is
supported by business segment specific processes, which involve
independent review from oversight functions, and consider all aspects
of a new product, including reputational risk.
Compliance, and GAML departments have established regular meetings
with and reporting to the Audit Committee, which oversees the
establishment and maintenance of policies and programs that are
reasonably designed to achieve and maintain the Bank’s compliance
with the laws and regulations that apply to it. Senior management
of the Compliance Department reports regularly to the Corporate
Governance Committee, which acts as the conduct review committee
for the Bank and certain of its Canadian subsidiaries that are federally-
regulated financial institutions, including providing oversight of conduct
risk. In addition, senior management of the Regulatory Risk group has
established periodic reporting to the Board and its committees.
HOW TD MANAGES LEGAL, REGULATORY COMPLIANCE,
AND CONDUCT RISK
Effective management of LRCC risk is a result of enterprise-wide
collaboration and requires (a) independent and objective identification
and assessment of LRCC risk, (b) objective guidance and advisory
services to identify, assess, control, and monitor LRCC risk, and
(c) an approved set of frameworks, policies, procedures, guidelines,
and practices. Each of the Legal, Compliance, and GAML departments
plays a critical role in the management of LRCC 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 conduct risk management oversight
function; assesses the adequacy of, adherence to, and effectiveness
of the Bank’s Regulatory Compliance Management (RCM) controls; is
accountable for leading enterprise conduct risk governance oversight;
and supports the Chief Compliance Officer in providing an opinion to
the Audit Committee, as to whether the RCM controls are sufficiently
robust in achieving compliance with applicable regulatory requirements.
The Compliance department works in partnership with Human
Resources and Operational Risk Management to provide oversight
and challenge to the businesses in their identification, management,
measurement, mitigation, and monitoring of conduct risk. The GAML
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 the GAML, Anti-Terrorist Financing, Sanctions, and Anti-Bribery/
Anti-Corruption programs (the “GAML Programs”), including their
design, content, and enterprise-wide implementation; monitors,
evaluates, and reports on GAML program controls, design, and
execution; and reports on the overall adequacy and effectiveness
of the GAML Programs, including program design and operation.
In addition, the Compliance and GAML departments have developed
methodologies and processes to measure and aggregate legal and
regulatory risks on an ongoing basis as a critical baseline to assess
whether the Bank’s internal controls are effective in adequately
mitigating such risks and determine whether individual or aggregate
business activities are conducted within the Bank’s risk appetite.
The Legal department acts as an independent provider of legal
services and advice, and protects the Bank from unacceptable legal
risk. The Legal department has also developed methodologies for
measuring litigation risk for adherence to the Bank’s risk appetite.
Processes employed by the Legal, Compliance, and GAML
departments (including policies and frameworks, training and
education, and the Code of Conduct and Ethics) support the
responsibility of each business to adhere to LRCC requirements.
Finally, the Bank’s Regulatory Risk and Government Affairs 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.
102
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS 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
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 Vice President of Global Corporate
Citizenship who provides operational oversight, and the Head of
Environment who has management responsibility and 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 Corporate
Citizenship Committee (CCC) composed of senior executives from the
Bank’s main business segments and corporate functions. The CCC is
responsible for approving environmental strategy and performance
standards, and communicating these throughout the business.
The Bank’s business segments are responsible for implementing the
environmental strategy and managing associated risks within their units.
HOW TD MANAGES ENVIRONMENTAL RISK
The Bank 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.
The Bank 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.
The Bank reports on climate-related risk in its Corporate Responsibility
Report (CRR). In the 2017 CRR, the Bank provided disclosure on its
alignment with the recommendations of the Financial Stability Board’s
Task Force on Climate-related Financial Disclosure (TCFD) which seek to
provide a more consistent approach in assessing and reporting climate-
related risks and opportunities. The Bank is a member of the United
Nations Environment Programme Finance Initiative (UNEP-FI) and is
participating in three TCFD pilot studies led by UNEP-FI that seek to
develop harmonized industry-wide approaches for climate scenario
analysis in bank lending, investments, and insurance portfolios.
TDAM is a signatory to the United Nations Principles for Responsible
Investment (UNPRI). Under the UNPRI, investors commit to incorporate
environmental, social and governance (ESG) issues into investment
analysis and decision-making. TDAM applies its Sustainable Investing
Policy across its operations. The Policy provides a high level overview
of how TDAM fulfills its commitment to the six guiding principles set
out by the UNPRI. In 2015, TD Insurance became a signatory to the
United Nations Environment Program Finance Initiative Principles for
Sustainable Insurance 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.
Additional information on TD’s environmental policy, management
and performance is included in the Corporate Responsibility Report,
which is available on the Bank’s website.
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 between the Bank and TD Ameritrade are designed 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.
103
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS 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.
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 2018 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 2018 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 2018 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.
CLASSIFICATION AND MEASUREMENT OF FINANCIAL ASSETS
Business Model Assessment
The Bank determines its business models based on the objective under
which its portfolios of financial assets are managed. Refer to Note 2
for details on the Bank’s business models. In determining its business
models, the Bank considers the following:
• Management’s intent and strategic objectives and the operation
of the stated policies in practice;
• The primary risks that affect the performance of the business model
and how these risks are managed;
• How the performance of the portfolio is evaluated and reported
to management; and
• The frequency and significance of financial asset sales in prior periods,
the reasons for such sales and the expected future sales activities.
Sales in themselves do not determine the business model and are not
considered in isolation. Instead, sales provide evidence about how cash
flows are realized. A held-to-collect business model will be reassessed
by the Bank to determine whether any sales are consistent with an
objective of collecting contractual cash flows if the sales are more than
insignificant in value or infrequent.
Solely Payments of Principal and Interest Test
In assessing whether contractual cash flows are SPPI, the Bank
considers the contractual terms of the instrument. This includes
assessing whether the financial asset contains a contractual term that
could change the timing or amount of contractual cash flows such
that they would not be consistent with a basic lending arrangement.
In making the assessment, the Bank considers the primary terms as
follows and assess if the contractual cash flows of the instruments
continue to meet the SPPI test:
• Performance-linked features;
• Terms that limit the Bank’s claim to cash flows from specified assets
(non-recourse terms);
• Prepayment and extension terms;
• Leverage features; and
• Features that modify elements of the time value of money.
104
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS IMPAIRMENT OF FINANCIAL ASSETS
Significant Increase in Credit Risk
For retail exposures, criteria for assessing significant increase in credit
risk are defined at the appropriate product or portfolio level and vary
based on the exposure’s credit risk at origination. 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.
judgment to recommend probability weights to each forecast on a
quarterly basis. The proposed macroeconomic forecasts and probability
weightings are subject to robust management review and challenge
process by a cross-functional committee that includes representation
from TD Economics, Risk, Finance, and Business. ECLs calculated under
each of the three forecasts are applied against the respective probability
weightings to determine the probability-weighted ECLs. Refer to Note 8
of the Consolidated Financial Statements for further details on the
macroeconomic variables and ECL sensitivity.
For non-retail exposures, BRR is determined on an individual
borrower basis using industry and sector-specific credit risk models
that are based on historical data. Current and forward-looking
information that is specific to the borrower, industry, and sector is
considered based on expert credit judgment. Criteria for assessing
significant increase in credit risk are defined at the appropriate
segmentation level and vary based on the BRR of the exposure at
origination. Criteria include relative changes in BRR, absolute BRR
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.
Measurement of Expected Credit Loss
For retail exposures, ECLs are 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 asset and discounted
to the reporting date at the effective interest rate. PD estimates
represent the point-in-time PD, updated quarterly based on the Bank’s
historical experience, current conditions, and relevant forward-looking
expectations over the expected life of the exposure to determine the
lifetime PD curve. LGD estimates are determined based on historical
charge-off events and recovery payments, current information about
attributes specific to the borrower, and direct costs. Expected cash
flows from collateral, guarantees, and other credit enhancements are
incorporated in LGD if integral to the contractual terms. Relevant
macroeconomic variables are incorporated in determining expected
LGD. EAD represents the expected balance at default across the
remaining expected life of the exposure. EAD incorporates forward-
looking expectations about repayments of drawn balances and
expectations about future draws where applicable.
For non-retail exposures, ECLs are 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. Lifetime PD is determined by
mapping the exposure’s BRR to point-in-time PD over the expected life.
LGD estimates are determined by mapping the exposure’s facility risk
rating (FRR) to expected LGD which takes into account facility-specific
characteristics such as collateral, seniority ranking of debt, and
loan structure. Relevant macroeconomic variables are incorporated
in determining expected PD and LGD. Expected cash flows are
determined by applying the expected LGD to the contractual cash
flows to calculate cash shortfalls over the expected life of the exposure.
Forward-Looking Information
In calculating the ECL, the Bank employs internally developed models
that utilize parameters for PD, LGD, and EAD. Forward-looking
macroeconomic factors including at the regional level are incorporated
in the risk parameters as relevant. Additional risk factors that are
industry or segment specific are also incorporated, where relevant.
Three forward-looking macroeconomic forecasts are generated by
TD Economics as part of the ECL process: A base forecast, an upside
forecast, and a downside forecast. The base forecast is updated
quarterly. Upside and downside forecasts are generated quarterly using
realistically possible outcomes that are statistically derived relative to the
base forecast based on historical distribution. TD Economics will apply
Expert Credit Judgment
ECLs are recognized on initial recognition of the financial assets.
Allowance for credit losses represents management’s best estimate
of risk of default and ECLs on the financial assets, including any
off-balance sheet exposures, at the balance sheet date. Management
exercises expert credit judgment in assessing if an exposure has
experienced significant increase in credit risk since initial recognition
and in determining the amount of ECLs at each reporting date
by considering reasonable and supportable information that is not
already included in the quantitative models.
Management’s judgment is used to determine the point within
the range that is the best estimate for the qualitative component
contributing to ECLs, based on an assessment of business and economic
conditions, historical loss experience, loan portfolio composition,
and other relevant indicators and forward-looking information 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 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. For example, the future decommissioning of Interbank Offered
Rates (IBOR) may also have an impact on the fair value of products that
reference or use valuation models with IBOR inputs.
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
2018 Consolidated Financial Statements.
105
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 is determined by reference to
market yields on high quality corporate bonds with terms matching the
plans’ specific cash flows. 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.
106
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS 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
IMPAIRMENT OF FINANCIAL ASSETS PRIOR TO
NOVEMBER 1, 2017 UNDER IAS 39
The following is applicable to periods prior to November 1, 2017 for
financial instruments accounted for under IAS 39.
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 the entity 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.
Available-for-Sale Securities
Impairment losses were recognized on available-for-sale securities if
there was objective evidence of impairment as a result of one or more
events that occurred after initial recognition and the loss event(s)
resulted in a decrease in the estimated cash flows of the instrument.
The Bank individually reviewed 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 was considered
objective evidence of impairment. For available-for-sale debt securities,
a deterioration of credit quality was considered objective evidence of
impairment. Other factors considered in the impairment assessment
included 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 were recognized on held-to-maturity securities if
there was objective evidence of impairment as a result of one or more
events that occurred after initial recognition and the loss event(s)
resulted in a decrease in the estimated cash flows of the instrument.
The Bank reviewed these securities at least quarterly for impairment
at the counterparty-specific level. If there was no objective evidence
of impairment at the counterparty-specific level then the security
was grouped with other held-to-maturity securities with similar credit
risk characteristics and collectively assessed for impairment, which
considered losses incurred but not identified. A deterioration of credit
quality was considered objective evidence of impairment. Other factors
considered in the impairment assessment included 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, was considered
impaired when there was objective evidence that there had been a
deterioration of credit quality subsequent to the initial recognition of
the loan to the extent the Bank no longer had reasonable assurance
as to the timely collection of the full amount of principal and interest.
The Bank assessed loans for objective evidence of impairment
individually for loans that were individually significant, and collectively
for loans that were not individually significant. The allowance for credit
losses represented management’s best estimate of impairment incurred
in the lending portfolios, including any off-balance sheet exposures,
at the balance sheet date. Management exercised judgment as to the
timing of designating a loan as impaired, the amount of the allowance
required, and the amount that would be recovered once the borrower
defaulted. Changes in the amount that management expected to
recover would have a direct impact on the provision for credit losses
and may have resulted in a change in the allowance for credit losses.
If there was no objective evidence of impairment for an individual
loan, whether significant or not, the loan was 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 employed internally developed models that utilized
parameters for PD, LGD, and EAD. Management’s judgment was used
to determine the point within the range that was 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 were not fully incorporated into the model
calculation. Changes in these assumptions would have a direct impact
on the provision for credit losses and may have resulted in a change in
the incurred but not identified allowance for credit losses.
107
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS ACCOUNTING STANDARDS AND POLICIES
Current and Future Changes in Accounting Policies
CURRENT CHANGES IN ACCOUNTING POLICIES
The following new standard has been adopted by the Bank on
November 1, 2017.
IFRS 9 FINANCIAL INSTRUMENTS
On November 1, 2017, the Bank adopted IFRS 9, Financial Instruments
(IFRS 9), which replaces the guidance in IAS 39, Financial Instruments:
Recognition and Measurement (IAS 39). IFRS 9 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 annual
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. In January 2015, OSFI issued the final version of the
Advisory titled “Early adoption of IFRS 9 Financial Instruments for
Domestic Systemically Important Banks” which mandated that all
D-SIBs, including the Bank, were required to early adopt IFRS 9 for the
annual period beginning on November 1, 2017. As such, on
November 1, 2017, the Bank adopted IFRS 9 retrospectively. 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. However, the Bank made the decision not to
restate comparative period financial information and has recognized
any measurement differences between the previous carrying amounts
and the new carrying amounts on November 1, 2017, through an
adjustment to opening retained earnings or accumulated other
comprehensive income (AOCI), as applicable.
Amendments were also made to IFRS 7 introducing expanded
qualitative and quantitative disclosures related to IFRS 9, which
the Bank has also adopted for the annual period beginning
November 1, 2017. Refer to Notes 2, 3, and 4 of the 2018
Consolidated Financial Statements for further details.
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.
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
is required to adopt the standard for the annual period beginning
on November 1, 2018. The standard is to be applied on a modified
retrospective basis, recognizing the cumulative effect of initially applying
the standard as an adjustment to the opening balance of retained
earnings without restating comparative period financial information.
As at October 31, 2018, the Bank’s current estimate of the adoption
impact of IFRS 15, subject to refinement, is an overall reduction to
Shareholder’s Equity of approximately $41 million related to certain
expenses not eligible for deferral under IFRS 15. The presentation
of certain revenue and expense items will also be reclassified
prospectively. These presentation changes are not significant and
do not have an impact on net income.
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 on the balance sheet. Lessees
will also recognize depreciation expense on the right-of-use asset,
interest expense on the lease liability, and a shift in the timing of
expense recognition in the statement of income. Short-term leases,
which are defined as those that have a lease term of twelve 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.
The Bank is continuing to assess the impact of the new standard on
its portfolio of leases, including the impact upon its existing systems
and internal controls.
Share-based Payment
In June 2016, the IASB published amendments to IFRS 2, Share-based
Payment (IFRS 2), 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 is November 1, 2018 for the Bank.
These amendments will be applied prospectively and will not have
a significant impact on the Bank.
108
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS Insurance Contracts
In May 2017, the IASB issued IFRS 17, Insurance Contracts (IFRS 17),
which replaces the guidance in IFRS 4, Insurance Contracts and
establishes a new model for recognizing insurance policy obligations,
premium revenue, and claims-related expenses. IFRS 17 is currently
effective for the Bank’s annual reporting period beginning
November 1, 2021; however, based on recent IASB meetings, an
upcoming amendment to IFRS 17 and a deferral of the transition date
by one year is anticipated. Any change to the Bank’s transition date
is subject to updates of OSFI’s related Advisory. The Bank is currently
assessing the impact of adopting this standard.
Conceptual Framework for Financial Reporting
In March 2018, the IASB issued the revised Conceptual Framework for
Financial Reporting (Revised Conceptual Framework), which provides
a set of concepts to assist the IASB in developing standards and to
help preparers consistently apply accounting policies where specific
accounting standards do not exist. The framework is not an accounting
standard and does not override the requirements that exist in other IFRS
standards. The Revised Conceptual Framework describes that financial
information must be relevant and faithfully represented to be useful,
provides revised definitions and recognition criteria for assets and
liabilities, and confirms that different measurement bases are useful
and permitted. The Revised Conceptual Framework is effective for
annual periods beginning on or after January 1, 2020, which will be
November 1, 2020 for the Bank, with early adoption permitted. The Bank
is currently assessing the impact of adopting the revised framework.
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, 2018. Based on
that evaluation, the Bank’s management, including the Chief Executive
Officer and Chief Financial Officer, concluded that the Bank’s disclosure
controls and procedures were effective as of October 31, 2018.
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, 2018. 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, 2018.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the year and quarter ended October 31, 2018, 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. The Bank adopted
IFRS 9 effective November 1, 2017 and has updated and modified
certain internal controls over financial reporting as a result of the
new accounting standard. Refer to Notes 2, 3, and 4 of the 2018
Consolidated Financial Statements for further information regarding
the Bank’s changes to accounting policies, procedures, and estimates.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
The Bank’s management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Bank. The
Bank’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records, that,
in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Bank; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with IFRS, and that receipts and
expenditures of the Bank are being made only in accordance with
authorizations of the Bank’s management and directors; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Bank’s assets that
could have a material effect on the financial statements.
The Bank’s management has used the criteria established in the
2013 Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
to assess, with the participation of the Chief Executive Officer and
Chief Financial Officer, the effectiveness of the Bank’s internal control
over financial reporting. Based on this assessment, management has
concluded that as at October 31, 2018, the Bank’s internal control
over financial reporting was effective based on the applicable criteria.
109
TD BANK GROUP ANNUAL REPORT 2018 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 0
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
2016
2018
2017
Securities at fair value through other comprehensive
income (available-for-sale securities under IAS 39)
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 securities at fair value through other
comprehensive income (available-for-sale
securities under IAS 39)
Fair value
Amortized cost
Yield
$ 3,504 $ 5,614 $ 2,875 $
5,596
2,869
2.07%
2.19%
3,500
2.03%
290 $
291
2.40%
$
448
484
2.69%
– $ 12,731 $ 16,225 $ 14,717
16,200 14,671
– 12,740
1.91%
–%
2.12%
1.79%
676
676
3.00%
1,561
1,553
2,376
2,357
4,691
4,653
2.50% 2.90%
3.45%
203
204
2.97%
– 9,507
– 9,443
–%
3.12%
7,922
7,859
2.71%
7,851
7,871
2.73%
2,290 13,188
2,287 13,115
8,890
8,840
2,692
2,656
0.96%
1.46%
1.85%
1.74%
–
–
–%
– 27,060
– 26,898
–%
1.58%
27,258 23,892
27,087 23,929
1.58%
1.57%
1,116
1,116
1.82%
4,089
4,022
1,748
1,734
1,613
1,638
10,140
10,449
2.41% 1.95%
2.43%
2.60%
– 18,706
– 18,959
–%
2.44%
21,022 10,581
20,995 10,448
2.17%
1.78%
6,991
6,987
0.63%
6,138
6,107
6,643
6,617
1.76% 2.22%
324
323
2.50%
454
454
2.30%
2,696
2,664
3,483
3,457
1.53%
1.70%
–
–
–%
–
–
–%
–
–
–%
– 20,096
– 20,034
–%
1.53%
21,122 15,509
21,067 15,574
1.48%
1.35%
– 6,633
– 6,575
–%
1.67%
8,812
8,757
1.72%
4,949
4,916
1.72%
–
–
–%
–
–
–%
3,740
3,739
9,213
9,183
2,981
2,966
6,035
6,013
1.84% 2.12%
2.44%
3.07%
– 21,969
– 21,901
–%
2.37%
29,981 18,593
29,879 18,665
1.85%
1.49%
–
–
–%
–
–
–%
–
–
–%
472
471
3.06%
–
–
–%
472
471
3.06%
1,715
1,706
2.51%
625
624
1.63%
1,307
1,307
2.20%
3,522
3,518
1,858
1,879
1,796
1,800
2.88% 3.57%
2.39%
24
30
1.94%
– 8,507
– 8,534
–%
2.82%
9,790
9,753
2.48%
8,286
8,229
2.80%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
1,804 1,804
1,725 1,725
3.43%
3.43%
1,922
1,821
2.88%
2,054
1,934
1.94%
–
–
–%
370
376
4.17%
370
376
4.17%
365
313
4.44%
186
168
4.37%
n/a
n/a
n/a%
n/a
n/a
n/a%
n/a
n/a
n/a%
n/a
n/a
n/a%
n/a
n/a
n/a%
n/a
n/a
n/a%
n/a
n/a
n/a%
277
250
5.51%
328
301
6.01%
$ 16,338 $ 40,548 $ 37,086 $ 14,387 $ 17,322
17,651
36,936
16,327 40,314
14,327
$ 2,174 $ 127,855 $ 146,411 $ 107,571
107,330
127,656 145,687
2,101
1.33%
1.89%
2.16%
2.63%
2.77%
3.56%
2.13%
1.88%
1.78%
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, 2018, includes securities issued by Government of Japan of
$9.5 billion (as at October 31, 2017, includes securities issued by Government
of Japan of $8.9 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 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 6 0
INVESTMENT PORTFOLIO – Securities Maturity Schedule (continued) 1,2,3
(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 maturities4
Total
Total
October 31 October 31 October 31
2018
2017
2016
0.30%
10
10
4.65%
$ 1,363 $
1,364
Debt securities at amortized cost (held-to-maturity securities under IAS 39)
Government and government-related securities
Canadian government debt
Federal
Fair value
Amortized cost
Yield
Provinces
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
Asset-backed securities
Fair value
Amortized cost
Yield
Non-agency CMO
Fair value
332
332
1.91%
1,597
1,606
8,985
8,960
–
–
–%
1.96%
0.47%
3,788
3,787
49
50
Amortized cost
Yield
Other issuers
Fair value
Amortized cost
Yield
Total debt securities at amortized cost
(held-to-maturity securities under IAS 39)
Fair value
Amortized cost
Yield
399 $ 1,136 $
396
1.80% 2.28%
1,136
–
–
–% 2.22%
176
176
38
39
0.03% 0.03%
328 $ 1,688
317
1,709
2.18%
3.10%
597
596
3.29%
24
25
0.03%
–
–
–%
–
–
–%
$ – $
4,914 $
661 $
661
1.87%
– 4,922
–%
1.97%
–
–
–%
–
–
–%
783
782
3.07%
111
114
0.03%
812
802
1.84%
n/a
n/a
n/a%
–
–
–%
n/a
n/a
n/a%
–
–
–%
4,704
4,787
5,912
6,172
10,807
11,028
5,352
5,441
2.19% 2.09%
2.78%
2.66%
– 28,372
– 29,034
–%
2.47%
22,417
22,531
22,119
21,845
2.15%
2.03%
7,571
7,529
7,531
7,519
1,681
1,675
0.52% 1.22%
0.66%
–
–
–%
– 25,768
– 25,683
–%
0.72%
22,629
22,431
28,923
28,643
0.43%
0.29%
5,738
5,738
5,105
5,096
8,765
8,756
2.53% 2.79%
3.13%
3.05%
– 23,728
– 23,709
–%
2.91%
n/a
n/a
n/a%
n/a
n/a
n/a%
–
–
–%
–
–
–%
–
–
–%
15,525
15,867
–
–
–%
2.85%
– 15,525
– 15,867
–%
2.85%
1,847
1,849
2,397
2,391
2,403
2,403
1.79%
1.06% 0.95%
414
414
0.33%
3
3
5.23%
–
–
–%
7,064
7,060
1.17%
n/a
n/a
n/a%
n/a
n/a
n/a%
n/a
n/a
n/a%
n/a
n/a
n/a%
$ 14,134 $ 18,908 $ 22,934 $ 18,956 $ 31,333
31,776
23,183
14,121
19,151
18,940
0.83%
1.44% 1.87%
2.63%
2.89%
$ – $ 106,265 $ 71,426 $ 84,987
84,395
71,363
– 107,171
–%
2.09%
1.59%
1.35%
1 Certain comparative amounts have been reclassified to conform with the presentation
3 As at October 31, 2018, includes securities issued by Government of Japan of
adopted in the current period.
2 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.
$9.5 billion (as at October 31, 2017, includes securities issued by Government of
Japan of $8.9 billion), where the book value was greater than 10% of the
shareholders’ equity.
4 Represents contractual maturities. Actual maturities may differ due to prepayment
privileges in the applicable contract.
111
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 6 1
LOAN PORTFOLIO – Maturity Schedule
(millions of Canadian dollars)
Remaining term-to-maturity
Under
1 year
1 to 5
years
Over
5 years
Total
As at
Total
October 31 October 31 October 31 October 31 October 31
2014
2018
2015
2016
2017
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
$ 32,310 $ 156,837 $ 4,682 $ 193,829 $ 190,325 $ 189,299 $ 185,009 $ 175,125
46,417 39,709
33 86,159 74,937 65,068 61,317 59,568
583 12,188 11,445 24,216 22,282 20,577 19,038 16,475
800 18,574 17,355 16,456 16,075 16,116
16,740
18,046
– 18,046 18,028 18,226 17,941 17,927
114,096 209,768 16,960 340,824 322,927 309,626 299,380 285,211
1,034
–
6,539
8,148
8,016
3,418
14,687 11,434
3,809 18,364 17,981 16,001 14,862 14,604
2,069 13,635 12,832 12,780 11,330
9,768
5,878 31,999 30,813 28,781 26,192 24,372
9,163 111,145 97,033 91,054 84,155 71,814
71,060 30,922
185,156 240,690 26,123 451,969 419,960 400,680 383,535 357,025
668
73 30,387 31,128 31,460 27,662 26,922 23,335
80
10,453
1,801 12,334 12,434 13,208 13,334 11,665
303 17,762 11,805 29,870 29,182 28,370 24,862 18,782
615
314
16,964
7,637
28,702 18,135 44,333 91,170 88,894 83,665 78,085 62,034
693
– 16,964 14,972 13,680 12,274
220
–
745
846
340
874
4,294
3,215
3,219
1,616
2,320 11,050
9,056 22,426 22,163 21,675 18,317 14,037
3,936 14,269 12,271 30,476 29,479 28,527 24,008 18,331
6,852
5,691
7,316
8,050
21,812 54,449 47,829 124,090 119,350 116,713 97,217 69,417
50,514 72,584 92,162 215,260 208,244 200,378 175,302 131,451
14
1,523
1,537
–
685
685
–
50
50
14
2,258
2,272
14
1,579
1,593
16
1,513
1,529
5
1,978
1,983
9
2,124
2,133
n/a
320
320
2,695
1,713
4,408
$ 237,527 $ 313,959 $ 118,468 $ 669,954 $ 633,671 $ 605,235 $ 564,421 $ 495,017
1,674
974
2,648
2,187
1,414
3,601
3,209
665
3,874
n/a
–
–
n/a
453
453
n/a
133
133
T A B L E 6 2
LOAN PORTFOLIO – Rate Sensitivity
(millions of Canadian dollars)
As at
October 31, 2018
October 31, 2017
October 31, 2016
October 31, 2015
October 31, 2014
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
$ 218,098 $ 84,450 $ 197,483 $ 84,080 $ 212,257 $ 82,507 $ 176,316 $ 66,949 $ 155,614 $ 59,555
24,991
$ 313,959 $ 118,468 $ 276,930 $ 120,173 $ 297,396 $ 116,767 $ 248,979 $ 99,157 $ 229,286 $ 84,546
95,861 34,018 79,447 36,093 85,139 34,260
32,208 73,672
72,663
Fixed rate
Variable rate
Total
112
TD BANK GROUP ANNUAL REPORT 2018 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 3
ALLOWANCE FOR LOAN 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.
2018
$ 3,475
2,472
2017
$ 3,873
2,216
2016
$ 3,434
2,330
2015
$ 3,028
1,683
2014
$ 2,855
1,557
15
22
18
23
21
8
251
216
557
1,047
2
1
3
75
1,122
11
337
216
595
1,181
1
2
3
75
1,256
16
19
22
387
192
958
1,575
1
10
11
79
1,654
–
–
–
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
–
–
–
n/a
2
2
2,778
9
1
10
2,659
14
4
18
2,351
13
6
19
2,157
1
1
58
37
87
184
2
1
90
41
98
232
1
–
91
52
118
262
–
–
–
17
$ 201
1
–
1
20
$ 252
1
3
4
27
$ 289
1
2
78
58
124
263
1
1
2
33
$ 296
13
207
234
582
1,057
1
3
4
109
1,166
17
43
232
79
288
659
12
18
30
117
776
–
–
–
5
20
25
1,967
5
5
138
60
109
317
1
2
3
29
$ 346
113
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 6 3
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 loan losses, including off-balance sheet positions
Less: Allowance for off-balance sheet positions3
Total allowance for loan losses, at end of period
Ratio of net write-offs in the period to average loans outstanding
2018
2017
2016
2015
2014
$
2
$
4
$
9
$
11
$
10
4
116
35
173
330
2
7
9
42
372
–
–
–
n/a
16
16
589
(2,189)
(46)
49
3,761
212
$ 3,549
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
0.34%
0.33%
0.30%
0.30%
5
12
20
60
107
14
15
29
73
180
–
–
–
–
7
7
533
(1,434)
–
112
3,090
62
$ 3,028
0.31%
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.
3 The allowance for loan losses for off-balance sheet positions is recorded in Other
liabilities on the Consolidated Balance Sheet.
T A B L E 6 4
AVERAGE DEPOSITS
(millions of Canadian dollars, except as noted)
October 31, 2018
October 31, 2017
Average
balance
Total
interest
expense
Average
rate paid
Average
balance
Total
interest
expense
Average
rate paid
Average
balance
For the years ended
October 31, 2016
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
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
$ 13,156 $
57,030
222,394
223,295
515,875
–
1,094
567
4,215
5,876
10,037
2,859
317,218
52,461
382,575
–
16
3,233
958
4,207
155
1,025
–
37,435
38,615
–
1
–
405
406
–% $ 11,201 $
–% $
3,674 $
1.92
0.25
1.89
1.14
57,521
209,939
176,345
455,006
–
648
321
2,730
3,699
1.13
0.15
1.55
0.81
58,124
189,018
168,393
419,209
–
521
249
2,359
3,129
–
0.56
1.02
1.83
1.10
–
0.10
–
1.08
1.05
10,405
3,152
298,639
79,090
391,286
–
11
1,695
973
2,679
(7)
1,442
–
28,153
29,588
–
3
–
234
237
–
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
54
1,918
–
27,132
29,104
–
4
–
175
179
–%
0.90
0.13
1.40
0.75
–
0.18
0.33
0.74
0.40
–
0.21
–
0.64
0.62
Total average deposits
$ 937,065 $ 10,489
1.12% $ 875,880 $ 6,615
0.76% $ 810,261 $ 4,758
0.59%
1 As at October 31, 2018, deposits by foreign depositors in TD’s Canadian
bank offices amounted to $152 billion (October 31, 2017 – $100 billion,
October 31, 2016 – $83 billion). Certain comparative amounts have been
recast to conform with the presentation adopted in the current period.
114
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 6 5
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 6
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
$ 65,253
20,203
20,225
$ 105,681
$ 41,862
34,955
20,037
$ 96,854
$ 32,237
23,027
16,033
$ 71,297
$ 22,761
16,547
2,016
$ 41,324
$ 19,392
15,607
9,058
$ 44,057
$ 10,607
13,450
10,582
$ 34,639
$ 37,652
11,654
2,787
$ 52,093
$ 20,623
11,821
3,714
$ 36,158
$ 13,721
17,760
7,297
$ 38,778
October 31, 2018
$ 92,105
2,166
–
$ 94,271
$ 217,771
50,570
25,028
$ 293,369
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
2018
October 31
2017
As at
October 31
2016
$ 93,389
95,286
98,539
1.63%
1.65
$ 88,591
76,136
88,986
0.87%
0.92
$ 48,973
65,511
70,415
0.38%
0.51
115
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 6 7
NET INTEREST INCOME ON AVERAGE EARNING BALANCES1,2,3
(millions of Canadian dollars, except as noted)
2018
2017
2016
Average
balance
Interest4
Average
rate
Average
balance
Interest4
Average
rate
Average
balance
Interest4
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 mortgages5
Canada
U.S.
Consumer instalment and other personal
Canada
U.S.
Credit card
Canada
U.S.
Business and government5
Canada
U.S.
International
Total interest-earning assets
Interest-bearing liabilities
Deposits
Personal
Canada
U.S.
Banks6
Canada
U.S.
Business and government6,7
Canada
U.S.
Subordinated notes and debentures
Obligations related to securities sold short
and under repurchase agreements
Canada
U.S.
Securitization liabilities8
Other liabilities
Canada
U.S.
International6
Total interest-bearing liabilities
Total net interest income on average
earning assets
$
5,204 $
34,424
102
592
1.96% $
1.72
5,629 $
42,899
21
405
0.37%
0.94
$
6,716 $
38,658
16
187
0.24%
0.48
55,519
20,496
1,684
517
47,761
155,892
1,219
3,719
3.03
2.52
2.55
2.39
47,985
20,186
1,332
403
48,109
130,611
949
2,378
2.78
2.00
1.97
1.82
45,102
22,605
1,187
401
2.63
1.77
41,531
112,147
614
1,802
1.48
1.61
41,518
44,238
665
1,020
1.60
2.31
33,725
43,087
371
496
1.10
1.15
42,981
31,824
254
189
0.59
0.59
201,772
29,514
5,656
1,110
120,273
41,762
5,215
1,711
2.80
3.76
4.34
4.10
200,251
27,982
4,916
1,041
106,614
41,263
4,704
1,455
2.45
3.72
4.41
3.53
18,708
15,853
2,323
2,550
12.42
16.09
18,571
13,771
2,270
2,213
12.22
16.07
197,925
27,331
4,726
1,029
2.39
3.76
97,881
40,471
18,414
12,598
4,604
1,285
4.70
3.18
2,223 12.07
1,999 15.87
92,348
115,147
102,855
2,943
4,203
1,193
$ 1,143,284 $ 36,422
2,187
80,673
3.19
3,795
112,416
3.65
1.16
896
88,963
3.19% $ 1,062,735 $ 29,832
2.71
3.38
1.01
2.81%
71,869
105,929
77,001
1,929
3,348
767
$ 990,983 $ 26,560
2.68
3.16
1.00
2.68%
$ 215,320 $ 1,228
531
238,005
0.57% $ 208,027 $
0.22
221,560
983
281
0.47%
0.13
$ 193,525 $
204,697
974
218
0.50%
0.11
11,612
7,214
135
135
248,013
84,575
7,946
4,513
3,541
337
46,981
57,384
27,805
1,091
1,274
586
1.16
1.87
1.82
4.19
4.24
2.32
2.22
2.11
10,686
9,460
71
115
199,236
108,078
9,045
2,645
2,283
391
0.66
1.22
1.33
2.11
4.32
10,528
6,503
191,284
101,620
8,769
55
47
0.52
0.72
2,100
1,185
395
1.10
1.17
4.50
34,719
56,587
29,761
540
696
472
1.56
1.23
1.59
45,098
47,654
32,027
412
346
452
0.91
0.73
1.41
5,706
34
68,074
132
4
676
$ 1,018,669 $ 14,183
92
5,306
2.31
4
34
11.76
0.99
412
48,787
1.39% $ 941,286 $ 8,985
1.73
11.76
0.84
0.95%
4,225
35
45,524
$ 891,489 $
82
1.94
4 11.43
0.81
0.74%
367
6,637
$ 1,143,284 $ 22,239
1.95% $ 1,062,735 $ 20,847
1.96%
$ 990,983 $ 19,923
2.01%
1 Certain comparative amounts have been restated to conform with the presentation
6 Includes average trading deposits with a fair value of $102 billion (2017 –
adopted in the current period.
$87 billion, 2016 – $77 billion).
2 Net interest income includes dividends on securities.
3 Geographic classification of assets and liabilities is based on the domicile of the
7 Includes marketing fees incurred on the TD Ameritrade IDA of $1.9 billion
(2017 – $1.5 billion, 2016 – $1.2 billion).
booking point of assets and liabilities.
4 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.
5 Includes average trading loans of $11 billion (2017 – $12 billion, 2016 – $11 billion).
8 Includes average securitization liabilities at fair value of $12 billion (2017 –
$13 billion, 2016 – $12 billion) and average securitization liabilities
at amortized cost of $16 billion (2017 –$17 billion, 2016 – $20 billion).
116
TD BANK GROUP ANNUAL REPORT 2018 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 6 8
ANALYSIS OF CHANGE IN NET INTEREST INCOME1,2,3
(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
2018 vs. 2017
2017 vs. 2016
Increase (decrease) due to changes in
Increase (decrease) due to changes in
Average
volume
Average
rate
Net
change
Average
volume
Average
rate
Net
change
$
(2)
(80)
$
83 $
267
81
187
$
(3) $
21
8
197
$
5
218
210
6
(7)
460
86
13
38
57
603
17
17
334
142
108
352
114
75
(43)
277
881
270
1,341
97
297
208
511
702
12
(92)
239
36
3
294
524
740
69
511
256
53
337
(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
316
92
182
$ 2,342
440
316
115
756
408
297
$ 4,248 $ 6,590
236
205
49
22
242
80
$ 1,668 $ 1,604
258
447
129
$ 3,272
$
34
21
6
(27)
$ 211 $ 245
250
229
$
73 $
18
(64)
45
$
58
47
64
20
15
47
9
63
16
68
648
(496)
(48)
1,220
1,754
(6)
1,868
1,258
(54)
191
9
(31)
7
–
195
$ 509
$ 1,833
360
569
145
551
578
114
33
–
69
40
–
264
$ 4,689 $ 5,198
$ (441) $ 1,392
1
21
88
75
12
(95)
65
(32)
457
1,023
(16)
545
1,098
(4)
223
285
52
128
350
20
21
–
33
(11)
–
12
$ 280 $ 2,068
(464)
$ 1,388 $
10
–
45
$ 2,348
$ 924
1 Certain comparative amounts have been restated to conform with the presentation
adopted in the current period.
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.
117
TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL RESULTS
Consolidated Financial Statements
PAGE
Management’s Responsibility for Financial Information
119
Reports of Independent Registered Public
Accounting Firm
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
Nature of Operations
Summary of Significant Accounting Policies
Significant Accounting Judgments,
Estimates, and Assumptions
Current and Future Changes in Accounting Policies
Fair Value Measurements
Offsetting Financial Assets and Financial Liabilities
Securities
Loans, Impaired Loans, and Allowance for
Credit Losses
Transfers of Financial Assets
Structured Entities
Derivatives
Investment in Associates and Joint Ventures
Significant Acquisitions and Disposals
Goodwill and Other Intangibles
Land, Buildings, Equipment, and Other
Depreciable Assets
Other Assets
Deposits
127
127
139
142
146
157
159
162
169
171
174
182
183
184
186
186
186
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
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 Income and Expense
Credit Risk
Regulatory Capital
Risk Management
Information on Subsidiaries
Significant and Subsequent Events,
and Pending Acquisition
PAGE
187
188
189
189
192
194
195
200
202
202
205
206
208
209
211
212
212
214
118
TD BANK GROUP ANNUAL REPORT 2018 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, 2018, 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, 2018, the Bank’s
internal control over financial reporting is effective.
The Bank’s Board of Directors, acting through the Audit Committee
which is composed entirely of independent directors, oversees
management’s responsibilities for financial reporting. The Audit
Committee reviews the Consolidated Financial Statements and
recommends them to the Board for approval. Other responsibilities
of the Audit Committee include monitoring the Bank’s system of
internal control over the financial reporting process and making
recommendations to the Board and shareholders regarding the
appointment of the external auditor.
The Bank’s Chief Auditor, who has full and free access to the
Audit Committee, conducts an extensive program of audits. This
program supports the system of internal control and is carried out
by a professional staff of auditors.
The Office of the Superintendent of Financial Institutions Canada,
makes such examination and enquiry into the affairs of the Bank
as deemed necessary to ensure that the provisions of the Bank Act,
having reference to the safety of the depositors, are being duly
observed and that the Bank is in sound financial condition.
Ernst & Young LLP, the independent auditors appointed by the
shareholders of the Bank, have audited the effectiveness of the Bank’s
internal control over financial reporting as at October 31, 2018, 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 28, 2018
119
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Shareholders and Directors of
The Toronto-Dominion Bank
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of
The Toronto-Dominion Bank (“TD”), which comprise the Consolidated
Balance Sheet as at October 31, 2018 and 2017, 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, 2018, and the related notes, comprising a summary of
significant accounting policies and other explanatory information
(collectively referred to as the “consolidated financial statements”).
In our opinion, the consolidated financial statements present fairly,
in all material respects, the consolidated financial position of TD as
at October 31, 2018 and October 31, 2017, and its consolidated
financial performance and its consolidated cash flows for each of the
years in the three-year period ended October 31, 2018, in accordance
with International Financial Reporting Standards as issued by the
International Accounting Standards Board.
Adoption of IFRS 9
As discussed in Note 2 to the consolidated financial statements,
TD changed its method of accounting for the classification and
measurement of financial instruments in 2018 due to the adoption
of IFRS 9, Financial Instruments. Our opinion is not qualified with
respect to this matter.
Report on Internal Control over Financial Reporting
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States) (“PCAOB”),
TD’s internal control over financial reporting as of October 31, 2018,
based on the criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
November 28, 2018, expressed an unqualified opinion on the
effectiveness of TD’s internal control over financial reporting.
Basis for Opinion
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 PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free from material misstatement,
whether due to error or fraud. Those standards also require that we
comply with ethical requirements, including independence. We are
required to be independent with respect to TD in accordance with the
ethical requirements that are relevant to our audit of the consolidated
financial statements in Canada, the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB. We are a public accounting firm
registered with the PCAOB.
An audit includes performing procedures to assess the risks of material
misstatements of the consolidated financial statements, whether
due to error or fraud, and performing procedures to respond to those
risks. Such procedures included obtaining and examining, on a test
basis, audit evidence regarding the amounts and disclosures in the
consolidated financial statements. The procedures selected depend
on our 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, we consider internal
control relevant to TD’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 evaluating the appropriateness of accounting
policies and principles 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 reasonable basis for our
audit opinion.
We have served as TD’s sole auditor since 2006. Prior to 2006, we or
our predecessor firm have served as joint auditor with various other
firms since 1955.
Ernst & Young LLP
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
November 28, 2018
120
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Shareholders and Directors of
The Toronto-Dominion Bank
Opinion on Internal Control over Financial Reporting
We have audited The Toronto-Dominion Bank’s (“TD”) internal control
over financial reporting as of October 31, 2018, based on criteria
established in Internal Control – Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (the “COSO criteria”). In our opinion, TD maintained, in
all material respects, effective internal control over financial reporting
as of October 31, 2018, 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) (“PCAOB”),
the Consolidated Balance Sheet of TD as at October 31, 2018 and
2017, 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, 2018, and the related notes,
comprising a summary of significant accounting policies and other
explanatory information and our report dated November 28, 2018,
expressed an unqualified opinion thereon.
Basis for Opinion
TD’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 TD’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to TD in accordance with the
ethical requirements that are relevant to our audit of the consolidated
financial statements in Canada, the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the
PCAOB. 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.
Definition and Limitations of Internal Control over
Financial Reporting
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.
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 International
Financial Reporting Standards as issued by the International Accounting
Standards Board, 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.
Ernst & Young LLP
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
November 28, 2018
121
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Consolidated Balance Sheet
(As at and in millions of Canadian dollars)
ASSETS
Cash and due from banks
Interest-bearing deposits with banks
Trading loans, securities, and other (Notes 5, 7)
Non-trading financial assets at fair value through profit or loss (Note 5)
Derivatives (Notes 5, 11)
Financial assets designated at fair value through profit or loss (Note 5)
Financial assets at fair value through other comprehensive income (Notes 5, 7, 8)
Available-for-sale securities (Notes 5, 7)
Debt securities at amortized cost, net of allowance for credit losses (Note 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)
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 (Note 22)
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
1 Not applicable.
The accompanying Notes are an integral part of these Consolidated
Financial Statements.
Certain comparative amounts have been reclassified to conform with the
presentation adopted in the current period.
122
October 31
2018
October 31
2017
$
4,735
30,720
35,455
127,897
4,015
56,996
3,618
130,600
n/a
323,126
107,171
n/a
127,379
225,191
172,079
35,018
217,654
n/a
649,942
(3,549)
646,393
$
3,971
51,185
55,156
103,918
n/a 1
56,195
4,032
n/a
146,411
310,556
n/a
71,363
134,429
222,079
157,101
33,007
200,978
3,209
616,374
(3,783)
612,591
17,267
8,445
16,536
2,459
5,324
2,812
26,940
15,596
95,379
$ 1,334,903
17,297
7,784
16,156
2,618
5,313
2,497
29,971
13,264
94,900
$ 1,278,995
$
$ 114,704
48,270
12,618
175,592
477,644
16,712
357,083
851,439
17,269
39,478
93,389
14,683
28,385
6,698
19,190
219,092
8,740
1,254,863
79,940
51,214
12,757
143,911
468,155
25,887
338,782
832,824
17,297
35,482
88,591
16,076
32,851
6,775
20,470
217,542
9,528
1,203,805
21,221
5,000
(144)
(7)
193
46,145
6,639
79,047
993
80,040
$ 1,334,903
20,931
4,750
(176)
(7)
214
40,489
8,006
74,207
983
75,190
$ 1,278,995
Bharat B. Masrani
Group President and
Chief Executive Officer
Alan N. MacGibbon
Chair, Audit Committee
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
Consolidated Statement of Income
(millions of Canadian dollars, except as noted)
Interest income1
Loans
Securities
Interest
Dividends
Deposits with banks
Interest expense (Note 30)
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)
Income (loss) from non-trading financial instruments at fair value through profit or loss
Income (loss) from financial instruments designated at fair value through profit or 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)
For the years ended October 31
2018
2017
2016
$ 27,790
$ 23,663
$ 21,751
6,685
1,234
713
36,422
10,489
586
337
2,771
14,183
22,239
4,656
1,210
111
1,052
48
(170)
2,716
2,376
4,045
551
16,595
38,834
2,480
2,444
10,377
1,765
1,073
815
803
73
306
1,247
3,678
20,137
13,773
3,182
743
11,334
214
$ 11,120
4,595
1,128
446
29,832
6,615
472
391
1,507
8,985
20,847
4,459
1,130
128
303
n/a
(254)
2,648
2,388
3,760
740
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
$ 11,048
72
$ 10,203
121
$
6.02
6.01
2.61
$
5.51
5.50
2.35
3,672
912
225
26,560
4,758
452
395
1,032
6,637
19,923
4,143
1,048
54
395
n/a
(20)
2,571
2,313
3,796
92
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
$ 8,680
115
$
4.68
4.67
2.16
1 Includes $30,639 million, for the year ended October 31, 2018, which has been
calculated based on the effective interest rate method (EIRM). Refer to Note 30.
The accompanying Notes are an integral part of these Consolidated
Financial Statements.
Certain comparative amounts have been reclassified to conform with the
presentation adopted in the current period.
123
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
Consolidated Statement of Comprehensive Income1
(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 financial assets at fair value through other
comprehensive income (available-for-sale securities under IAS 392)
Change in unrealized gains (losses) on available-for-sale securities
Change in unrealized gains (losses) on debt securities at fair value through other comprehensive income
Reclassification to earnings of net losses (gains) in respect of available-for-sale securities
Reclassification to earnings of net losses (gains) in respect of debt securities at fair value through
other comprehensive income
Reclassification to earnings of changes in allowance for credit losses on debt securities at fair value
through other comprehensive income
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 operations
Net gains (losses) on hedges of investments in foreign operations
Reclassification to earnings of net losses (gains) on hedges of investments in foreign operations
Net change in gains (losses) on derivatives designated as cash flow hedges
Change in gains (losses) on derivatives designated as cash flow hedges
Reclassification to earnings of losses (gains) on cash flow hedges
Items that will not be subsequently reclassified to net income
Actuarial gains (losses) on employee benefit plans
Change in net unrealized gains (losses) on equity securities designated at fair value through
other comprehensive income
Total other comprehensive income (loss), net of income taxes
Total comprehensive income (loss), net of income taxes
Attributable to:
Common shareholders
Preferred shareholders
Non-controlling interests in subsidiaries
1 The amounts are net of income tax provisions (recoveries) presented in the
following table.
2 IAS 39, Financial Instruments: Recognition and Measurement (IAS 39).
Income Tax Provisions (Recoveries) in the Consolidated Statement of Comprehensive Income
(millions of Canadian dollars)
Change in unrealized gains (losses) on available-for-sale securities
Change in unrealized gains (losses) on debt securities at fair value through
other comprehensive income
Less: Reclassification to earnings of net losses (gains) in respect of available-for-sale securities
Less: Reclassification to earnings of net losses (gains) in respect of debt securities at fair value
through other comprehensive income
Less: Reclassification to earnings of changes in allowance for credit losses on debt securities at fair value
through other comprehensive income
Unrealized gains (losses) on investments in foreign operations
Less: Reclassification to earnings of net losses (gains) on investment in foreign operations
Net gains (losses) on hedges of investments in foreign operations
Less: Reclassification to earnings of net losses (gains) on hedges of investments in foreign operations
Change in gains (losses) on derivatives designated as cash flow hedges
Less: Reclassification to earnings of losses (gains) on cash flow hedges
Actuarial gains (losses) on employee benefit plans
Change in net unrealized gains (losses) on equity securities designated at fair value through
other comprehensive income
Total income taxes
The accompanying Notes are an integral part of these Consolidated
Financial Statements.
For the years ended October 31
2018
2017
$ 11,334
$ 10,517
2016
$ 8,936
n/a
(261)
n/a
(22)
(1)
(284)
1,323
–
(288)
–
1,035
(1,624)
(455)
(2,079)
467
n/a
(143)
n/a
n/a
324
(2,534)
(17)
659
4
(1,888)
(1,454)
(810)
(2,264)
622
325
274
n/a
(56)
n/a
n/a
218
1,290
–
34
–
1,324
835
(752)
83
(882)
38
(668)
$ 10,666
$ 10,380
214
72
n/a
(3,503)
$ 7,014
$ 6,700
193
121
n/a
743
$ 9,679
$ 9,423
141
115
2018
$
n/a
For the years ended October 31
2017
$
150
2016
$
125
(139)
n/a
13
–
–
–
(104)
–
(473)
283
243
n/a
(36)
n/a
n/a
–
–
237
(1)
(789)
258
129
20
(749)
$
n/a
(494)
$
$
n/a
32
n/a
n/a
–
–
9
–
599
533
(340)
n/a
(172)
124
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
Consolidated Statement of Changes in Equity
(millions of Canadian dollars)
For the years ended October 31
2018
2017
2016
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
Impact on adoption of IFRS 91
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
Realized gains (losses) on equity securities designated at fair value through other comprehensive income
Balance at end of year
Accumulated other comprehensive income (loss)
Net unrealized gain (loss) on debt securities at fair value through other comprehensive income:
Balance at beginning of year
Impact on adoption of IFRS 9
Other comprehensive income (loss)
Allowance for credit losses
Balance at end of year
Net unrealized gain (loss) on equity securities designated at fair value through other comprehensive income:
Balance at beginning of year
Impact on adoption of IFRS 9
Other comprehensive income (loss)
Reclassification of loss (gain) to retained earnings
Balance at end of year
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
$ 20,931
152
366
(228)
21,221
4,750
750
(500)
5,000
(176)
(8,295)
8,327
(144)
(7)
(129)
129
(7)
214
(2)
(12)
(7)
193
40,489
53
11,262
(4,786)
(214)
(10)
(1,273)
622
2
46,145
510
19
(283)
(1)
245
113
(96)
40
(2)
55
n/a
n/a
n/a
7,791
1,035
8,826
(408)
(2,079)
(2,487)
6,639
79,047
983
72
–
(62)
993
$ 80,040
1 IFRS 9, Financial Instruments (IFRS 9).
The accompanying Notes are an integral part of these Consolidated Financial Statements.
$ 20,711
148
329
(257)
20,931
$ 20,294
186
335
(104)
20,711
4,400
350
–
4,750
(31)
(9,654)
9,509
(176)
(5)
(175)
173
(7)
203
23
(8)
(4)
214
35,452
n/a
10,396
(4,347)
(193)
(4)
(1,140)
325
n/a
40,489
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
299
324
623
9,679
(1,888)
7,791
1,856
(2,264)
(408)
8,006
74,207
1,650
121
(617)
(171)
983
$ 75,190
2,700
1,700
–
4,400
(49)
(5,769)
5,787
(31)
(3)
(115)
113
(5)
214
26
(28)
(9)
203
32,053
n/a
8,821
(4,002)
(141)
(14)
(383)
(882)
n/a
35,452
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
81
218
299
8,355
1,324
9,679
1,773
83
1,856
11,834
72,564
1,610
115
–
(75)
1,650
$ 74,214
125
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
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 under repurchase agreements
Securities purchased (sold) under reverse repurchase agreements
Securities sold short
Trading loans and securities
Loans net of securitization and sales
Deposits
Derivatives
Non-trading financial assets at fair value through profit or loss
Financial assets designated at fair value through profit or loss
Securitization liabilities
Current taxes
Brokers, dealers, and clients amounts receivable and payable
Other
Net cash from (used in) operating activities
Cash flows from (used in) financing activities
Issuance of subordinated notes and debentures (Note 19)
Redemption or repurchase 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 financial assets at fair value through other comprehensive income (Note 7)
Purchases
Proceeds from maturities
Proceeds from sales
Activities in available-for-sale securities (Note 7)
Purchases
Proceeds from maturities
Proceeds from sales
Activities in debt securities at amortized cost (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
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
For the years ended October 31
2018
2017
2016
$ 14,516
$ 12,770
$ 11,079
2,480
576
815
(111)
(743)
–
385
(104)
4,798
7,050
3,996
(24,065)
(45,620)
53,379
(3,745)
5,257
(468)
(1,532)
(780)
(1,435)
(8,956)
5,693
1,750
(2,468)
128
740
(1,501)
(500)
–
8,454
(8,424)
(4,634)
(72)
(6,527)
2,216
603
704
(128)
(449)
(204)
175
(283)
39,618
(48,377)
2,367
(4,661)
(22,332)
40,150
1,836
n/a
251
(1,575)
(419)
2,459
1,406
26,127
1,500
(2,536)
125
346
(1,397)
–
(626)
9,705
(9,829)
(4,211)
(112)
(7,035)
2,330
629
708
(54)
(433)
–
103
7
(18,183)
11,312
(5,688)
(4,100)
(44,158)
81,885
5,403
n/a
95
(3,321)
845
(247)
(811)
37,401
3,262
(979)
152
1,686
(487)
–
–
5,926
(5,884)
(3,808)
(115)
(247)
20,465
2,529
(11,231)
(20,269)
30,101
2,731
n/a
n/a
n/a
(51,663)
20,101
670
n/a
n/a
n/a
n/a
n/a
n/a
(587)
–
1,549
49
764
3,971
$ 4,735
$ 3,535
13,888
34,789
1,202
n/a
n/a
n/a
(63,339)
30,775
4,977
n/a
n/a
n/a
(17,807)
27,729
452
(2,471)
337
447
(434)
(2,129)
(18,934)
(94)
64
3,907
$ 3,971
$ 2,866
8,957
28,393
1,153
n/a
n/a
n/a
(52,775)
28,454
4,665
n/a
n/a
n/a
(20,575)
15,193
–
(41)
654
1
(797)
–
(36,452)
51
753
3,154
$ 3,907
$ 1,182
6,559
25,577
921
The accompanying Notes are an integral part of these Consolidated
Certain comparative amounts have been reclassified to conform with the
Financial Statements.
presentation adopted in the current period.
126
TD BANK GROUP ANNUAL REPORT 2018 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.
These Consolidated Financial Statements were prepared using the
accounting policies as described in Notes 2 and 4. 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 28, 2018.
Certain disclosures are included in the shaded sections of the
“Managing Risk” section of the accompanying 2018 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.
The Bank may consolidate certain subsidiaries where it owns 50%
or less of the voting rights. Most of those subsidiaries are structured
entities as described in the following section.
Structured Entities
Structured entities, including special purpose entities (SPEs), are
entities that are created to accomplish a narrow and well-defined
objective. Structured entities may take the form of a corporation, trust,
partnership, or unincorporated entity. They are often created with
legal arrangements that impose limits on the decision-making powers
of their governing board, trustee, or management over the operations
of the entity. Typically, structured entities may not be controlled
directly through holding more than half of the voting power of the
entity as the ownership of voting rights may not be aligned with
the variable returns absorbed from the entity. As a result, structured
entities are consolidated when the substance of the relationship
between the Bank and the structured entity indicates that the entity
is controlled by the Bank. When assessing whether the Bank has
to consolidate a structured entity, the Bank evaluates three primary
criteria in order to conclude whether, in substance:
• The Bank has the power to direct the activities of the structured
entity that have the most significant impact on the entity’s risks
and/or returns;
• The Bank is exposed to significant variable returns arising from
the entity; and
• The Bank has the ability to use its power to affect the risks and/or
returns to which it is exposed.
127
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Consolidation conclusions are reassessed at the end of each financial
reporting period. The Bank’s policy is to consider the impact on
consolidation of all significant changes in circumstances, focusing on
the following:
• Substantive changes in ownership, such as the purchase or disposal
of more than an insignificant additional interest in an entity;
• Changes in contractual or governance arrangements of an entity;
• Additional activities undertaken, such as providing a liquidity
facility beyond the original terms or entering into a transaction
not originally contemplated; or
• Changes in the financing structure of an entity.
Investments in Associates and Joint Ventures
Entities over which the Bank has significant influence are associates
and entities over which the Bank has joint control are joint ventures.
Significant influence is the power to participate in the financial and
operating policy decisions of an investee, but is not control or joint
control over these entities. Associates and joint ventures are accounted
for using the equity method of accounting. Investments in associates
and joint ventures are carried on the Consolidated Balance Sheet
initially at cost and increased or decreased to recognize the Bank’s
share of the profit or loss of the associate or joint venture, capital
transactions, including the receipt of any dividends, and write-downs
to reflect any impairment in the value of such entities. These increases
or decreases, together with any gains and losses realized on
disposition, are reported on the Consolidated Statement of Income.
At each balance sheet date, the Bank assesses whether there is any
objective evidence that the investment in an associate or joint venture
is impaired. The Bank calculates the amount of impairment as the
difference between the higher of fair value or value-in-use and its
carrying value.
Non-controlling Interests
When the Bank does not own all of the equity of a consolidated entity,
the minority shareholders’ interest is presented on the Consolidated
Balance Sheet as Non-controlling interests in subsidiaries as a component
of total equity, separate from the equity of the Bank’s shareholders.
The income attributable to the minority interest holders, net of tax, is
presented as a separate line item on the Consolidated Statement
of Income.
CASH AND DUE FROM BANKS
Cash and due from banks consist of cash and amounts due from
banks which are issued by investment grade financial institutions.
These amounts are due on demand or have an original maturity
of three months or less.
REVENUE RECOGNITION
Revenue is recognized to the extent that it is probable that the
economic benefits will flow to the Bank and the revenue can be reliably
measured. Revenue associated with the rendering of services is
recognized by reference to the stage of completion of the transaction
at the end of the reporting period.
Interest from interest-bearing assets and liabilities not measured
at fair value through profit or loss 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
Investment and securities services income include asset management
fees, administration and commission fees, and investment banking fees.
The Bank recognizes asset management and administration fees based
on time elapsed, which depicts the rendering of investment management
and related services over time. The fees are primarily calculated based
on average daily or point in time assets under management (AUM) or
assets under administration (AUA) depending on investment mandate.
Commission fees include sales, trailer and brokerage commissions.
Sales and brokerage commissions are generally recognized at a point
in time when the transaction is executed. Trailer commissions
are recognized over time and are generally calculated based on the
average daily net asset value of the fund during the period.
Investment banking fees include advisory fees and underwriting
fees and are generally recognized at a point in time as income upon
successful completion of the engagement.
Credit fees
Credit fees include liquidity fees, restructuring fees, letter of credit
fees, and loan syndication fees. Liquidity, restructuring, and letter of
credit fees are recognized in income over the period in which the
service is provided. Loan syndication fees are generally recognized at
a point in time upon completion of the financing placement.
Service charges
Service charges income is earned on personal and commercial deposit
accounts and consists of account fees and transaction-based service
charges. Account fees relate to account maintenance activities and are
recognized in income over the period in which the service is provided.
Transaction-based service charges are recognized as earned at a point
in time when the transaction is complete.
Card services
Card services income includes interchange income as well as card
fees such as annual and transactional fees. Interchange income is
recognized at a point in time when the transaction is authorized
and funded. Card fees are recognized as earned at the transaction
date with the exception of annual fees, which are recognized over
a twelve-month period.
IFRS 9 FINANCIAL INSTRUMENTS
On November 1, 2017, the Bank adopted IFRS 9, Financial Instruments
(IFRS 9), which replaces the guidance in IAS 39, Financial Instruments:
Recognition and Measurement (IAS 39). IFRS 9 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 annual
hedge accounting disclosures as required by the related amendments
to IFRS 7, Financial Instruments: Disclosures (IFRS 7). Refer to Note 4
for further details.
Classification and Measurement of Financial Assets
The Bank classifies its financial assets into the following categories:
• Amortized cost;
• Fair value through other comprehensive income (FVOCI);
• Held-for-trading;
• Non-trading fair value through profit or loss (FVTPL); and
• Designated at FVTPL.
The Bank continues to recognize financial assets on a trade date basis.
Debt Instruments
The classification and measurement for debt instruments is based
on the Bank’s business models for managing its financial assets and
whether the contractual cash flows represent solely payments
of principal and interest (SPPI). Refer to Note 3 for judgment with
respect to business models and SPPI.
The Bank has determined its business models as follows:
• Held-to-collect: the objective is to collect contractual cash flows;
• Held-to-collect-and-sell: the objective is both to collect contractual
cash flows and sell the financial assets; and
• Held-for-sale and other business models: the objective is neither
of the above.
128
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS The Bank performs the SPPI test for financial assets held within the
held-to-collect and held-to-collect-and-sell business models. If these
financial assets have contractual cash flows which are inconsistent with
a basic lending arrangement, they are classified as non-trading financial
assets measured at FVTPL. In a basic lending arrangement, interest
includes only consideration for time value of money, credit risk, other
basic lending risks, and a reasonable profit margin.
assets held within the held-to-collect or held-to-collect-and-sell
business models that do not pass the SPPI test are also classified as
non-trading financial assets measured at FVTPL. Changes in fair value
as well as any gains or losses realized on disposal are recognized in
income (loss) from non-trading financial instruments at FVTPL. Interest
income from debt instruments is included in interest income on an
accrual basis.
Debt Securities and Loans Measured at Amortized Cost
Debt securities and loans held within a held-to-collect business model
where their contractual cash flows pass the SPPI test are measured
at amortized cost. The carrying amount of these financial assets is
adjusted by an allowance for credit losses recognized and measured
as described in the Impairment – Expected Credit Loss Model section
of this Note, as well as any 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 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 in interest income over the term
of the loan.
Debt Securities and Loans Measured at Fair Value through
Other Comprehensive Income
Debt securities and loans held within a held-to-collect-and-sell business
model where their contractual cash flows pass the SPPI test are
measured at FVOCI. Fair value changes are recognized in OCI, except
for impairment gains or losses, interest income and foreign exchange
gains and losses on the instrument’s amortized cost, which are
recognized in the Consolidated Statement of Income. The expected
credit loss (ECL) allowance is recognized and measured as described in
the Impairment – Expected Credit Loss Model section of this Note.
When the financial asset is derecognized, the cumulative gain or loss
previously recognized in OCI is reclassified from equity to income and
recognized in net securities gain (loss). Interest income from these
financial assets is included in interest income using EIRM.
Financial Assets Held-for-Trading
This held-for-sale business model includes financial assets held within
a trading portfolio if they have been originated, acquired, or incurred
principally for the purpose of selling in the near term, or if they form
part of a portfolio of identified financial instruments that are managed
together and for which there is evidence of short-term profit-taking.
Financial assets held within this business model consist of trading
securities, trading loans, as well as certain debt securities and
financing-type physical commodities that are recorded as securities
purchased under reverse repurchase agreements on the Consolidated
Balance Sheet.
Trading portfolio assets 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. Transaction costs are expensed as
incurred. Dividends are recognized on the ex-dividend date and
interest is recognized on an accrual basis. Both dividends and interest
are included in interest income.
Non-Trading Financial Assets Measured at Fair Value through
Profit or Loss
Non-trading financial assets measured at FVTPL include financial assets
held within the held-for-sale and other business models, for example
debt securities and loans managed on a fair value basis. Financial
Financial Assets Designated at Fair Value through Profit or Loss
Debt instruments in a held-to-collect or held-to-collect-and-sell business
model can be designated at initial recognition as measured at FVTPL,
provided the designation can eliminate or significantly reduce an
accounting mismatch that would otherwise arise from measuring these
financial assets on a different basis. The FVTPL designation is available
only for those financial instruments for which a reliable estimate of fair
value can be obtained. Once financial assets are designated at FVTPL,
the designation is irrevocable. Changes in fair value as well as any
gains or losses realized on disposal are recognized in income (loss)
from financial instruments designated at FVTPL. Interest income from
these financial assets is included in interest income on an accrual basis.
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.
Equity Instruments
Equity investments are required to be measured at FVTPL (classified
as non-trading financial assets measured at FVTPL), except where
the Bank has elected at initial recognition to irrevocably designate an
equity investment, held for purposes other than trading, at FVOCI.
If such an election is made, the fair value changes, including any
associated foreign exchange gains or losses, are recognized in OCI
and are not subsequently reclassified to net income, including upon
disposal. Realized gains and losses are transferred directly to retained
earnings upon disposal. Consequently, there is no review required
for impairment. Dividends will normally be recognized in interest
income unless the dividends represent a recovery of part of the cost
of the investment. Gains and losses on non-trading equity investments
measured at FVTPL are included in income (loss) from non-trading
financial instruments at FVTPL.
Classification and Measurement for Financial Liabilities
The Bank classifies its financial liabilities into the following categories:
• Held-for-trading;
• Designated at FVTPL; and
• Other liabilities.
Financial Liabilities Held-for-Trading
Financial liabilities are held within a trading portfolio if they have been
incurred principally for the purpose of repurchasing in the near term,
or 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. Financial liabilities held-for-trading
are primarily trading deposits, securitization liabilities at fair value,
obligations related to securities sold short and obligations related to
certain securities sold under repurchase agreements.
Trading portfolio liabilities are recognized on a trade date basis and
are accounted for at fair value, with changes in fair value and any
gains or losses recognized in trading income. Transaction costs are
expensed as incurred. Interest is recognized on an accrual basis and
included in interest expense.
129
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Financial Liabilities Designated at Fair Value through
Profit or Loss
Certain financial liabilities that do not meet the definition of trading
may be designated at FVTPL. To be designated at FVTPL, financial
liabilities must meet one of the following criteria: (1) the designation
eliminates or significantly reduces a measurement or recognition
inconsistency; (2) a group of financial liabilities 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 FVTPL
designation is available only for those financial instruments for which
a reliable estimate of fair value can be obtained. Once financial
liabilities are designated at FVTPL, the designation is irrevocable.
Liabilities designated at FVTPL 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 (loss),
except for the amount of change in fair value attributable to changes
in the Bank’s own credit risk, which is presented in OCI. This exception
does not apply to loan commitments or financial guarantee contracts.
Interest is included in interest expense on an accrual basis.
Other Financial Liabilities
Deposits
Deposits, other than deposits included in a trading portfolio, are
accounted for at amortized cost. Accrued interest on deposits is included
in Other liabilities on the Consolidated Balance Sheet. Interest, including
capitalized transaction costs, is recognized on an accrual basis using
EIRM as Interest expense on the Consolidated Statement of Income.
Subordinated Notes and Debentures
Subordinated notes and debentures are accounted for at amortized
cost. Accrued interest on subordinated notes and debentures is
included in Other liabilities on the Consolidated Balance Sheet.
Interest, including capitalized transaction costs, is recognized on an
accrual basis using EIRM as Interest expense on the Consolidated
Statement of Income.
Reclassification of Financial Assets and Liabilities
Financial assets and financial liabilities are not reclassified subsequent
to their initial recognition, except for financial assets for which the Bank
changes its business model for managing financial assets. Such
reclassifications of financial assets are expected to be rare in practice.
Impairment – Expected Credit Loss Model
The ECL model applies to financial assets, including loans and debt
securities measured at amortized cost, loans and debt securities
measured at FVOCI, loan commitments, and financial guarantees that
are not measured at FVTPL.
The ECL model consists of three stages: Stage 1 – twelve-month
ECLs for performing financial assets, Stage 2 – Lifetime ECLs for
financial assets that have experienced a significant increase in credit
risk since initial recognition, and Stage 3 – Lifetime ECLs for financial
assets that are impaired. ECLs are the difference between all contractual
cash flows that are due to the Bank in accordance with the contract
and all the cash flows the Bank expects to receive, discounted at the
original effective interest rate. If a significant increase in credit risk has
occurred since initial recognition, impairment is measured as lifetime
ECLs. Otherwise, impairment is measured as twelve-month ECLs which
represent the portion of lifetime ECLs that are expected to occur based
on default events that are possible within twelve months after the
reporting date. If credit quality improves in a subsequent period such
that the increase in credit risk since initial recognition is no longer
considered significant, the loss allowance reverts back to being
measured based on twelve-month ECLs.
Significant Increase in Credit Risk
For retail exposures, significant increase in credit risk is assessed based
on changes in the twelve-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.
For non-retail exposures, significant increase in credit risk is assessed
based on changes in the internal risk rating (borrower risk ratings (BRR))
since initial recognition.
The Bank defines default as delinquency of 90 days or more for
most retail products and BRR 9 for non-retail exposures. Exposures
are considered impaired and migrate to Stage 3 when they are 90 days
or more past due for retail exposures, rated BRR 9 for non-retail
exposures, or when there is objective evidence that there has been
a deterioration of credit quality to the extent the Bank no longer
has reasonable assurance as to the timely collection of the full amount
of principal and interest.
When determining whether there has been a significant increase in
credit risk since initial recognition of a financial asset, the Bank
considers all reasonable and supportable information that is available
without undue cost or effort about past events, current conditions,
and forecast of future economic conditions. Refer to Note 3 for
additional details.
Measurement of Expected Credit Losses
ECLs are measured as the probability-weighted present value of
expected cash shortfalls over the remaining expected life of the
financial instrument and 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, ECLs are measured over the
period the Bank is exposed to credit risk. For example, ECLs for credit
cards are measured over the borrowers’ expected behavioural life,
incorporating survivorship assumptions and borrower-specific attributes.
The Bank leverages its Advanced Internal Ratings Based (AIRB)
models used for regulatory capital purposes and incorporates
adjustments where appropriate to calculate ECLs.
Forward-Looking Information and Expert Credit Judgment
Forward-looking information is considered when determining
significant increase in credit risk and measuring ECLs. Forward-looking
macroeconomic factors are incorporated in the risk parameters
as relevant.
Qualitative factors that are not already considered in the modelling
are incorporated by exercising expert credit judgment in determining
the final ECL. Refer to Note 3 for additional details.
Modified 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.
If the Bank determines that a modification results in expiry of cash
flows, the original asset is derecognized while a new asset is recognized
based on the new contractual terms. Significant increase in credit risk
is assessed relative to the risk of default on the date of modification.
130
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS If the Bank determines that a modification does not result in
derecognition, significant increase in credit risk is assessed based on
the risk of default at initial recognition of the original asset. Expected
cash flows arising from the modified contractual terms are considered
when calculating the ECL for the modified asset. For loans that were
modified while having lifetime ECLs, the loans can revert to having
twelve-month ECLs after a period of performance and improvement
in the borrower’s financial condition.
Allowance for Loan Losses, Excluding Acquired Credit-Impaired
(ACI) Loans
The allowance for loan losses represents management’s best estimate
of ECLs in the lending portfolios, including any off-balance sheet
exposures, at the balance sheet date. The allowance for loan losses for
lending portfolios reported on the Consolidated Balance Sheet, which
includes credit-related allowances for residential mortgages, consumer
instalment and other personal, credit card, business and government
loans, is deducted from Loans on the Consolidated Balance Sheet. The
allowance for loan losses for loans measured at FVOCI is presented on
the Consolidated Statement of Changes in Equity. The allowance for
loan 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. Each quarter, allowances
are reassessed and adjusted based on any changes in management’s
estimate of ECLs. Loan losses on impaired loans in Stage 3 continue
to be recognized by means of an allowance for loan losses until
a loan is written off.
A loan is written off against the related allowance for loan 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 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. The time period over which the Bank performs
collection activities of the contractual amount outstanding of financial
assets that are written off varies from one jurisdiction to another and
generally spans between less than one year to five years.
Allowance for Credit Losses on Debt Securities
The allowance for credit losses on debt securities represents
management’s best estimate of ECLs. Debt securities measured at
amortized cost are presented net of the allowance for credit losses on
the Consolidated Balance Sheet. The allowance for credit losses on
debt securities measured at FVOCI are presented on the Consolidated
Statement of Changes in Equity. The allowance for credit losses is
increased by the provision for credit losses and decreased by write-offs
net of recoveries and disposals. Each quarter, allowances are
reassessed and adjusted based on any changes in management’s
estimate of ECLs.
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 current market rates. On acquisition,
twelve-month ECLs are recognized on the acquired loans, resulting
in the carrying amount for acquired loans to be lower than fair
value. 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 ACI loans, with no
ECLs recognized on acquisition. Acquired performing loans are
subsequently accounted for at amortized cost based on their
contractual cash flows and any acquisition related discount or
premium, including credit-related discounts, is considered to be
an adjustment to the loan yield and is recognized in interest income
using EIRM over the term of the loan, or the expected life of the
loan for acquired loans with revolving terms.
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 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 effective interest rate as compared to the carrying value of the
loan. The ECL in excess of the initial credit-related discount is recorded
through the provision for credit losses. Interest income on ACI loans
is calculated by multiplying the credit-adjusted effective interest rate
to the amortized cost of ACI loans.
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 on 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.
131
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS GUARANTEES
The Bank issues guarantee contracts that require payments to be made
to guaranteed parties based on: (1) changes in the underlying economic
characteristics relating to an asset or liability of the guaranteed party;
(2) failure of another party to perform under an obligating agreement;
or (3) failure of another third party to pay its indebtedness when due.
Financial standby letters of credit are financial guarantees that
represent irrevocable assurances that the Bank will make payments in
the event that a customer cannot meet its obligations to third parties
and they carry the same credit risk, recourse, and collateral security
requirements as loans extended to customers. Performance standby
letters of credit are considered non-financial guarantees as payment
does not depend on the occurrence of a credit event and is generally
related to a non-financial trigger event. Guarantees, including financial
and performance standby letters of credit, are initially measured
and recorded at their fair value. The fair value of a guarantee liability
at initial recognition is normally equal to the present value of the
guarantee fees received over the life of contract. The Bank’s release
from risk is recognized over the term of the guarantee using a
systematic and rational amortization method.
If a guarantee meets the definition of a derivative, it is carried at
fair value on the Consolidated Balance Sheet and reported as a
derivative asset or derivative liability at fair value. Guarantees that
are considered derivatives are a type of credit derivative contracts
which are over-the-counter (OTC) contracts designed to transfer
the credit risk in an underlying financial instrument from one
counterparty to another.
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 (loss).
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, 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 Net interest income or Non-interest income,
as applicable, on the Consolidated Statement of Income.
Cash Flow Hedges
The Bank is exposed to variability in future cash flows 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 initially
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.
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.
132
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS 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 certain instruments, including
financial liabilities, (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 for the period. Translation gains and losses are included in
non-interest income except for equity investments designated at
FVOCI where unrealized translation gains and losses are recorded in
other comprehensive income.
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 risks and rewards have been transferred
by quantitatively comparing the variability in cash flows before and
after the transfer. If the variability in cash flows does not change
significantly as a result of the transfer, the Bank has retained
substantially all of the risks and rewards of ownership.
133
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS 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 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.
134
TD BANK GROUP ANNUAL REPORT 2018 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 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 is
determined by reference to market yields on high quality corporate
135
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
bonds with terms matching the plans’ specific cash flows. The expense
recognized includes the cost of benefits for employee service provided
in the current year, net interest expense or income on the net defined
benefit liability or asset, past service costs related to plan amendments,
curtailments or settlements, and administrative costs. Plan amendment
costs are recognized in the period of a plan amendment, irrespective
of its vested status. Curtailments and settlements are recognized
by the Bank when the curtailment or settlement occurs. A curtailment
occurs when there is a significant reduction in the number of employees
covered by the plan. A settlement occurs when the Bank enters into
a transaction that eliminates all further legal or constructive obligation
for part or all of the benefits provided under a defined benefit plan.
The fair value of plan assets and the present value of the projected
benefit obligation are measured as at October 31. The net defined
benefit asset or liability represents the difference between the
cumulative actuarial gains and losses, expenses, and recognized
contributions and is reported in other assets or other liabilities.
Net defined benefit assets recognized by the Bank are subject to a
ceiling which limits the asset recognized on the Consolidated Balance
Sheet to the amount that is recoverable through refunds of contributions
or future contribution holidays. In addition, where a regulatory funding
deficit exists related to a defined benefit plan, the Bank is required to
record a liability equal to the present value of all future cash payments
required to eliminate that deficit.
Defined Contribution Plans
For defined contribution plans, annual pension expense is equal to
the Bank’s contributions to those plans.
INSURANCE
Premiums for short-duration insurance contracts are deferred
as unearned premiums and reported in non-interest income on a
straight-line basis over the contractual term of the underlying policies,
usually twelve 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.
FINANCIAL INSTRUMENTS OTHER THAN DERIVATIVES PRIOR
TO NOVEMBER 1, 2017 UNDER IAS 39
The following is applicable to periods prior to November 1, 2017
for financial instruments accounted for under IAS 39, to the extent not
already discussed earlier in this Note.
Classification and Measurement of Financial Assets and
Financial Liabilities
Available-for-Sale Securities
Financial assets not classified as trading, designated at fair value
through profit or loss, held-to-maturity or loans, were classified as
available-for-sale and included equity securities and debt securities.
Available-for-sale securities were recognized on a trade date
basis and were 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 were calculated on a weighted-average cost basis
and were recognized in net securities gains (losses) in non-interest
income. Dividends were recognized on the ex-dividend date and
interest income was recognized on an accrual basis using EIRM. Both
dividends and interest were included in Interest income on the
Consolidated Statement of Income.
Impairment losses were recognized if there was objective evidence
of impairment as a result of one or more events that occurred (a ‘loss
event’) and the loss event(s) resulted in a decrease in the estimated
future cash flows of the instrument. A significant or prolonged decline
in fair value below cost was considered objective evidence of
impairment for available-for-sale equity securities. A deterioration in
credit quality was considered objective evidence of impairment
for available-for-sale debt securities. Qualitative factors were also
considered when assessing impairment for available-for-sale securities.
When impairment was identified, the cumulative net loss previously
recognized in other comprehensive income, less any impairment loss
previously recognized on the Consolidated Statement of Income, was
136
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS removed from other comprehensive income and recognized in Net
securities gains (losses) in Non-interest income on the Consolidated
Statement of Income.
Consolidated Balance Sheet as Derivatives and measured at fair value
with subsequent changes recognized in Non-interest income on the
Consolidated Statement of Income.
If the fair value of a previously impaired equity security subsequently
increased, the impairment loss was not reversed through the
Consolidated Statement of Income. Subsequent increases in fair value
were recognized in other comprehensive income. If the fair value of
a previously impaired debt security subsequently increased and the
increase could be objectively related to an event occurring after the
impairment was recognized on the Consolidated Statement of Income,
then the impairment loss was reversed through the Consolidated
Statement of Income. An increase in fair value in excess of impairment
recognized previously on the Consolidated Statement of Income was
recognized in other comprehensive income.
Held-to-Maturity Securities
Debt securities with fixed or determinable payments and fixed maturity
dates, that did not meet the definition of loans and receivables, and
that the Bank intended and had the ability to hold to maturity were
classified as held-to-maturity and were carried at amortized cost, net
of impairment losses. Securities classified as held-to-maturity were
assessed for objective evidence of impairment at the counterparty-
specific level. If there was no objective evidence of impairment at the
counterparty-specific level then the security was grouped with other
held-to-maturity securities with similar credit risk characteristics and
was collectively assessed for impairment, which considered losses
incurred but not identified. Interest income was recognized using EIRM
and was included in Interest income on the Consolidated Statement
of Income.
Financial Assets and Liabilities Designated at Fair Value through
Profit or Loss
Certain financial assets and financial liabilities that did not meet the
definition of trading could be designated at FVTPL on initial recognition.
To be designated at FVTPL, financial assets and financial liabilities had
to meet one of the following criteria: (1) the designation eliminated
or significantly reduced a measurement or recognition inconsistency
(also referred to as “an accounting mismatch”); (2) a group of financial
assets, financial liabilities, or both, was managed and its performance
was evaluated on a fair value basis in accordance with a documented
risk management or investment strategy; or (3) the instrument
contained one or more embedded derivatives unless a) the embedded
derivative did not significantly modify the cash flows that otherwise
would be required by the contract, or b) it was clear with little or no
analysis that separation of the embedded derivative from the financial
instrument was prohibited. In addition, the FVTPL designation was
available only for those financial instruments for which a reliable
estimate of fair value could be obtained. Once financial assets
and financial liabilities were designated at FVTPL, the designation
was irrevocable.
Financial assets and financial liabilities designated at FVTPL were
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 income (loss) from financial instruments designated at
fair value at profit or loss. Interest was recognized on an accrual basis
and was included in interest income or interest expense.
Embedded Derivatives
Derivatives that were embedded in financial assets and liabilities were
separated from their host instruments and treated as separate
derivatives when their characteristics and risks were not closely related
to those of the host instrument, a separate instrument with the same
terms as the embedded derivative met the definition of a derivative,
and the combined contract was not held-for-trading or designated at
fair value through profit or loss. These embedded derivatives, which
were bifurcated from the host contract, were recognized on the
Impairment – Allowance for Credit Losses
Loan Impairment, Excluding Acquired Credit-Impaired Loans
A loan, including a debt security classified as a loan, was considered
impaired when there was objective evidence that there had been
a deterioration of credit quality subsequent to the initial recognition
of the loan (a ‘loss event’) to the extent the Bank no longer had
reasonable assurance as to the timely collection of the full amount
of principal and interest. Indicators of impairment could include,
but were 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 would enter bankruptcy
or other financial reorganization; or
• The disappearance of an active market for that financial asset.
A loan was reclassified back to performing status when it had been
determined that there was 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 had been remedied. For gross impaired debt
securities classified as loans, subsequent to any recorded impairment,
interest income continued to be recognized using 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 experienced financial difficulties the Bank
may have granted certain concessionary modifications to the terms and
conditions of a loan. Modifications may have included 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 had policies in place to determine
the appropriate remediation strategy based on the individual borrower.
Once modified, additional impairment was recorded where the Bank
identified a decrease in the modified loan’s estimated realizable value
as a result of the modification. Modified loans were assessed for
impairment, consistent with the Bank’s policies for impairment.
Allowance for Credit Losses, Excluding Acquired
Credit-Impaired Loans
The allowance for credit losses represented 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 included credit-related allowances
for residential mortgages, consumer instalment and other personal,
credit card, business and government loans, and debt securities
classified as loans, was deducted from Loans on the Consolidated
Balance Sheet. The allowance for credit losses for off-balance sheet
instruments, which related to certain guarantees, letters of credit,
and undrawn lines of credit, was recognized in Other liabilities
on the Consolidated Balance Sheet. Allowances for lending portfolios
reported on the balance sheet and off-balance sheet exposures
were calculated using the same methodology. The allowance was
increased by the provision for credit losses and decreased by
write-offs net of recoveries and disposals. The Bank maintained both
counterparty-specific and collectively assessed allowances. Each
quarter, allowances were 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 were recognized by
means of an allowance for credit losses until a loan was written off.
137
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS A loan was written off against the related allowance for credit losses
when there was no realistic prospect of recovery. Non-retail loans were
generally written off when all reasonable collection efforts had been
exhausted, such as when a loan was sold, when all security had been
realized, or when all security had been resolved with the receiver or
bankruptcy court. Non-real estate secured retail loans were generally
written off when contractual payments were 180 days past due, or
when a loan was sold. Real-estate secured retail loans were generally
written off when the security was realized.
Counterparty-Specific Allowance
Individually significant loans, such as the Bank’s medium-sized business
and government loans and debt securities classified as loans, were
assessed for impairment at the counterparty-specific level. The
impairment assessment was based on the counterparty’s credit ratings,
overall financial condition, and where applicable, the realizable value
of the collateral. Collateral was reviewed at least annually and when
conditions arose indicating an earlier review was necessary. An
allowance, if applicable, was measured as the difference between the
carrying amount of the loan and the estimated recoverable amount.
The estimated recoverable amount was 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, were collectively assessed
for impairment. Allowances were calculated using a formula that
incorporated recent loss experience, historical default rates which were
delinquency levels in interest or principal payments that indicated
impairment, other applicable observable data, and the type of
collateral pledged.
Collectively Assessed Allowance for Incurred but Not Identified
Credit Losses
If there was no objective evidence of impairment for an individual loan,
whether significant or not, the loan was included in a group of assets
with similar credit risk characteristics and collectively assessed for
impairment for losses incurred but not identified. This allowance was
referred to as the allowance for incurred but not identified credit
losses. The level of the allowance for each group depended upon an
assessment of business and economic conditions, historical loss
experience, loan portfolio composition, and other relevant indicators.
Historical loss experience was adjusted based on observable data
to reflect the effects of conditions which existed at the time. The
allowance for incurred but not identified credit losses was calculated
using credit risk models that considered probability of default (loss
frequency), loss given credit default (loss severity), and exposure
at default (EAD). For purposes of measuring the collectively assessed
allowance for incurred but not identified credit losses, default was
defined as delinquency levels in interest or principal payments that
would indicate impairment.
Acquired Loans
Acquired loans were initially measured at fair value which considered
incurred and expected future credit losses estimated at the acquisition
date and also reflected adjustments based on the acquired loan’s
interest rate in comparison to market rates. As a result, no allowance
for credit losses was recorded on the date of acquisition. When
loans were acquired with evidence of incurred credit loss where it
was probable at the purchase date that the Bank would be unable
to collect all contractually required principal and interest payments,
they were generally considered to be ACI loans.
Acquired performing loans were subsequently accounted for
at amortized cost based on their contractual cash flows and any
acquisition-related discount or premium was considered to be
an adjustment to the loan yield and recognized in interest income
using 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 were not accreted.
Acquired loans were 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 were 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 were accounted for based on the present value of expected
cash flows as opposed to their contractual cash flows. The Bank
determined the fair value of these loans at the acquisition date by
discounting expected cash flows at a discount rate that reflected
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 were reflective of market conditions. With respect to certain
individually significant ACI loans, accounting was applied individually
at the loan level. The remaining ACI loans were aggregated provided
that they were acquired in the same fiscal quarter and had common
risk characteristics. Aggregated loans were accounted for as a single
asset with aggregated cash flows and a single composite interest rate.
Subsequent to acquisition, the Bank regularly reassessed and
updated its cash flow estimates for changes to assumptions relating to
default rates, loss severities, the amount and timing of prepayments,
and other factors that were reflective of market conditions. Probable
decreases in expected cash flows triggered the recognition of
additional impairment, which was 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 was
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 have
increased or decreased which may have resulted 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
was recognized.
138
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS N O T E 3
SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES, AND ASSUMPTIONS
The estimates used in the Bank’s accounting policies are essential to
understanding its results of operations and financial condition. Some
of the Bank’s policies require subjective, complex judgments and
estimates as they relate to matters that are inherently uncertain.
Changes in these judgments or estimates and changes to accounting
standards and policies could have a materially adverse impact on
the Bank’s Consolidated Financial Statements. The Bank has established
procedures to ensure that accounting policies are applied consistently
and that the processes for changing methodologies, determining
estimates, and adopting new accounting standards are well-controlled
and occur in an appropriate and systematic manner.
For non-retail exposures, BRR is determined on an individual
borrower basis using industry and sector-specific credit risk models
that are based on historical data. Current and forward-looking
information that is specific to the borrower, industry, and sector is
considered based on expert credit judgment. Criteria for assessing
significant increase in credit risk are defined at the appropriate
segmentation level and vary based on the BRR of the exposure at
origination. Criteria include relative changes in BRR, absolute BRR
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.
CLASSIFICATION AND MEASUREMENT OF FINANCIAL ASSETS
Business Model Assessment
The Bank determines its business models based on the objective under
which its portfolios of financial assets are managed. Refer to Note 2
for details on the Bank’s business models. In determining its business
models, the Bank considers the following:
• Management’s intent and strategic objectives and the operation
of the stated policies in practice;
• The primary risks that affect the performance of the business model
and how these risks are managed;
• How the performance of the portfolio is evaluated and reported
to management; and
• The frequency and significance of financial asset sales in prior periods,
the reasons for such sales and the expected future sales activities.
Sales in themselves do not determine the business model and are not
considered in isolation. Instead, sales provide evidence about how cash
flows are realized. A held-to-collect business model will be reassessed
by the Bank to determine whether any sales are consistent with an
objective of collecting contractual cash flows if the sales are more than
insignificant in value or infrequent.
Solely Payments of Principal and Interest Test
In assessing whether contractual cash flows are SPPI, the Bank considers
the contractual terms of the instrument. This includes assessing whether
the financial asset contains a contractual term that could change the
timing or amount of contractual cash flows such that they would
not be consistent with a basic lending arrangement. In making the
assessment, the Bank considers the primary terms as follows and
assess if the contractual cash flows of the instruments continue to
meet the SPPI test:
• Performance-linked features;
• Terms that limit the Bank’s claim to cash flows from specified
assets (non-recourse terms);
• Prepayment and extension terms;
• Leverage features; and
• Features that modify elements of the time value of money.
IMPAIRMENT OF FINANCIAL ASSETS
Significant Increase in Credit Risk
For retail exposures, criteria for assessing significant increase in credit
risk are defined at the appropriate product or portfolio level and vary
based on the exposure’s credit risk at origination. 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.
Measurement of Expected Credit Loss
For retail exposures, ECLs are 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 asset and discounted
to the reporting date at the effective interest rate. PD estimates
represent the point-in-time PD, updated quarterly based on the Bank’s
historical experience, current conditions, and relevant forward-looking
expectations over the expected life of the exposure to determine the
lifetime PD curve. LGD estimates are determined based on historical
charge-off events and recovery payments, current information about
attributes specific to the borrower, and direct costs. Expected cash
flows from collateral, guarantees, and other credit enhancements are
incorporated in LGD if integral to the contractual terms. Relevant
macroeconomic variables are incorporated in determining expected
LGD. EAD represents the expected balance at default across the
remaining expected life of the exposure. EAD incorporates forward-
looking expectations about repayments of drawn balances and
expectations about future draws where applicable.
For non-retail exposures, ECLs are 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. Lifetime PD is determined
by mapping the exposure’s BRR to point-in-time PD over the expected
life. LGD estimates are determined by mapping the exposure’s facility
risk rating (FRR) to expected LGD which takes into account facility-
specific characteristics such as collateral, seniority ranking of debt,
and loan structure. Relevant macroeconomic variables are incorporated
in determining expected PD and LGD. Expected cash flows are
determined by applying the expected LGD to the contractual cash
flows to calculate cash shortfalls over the expected life of the exposure.
Forward-Looking Information
In calculating the ECL, the Bank employs internally developed models
that utilize parameters for PD, LGD, and EAD. Forward-looking
macroeconomic factors including at the regional level are incorporated
in the risk parameters as relevant. Additional risk factors that are
industry or segment-specific are also incorporated, where relevant.
Forward-looking macroeconomic forecasts are generated by
TD Economics as part of the ECL process: A base economic forecast
is accompanied with upside and downside estimates of realistically
possible economic conditions. All economic forecasts are updated
quarterly for each variable on a regional basis where applicable
and incorporated as relevant into the quarterly modelling of base,
upside and downside risk parameters used in the calculation of
ECL scenarios and probability-weighted ECL. The macroeconomic
variable estimations are statistically derived relative to the base
139
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS forecast based on the historical distribution of each variable.
TD Economics will apply judgment to recommend probability weights
to each forecast on a quarterly basis. The proposed macroeconomic
forecasts and probability weightings are subject to robust management
review and challenge process by a cross-functional committee
that includes representation from TD Economics, Risk, Finance, and
Business. ECLs calculated under each of the three forecasts are
applied against the respective probability weightings to determine the
probability-weighted ECLs. Refer to Note 8 for further details on
the macroeconomic variables and ECL sensitivity.
Expert Credit Judgment
ECLs are recognized on initial recognition of the financial assets.
Allowance for credit losses represents management’s best estimate
of risk of default and ECLs on the financial assets, including any
off-balance sheet exposures, at the balance sheet date. Management
exercises expert credit judgment in assessing if an exposure has
experienced significant increase in credit risk since initial recognition
and in determining the amount of ECLs at each reporting date by
considering reasonable and supportable information that is not
already included in the quantitative models.
Management’s judgment is used to determine the point within
the range that is the best estimate for the qualitative component
contributing to ECLs, based on an assessment of business and
economic conditions, historical loss experience, loan portfolio
composition, and other relevant indicators and forward-looking
information 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
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. For example, the future decommissioning of Interbank Offered
Rates (IBOR) may also have an impact on the fair value of products that
reference or use valuation models with IBOR inputs.
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
140
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS 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 is determined by reference to market yields on
high quality corporate bonds with terms matching the plans’ specific
cash flows. 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.
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 the entity 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.
141
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS IMPAIRMENT OF FINANCIAL ASSETS PRIOR TO
NOVEMBER 1, 2017 UNDER IAS 39
The following is applicable to periods prior to November 1, 2017 for
financial instruments accounted for under IAS 39.
Available-for-Sale Securities
Impairment losses were recognized on available-for-sale securities if
there was objective evidence of impairment as a result of one or more
events that occurred after initial recognition and the loss event(s)
resulted in a decrease in the estimated cash flows of the instrument.
The Bank individually reviewed 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
was considered objective evidence of impairment. For available-for-sale
debt securities, a deterioration of credit quality was considered objective
evidence of impairment. Other factors considered in the impairment
assessment included 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 were recognized on held-to-maturity securities if
there was objective evidence of impairment as a result of one or more
events that occurred after initial recognition and the loss event(s)
resulted in a decrease in the estimated cash flows of the instrument.
The Bank reviewed these securities at least quarterly for impairment
at the counterparty-specific level. If there was no objective evidence
of impairment at the counterparty-specific level then the security was
grouped with other held-to-maturity securities with similar credit risk
characteristics and collectively assessed for impairment, which considered
losses incurred but not identified. A deterioration of credit quality was
considered objective evidence of impairment. Other factors considered
in the impairment assessment included 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, was considered
impaired when there was objective evidence that there had been a
deterioration of credit quality subsequent to the initial recognition
of the loan to the extent the Bank no longer had reasonable assurance
as to the timely collection of the full amount of principal and interest.
The Bank assessed loans for objective evidence of impairment
individually for loans that were individually significant, and collectively
for loans that were not individually significant. The allowance for
credit losses represented management’s best estimate of impairment
incurred in the lending portfolios, including any off-balance sheet
exposures, at the balance sheet date. Management exercised judgment
as to the timing of designating a loan as impaired, the amount of the
allowance required, and the amount that would be recovered once
the borrower defaulted. Changes in the amount that management
expected to recover would have a direct impact on the provision
for credit losses and may have resulted in a change in the allowance
for credit losses.
If there was no objective evidence of impairment for an individual
loan, whether significant or not, the loan was 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 employed internally developed models that utilized
parameters for PD, LGD, and EAD. Management’s judgment was used
to determine the point within the range that was 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 were not fully incorporated into the model
calculation. Changes in these assumptions would have a direct impact
on the provision for credit losses and may have resulted in a change
in the incurred but not identified allowance for credit losses.
N O T E 4
CURRENT AND FUTURE CHANGES IN ACCOUNTING POLICIES
CURRENT CHANGES IN ACCOUNTING POLICIES
The following new standard has been adopted by the Bank on
November 1, 2017.
IFRS 9 FINANCIAL INSTRUMENTS
On November 1, 2017, the Bank adopted IFRS 9, Financial Instruments
(IFRS 9), which replaces the guidance in IAS 39, Financial Instruments:
Recognition and Measurement (IAS 39). IFRS 9 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 annual
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. In January 2015, OSFI issued the final version of the
Advisory titled “Early adoption of IFRS 9 Financial Instruments for
Domestic Systemically Important Banks” which mandated that all
domestic systemically important banks (D-SIBs), including the Bank,
were required to early adopt IFRS 9 for the annual period beginning
on November 1, 2017. As such, on November 1, 2017, the Bank
adopted IFRS 9 retrospectively. 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.
However, the Bank made the decision not to restate comparative
period financial information and has recognized any measurement
differences between the previous carrying amounts and the new
carrying amounts on November 1, 2017, through an adjustment to
opening retained earnings or AOCI, as applicable. Refer to Note 2
for accounting policies under IAS 39 applied during those periods.
Amendments were also made to IFRS 7 introducing expanded
qualitative and quantitative disclosures related to IFRS 9, which
the Bank has also adopted for the annual period beginning
November 1, 2017. Refer to Notes 2 and 3 for further details.
Summary of impact upon adoption of IFRS 9 – Classification
and measurement
The following table summarizes the classification and measurement
impact as at November 1, 2017. Reclassifications represent movements
of the carrying amount of financial assets and liabilities which have
changed their classification. Remeasurement represents changes in the
carrying amount of the financial assets and liabilities due to changes
in their measurement.
142
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS FINANCIAL ASSETS
(millions of Canadian dollars)
IAS 39
Cash and due from banks
Interest-bearing deposits
with banks
Trading loans, securities,
and other
Debt securities
Equity securities
Loans
Commodities and other
As at
Oct. 31, 2017
As at
Nov. 1, 2017
IAS 39
Measurement
Category
IAS 39
Re-
Carrying
Amount classifications measurement
Re-
IFRS 9
Carrying
Amount
IFRS 9
Measurement
Category
IFRS 9
$
– $
3,971 Amortized Cost Cash and due from banks
Interest-bearing deposits
–
51,185 Amortized Cost
with banks
Amortized Cost $
3,971
$
Amortized Cost
51,185
FVTPL
FVTPL
FVTPL
FVTPL
53,402
32,010
11,235
7,271
103,918
–
–
–
–
(86)
–
(86)
–
–
–
–
–
53,402
32,010
11,149
7,271
103,832
3,734
369
264
2,857
1,918
86
44
9,272
56,195
3,150
–
–
3,150
139,193
–
2,091
1,823
143,107
3,734
369
196
2,857
1,917
86
44
9,203
–
–
(369)
(513)
(882)
(3,734)
(1,197)
(196)
1,823
(3,304)
–
3,209
1,197
513
(155)
4,764
–
–
68
–
1
–
–
69
–
–
–
–
–
–
–
–
–
–
29
–
(7)
–
8
30
Trading loans, securities,
and other
FVTPL Debt securities
FVTPL Equity securities
FVTPL Loans
FVTPL Commodities and other
Non-trading financial assets
at FVTPL
FVTPL Debt securities
FVTPL Debt securities
FVTPL Equity securities
FVTPL Loans
FVTPL Loans
FVTPL Loans
FVTPL Loans
FVTPL Derivatives
Financial assets designated
at FVTPL
FVTPL Debt securities
FVTPL Debt securities
FVTPL Debt securities
Financial assets at FVOCI
FVOCI Debt securities
FVOCI Debt securities
FVOCI Equity securities
FVOCI Loans
(2)
(9)
(4)(10)
(11)
Debt securities at amortized cost,
net of allowance for credit losses
71,392 Amortized Cost Debt securities
3,209 Amortized Cost Debt securities
1,190 Amortized Cost Debt securities
513 Amortized Cost Debt securities
(147)
Allowance for security losses
(12)
(13)
(9)
(8)
(14)
76,157
Securities purchased under reverse
repurchase agreements
Securities purchased under reverse
Derivatives
Financial assets designated
at FVTPL
Debt securities
Debt securities
Debt securities
Available-for-sale securities
Debt securities
Debt securities
Equity securities
Loans
FVTPL
56,195
FVTPL
FVTPL
FVTPL
3,150
369
513
4,032
FVOCI 142,927
1,197
FVOCI
2,287
FVOCI
–
FVOCI
146,411
Held-to-maturity securities
Debt securities
Amortized Cost
71,363
Securities purchased under reverse
repurchase agreements
Securities purchased under reverse
repurchase agreements
Securities purchased under reverse
71,363
FVTPL
1,345
repurchase agreements
Amortized Cost
133,084
134,429
Loans
Residential mortgages
Consumer instalment and
653
(653)
–
–
–
–
1,998
FVTPL
repurchase agreements
Securities purchased under reverse
132,431 Amortized Cost
134,429
repurchase agreements
Loans
Amortized Cost 222,079
(2,857)
–
219,222 Amortized Cost Residential mortgages
other personal
Amortized Cost
157,101
33,007
Amortized Cost
Credit card
Amortized Cost 199,053
Business and government
1,925
Business and government
Amortized Cost
3,209
Debt securities classified as loans Amortized Cost
616,374
Total Loans before allowance
(3,783)
Allowance for loan losses
Loans, net of allowance for
(44)
–
(1,823)
(1,925)
(3,209)
(9,858)
156
–
–
–
–
–
–
152
606,516
(3,475)
612,591
(9,702)
152
603,041
Consumer instalment and
157,057 Amortized Cost
33,007 Amortized Cost Credit card
other personal
197,230 Amortized Cost Business and government
– Amortized Cost Business and government
– Amortized Cost
Amortized Cost
17,297
Amortized Cost
Amortized Cost
29,971
4,556
51,824
1,235,919
43,076
$ 1,278,995
–
–
8
8
1
–
1
$
–
(28)
(28)
51,804
223 1,236,143
43,078
$ 225 $ 1,279,221
2
–
17,297 Amortized Cost
29,971 Amortized Cost
dealers, and clients
4,536 Amortized Cost Other financial assets
Amounts receivable from brokers,
Total Loans before allowance
Allowance for loan losses
Loans, net of allowance for
loan losses
Other
Customers’ liability
under acceptances
Total financial assets
Non-financial assets
Total assets
loan losses
Other
Customers’ liability
under acceptances
Amounts receivable from brokers,
dealers, and clients
Other financial assets
Total financial assets
Non-financial assets
Total assets
Note
(1)
(2)
(3)
(4)
(5)
(6)
(1)
(5)
(7)
(3)
(8)
(15)
(15)
(5)
(5)
(11)
(6)
(13)
(14)
(16)
143
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
FINANCIAL LIABILITIES
(millions of Canadian dollars)
IAS 39
Trading deposits
Derivatives
Securitization liabilities at fair value
Deposits
Acceptances
Obligations related to securities
sold short
Obligations related to securities
sold under repurchase
agreements
Securitization liabilities at
amortized cost
IAS 39
Measurement
Category
FVTPL $
FVTPL
FVTPL
Amortized Cost
Amortized Cost
FVTPL
Amortized
Cost/
FVTPL
88,591
Amortized Cost
16,076
Amounts payable to brokers,
dealers, and clients
Amortized Cost
Subordinated notes and debentures Amortized Cost
Other financial liabilities
Amortized Cost
Total financial liabilities
Non-financial liabilities
Total liabilities
Retained earnings
Accumulated other comprehensive
income
Other equity
Total liabilities and equity
32,851
9,528
9,934
1,186,494
17,311
1,203,805
40,489
8,006
26,695
$ 1,278,995
As at
Oct. 31, 2017
As at
Nov. 1, 2017
Re-
IAS 39
Re-
Carrying
Amount classifications measurement
79,940
51,214
12,757
832,824
17,297
$ –
–
–
–
–
$
– $
–
–
–
–
IFRS 9
Carrying
Amount
79,940
51,214
12,757
IFRS 9
Measurement
Category
IFRS 9
Note
FVTPL Trading deposits
FVTPL Derivatives
FVTPL Securitization liabilities at fair value
832,824 Amortized Cost Deposits
17,297 Amortized Cost Acceptances
Obligations related to securities
35,482
–
–
35,482
FVTPL
sold short
–
–
–
–
–
–
–
–
–
1
–
$ 1
–
–
250
250 1,186,744
17,311
250 1,204,055
40,542
53
–
(78)
–
7,929
26,695
$ 225 $ 1,279,221
–
88,591
Amortized Obligations related to securities
Cost/
FVTPL
sold under repurchase
agreements
Securitization liabilities at
–
16,076 Amortized Cost
amortized cost
Amounts payable to brokers,
32,851 Amortized Cost
dealers, and clients
9,528 Amortized Cost Subordinated notes and debentures
10,184 Amortized Cost Other financial liabilities
(14)
Total financial liabilities
Non-financial liabilities
Total liabilities
Retained earnings
Accumulated other comprehensive
income
Other equity
Total liabilities and equity
1 Certain loans that met the definition of trading under IAS 39 have been reclassified
to non-trading financial assets at FVTPL, as these loans are held within a business
model that is managed on a fair value basis but are not subject to active and
frequent buying and selling with the objective of generating a profit from
short-term fluctuations in price.
2 Certain available-for-sale (AFS) debt securities under IAS 39 are required to be
measured at FVTPL under IFRS 9 as these securities do not pass the SPPI test.
Previously recognized changes in fair value on these securities were reclassified
to retained earnings.
3 Certain debt securities designated at FVTPL under IAS 39 are required to be
measured at FVTPL under IFRS 9 as they do not pass the SPPI test.
4 Certain equity securities classified as AFS under IAS 39 have been reclassified
to non-trading financial assets at FVTPL. Unrealized gains (losses) on the AFS
equity securities were reclassified to retained earnings. In addition, certain
AFS equity securities were measured at cost under IAS 39 as they did not have
a quoted market price in an active market and their fair value could not be
reliably measured. Under IFRS 9, these equity securities are required to be
measured at fair value as the exception under IAS 39 is no longer available. The
difference between the cost and the fair value was recorded in retained earnings.
5 Certain loans are held in a business model managed on a fair value basis under
IFRS 9 and are therefore reclassified to non-trading financial assets at FVTPL.
6 Certain business and government loans are required to be measured at FVTPL
as they do not pass the SPPI test. The carrying value of these loans was adjusted
to reflect their fair value with the difference recorded in retained earnings.
7 Certain debt securities designated at FVTPL under IAS 39 have been similarly
re-designated to be measured at FVTPL to achieve a significant reduction in
accounting mismatch.
Consolidated Statement of Income would not have been material during the year
ended October 31, 2018. The effective interest rate of these debt securities
determined on November 1, 2017 ranged from 0.55% to 1.38% and interest
income of $11 million was recognized during the year ended October 31, 2018.
9 Certain debt securities classified as AFS under IAS 39 were held within a business
model with an objective to hold assets to collect contractual cash flows. The
carrying value of these debt securities as at November 1, 2017 has been adjusted
to amortized cost through AOCI. The fair value of these debt securities was
$1.2 billion as at October 31, 2018. Had the Bank not reclassified these debt
securities to amortized cost, the change in unrealized gains (losses) on AFS
securities recognized on the Consolidated Statement of Comprehensive Income
would have been a loss of $27 million during the year ended October 31, 2018.
10 Certain equity securities classified as AFS under IAS 39 have been designated to
be measured at FVOCI under IFRS 9. Previously recognized impairment associated
with these equity securities has been reclassified from retained earnings to AOCI.
11 Certain business and government loans measured at amortized cost under IAS 39
are included in a held-to-collect-and-sell business model under IFRS 9 and are
measured at FVOCI.
12 Under IAS 39, certain debt securities were reclassified out of the AFS category
to HTM at their fair value as of the reclassification date. Under IFRS 9, these debt
securities are held within a held-to-collect business model and are measured
at amortized cost. On transition, the carrying amount of these debt securities
was adjusted through AOCI to reflect amortized cost measurement since
their inception.
13 Debt securities classified as loans have been reclassified as debt securities at
amortized cost under IFRS 9.
14 Refer to the impairment allowance reconciliation for remeasurement of credit
8 Certain debt securities held by the Bank were designated at FVTPL under IAS 39.
losses under IFRS 9.
Under IFRS 9, the designation was revoked and these debt securities are
held within a held-to-collect business model and are measured at amortized
cost. Previously recognized changes in fair value of these securities were
reversed through retained earnings. The fair value of these debt securities was
$1,143 million as at October 31, 2018. Had the Bank not reclassified these
debt securities to amortized cost, the change in fair value recognized on the
15 Certain securities purchased under reverse repurchase agreements were measured
at amortized cost under IAS 39. These securities are included in a held-for-sale
business model with a purpose to hold these instruments for trading and are
measured at FVTPL.
16 Tax impact related to the adoption of IFRS 9.
144
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
Summary of Impact upon adoption of IFRS 9 – Impairment
The reconciliation of the Bank’s closing allowances for credit losses
in accordance with IAS 39 and provisions for loan commitments
and financial guarantee contracts in accordance with IAS 37 to
the Bank’s opening ECL determined in accordance with IFRS 9,
as at November 1, 2017, is shown in the following table:
Reconciliation of the Closing Allowance for Credit Losses under IAS 39/IAS 37 to Opening Allowance
for Credit Losses under IFRS 91
(millions of Canadian dollars)
IAS 39/IAS 37 closing balance
as at October 31, 2017
IFRS 9 opening balance
as at November 1, 2017
Incurred but Counterparty-
specific
not identified
Individually
insignificant
Total IAS 39/
IAS 37 closing
balance
Re-
classifications2 measurement3
Re-
Stage 1
Stage 2
Total IFRS 9
opening
balance
Stage 3
Loans
Residential mortgages
Consumer instalment and
other personal
Credit card
Business and government
Debt securities classified
as loans
Acquired credit-impaired loans
Total loans, including off-balance
sheet instruments
Less: Off-balance sheet
instruments4
Total allowance for
loan losses5
Debt securities at
amortized cost6,7
Debt securities at fair
value through other
comprehensive income
$
36
$ –
$ 42
$
78
$
–
$ 17 $
24 $ 26 $ 45 $
95
689
1,231
1,526
20
3,502
–
–
–
134
126
260
3
147
335
29
–
553
32
836
1,566
1,689
146
4,315
35
–
–
(10)
(146)
(156)
–
214 529
39 763
(172) 706
355
521
627
166
321
174
1,050
1,605
1,507
–
–
98 2,022
–
–
–
1,529
–
–
706
35
–
4,257
35
3,502
263
585
4,350
(156)
98 2,022
1,529
741
4,292
567
–
–
567
–
250 488
329
–
817
2,935
263
585
3,783
(156)
(152) 1,534
1,200
741
3,475
–
–
–
–
155
(8)
–
21
126
147
$
–
$ –
$
–
$
–
$
1
$
4 $
3 $
2 $
– $
5
1 Stage 3 allowance under IFRS 9 and counterparty-specific and individually insignifi-
cant allowance under IAS 39 represent allowance for credit losses on impaired
financial assets.
2 Reclassifications represent the impact of classification and measurement changes
on impairment allowances.
3 Remeasurement includes the impact of adopting the ECL model under IFRS 9,
which has been recorded as an adjustment to opening retained earnings on
November 1, 2017.
4 The allowance for credit losses for off-balance sheet instruments is recorded in
Other liabilities on the Consolidated Balance Sheet.
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.
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
5 Excludes allowance on securities purchased under reverse repurchase agreements,
amounts receivable from brokers, dealers, and clients, and other assets which
are netted against the related assets. The allowance for credit losses related to
customers’ liability under acceptances is included in business and government.
6 Impairment allowances related to held-to-maturity securities were previously
included in the allowances for business and government loans under IAS 39.
7 Previously held-to-maturity securities and debt securities classified as loans
under IAS 39.
identification of performance obligations, on assessing principal versus
agent considerations and on licensing revenue. The amendments also
provided additional transitional relief upon initial adoption of IFRS 15
and have the same effective date as the IFRS 15 standard. The Bank
is required to adopt the standard for the annual period beginning
on November 1, 2018. The standard is to be applied on a modified
retrospective basis, recognizing the cumulative effect of initially applying
the standard as an adjustment to the opening balance of retained
earnings without restating comparative period financial information.
As at October 31, 2018, the Bank’s current estimate of the adoption
impact of IFRS 15, subject to refinement, is an overall reduction to
Shareholder’s Equity of approximately $41 million related to certain
expenses not eligible for deferral under IFRS 15. The presentation of
certain revenue and expense items will also be reclassified prospectively.
These presentation changes are not significant and do not have an
impact on net income.
145
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
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 on the balance sheet. Lessees
will also recognize depreciation expense on the right-of-use asset,
interest expense on the lease liability, and a shift in the timing of
expense recognition in the statement of income. Short-term leases,
which are defined as those that have a lease term of twelve 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. The Bank is continuing
to assess the impact of the new standard on its portfolio of leases,
including the impact upon its existing systems and internal controls.
Share-based Payment
In June 2016, the IASB published amendments to IFRS 2, Share-based
Payment (IFRS 2), 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 is
November 1, 2018 for the Bank. These amendments will be applied
prospectively and will not have a significant impact on the Bank.
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, non-trading
financial assets at fair value through profit or loss, assets and liabilities
designated at fair value through profit or loss, financial assets at fair
value through other comprehensive income, 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 include consideration of the reliability,
relevancy, and timeliness of data.
Insurance Contracts
In May 2017, the IASB issued IFRS 17, Insurance Contracts (IFRS 17),
which replaces the guidance in IFRS 4, Insurance Contracts and
establishes a new model for recognizing insurance policy obligations,
premium revenue, and claims-related expenses. IFRS 17 is currently
effective for the Bank’s annual reporting period beginning
November 1, 2021; however, based on recent IASB meetings, an
upcoming amendment to IFRS 17 and a deferral of the transition
date by one year is anticipated. Any change to the Bank’s transition
date is subject to updates of OSFI’s related Advisory. The Bank is
currently assessing the impact of adopting this standard.
Conceptual Framework for Financial Reporting
In March 2018, the IASB issued the revised Conceptual Framework for
Financial Reporting (Revised Conceptual Framework), which provides
a set of concepts to assist the IASB in developing standards and to
help preparers consistently apply accounting policies where specific
accounting standards do not exist. The framework is not an accounting
standard and does not override the requirements that exist in other
IFRS standards. The Revised Conceptual Framework describes that
financial information must be relevant and faithfully represented to
be useful, provides revised definitions and recognition criteria for
assets and liabilities, and confirms that different measurement bases
are useful and permitted. The Revised Conceptual Framework is
effective for annual periods beginning on or after January 1, 2020,
which will be November 1, 2020 for the Bank, with early adoption
permitted. The Bank is currently assessing the impact of adopting
the revised framework.
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.
146
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS The fair value of residential mortgage-backed securities is 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 is based on broker
quotes, third-party vendor prices, or other valuation techniques, such
as discounted cash flow techniques. Market inputs used in the other
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 its relative fair market 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 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.
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.
The fair value of loans carried at fair value through other
comprehensive income is assumed to approximate amortized cost
as they are generally floating rate performing loans that are short
term in nature.
Commodities
The fair value of commodities is based on quoted prices in active
markets, where available. The Bank also transacts 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
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.
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 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.
147
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS 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.
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.
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
and mortgage-backed security (MBS) curves.
Obligations Related to Securities Sold Short
The fair value of these obligations is based on the fair value of the
underlying securities, which can include equity or debt securities. As
these obligations are fully collateralized, the method used to determine
fair value would be the same as that of the relevant underlying equity
or debt securities.
Securities Purchased under Reverse Repurchase Agreements
and Obligations Related to Securities Sold under
Repurchase Agreements
Commodities and bonds 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.
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.
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.
148
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Financial Assets and Liabilities not carried at Fair Value1,2
(millions of Canadian dollars)
FINANCIAL ASSETS
Debt securities at amortized cost, net of allowance for credit losses
Government and government-related securities
Other debt securities
Total debt securities at amortized cost, net of allowance for credit losses
Held-to-maturity securities
Government and government-related securities
Other debt securities
Total held-to-maturity securities
Loans, net of allowance for loan losses
Debt securities classified as loans
Total loans, net of allowance for loan losses
Total financial assets not carried at fair value
FINANCIAL LIABILITIES
Deposits
Securitization liabilities at amortized cost
Subordinated notes and debentures
Total financial liabilities not carried at fair value
Carrying value
October 31, 20181
Fair value
As at
October 31, 2017
Carrying value
Fair value
$ 60,535
46,636
107,171
$ 59,948
46,316
106,264
$
$
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
646,393
n/a
646,393
$ 753,564
n/a
n/a
n/a
642,542
n/a
642,542
$ 748,806
45,623
25,740
71,363
609,529
3,062
612,591
$ 683,954
45,708
25,719
71,427
610,491
3,156
613,647
$ 685,074
$ 851,439
14,683
8,740
$ 874,862
$ 846,148
14,654
9,027
$ 869,829
$ 832,824
16,076
9,528
$ 858,428
$ 833,475
16,203
10,100
$ 859,778
1 Balances as at October 31, 2018 are prepared in accordance with IFRS 9. Prior
period comparatives are based on IAS 39. Refer to Note 4 for further details.
2 This table excludes financial assets and liabilities where the carrying amount is
a reasonable approximation of fair value.
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.
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.
149
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
Fair Value Hierarchy for Assets and Liabilities Measured at Fair Value on a Recurring Basis
(millions of Canadian dollars)
Level 1
Level 2
October 31, 20181
Total2
Level 3
Level 1
Level 2
As at
October 31, 2017
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
Non-trading financial assets at fair value through
profit or loss4
Securities
Loans
Derivatives
Interest rate contracts
Foreign exchange contracts
Credit contracts
Equity contracts
Commodity contracts
Financial assets designated at
fair value through profit or loss
Securities3
Financial assets at fair value through other
comprehensive income
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
Loans
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 shares5,6
Preferred shares
Debt securities reclassified from trading
Securities purchased under reverse
repurchase agreements
150
$
127 $ 14,335
7,535
–
$
– $ 14,462 $
7,538
3
390 $ 8,678
6,524
–
$
– $ 9,068
6,524
–
–
–
–
19,732
3,324
2,029
– 19,732
3,324
–
2,029
–
605
–
–
16,862
5,047
1,906
–
–
5,630
14,459
1
5,631
16 14,475
–
–
3,337
10,007
43,699
33
–
5,540
–
49,399
53
26
10,990
340
25
78,478
– 43,752 31,921
68
–
59
– 10,990
–
5,880 7,139
–
–
–
20 127,897 40,123
25
21
–
11,235
132
32
63,781
–
–
–
17,467
5,047
1,906
6
8
3,343
10,015
–
–
–
–
–
14
31,942
68
11,235
7,271
32
103,918
176
–
176
2,095
1,317
3,412
408
19
427
2,679
1,336
4,015
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
33
24
–
–
144
201
12,365
39,647
9
3,170
1,112
56,303
– 12,398
4 39,675
9
–
3,623
453
1,291
35
492 56,996
21
9
–
–
96
126
15,324
37,817
34
1,303
677
55,155
–
1
–
908
5
914
15,345
37,827
34
2,211
778
56,195
–
–
3,618
3,618
–
–
3,618
3,618
220
220
3,699
3,699
113
113
4,032
4,032
–
–
12,731
9,507
–
–
–
–
–
–
45,766
19,896
6,633
21,407
472
8,483
– 12,731
9,507
–
– 45,766
200 20,096
6,633
–
562 21,969
472
8,507
–
24
309
235
–
544
3
–
2,745
127,643
1,492
135
–
1,804
370
2,745
2,413 130,600
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
–
–
–
–
–
–
–
–
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
16,225
7,922
48,280
21,122
8,812
–
–
16,225
7,922
–
–
–
48,280
21,122
8,812
29,428
1,715
9,768
553
–
22
29,981
1,715
9,790
341
242
–
583
3
–
2
143,277
1,572
123
275
2,545
1,916
365
277
146,405
–
3,920
–
3,920
–
1,345
–
1,345
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
Fair Value Hierarchy for Assets and Liabilities Measured at Fair Value on a Recurring Basis (continued)
(millions of Canadian dollars)
Level 1
Level 2
October 31, 20181
Total2
Level 3
Level 1
Level 2
As at
October 31, 2017
Total2
Level 3
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
$
– $ 111,680 $ 3,024 $ 114,704 $
– $ 77,419
$ 2,521 $ 79,940
24
18
–
–
134
176
–
9,646
34,897
386
1,319
695
46,943
12,618
63
9,733
3 34,918
386
–
2,396
1,077
837
8
1,151 48,270
– 12,618
15
10
–
–
97
122
–
12,730
33,599
356
1,999
534
49,218
12,757
70
–
–
1,801
3
1,874
–
12,815
33,609
356
3,800
634
51,214
12,757
–
1,142
2
38,336
14
–
16
– 39,478 2,068
1
33,414
7
–
8
35,482
–
3,797
–
3,797
–
2,064
–
2,064
1 Balances as at October 31, 2018 are prepared in accordance with IFRS 9. Prior
period comparatives have not been restated. Refer to Note 4 for further details.
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 Refer to Note 4 for further details on financial assets that were re-classified to
non-trading as a result of adoption of IFRS 9.
5 As at October 31, 2017, includes Federal Reserve stock and Federal Home Loan
Bank stock of $1.4 billion. These are redeemable by the issuer at cost which
approximates fair value.
6 As at October 31, 2017, the carrying values of certain available-for-sale equity
securities of $6 million are assumed to approximate fair value in the absence of
quoted market prices in an active market and are excluded from the table above.
As at October 31, 2018, these were included as FVOCI securities in the table above.
• 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.
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, 2018, the Bank transferred
$20 million securities from Non-trading financial assets at fair value
through profit or loss from Level 1 to Level 2. During the year ended
October 31, 2017, the Bank transferred $164 million and $48 million
of treasury securities designated at fair value through profit or 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.
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.
151
TD BANK GROUP ANNUAL REPORT 2018 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
Fair value
as at
November 1
20171
Included
in income2
Included
in OCI3 Purchases
Issuances
Other4
Into
Level 3
Transfers
Change in
unrealized
gains
(losses) on
Out of October 31 instruments
still held5
Level 3
Fair value
as at
2018
FINANCIAL ASSETS
Trading loans, securities, and other
Government and government-
related securities
Canadian government debt
Provinces
Other debt securities
Canadian issuers
Other issuers
Non-trading financial assets at
fair value through profit or loss
Securities
Loans
Financial assets at fair value through
other comprehensive income
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
$
–
$
–
$
–
$
1
$
–
$
–
$ 2
$
–
$
3
$
–
6
8
14
–
(5)
(5)
305
15
320
60
(4)
56
–
–
–
–
–
–
203
15
(18)
553
95
–
12
(2)
2
–
46
47
54
8
62
–
–
–
1,469
108
$ 2,428
–
–
$ 27
(5)
27
$ 4
23
–
$ 23
$
–
–
–
–
–
–
–
–
–
–
–
–
(4)
(31)
(35)
(11)
–
(11)
–
11
(85)
5
–
$ (69)
$
1
172
175
(2)
(174)
(176)
1
16
20
(1)
(2)
(3)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
408
19
427
51
(4)
47
200
(18)
562
24
(2)
2
1,492
135
$ 2,413
(7)
26
$ 1
Total realized and
unrealized losses (gains)
Movements
Fair value
as at
November 1
20171
Included
in income2
Included
in OCI3 Purchases
Issuances
Other4
Into
Level 3
Transfers
Change in
unrealized
losses
(gains) on
Out of October 31 instruments
still held5
Level 3
Fair value
as at
2018
FINANCIAL LIABILITIES
Trading deposits6
Derivatives7
Interest rate contracts
Foreign exchange contracts
Equity contracts
Commodity contracts
Other financial liabilities
designated at fair value
through profit or loss
Obligations related to
securities sold short
$ 2,521
$ (78)
$ –
$ (443) $ 1,729
$ (685)
$ 46
$ (66) $ 3,024
$ (122)
70
(1)
893
(2)
960
(10)
–
(131)
(43)
(184)
7
14
–
–
–
–
–
–
–
–
–
–
–
(75)
–
(75)
–
–
–
–
196
–
196
3
(1)
(260)
18
(240)
117
(124)
–
(4)
–
–
–
–
–
–
4
–
1
1
–
2
–
–
63
(1)
624
(27)
659
(6)
(3)
(125)
(26)
(160)
14
11
–
–
1 Balances as at November 1, 2017 are prepared in accordance with IFRS 9. Refer
to Note 4 for further details.
4 Consists of sales, settlements, and foreign exchange.
5 Changes in unrealized gains (losses) on financial assets at FVOCI (AFS under
2 Gains (losses) on financial assets and liabilities are recognized in Net securities
IAS 39) are recognized in AOCI.
gains (losses), Trading income (loss), and Other income (loss) on the Consolidated
Statement of Income.
6 Issuances and repurchases of trading deposits are reported on a gross basis.
7 As at October 31, 2018, consists of derivative assets of $0.5 billion
3 Includes realized gains/losses transferred to retained earnings on disposal of
equities designated at FVOCI. Refer to Note 7 for further details.
(November 1, 2017 – $0.9 billion) and derivative liabilities of $1.2 billion
(November 1, 2017 – $1.9 billion), which have been netted on this table for
presentation purposes only.
152
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
Reconciliation of Changes in Fair Value for Level 3 Assets and Liabilities
(millions of Canadian dollars)
Total realized and
unrealized gains (losses)
Movements
Transfers
Fair value
as at
November 1
2016
Included
in income1
Included
in OCI
Purchases
Issuances
Other2
Into
Level 3
Fair value
as at
Out of October 31
2017
Level 3
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
Retained interests
Financial assets designated
at fair value through
profit or loss
Securities
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 deposits4
Derivatives5
Interest rate contracts
Foreign exchange contracts
Equity contracts
Commodity contracts
Other financial liabilities
designated at fair value
through profit or loss
Obligations related to
securities sold short
Change in
unrealized
gains
(losses) on
instruments
still held3
$
–
–
–
–
1
–
–
1
(3)
(3)
–
–
2
(26)
26
3
$ 5
Change in
unrealized
losses
(gains) on
instruments
still held3
$
34
–
73
15
148
65
31
366
157
157
6
–
20
$
(2)
–
$
7
–
2
–
–
–
–
–
–
6
13
–
–
–
$
$
3
–
17
1
253
–
–
274
(3)
(3)
–
–
13
13
–
–
–
–
–
2
–
553
–
1,594
98
36
6
(26)
26
153
4
279
$ 1,997
(2)
$ 40
3
$ 5
–
$ 710
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
(32)
–
$
–
7
$
(3)
(7)
$
(58)
20
(59)
(15)
(312)
9
138
(4)
(221)
(65)
–
(482)
–
–
174
–
(37)
(331)
(54)
(54)
–
–
(6)
–
–
(185)
(11)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
6
8
–
–
14
113
113
–
553
22
1,572
123
(3)
$ (205)
1
1
$
(3)
(3)
275
$ 2,545
$
Total realized and
unrealized losses (gains)
Movements
Transfers
Fair value
as at
November 1
2016
Included
in income1
Included
in OCI
Purchases
Issuances
Other2
Into
Level 3
Fair value
as at
Out of October 31
2017
Level 3
$ 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 Consists of sales, settlements, and foreign exchange.
3 Changes in unrealized gains (losses) on AFS securities are recognized in AOCI.
4 Issuances and repurchases of trading deposits are reported on a gross basis.
5 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.
153
TD BANK GROUP ANNUAL REPORT 2018 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 creditworthy 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.
154
TD BANK GROUP ANNUAL REPORT 2018 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, 2018
October 31, 2017
As at
Lower
range
Upper
range
Lower
range
Upper
range
Unit
Government and government-
related securities
Market comparable
Bond price equivalent
76
172
100
177 points
Other debt securities
Market comparable
Bond price equivalent
–
104
–
114
points
Equity securities1
Market comparable
Discounted cash flow
EBITDA multiple
Market comparable
New issue price
Discount rate
Earnings multiple
Price equivalent
n/a
6
5.0
84
100
8
0.3
50
n/a
n/a
9
20.5
117
100
40
5.3
50
n/a
100
6
5.5
50
n/a
n/a
n/a
n/a
n/a
100
9
20.5
118
%
%
times
%
n/a
n/a
n/a
n/a
n/a
%
%
times
%
Market comparable
Discounted cash flow
EBITDA multiple
Market comparable
Price-based
New issue price
Discount rates
Earnings multiple
Liquidity Discount
Net Asset Value
Non-trading financial assets
at fair value through profit
or loss
Other financial assets
designated at fair value
through profit or loss
Derivatives
Interest rate contracts
Price-based
Net Asset Value
n/a
n/a
n/a
n/a
Swaption model
Discounted cash flow
Option model
Currency-specific volatility
Inflation rate swap curve
Funding ratio
15
1
65
7
346
2
75
14
Foreign exchange contracts
Option model
Currency-specific volatility
Credit contracts
Discounted cash flow
Credit spread
n/a
n/a
Equity contracts
Option model
Commodity contracts
Option model
Market comparable
Trading deposits
Option model
Swaption model
Price correlation
Quanto correlation
Dividend yield
Equity volatility
New issue price
Quanto correlation
Swaption correlation
Price correlation
Quanto correlation
Dividend yield
Equity volatility
Currency-specific volatility
1
(65)
–
10
100
(66)
n/a
1
(85)
–
8
15
96
68
8
105
100
(46)
n/a
96
68
13
131
346
11
1
55
7
40
(9)
(38)
–
8
n/a
(65)
29
(9)
(38)
–
7
11
338
2
75
10
40
97
17
8
74
n/a
(45)
41
97
18
10
68
338
%
%
%
%
bps2
%
%
%
%
%
%
%
%
%
%
%
%
Other financial liabilities
designated at fair value
through profit or loss
Option model
Funding ratio
2
70
5
67
%
1 As at October 31, 2018, common shares exclude the fair value of Federal Reserve
stock and Federal Home Loan Bank stock of $1.4 billion (October 31, 2017 –
$1.4 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 Basis points.
155
TD BANK GROUP ANNUAL REPORT 2018 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
derivative contracts, 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 equity securities at fair value through other
comprehensive income, the sensitivity was calculated based on an
upward and downward shock of the fair value reported. For trading
deposits, the sensitivity was calculated by varying unobservable inputs
which may include volatility, credit spreads, and correlation.
Sensitivity Analysis of Level 3 Financial Assets and Liabilities
(millions of Canadian dollars)
FINANCIAL ASSETS
Non-trading financial assets at fair value through profit or loss
Securities
Loans
Derivatives
Equity contracts
Commodity contracts
Financial assets designated at fair value through profit or loss
Securities
Financial assets at fair value through other comprehensive income
Other debt securities
Asset-backed securities
Corporate and other debt
Equity securities
Common shares
Preferred shares
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
October 31, 2018
Impact to net assets
As at
October 31, 2017
Impact to net assets
Decrease in
fair value
Increase in
fair value
Decrease in
fair value
Increase in
fair value
$ 46
2
48
16
1
17
–
–
40
2
4
26
72
n/a
n/a
n/a
n/a
$ 26
2
28
21
1
22
–
–
40
2
2
7
51
n/a
n/a
n/a
n/a
$ n/a
n/a
12
–
12
6
6
n/a
n/a
n/a
n/a
11
2
26
21
60
$ n/a
n/a
10
–
10
6
6
n/a
n/a
n/a
n/a
11
2
8
6
27
18
26
11
16
15
45
60
2
$ 217
12
36
48
2
$ 177
16
20
36
1
$ 126
14
22
36
1
$ 96
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
2018
$ 19
25
(30)
$ 14
2017
$ 41
35
(57)
$ 19
156
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
FINANCIAL ASSETS 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 FVTPL 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, which
includes the securities designated at FVTPL, with changes in the
discount factor being recognized on the Consolidated Statement of
Income. The unrealized gains or losses on securities designated at
FVTPL are 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 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.
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, 2018
As at
October 31, 2017
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
ASSETS
Debt securities at amortized cost, net of allowance for
credit losses
Government and government-related securities
Other debt securities
Total debt securities at amortized cost, net of allowance
for credit losses
Held-to-maturity securities
Government and government-related securities
Other debt securities
Total held-to-maturity securities
Loans, net of allowance for loan losses
Debt securities classified as loans
Total Loans
Total assets with fair value disclosures
LIABILITIES
Deposits
Securitization liabilities at amortized cost
Subordinated notes and debentures
Total liabilities with fair value disclosures
$ 119 $ 59,828 $
43,826
–
1 $ 59,948
2,490 46,316
$ n/a
n/a
$
119
103,654
2,491 106,264
n/a
$
n/a
n/a
n/a
n/a $
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
–
n/a
–
n/a
n/a
n/a
208,794 433,748 642,542
n/a
208,794 433,748 642,542
$ 119 $ 312,448 $ 436,239 $ 748,806
n/a
n/a
$
$
– $ 846,148 $
14,654
–
–
9,027
– $ 869,829 $
– $ 846,148
– 14,654
–
9,027
– $ 869,829
45,708
25,719
71,427
204,695
2,487
207,182
– 45,708
–
– 25,719
–
– 71,427
–
405,796 610,491
–
3,156
–
–
406,465 613,647
– $ 278,609 $ 406,465 $ 685,074
669
– $ 833,475 $
16,203
–
–
10,100
– $ 859,778 $
– $ 833,475
– 16,203
– 10,100
– $ 859,778
$
$
$
1 This table excludes financial assets and liabilities where the carrying amount
is a reasonable approximation of fair value.
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.
157
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
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 Liabilities1
(millions of Canadian dollars)
As at
October 31, 2018
Amounts subject to an enforceable
master netting arrangement or similar
agreement that are not offset in
the Consolidated Balance Sheet2,3
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
Derivatives4
Securities purchased under
reverse repurchase agreements
Total
Financial Liabilities
Derivatives
Obligations related to securities sold
under repurchase agreements
Total
$ 59,661
$ 2,665
$ 56,996
157,832
217,493
30,453
33,118
127,379
184,375
50,935
2,665
48,270
123,842
$ 174,777
30,453
$ 33,118
93,389
$ 141,659
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
$ 34,205
7,452
41,657
34,205
7,452
$ 41,657
$ 36,522
8,595
45,117
36,522
8,595
$ 45,117
Collateral
Net Amount
$ 11,678
$ 11,113
119,797
131,475
130
11,243
12,127
1,938
85,793
$ 97,920
144
$ 2,082
October 31, 2017
$ 9,731
$ 9,942
125,479
135,210
355
10,297
12,571
2,121
79,697
$ 92,268
299
$ 2,420
1 Certain comparative amounts have been restated to conform with the presentation
4 The decrease in gross amounts of recognized financial instruments before balance
adopted in the current period.
2 Excess collateral as a result of overcollateralization has not been reflected in the table.
3 Includes amounts where the contractual set-off rights are subject to uncertainty
under the laws of the relevant jurisdiction.
sheet netting and gross amounts of recognized financial instruments offset in
the Consolidated Balance Sheet reflects rule changes adopted by certain central
clearing counterparties that require or allow entities to elect to treat daily
variation margin as settlement of the related derivative fair values. This change
is accounted for prospectively effective January 2018.
158
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
N O T E 7
SECURITIES
Remaining Terms to Maturities of Securities
The remaining terms to contractual maturities of the securities held
by the Bank are shown on the following table.
Securities Maturity Schedule
(millions of Canadian dollars)
Trading securities
Government and government-related securities
Canadian government debt
Federal
Provinces
U.S. federal, state, municipal governments, and agencies debt
Other OECD government-guaranteed debt
Mortgage-backed securities
Residential
Commercial
Other debt securities
Canadian issuers
Other issuers
Equity securities
Common shares
Preferred shares
Retained interests
Total trading securities
Securities designated at fair value through profit or loss
Government and government-related securities
Canadian government debt
Federal
Provinces
U.S. federal, state, municipal governments, and agencies debt
Other OECD government-guaranteed debt
Other debt securities
Canadian issuers
Other issuers
Total FVO securities
Securities at fair value through other comprehensive income
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
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
2017
2018
$ 6,788 $ 2,526 $ 2,127 $ 1,901 $ 1,120 $
1,223
1,641
1,278
1,040
2,081
659
1,166
2,948
779
1,540
6,274
433
2,569
6,788
175
348
6
11,284
1,017
7
7,330
581
11
7,612
–
59
10,207
–
–
10,652
– $ 14,462 $ 9,068
6,524
7,538
–
17,467
– 19,732
5,047
3,324
–
1,946
–
–
83
– 47,085
1,784
122
40,012
829
3,885
4,714
1,704
5,509
7,213
1,324
2,853
4,177
1,053
1,970
3,023
721
258
979
–
5,631
– 14,475
– 20,106
3,343
10,015
13,358
–
–
–
–
31,942
68
32,010
32
$ 15,998 $ 14,545 $ 11,798 $ 13,244 $ 11,631 $ 43,811 $ 111,027 $ 85,412
43,752 43,752
59
43,811 43,811
25
–
–
–
–
14
–
–
–
9
–
–
–
2
–
–
–
–
59
$
$
30 $
63
–
649
742
13
238
251
993 $
– $
–
127
80
207
– $
– $
15 $
71
–
42
113
216
–
–
216
104
–
–
119
45 $
– $
454
–
127
–
–
771
– 1,397
713
718
–
688
2,119
376
237
613
820 $ 1,020 $
770
137
907
450
–
450
666 $
–
–
–
119 $
1,188
1,609
–
725
612
–
– 2,221
1,913
– $ 3,618 $ 4,032
$ 3,504 $ 5,614 $ 2,875 $
290 $
676
3,406
6,991
454
15,031
1,561
17,277
6,138
2,696
33,286
2,376
10,638
6,643
3,483
26,015
4,691
4,305
324
–
9,610
448 $
203
10,140
–
–
10,791
–
–
1,307
1,307
3,740
–
3,522
7,262
9,213
–
1,858
11,071
2,981
–
1,796
4,777
6,035
472
24
6,531
– $ 12,731 $
–
9,507
– 45,766
– 20,096
– 6,633
– 94,733
– 21,969
–
472
– 8,507
– 30,948
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,804
370
1,804
370
2,174 2,174
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Total securities at fair value through other
comprehensive income
$ 16,338 $ 40,548 $ 37,086 $ 14,387 $ 17,322 $ 2,174 $ 127,855 $
n/a
1 Represents contractual maturities. Actual maturities may differ due to prepayment
privileges in the applicable contract.
159
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
Securities Maturity Schedule (continued)
(millions of Canadian dollars)
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
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
2017
2018
$
n/a $
n/a
n/a $
n/a
n/a $
n/a
n/a $
n/a
n/a $
n/a
n/a $
n/a
n/a $ 16,225
7,922
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
48,280
21,122
8,812
102,361
29,981
1,715
9,790
41,486
n/a
n/a
n/a
n/a
n/a $
n/a
n/a
n/a
n/a
n/a $
n/a
n/a
n/a
n/a
n/a $
n/a
n/a
n/a
n/a
n/a $
n/a
n/a
n/a
n/a
n/a $
n/a
n/a
n/a
n/a
n/a $
1,922
n/a
365
n/a
2,287
n/a
n/a
277
n/a $ 146,411
Debt securities reclassified from trading
Total available-for-sale securities
Debt securities at amortized cost, net of allowance for credit losses
Government and government-related securities
Canadian government debt
Federal
Provinces
U.S. federal, state, municipal governments, and agencies debt
Other OECD government guaranteed debt
$
$ 1,364 $
396 $ 1,136 $
10
1,606
8,960
11,940
–
4,837
7,529
12,762
176
6,211
7,519
15,042
317 $ 1,709 $
596
11,053
1,675
13,641
–
5,441
–
7,150
– $ 4,922 $
–
782
– 29,148
– 25,683
– 60,535
– 23,709
– 15,867
– 7,060
– 46,636
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Other debt securities
Asset-backed securities
Non-agency collateralized mortgage obligation portfolio
Other issuers
332
–
1,849
2,181
3,787
–
2,391
6,178
5,738
–
2,403
8,141
5,096
–
414
5,510
8,756
15,867
3
24,626
Total debt securities at amortized cost, net of allowance
for credit losses
$ 14,121 $ 18,940 $ 23,183 $ 19,151 $ 31,776 $
– $ 107,171 $
n/a
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
$
n/a $
n/a
n/a
n/a
n/a $
n/a
n/a
n/a
n/a $
n/a
n/a
n/a
n/a $
n/a
n/a
n/a
n/a $
n/a
n/a
n/a
n/a $
n/a
n/a
n/a
n/a $
n/a
n/a
n/a
661
22,531
22,431
45,623
n/a
n/a
n/a
n/a
n/a
8,837
10,728
6,175
25,740
71,363
$ 47,450 $ 74,853 $ 73,087 $ 47,448 $ 60,848 $ 45,985 $ 349,671 $ 307,218
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
1 Represents contractual maturities. Actual maturities may differ due to prepayment
privileges in the applicable contract.
160
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
Unrealized Securities Gains (Losses)
The following table summarizes the unrealized gains and losses
as at October 31.
Unrealized Securities Gains (Losses) for Securities at Fair Value Through Other Comprehensive Income
(IAS 39 – Available-for-Sale Securities)
(millions of Canadian dollars)
October 31, 2018
As at
October 31, 2017
Cost/
Gross
amortized unrealized unrealized
(losses)
Gross
cost1
gains
Cost/
Gross
Fair amortized unrealized unrealized
(losses)
cost1
Gross
gains
value
Fair
value
Securities at Fair Value Through Other
Comprehensive Income (IAS 39 –
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
Debt securities reclassified from trading
Total debt securities
Equity securities
Common shares
Preferred shares
Total securities at fair value through other
comprehensive income
$ 12,740
9,443
45,857
20,034
6,575
94,649
21,901
471
8,534
30,906
n/a
125,555
1,725
376
2,101
$ 38
75
265
65
59
502
87
1
31
119
n/a
621
118
20
138
$ (47) $ 12,731 $ 16,200
(11)
7,859
9,507
(356) 45,766 48,082
(3) 20,096 21,067
8,757
(1)
6,633
(418) 94,733 101,965
(19) 21,969 29,879
1,706
472
–
9,753
8,507
(58)
(77) 30,948 41,338
n/a
250
n/a
(495) 125,681 143,553
(39)
(26)
(65)
1,804
370
2,174
1,821
313
2,134
$ 53
66
310
69
56
554
135
9
63
207
27
788
114
52
166
$
(3)
(28) $ 16,225
7,922
(112) 48,280
(14) 21,122
8,812
(158) 102,361
(1)
(33) 29,981
1,715
–
9,790
(26)
(59) 41,486
277
(217) 144,124
–
(13)
–
(13)
1,922
365
2,287
$ 127,656
$ 759
$ (560) $ 127,855 $ 145,687
$ 954
$ (230) $ 146,411
1 Includes the foreign exchange translation of amortized cost balances at the
period-end spot rate.
Equity Securities Designated at Fair Value Through Other
Comprehensive Income
The Bank designated certain equity securities shown in the following
table as equity securities at FVOCI under IFRS 9. The designation was
made because the investments are held for purposes other than trading.
Equity Securities Designated at Fair Value Through Other
Comprehensive Income
(millions of Canadian dollars)
As at
For the year ended
Common shares
Preferred shares
Total
October 31, 2018
October 31, 2018
Fair
value
$ 1,804
370
$ 2,174
Dividend income
recognized
$ 71
16
$ 87
The Bank disposed of equity securities with a fair value of $22 million
during the year ended October 31, 2018. The Bank realized a cumulative
gain/(loss) of $2 million during the year ended October 31, 2018, on
disposal of these equity securities and recognized dividend income of nil
during the year ended October 31, 2018.
Net Securities Gains (Losses)
(millions of Canadian dollars)
Debt securities at amortized cost
Net realized gains (losses)
Debt securities at fair value through other
comprehensive income
Net realized gains (losses)
Held-to-maturity securities
Net realized gains (losses)
Available-for-sale securities2
Net realized gains (losses)
Impairment (losses)
Total
For the year ended
October 31 October 31
2017
20181
$ 76
$ n/a
35
n/a
n/a
(8)
n/a
n/a
$ 111
147
(11)
$ 128
1 Amounts for the year ended October 31, 2018 are prepared in accordance
with IFRS 9. Prior period comparatives are based on IAS 39. Refer to Note 4 for
further details.
2 Under IFRS 9, realized gains (losses) on equity securities at FVOCI are no longer
recognized in income, rather they are recognized in Retained earnings. Prior
to the adoption of IFRS 9, realized gains (losses) from AFS equity securities were
included in Net securities gain (loss).
161
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
Credit Quality of Debt Securities
The Bank evaluates non-retail credit risk on an individual borrower
basis, using both a BRR and FRR, and this system is used to assess all
non-retail exposures, including debt securities. Refer to the shaded
areas of the “Managing Risk” section of the 2018 MD&A for further
details, as well as the mapping of the Bank’s 21-point BRR scale to risk
levels and external ratings.
The following table provides the gross carrying amounts of debt
securities measured at amortized cost and debt securities at FVOCI by
internal risk ratings for credit risk management purposes, presenting
separately those debt securities that are subject to Stage 1, Stage 2,
and Stage 3 allowances.
Debt Securities by Risk Ratings
(millions of Canadian dollars)
Debt securities
Investment grade
Non-Investment grade
Watch and classified
Default
Total debt securities
Allowance for credit losses on debt securities at amortized cost
Debt securities, net of allowance
As at
October 31, 2018
Stage 1
Stage 2
Stage 3
Total
$ 230,488
2,140
n/a
n/a
232,628
1
$ 232,627
$ –
54
11
n/a
65
4
$ 61
$ n/a
n/a
n/a
234
234
70
$ 164
$ 230,488
2,194
11
234
232,927
75
$ 232,852
As at October 31, 2018, the allowance for credit losses on debt
securities at FVOCI was $5 million, inclusive within the FVOCI balance.
For the year ended October 31, 2018, the Bank reported $2 million
recovery of credit losses on debt securities at amortized cost and
$10 million of provision for credit losses on debt securities at FVOCI.
The difference between probability-weighted ECL and base ECL on
debt securities at FVOCI and at amortized cost at October 31, 2018,
was insignificant. Refer to Note 3 for further details.
N O T E 8
LOANS, IMPAIRED LOANS, AND ALLOWANCE FOR CREDIT LOSSES
Credit Quality of Loans
In the retail portfolio, including individuals and small businesses, the
Bank manages exposures on a pooled basis, using predictive credit
scoring techniques. For non-retail exposures, each borrower is assigned
a BRR that reflects the PD of the borrower using proprietary industry
and sector-specific risk models and expert judgement. Refer to the
shaded areas of the “Managing Risk” section of the 2018 MD&A for
further details, as well as the mapping of PD ranges to risk levels for
retail exposures and TD’s 21-point BRR scale to risk levels and external
ratings for non-retail exposures.
The following table provides the gross carrying amounts of loans
and credit risk exposures on loan commitments and financial guarantee
contracts by internal risk ratings for credit risk management purposes,
presenting separately those that are subject to Stage 1, Stage 2, and
Stage 3 allowances.
162
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
Loans by Risk Ratings1
(millions of Canadian dollars)
Residential mortgages2,3,4
Low Risk
Normal Risk
Medium Risk
High Risk
Default
Total
Allowance for loan losses
Loans, net of allowance
Consumer instalment and other personal5
Low Risk
Normal Risk
Medium Risk
High Risk
Default
Total
Allowance for loan losses
Loans, net of allowance
Credit card
Low Risk
Normal Risk
Medium Risk
High Risk
Default
Total
Allowance for loan losses
Loans, net of allowance
Business and government2,3,4
Investment grade or Low/Normal Risk
Non-Investment grade or Medium Risk
Watch and classified or High Risk
Default
Total
Allowance for loan losses
Loans, net of allowance
Total loans
Total Allowance for loan losses
Total loans, net of allowance
Off-balance sheet credit instruments
Retail Exposures6
Low Risk
Normal Risk
Medium Risk
High Risk
Default
Non-Retail Exposures7
Investment grade
Non-Investment grade
Watch and classified
Default
Total off-balance sheet credit instruments
Allowance for off-balance sheet credit instruments
Total off-balance sheet credit instruments, net of allowance
Acquired credit-impaired loans
Allowance for loan losses
Acquired credit-impaired loans, net of allowance for loan losses
Stage 1
Stage 2
Stage 3
Total
As at
October 31, 2018
$ 168,690
47,821
5,106
892
n/a
222,509
24
222,485
$
32
176
267
1,264
n/a
1,739
34
1,705
87,906
48,008
23,008
6,158
n/a
165,080
574
164,506
7,234
9,780
11,347
4,435
n/a
32,796
379
32,417
118,414
108,678
666
n/a
227,758
651
227,107
648,143
1,628
$ 646,515
$ 246,575
51,961
12,298
1,765
n/a
167,993
60,002
13
n/a
540,607
550
540,057
n/a
n/a
n/a
$
983
1,190
1,063
2,386
n/a
5,622
349
5,273
11
66
246
1,445
n/a
1,768
283
1,485
57
5,272
3,746
n/a
9,075
551
8,524
18,204
1,217
$ 16,987
$ 2,576
1,129
469
638
n/a
323
2,309
1,949
n/a
9,393
479
8,914
n/a
n/a
n/a
$
$
n/a
n/a
n/a
317
392
709
47
662
n/a
n/a
n/a
817
514
1,331
178
1,153
n/a
n/a
n/a
333
121
454
341
113
n/a
n/a
97
563
660
120
540
3,154
686
$ 2,468
$
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
453
18
435
$
$ 168,722
47,997
5,373
2,473
392
224,957
105
224,852
88,889
49,198
24,071
9,361
514
172,033
1,101
170,932
7,245
9,846
11,593
6,213
121
35,018
1,003
34,015
118,471
113,950
4,509
563
237,493
1,322
236,171
669,501
3,531
$ 665,970
$ 249,151
53,090
12,767
2,403
n/a
168,316
62,311
1,962
n/a
550,000
1,029
548,971
453
18
435
$
1 Includes loans that are measured at FVOCI and customers’ liability under
5 Includes Canadian government-insured real estate personal loans of $14 billion
acceptances.
as at October 31, 2018.
2 As at October 31, 2018, impaired loans with a balance of $124 million did not
have a related allowance for loan losses. An allowance was not required for
these loans as the balance relates to loans where the realizable value of the
collateral exceeded the loan amount.
6 As at October 31, 2018, includes $302 billion of personal lines of credit and
credit card lines, which are unconditionally cancellable at the Bank’s discretion
at any time.
7 As at October 31, 2018, includes $37 billion of the undrawn component of
3 Excludes trading loans and non-trading loans at FVTPL with a fair value of
uncommitted credit and liquidity facilities.
$11 billion and $1 billion, respectively, as at October 31, 2018.
4 Includes insured mortgages of $95 billion as at October 31, 2018.
163
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
The following table presents the Bank’s loans, impaired loans, and
related allowance for credit losses under IAS 39.
Loans, Impaired Loans, and Allowance for Loan Losses
(millions of Canadian dollars)
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
Neither
past due
nor
impaired
Past due
but not
impaired
$ 218,653 $ 2,382
6,258
149,473
1,800
30,783
1,173
198,893
$ 597,802 $ 11,613
Gross Loans
Total
Impaired2
$ 750 $ 221,785
1,312 157,043
424 33,007
599 200,665
$ 3,085 $ 612,500
3,209
665
$ 616,374
As at
October 31, 2017
Counter-
party
specific
Individually
insignificant
impaired
loans
Allowance for loan losses1
Incurred
Total
but not allowance
for loan
losses
identified
loan losses
Net
loans
$
–
–
–
134
$ 134
126
3
$ 263
$ 42
147
335
29
$ 553
–
32
$ 585
$
36 $
78 $ 221,707
803 156,240
656
1,264 31,743
929
1,457 199,208
1,294
$ 2,915 $ 3,602 $ 608,898
3,063
630
$ 2,935 $ 3,783 $ 612,591
146
35
20
–
1 Excludes allowance for off-balance sheet instruments.
2 As at October 31, 2017, impaired loans exclude $0.6 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,
and amortized cost of $11 billion as at October 31, 2017.
5 As at October 31, 2017, impaired loans with a balance of $99 million did not
have a related allowance for loan losses. 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.
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
$ 776
1,465
454
726
$ 3,421
Carrying
value
$ 709
1,331
454
660
$ 3,154
October 31, 2018
Related
allowance
for credit
losses
Average
gross
impaired
loans
$ 47
$ 726
178
341
120
$ 686
1,325
422
580
$ 3,053
Unpaid
principal
balance2
$ 790
1,477
424
687
$ 3,378
Carrying
value
$ 750
1,312
424
599
$ 3,085
As at
October 31, 2017
Related
allowance
for credit
losses
$ 42
147
335
163
$ 687
Average
gross
impaired
loans
$ 801
1,349
391
706
$ 3,247
1 Balances as at October 31, 2018 exclude ACI loans. As at October 31, 2017,
balances exclude both ACI loans and debt securities classified as loans.
2 Represents contractual amount of principal owed.
164
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
The changes to the Bank’s allowance for loan losses, as at and for the
year ended October 31, 2018 are shown in the following tables.
Allowance for Loan Losses – Residential Mortgages
(millions of Canadian dollars)
Allowance for loan losses as at November 1, 2017
Provision for credit losses
Transfer to Stage 11
Transfer to Stage 2
Transfer to Stage 3
Net remeasurement due to transfers2
New originations or purchases3
Net repayments4
Derecognition of financial assets (excluding disposals and write-offs)5
Changes to risk, parameters, and models6
Other changes
Disposals
Foreign exchange and other adjustments
Write-offs
Recoveries
Total allowance for loan losses as at October 31, 2018
Stage 1
$ 24
Stage 2
$ 26
Acquired
credit-impaired
loans
$ 12
Stage 3
$ 45
24
(4)
–
20
(14)
14
(1)
(3)
(16)
–
–
–
–
–
–
$ 24
(23)
8
(9)
(24)
6
n/a
(1)
(2)
29
8
–
–
–
–
–
$ 34
(1)
(4)
9
4
–
n/a
(1)
(4)
29
28
–
2
(31)
3
(26)
$ 47
–
–
–
–
–
–
(4)
–
(5)
(9)
–
2
–
–
2
$ 5
Total
$ 107
–
–
–
–
(8)
14
(7)
(9)
37
27
–
4
(31)
3
(24)
$ 110
1 Transfers represent stage transfer movements prior to ECLs remeasurement.
2 Represents the remeasurement between twelve-month and lifetime ECLs due to
stage transfers, excluding the change to risk, parameters, and models.
5 Represents the decrease in the allowance resulting from loans that were fully
repaid and excludes the decrease associated with loans that were disposed
or fully written off.
3 Represents the increase in the allowance resulting from loans that were newly
6 Represents the change in the allowance related to changes in risk including changes
originated, purchased, or renewed.
to macroeconomic factors, level of risk, associated parameters, and models.
4 Represents the changes in the allowance related to cash flow changes associated
with new draws or repayments on loans outstanding.
Allowance for Loan Losses – Consumer Instalment and Other Personal
(millions of Canadian dollars)
Allowance for loan losses, including off-balance sheet instruments,
as at November 1, 2017
Provision for credit losses
Transfer to Stage 11
Transfer to Stage 2
Transfer to Stage 3
Net remeasurement due to transfers1
New originations or purchases1
Net draws (repayments)1
Derecognition of financial assets (excluding disposals and write-offs)1
Changes to risk, parameters, and models1
Other changes
Disposals
Foreign exchange and other adjustments
Write-offs
Recoveries
Balance as at October 31, 2018
Less: Allowance for off-balance sheet instruments2
Total allowance for loan losses as at October 31, 2018
Stage 1
Stage 2
Stage 3
Acquired
credit-impaired
loans
Total
$ 529
$ 355
$ 166
$ 5
$ 1,055
303
(114)
(21)
168
(125)
322
(49)
(126)
(127)
63
–
7
–
–
7
599
25
$ 574
(285)
152
(172)
(305)
139
n/a
(24)
(97)
321
34
–
3
–
–
3
392
43
$ 349
(18)
(38)
193
137
11
n/a
(11)
(45)
744
836
–
1
(1,076)
251
(824)
178
–
$ 178
–
–
–
–
–
–
(4)
–
–
(4)
–
–
(1)
2
1
2
–
$ 2
–
–
–
–
25
322
(88)
(268)
938
929
–
11
(1,077)
253
(813)
1,171
68
$ 1,103
1 For explanations regarding this line item, refer to the “Allowance for Loan Losses –
2 The allowance for loan losses for off-balance sheet instruments is recorded in
Residential Mortgages” table in this Note.
Other liabilities on the Consolidated Balance Sheet.
165
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
Allowance for Loan Losses – Credit Card
(millions of Canadian dollars)
Allowance for loan losses, including off-balance sheet instruments,
as at November 1, 2017
Provision for credit losses
Transfer to Stage 12
Transfer to Stage 2
Transfer to Stage 3
Net remeasurement due to transfers2
New originations or purchases2
Net draws (repayments)2
Derecognition of financial assets (excluding disposals and write-offs)2
Changes to risk, parameters, and models2
Other changes
Disposals
Foreign exchange and other adjustments
Write-offs
Recoveries
Balance as at October 31, 2018
Less: Allowance for off-balance sheet instruments3
Total allowance for loan losses as at October 31, 2018
1 Credit cards are considered impaired and migrate to Stage 3 when they are
90 days past due and written off at 180 days past due. Refer to Note 2 for
further details.
2 For explanations regarding this line item, refer to the “Allowance for Loan Losses –
Residential Mortgages” table in this Note.
Allowance for Loan Losses – Business and Government1
(millions of Canadian dollars)
Allowance for loan losses, including off-balance sheet instruments,
as at November 1, 2017
Provision for credit losses
Transfer to Stage 12
Transfer to Stage 2
Transfer to Stage 3
Net remeasurement due to transfers2
New originations or purchases2
Net draws (repayments)2
Derecognition of financial assets (excluding disposals and write-offs)2
Changes to risk, parameters, and models2
Other changes
Disposals
Foreign exchange and other adjustments
Write-offs
Recoveries
Balance as at October 31, 2018
Less: Allowance for off-balance sheet instruments3
Total allowance for loan losses as at October 31, 2018
Stage 1
Stage 2
Stage 31
Total
$ 763
$ 521
$
321
$ 1,605
590
(192)
(38)
360
(209)
171
125
(102)
(276)
69
(21)
8
–
–
(13)
819
440
$ 379
(521)
259
(475)
(737)
249
n/a
(51)
(106)
705
60
(12)
11
–
–
(1)
580
297
$ 283
(69)
(67)
513
377
63
n/a
39
(371)
1,168
1,276
(8)
7
(1,515)
260
(1,256)
341
–
341
$
–
–
–
–
103
171
113
(579)
1,597
1,405
(41)
26
(1,515)
260
(1,270)
1,740
737
$ 1,003
3 The allowance for loan losses for off-balance sheet instruments is recorded in
Other liabilities on the Consolidated Balance Sheet.
Stage 1
Stage 2
Stage 3
Acquired
credit-impaired
loans
Total
$ 706
$ 627
$ 174
$ 18
$ 1,525
133
(106)
(6)
21
(38)
467
(4)
(338)
(89)
19
–
11
–
–
11
736
85
$ 651
(129)
114
(56)
(71)
68
n/a
(26)
(365)
447
53
–
10
–
–
10
690
139
$ 551
(4)
(8)
62
50
5
n/a
(25)
(54)
76
52
(5)
(6)
(154)
59
(106)
120
–
$ 120
–
–
–
–
–
–
(2)
(3)
(8)
(13)
–
(7)
(1)
14
6
11
–
$ 11
–
–
–
–
35
467
(57)
(760)
426
111
(5)
8
(155)
73
(79)
1,557
224
$ 1,333
1 Includes the allowance for credit losses related to customers’ liability
3 The allowance for loan losses for off-balance sheet instruments is recorded in
under acceptances.
Other liabilities on the Consolidated Balance Sheet.
2 For explanations regarding this line item, refer to the “Allowance for Loan
Losses – Residential Mortgages” table in this Note.
166
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
The allowance for credit losses on all remaining financial assets in
scope for IFRS 9 is not significant.
The changes to the Bank’s allowance for credit losses under IAS 39,
as at and for the year ended October 31, 2017, are shown in
the following table.
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
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
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
Total allowance for credit losses
Less: Allowance for off-balance sheet positions2
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)
29
788
1,173
59
$
(75)
(9)
(84)
–
(84)
(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 Federal Deposit Insurance Corporation (FDIC) covered loans and other
2 The allowance for credit losses for off-balance sheet instruments is recorded in
ACI loans.
Other liabilities on the Consolidated Balance Sheet.
167
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
FORWARD-LOOKING INFORMATION
Relevant macroeconomic factors are incorporated in the risk
parameters as appropriate. Additional macroeconomic factors that
are industry-specific or segment-specific are also incorporated
where relevant. The key macroeconomic variables that are
incorporated in determining ECLs include regional unemployment
rates for all retail exposures and regional housing price index for
residential mortgages and home equity lines of credit. For business
and government loans, the key macroeconomic variables include
gross domestic product, unemployment rates, interest rates, and
credit spreads. Refer to Note 2 for a discussion on how forward-
looking information is considered in determining whether there
has been a significant increase in credit risk and in the measurement
of ECLs.
Forward-looking macroeconomic forecasts are generated by
TD Economics as part of the ECL process: A base economic forecast
is accompanied with upside and downside estimates of realistically
possible economic conditions. All economic forecasts are updated
quarterly for each variable on a regional basis where applicable
and incorporated as relevant into the quarterly modelling of base,
upside and downside risk parameters used in the calculation of
ECL scenarios and probability-weighted ECL. The macroeconomic
variable estimations are statistically derived relative to the base
forecast based on the historical distribution of each variable.
Select macroeconomic variables are projected over the forecast period,
and they could have a material impact in determining ECLs.
As the forecast period increases, information about the future
becomes less readily available and projections are anchored on
assumptions around structural relationships between economic
parameters that are inherently much less certain. The following table
represents the average values of the macroeconomic variables over
the next twelve months and the remaining 4-year forecast period for
the base forecast and 5-year forecast period for the upside and
downside estimations.
Macroeconomic Variables
Unemployment rate (%)
Canada
United States
Real gross domestic product (GDP) (annual % change)
Canada
United States
Home prices (annual % change)
Canada (average home price)2
United States (CoreLogic HPI)3
Central bank policy interest rate (%)
Canada
United States
U.S. 10-year treasury yield (%)
U.S. 10-year BBB spread (%)
Exchange rate (U.S. dollar/Canadian dollar)
Next 12 months1
Base Forecasts
Remaining
4-year period1
Downside
Upside
5-year period1
5-year period1
6.0
3.7
2.3
2.9
3.4
5.1
1.88
2.88
3.20
1.80
0.79
6.0
3.9
1.7
1.8
3.4
4.0
2.47
2.97
3.13
1.80
0.80
7.4
5.7
1.1
1.3
0.3
2.7
1.74
2.25
2.39
2.02
0.75
5.5
3.5
2.3
2.3
4.9
4.9
2.80
3.66
4.43
1.58
0.85
1 The numbers represent average values for the quoted periods.
2 The average home price is the average transacted sale price of homes sold via
the Multiple Listing Service (MLS); data is collected by the Canadian Real Estate
Association (CREA).
3 The CoreLogic home price index (HPI) is a repeat-sales index which tracks increases
and decreases in the same home’s sales price over time.
SENSITIVITY OF ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is sensitive to the inputs used in
internally developed models, macroeconomic variables in the
forward-looking forecasts and respective probability weightings in
determining the probability-weighted ECL, and other factors
considered when applying expert credit judgment. Changes in these
inputs, assumptions, models, and judgments would have an impact
on the assessment for significant increase in credit risk and the
measurement of ECLs.
The following table presents the base ECL scenario compared to
the probability-weighted ECL derived from using three ECL scenarios
for performing loans and off-balance sheet instruments. The difference
reflects the impact of deriving multiple scenarios around the base
ECL and resultant change in ECL due to non-linearity and sensitivity
to using macroeconomic forecasts.
lifetime ECLs respectively. Transfers from Stage 1 to Stage 2 ACLs
result from a significant increase in credit risk since initial recognition
of the loan. The following table presents the estimated impact of
staging on ACL for performing loans and off-balance sheet
instruments if they were all calculated using twelve-month ECLs
compared to the current aggregate probability-weighted ECL,
holding all risk profiles constant.
Incremental Lifetime ECL Impact
(millions of Canadian dollars)
Aggregate Stage 1 and 2 probability-weighted ECL
All performing loans and off-balance sheet instruments
using 12-month ECL
Incremental lifetime ECL impact
As at
October 31, 2018
$ 3,874
3,441
$ 433
Change from Base to Probability-Weighted ECL
(millions of Canadian dollars, except as noted)
Probability-weighted ECL
Base ECL
Difference – in amount
Difference – in percentage
As at
October 31, 2018
$ 3,874
3,775
99
2.6%
$
The allowance for credit losses for performing loans and off-balance
sheet instruments consists of an aggregate amount of Stage 1 and
Stage 2 probability-weighted ECL which are twelve-month ECLs and
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 $81 million as at
October 31, 2018 (October 31, 2017 – $78 million), and were
recorded in Other assets on the Consolidated Balance Sheet.
168
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
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 Impaired1,2
(millions of Canadian dollars)
Residential mortgages
Consumer instalment and other personal
Credit card
Business and government
Total
1-30
days
$ 1,471
5,988
1,403
1,314
$ 10,176
31-60
days
$ 358
811
340
444
$ 1,953
October 31, 2018
61-89
days
Total
1-30
days
$ 101 $ 1,930 $ 1,852
5,257
241
1,278
213
28
1,007
$ 583 $ 12,712 $ 9,394
7,040
1,956
1,786
31-60
days
$ 419
781
323
133
$ 1,656
As at
October 31, 2017
61-89
days
Total
$ 111 $ 2,382
6,258
220
1,800
199
33
1,173
$ 563 $ 11,613
1 Includes loans that are measured at FVOCI.
2 Balances as at October 31, 2018 exclude ACI loans. As at October 31, 2017, the
balances exclude both ACI loans and debt securities classified as loans.
MODIFIED FINANCIAL ASSETS
The amortized cost of financial assets with lifetime allowance that
were modified during the year ended October 31, 2018 was
$408 million before modification, with insignificant modification gain
or loss. As at October 31, 2018, there have been no significant
modified financial assets for which the loss allowance has changed
from lifetime to twelve-month expected credit losses.
COLLATERAL
As at October 31, 2018, the collateral held against total gross impaired
loans represents 81% of total gross impaired 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.
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 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.
169
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
The following table summarizes the securitized asset types that did not
qualify for derecognition, along with their associated securitization
liabilities as at October 31.
Financial Assets Not Qualifying for Derecognition Treatment as Part of the Bank’s Securitization Programs
(millions of Canadian dollars)
As at
Nature of transaction
Securitization of residential mortgage loans
Other financial assets transferred related to securitization1
Total
Associated liabilities2
October 31, 2018
October 31, 2017
Fair
value
Carrying
amount
Fair
value
Carrying
amount
$ 23,124
4,230
27,354
$ (27,272)
$ 23,334
4,235
27,569
$ (27,301)
$ 24,986
3,964
28,950
$ (28,960)
$ 24,985
3,969
28,954
$ (28,833)
1 Includes asset-backed securities, asset-backed commercial paper (ABCP), 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.
2 Includes securitization liabilities carried at amortized cost of $15 billion as at
October 31, 2018 (October 31, 2017 – $16 billion), and securitization liabilities
carried at fair value of $13 billion as at October 31, 2018 (October 31, 2017 –
$13 billion).
Other Financial Assets Not Qualifying for Derecognition
The Bank enters into certain transactions where it transfers previously
recognized commodities and financial assets, such as, debt and equity
securities, but retains substantially all of the risks and rewards of those
assets. These transferred assets are not derecognized and the transfers
are accounted for as financing transactions. The most common
transactions of this nature are repurchase agreements and securities
lending agreements, in which the Bank retains substantially all of the
associated credit, price, interest rate, and foreign exchange risks and
rewards associated with the assets.
The following table summarizes the carrying amount of financial assets
and the associated transactions that did not qualify for derecognition,
as well as their associated financial liabilities as at October 31.
Other Financial Assets Not Qualifying for Derecognition
(millions of Canadian dollars)
As at
Carrying amount of assets
Nature of transaction
Repurchase agreements1,2
Securities lending agreements
Total
Carrying amount of
associated liabilities2
October 31 October 31
2018
2017
$ 24,333 $ 20,482
22,015
42,497
27,124
51,457
$ 24,701 $ 20,264
1 Includes $2.0 billion, as at October 31, 2018, of assets related to repurchase
agreements or swaps that are collateralized by physical precious metals
(October 31, 2017 – $2.1 billion).
2 Associated liabilities are all related to repurchase agreements.
TRANSFERS OF FINANCIAL ASSETS QUALIFYING
FOR DERECOGNITION
Transferred financial assets that are derecognized in their
entirety where the Bank has a continuing involvement
Continuing involvement may arise if the Bank retains any contractual
rights or obligations subsequent to the transfer of financial assets.
Certain business and government loans securitized by the Bank are
derecognized from the Bank’s Consolidated Balance Sheet. In instances
where the Bank fully derecognizes business and government loans,
the Bank may be exposed to the risks of transferred loans through
a retained interest. As at October 31, 2018, the fair value of retained
interests was $25 million (October 31, 2017 – $32 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, 2018, the trading income
recognized on the retained interest was nil (October 31, 2017 –
$15 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, 2018, the carrying value of
these servicing rights was $39 million (October 31, 2017 – $31 million)
and the fair value was $57 million (October 31, 2017 – $40 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, 2018, was $18 million (October 31, 2017 – $21 million).
170
TD BANK GROUP ANNUAL REPORT 2018 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
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.
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.
171
TD BANK GROUP ANNUAL REPORT 2018 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.
172
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.
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS n/a
–
30
n/a
–
n/a
–
–
2,872
2,916
n/a
13
193
n/a
66,237
n/a
42,095
4,174
2,880
123,610
–
–
–
935
493
3,335
3,828
18,731
Carrying Amount and Maximum Exposure to Unconsolidated Structured Entities
(millions of Canadian dollars)
Securitizations
Investment
funds and
trusts
Other
Total
Securitizations
October 31, 2018
Investment
funds and
trusts
As at
October 31, 2017
Other
Total
FINANCIAL ASSETS
Trading loans, securities,
and other
$ 9,460
$
719
$
11
$ 10,190
$ 7,395
$ 609
$
14
$
8,018
Non-trading financial assets at
fair value through profit or loss
Derivatives1
Financial assets designated at
fair value through profit or loss
Financial assets at fair value through
1,810
–
–
367
826
3
–
–
–
2,177
826
3
n/a
–
–
other comprehensive income
Available-for-sale securities
Debt securities at amortized cost,
47,575
n/a
1,262
n/a
–
n/a
48,837
n/a
n/a
63,615
net of allowance for credit losses 68,736
n/a
2,438
6
130,025
Held-to-maturity securities
Loans
Other
Total assets
–
n/a
–
–
3,177
–
n/a
–
2,897
2,908
68,736
n/a
2,438
2,903
136,110
n/a
42,095
4,174
8
117,287
n/a
13
163
n/a
2,622
n/a
–
–
–
3,407
–
59
–
59
–
493
2,937
2,937
16,172
629
688
3,450
–
–
1,164
3,566
3,625
20,786
2,330
2,330
14,702
1,005
1,498
3,094
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
$ 143,260
$ 5,939
$ 4,072
$ 153,271
$ 129,659
$ 5,003
$ 3,851
$ 138,513
$ 10,216
$ 11,162
$ 1,750
$ 23,128
$ 13,020
$ 1,860
$ 1,750
$ 16,630
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 $1.9 billion (October 31, 2017 − $1.8 billion) for the
year ended October 31, 2018. The total AUM in these entities
as at October 31, 2018, was $196.1 billion (October 31, 2017 −
$196.8 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.
173
TD BANK GROUP ANNUAL REPORT 2018 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 such as tenor and timing of cash flows
between hedging instruments and hedged items.
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
174
transacted on an exchange. They are based upon an agreement to buy
or sell a specified quantity of a financial instrument on a specified
future date, at a contracted price. These contracts differ from forward
rate agreements in that they are in standard amounts with standard
settlement dates and are transacted on an exchange.
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
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS assets from an option writer in exchange for a premium. The option
purchaser may pay the agreed premium at inception or over a period
of time. The credit protection compensates the option purchaser for
deterioration in value of the reference asset or group of assets upon
the occurrence of certain credit events such as bankruptcy, or changes
in specified credit 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 derivative contracts
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 derivative contracts
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, 2018
Fair value as at
balance sheet date
October 31, 2017
Fair value as at
balance sheet date
Positive
Negative
Positive
Negative
$
–
37
9,931
–
516
10,484
–
17,638
–
18,489
–
486
36,613
–
9
9
2,537
1,291
3,828
50,934
2
1,893
–
19
1,914
333
–
2,729
3,062
–
–
1,086
1,086
6,062
$ 56,996
$
–
39
7,229
566
–
7,834
–
15,943
–
15,692
543
–
32,178
230
1
231
1,362
837
2,199
42,442
–
1,898
1
–
1,899
327
–
2,413
2,740
155
155
1,034
1,034
5,828
$ 48,270
$
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
–
–
1,677
1,677
7,148
$ 56,195
$
–
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
105
105
1,707
1,707
6,200
$ 51,214
175
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
The following table distinguishes 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.
As at
October 31, 2018
Derivative Liabilities
Derivatives
not in
qualifying
hedging
relationships
Total
$ 854
27
155
1,034
$ 2,070
$ 1,899
2,740
155
1,034
$ 5,828
October 31, 2017
Fair Value of Non-Trading Derivatives1,2
(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 derivative contracts
Other contracts
Fair value – non-trading
Derivatives held or issued for
non-trading purposes
Interest rate contracts
Foreign exchange contracts
Credit derivative contracts
Other contracts
Fair value – non-trading
$ 1,050
–
–
–
$ 1,050
$
(62)
2,948
–
594
$ 3,480
$ 494
–
–
–
$ 494
$
(250)
4,376
–
760
$ 4,886
$ 4
4
–
–
$ 8
$ –
2
–
–
$ 2
$ 922 $ 1,914
3,062
–
1,086
$ 1,524 $ 6,062
110
–
492
$ 858
–
–
–
$ 858
$ 187
2,399
–
–
$ 2,586
$
–
314
–
–
$ 314
$ 812 $ 1,056
4,415
–
1,677
$ 1,766 $ 7,148
37
–
917
$ 56
–
–
–
$ 56
$ 777
2,733
–
5
$ 3,515
$ 12
316
–
–
$ 328
$ 452
42
105
1,702
$ 2,301
$ 1,297
3,091
105
1,707
$ 6,200
1 Certain comparative amounts have been reclassified to conform with the
2 Certain derivatives assets qualify to be offset with certain derivative liabilities on the
presentation adopted in the current period.
Consolidated Balance Sheet. Refer to Note 6 for further details.
Fair Value Hedges
The following table presents the effects of fair value hedges on
the Consolidated Balance Sheet and the Consolidated Statement
of Income.
Fair Value Hedges
(millions of Canadian dollars)
Assets1
Interest rate risk
Debt securities at amortized cost
Financial assets at fair value through other
comprehensive income
Loans
Total assets
Liabilities1
Interest rate risk
Deposits
Securitization liabilities at amortized cost
Subordinated notes and debentures
Total liabilities
Total
Total for the year ended October 31, 2017
Total for the year ended October 31, 2016
Change in
value of hedged
items for
ineffectiveness
measurement
Change in fair
value of hedging
instruments for
ineffectiveness
measurement
Hedge
ineffectiveness
For the year ended or as at October 31, 2018
Carrying
amounts
for hedged
items
Accumulated
amount of fair
value hedge
adjustments on
hedged items
Accumulated
amount of fair
value hedge
adjustments on
de-designate
hedged items
$
(501)
$ 507
$ 6
$ 30,032
$
(618)
(1,874)
(792)
(3,167)
2,182
71
112
2,365
(802)
$
$
(933)
(4)
1,869
792
3,168
(2,179)
(73)
(112)
(2,364)
$ 804
$ 914
23
(5)
–
1
86,804
45,157
161,993
93,150
4,960
4,027
102,137
3
(2)
–
1
$ 2
$ (19)
19
(2,699)
(726)
(4,043)
(2,301)
(52)
(230)
(2,583)
$
–
(172)
(8)
(180)
(4)
–
(143)
(147)
1 The Bank has portfolios of fixed rate financial assets and liabilities whereby
the notional amount changes frequently due to originations, issuances, maturities
and prepayments. The interest rate risk hedges on these portfolios are
rebalanced dynamically.
176
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
Cash Flow Hedges and Net Investment Hedges
The following table presents the effects of cash flow hedges and net
investment hedges on the Bank’s Consolidated Statement of Income
and the Consolidated Statement of Comprehensive Income.
Cash Flow and Net Investment Hedges
(millions of Canadian dollars)
Change in
value of hedged
items for
ineffectiveness
measurement
Change in fair
value of hedging
instruments for
ineffectiveness
measurement
Hedge
ineffectiveness
For the year ended October 31, 2018
Hedging
gains (losses)
recognized
in other
comprehensive
income1
Amount
reclassified from
accumulated other
comprehensive
income (loss)
to earnings1
Net change
in other
comprehensive
income (loss)1
Cash flow hedges2
Interest rate risk
Assets3
Liabilities3
Foreign exchange risk4,5
Assets6
Liabilities6
Equity price risk
Liabilities
Total cash flow hedges
Total for the year ended October 31, 2017
Total for the year ended October 31, 2016
Net investment hedges
Total for the year ended October 31, 2017
Total for the year ended October 31, 2016
$ 2,744
(159)
(121)
(328)
(66)
$ 2,070
121
328
66
$ (2,072)
$ 392
$
(392)
$ (2,747)
160
$
(3)
1
$ (2,687)
159
$ 382
(47)
$ (3,069)
206
–
–
–
(2)
$
$
(2)
(11)
$
$
–
–
–
269
93
66
$ (2,100)
$ (2,229)
1,448
$
$
(392)
890
36
(193)
249
(31)
$ (2,838)
$
(392)
462
(156)
97
$ 738
$ 1,077
1,285
$
$
–
(8)
–
1 Effects on other comprehensive income are presented on a pre-tax basis.
2 During the years ended October 31, 2018 and October 31, 2017, there were
no instances where forecasted hedged transactions failed to occur.
3 Assets and liabilities include forecasted interest cash flows on loans, deposits,
and securitization liabilities.
4 For non-derivative instruments designated as hedging foreign exchange risk,
fair value change is measured as the gains and losses due to spot foreign
exchange movements.
5 Cross-currency swaps may be used to hedge foreign exchange risk or a
combination of interest rate risk and foreign exchange risk in a single hedging
relationship. These hedges are disclosed in the above risk category (foreign
exchange risk).
6 Assets and liabilities include principal and interest cash flows on foreign
denominated securities, loans, deposits, other liabilities, and subordinated
notes and debentures.
Reconciliation of Accumulated Other Comprehensive Income (Loss)1,2
(millions of Canadian dollars)
Accumulated other
comprehensive
income (loss) at
beginning of year
Net changes
in other
comprehensive
income (loss)
For the year ended October 31, 2018
Accumulated
other
comprehensive
income (loss)
at end of year
Accumulated
other
comprehensive
income (loss) on
designated hedges
Accumulated
comprehensive
income (loss) on
de-designated
hedges
Cash flow hedges
Interest rate risk
Assets
Liabilities
Foreign exchange risk
Assets
Liabilities
Equity price risk
Total cash flow hedges
Net investment hedges
Foreign translation risk
$
(533)
(260)
(243)
434
51
(551)
$
$ (3,069)
206
(193)
249
(31)
$ (2,838)
$ (3,602)
(54)
(436)
683
20
$ (3,389)
$ (2,420)
175
(436)
683
20
$ (1,978)
$ (1,182)
(229)
–
–
–
$ (1,411)
$ (5,297)
$
(392)
$ (5,689)
$ (5,689)
$
–
1 The Accumulated other comprehensive income (loss) is presented on a pre-tax basis.
2 Excludes the Bank’s equity in the AOCI of an investment in TD Ameritrade.
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, 2017.
Hedged Cash Flows
(millions of Canadian dollars)
Cash flow hedges
Cash inflows
Cash outflows
Net cash flows
Within
1 year
Over 1 year
to 3 years
Over 3 years
to 5 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)
As at
October 31, 2017
177
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
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.
The following table discloses the notional amount of over-the-counter
and exchange-traded derivatives.
Over-the-Counter and Exchange-Traded Derivatives
(millions of Canadian dollars)
October 31
2018
As at
October 31
2017
Trading
Exchange-
traded
Total
Non-
trading3
Total
Total
575,825 $
$ 575,825 $
–
970,679
– 8,024,217
200,895
121,246
154,683
224,884
851,754 9,996,500
– $
225
575,825 $
970,904
445,848
528,945
1,418,487 9,442,704 7,377,368
108,135
126,785
1,421,656 11,418,156 8,587,081
200,948
227,775
53
2,891
Over-the-Counter1
Non
clearing
house
Clearing
house2
$
– $
919,623
7,580,152
–
–
8,499,775
–
51,056
444,065
79,649
70,201
644,971
–
–
– 1,796,542
6
–
688,980
–
34,090
–
–
32,655
– 2,552,273
24
24
– 1,796,542
6
–
688,980
–
34,090
–
32,655
–
24 2,552,297
–
24
3
29,140 1,825,682 1,484,952
–
674,533
22,272
22,713
126,106 2,678,403 2,204,473
6
785,946
34,090
32,655
–
96,966
–
–
9,665
987
10,652
202
135
337
–
–
–
9,867
1,122
10,989
2,745
–
2,745
12,612
1,122
13,734
12,227
1,694
13,921
–
150
150
57,736
33,161
90,897
$ 8,510,577 $ 3,288,478
142,404
57,161
47,798
39,882
97,043
190,202
$ 948,821 $ 12,747,876 $ 1,580,937 $ 14,328,813 $ 10,995,677
145,327
73,193
218,520
30,430
–
30,430
114,897
73,193
188,090
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 derivative contracts
Credit default swaps – protection purchased
Credit default swaps – protection sold
Total credit derivative contracts
Other contracts
Equity contracts
Commodity contracts
Total other contracts
Total
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 $1,244 billion of over-the-counter derivatives that are transacted
with clearing houses (October 31, 2017 – $1,173 billion) and $337 billion of
over-the-counter derivatives that are transacted with non-clearing houses
(October 31, 2017 – $310 billion) as at October 31, 2018. There were no
exchange-traded derivatives both as at October 31, 2018 and October 31, 2017.
The following table distinguishes the notional amount of 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.
Notional of Non-Trading Derivatives
(millions of Canadian dollars)
Derivatives held or issued for
hedging (non-trading) purposes
Interest rate contracts
Foreign exchange contracts
Credit derivative contracts
Other contracts
Total notional non-trading
Derivatives in qualifying hedging relationships
Fair
value
$ 282,718
–
–
–
$ 282,718
Cash
flow1
$ 214,969
113,183
–
2,058
$ 330,210
Net
investment1
$ 1,646
1,249
–
–
$ 2,895
As at October 31, 2018
Derivatives not in
qualifying hedging
relationships
Total
$ 922,323 $ 1,421,656
126,106
11,674
2,745
2,745
30,430
28,372
$ 965,114 $ 1,580,937
1 Certain cross-currency swaps are executed using multiple derivatives, including
interest rate swaps. These derivatives are used to hedge foreign exchange rate
risk in cash flow hedges and net investment hedges.
178
TD BANK GROUP ANNUAL REPORT 2018 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)
October 31
2018
As at
October 31
2017
Remaining term-to-maturity
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 derivative contracts
Credit default swaps – protection purchased
Credit default swaps – protection sold
Total credit derivative contracts
Other contracts
Equity contracts
Commodity contracts
Total other contracts
Total
Within
1 year
$ 455,257
689,173
4,010,167
159,621
184,334
5,498,552
24
1,772,289
6
196,829
28,443
27,241
2,024,832
1,289
41
1,330
Over
1 year to
5 years
$ 120,528
281,731
4,155,482
33,151
35,811
4,626,703
–
49,765
–
437,096
5,647
5,414
497,922
4,466
663
5,129
Over
5 years
$
40
–
1,277,055
8,176
7,630
1,292,901
–
3,628
–
152,021
–
–
155,649
6,857
418
7,275
Total
Total
$
575,825
970,904
9,442,704
200,948
227,775
11,418,156
24
1,825,682
6
785,946
34,090
32,655
2,678,403
$
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
12,612
1,122
13,734
12,227
1,694
13,921
106,905
61,563
168,468
$ 7,693,182
37,652
11,284
48,936
$ 5,178,690
770
346
1,116
$ 1,456,941
145,327
73,193
218,520
$ 14,328,813
142,404
47,798
190,202
$ 10,995,677
179
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
The following table discloses the notional amount and average
price of derivative instruments designated in qualifying hedge
accounting relationships.
Hedging Instruments by Term-to-Maturity
(millions of Canadian dollars, except as noted)
Notional
Interest rate risk
Interest rate swaps
Notional – pay fixed
Average fixed interest rate %
Notional – received fixed
Average fixed interest rate %
Total notional – interest rate risk
Foreign exchange risk1
Forward contracts
Notional – USD/CAD
Average FX forward rate
Notional – EUR/CAD
Average FX forward rate
Notional – other
Cross-currency swaps2,3
Notional – USD/CAD
Average FX rate
Notional – EUR/CAD
Average FX rate
Notional – GBP/CAD
Average FX rate
Notional – other currency pairs4
Total notional – foreign exchange risk
Equity Price Risk
Notional – equity forward contracts
Total notional
Within
1 year
Over
1 year to
5 years
As at
October 31, 2018
Over
5 years
Total
$ 38,837
1.62
36,872
1.83
75,709
$ 57,774
2.09
63,997
2.15
121,771
$
84,933
1.92
111,144
2.12
196,077
1,329
1.26
4,169
1.54
1,249
10,868
1.24
–
n/a
673
2.02
12,626
30,914
281
1.27
11,211
1.59
–
36,298
1.28
13,694
1.50
3,281
1.71
10,838
75,603
–
n/a
1,903
1.73
–
2,321
1.32
3,355
1.47
–
n/a
335
7,914
$ 181,544
212,013
393,557
1,610
17,283
1,249
49,487
17,049
3,954
23,799
114,431
2,058
$ 108,681
–
$ 197,374
–
$ 203,991
2,058
$ 510,046
1 Foreign currency denominated deposit liabilities are also used to hedge foreign
exchange risk. As at October 31, 2018, the carrying value of these non-derivative
hedging instruments was $15.3 billion designated under net investment hedges.
3 Certain cross-currency swaps are executed using multiple derivatives, including
interest rate swaps. The notional amount of these interest rate swaps, excluded
from the above, is $105.8 billion as at October 31, 2018.
2 Cross-currency swaps may be used to hedge foreign exchange risk or a
combination of interest rate risk and foreign exchange risk in a single hedge
relationship. Both these types of hedges are disclosed under the Foreign
exchange risk as the risk category.
4 Includes derivatives executed to manage non-trading foreign currency exposures,
when more than one currency is involved prior to hedging to the Canadian dollar,
when the functional currency of the entity is not the Canadian dollar, or when
the currency pair is not a significant exposure for the Bank.
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.
180
TD BANK GROUP ANNUAL REPORT 2018 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
2018
$ 29,608
9,737
1,995
$ 41,340
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, 2018
As at
October 31, 2017
Current
replacement
cost
Credit
equivalent
amount
Risk-
weighted
amount
Current
replacement
cost
Credit
equivalent
amount
$
21
11,630
508
12,159
17,605
21,218
486
39,309
3
3,043
1,101
4,147
55,615
34,205
21,410
8,884
12,526
155
$ 12,681
$
56
15,557
776
16,389
35,543
40,942
1,029
77,514
358
7,383
2,546
10,287
104,190
54,039
50,151
9,602
40,549
14,332
$ 54,881
$
15
4,193
299
4,507
4,247
7,012
212
11,471
145
920
514
1,579
17,557
11,464
6,093
1,173
4,920
2,058
$ 6,978
$
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
Canada1
October 31
2017
$ 32,494
7,031
1,811
$ 41,336
October 31
2018
$
930
102
359
$ 1,391
United States1
October 31
2017
Other international1
October 31
2017
October 31
2018
$ 2,355
16
433
$ 2,804
$ 7,104
4,704
1,076
$ 12,884
$ 5,159
3,420
926
$ 9,505
October 31
2018
$ 37,642
14,543
3,430
$ 55,615
Risk-
weighted
amount
$
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
As at
Total
October 31
2017
$ 40,008
10,467
3,170
$ 53,645
October 31
2018
$ 3,898
4,887
October 31
2017
$ 3,749
3,312
487
2,183
1,071
3,741
$ 12,526
712
1,671
790
3,173
$ 10,234
43,089
$ 12,526
43,411
$ 10,234
October 31
2018
% mix
October 31
2017
% mix
31.1%
39.0
3.9
17.4
8.6
29.9
100.0%
36.6%
32.4
7.0
16.3
7.7
31.0
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, 2018, the aggregate net liability
position of those contracts would require: (1) the posting of collateral
or other acceptable remedy totalling $300 million (October 31, 2017 –
$193 million) in the event of a one-notch or two-notch downgrade
in the Bank’s senior debt rating; and (2) funding totalling $10 million
(October 31, 2017 – $26 million) 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.
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
181
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
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, 2018, the fair value of all derivative instruments with
credit risk related contingent features in a net liability position was
$8 billion (October 31, 2017 – $9 billion). The Bank has posted
$10 billion (October 31, 2017 – $13 billion) of collateral for this
exposure in the normal course of business. As at October 31, 2018,
the impact of a one-notch downgrade in the Bank’s credit rating would
require the Bank to post an additional $38 million (October 31, 2017 –
$121 million) of collateral to that posted in the normal course of
business. A two-notch downgrade in the Bank’s credit rating would
require the Bank to post an additional $44 million (October 31, 2017 –
$156 million) of collateral to that posted in the normal course of business.
N O T E 1 2
INVESTMENT IN ASSOCIATES AND JOINT VENTURES
INVESTMENT IN TD AMERITRADE HOLDING CORPORATION
The Bank has significant influence over TD Ameritrade Holding
Corporation (TD Ameritrade) and accounts for its investment in
TD Ameritrade using the equity method. The Bank’s equity share in
TD Ameritrade’s earnings, excluding dividends, is reported on a
one-month lag basis. The Bank takes into account changes in the
subsequent period that would significantly affect the results.
As at October 31, 2018, the Bank’s reported investment in
TD Ameritrade was 41.61% (October 31, 2017 – 41.27%) of the
outstanding shares of TD Ameritrade with a fair value of $16 billion
(US$12 billion) (October 31, 2017 – $15 billion (US$12 billion)) based
on the closing price of US$51.72 (October 31, 2017 – US$49.99)
on the New York Stock Exchange.
During the year ended October 31, 2018, TD Ameritrade repurchased
5.5 million shares (for the year ended October 31, 2017 – nil 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%.
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.
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, 2018, and
October 31, 2017, 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
2018
September 30
2017
As at
$ 1,809
29,773
17,811
$ 49,393
$ 3,923
30,126
4,809
38,858
10,535
$ 49,393
$ 1,721
22,127
25,985
$ 49,833
$ 3,230
32,391
4,862
40,483
9,350
$ 49,833
1 Customers’ securities are reported on a settlement date basis whereas the Bank
reports customers’ securities on a trade date basis.
2 The difference between the carrying value of the Bank’s investment in TD Ameritrade
and the Bank’s share of TD Ameritrade’s stockholders’ equity is comprised of goodwill,
other intangibles, and the cumulative translation adjustment.
182
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
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 income1,2
Earnings per share – basic (Canadian dollars)
Earnings per share – diluted (Canadian dollars)
For the years ended September 30
2018
2017
2016
$ 1,635
5,365
7,000
1,992
2,434
4,426
142
2,432
535
$ 1,897
$ 3.34
3.32
$ 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
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 and is subject to adjustments relating to the amortization
of certain intangibles.
2 The Bank’s equity share in TD Ameritrade earnings for the year ended
October 31, 2018 includes a net favourable adjustment of $41 million
(US$32 million) primarily representing the Bank’s share of TD Ameritrade’s
remeasurement of its deferred income tax balances as a result of the
reduction in the U.S. federal corporate income tax rate.
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, 2018,
or October 31, 2017. The carrying amount of the Bank’s investment in
individually immaterial associates and joint ventures during the period
was $3 billion (October 31, 2017 – $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.
The Bank recorded an impairment loss during the year ended
October 31, 2018 of $89 million representing the immediate impact
of lower future tax deductions on Low Income Housing Tax Credit
(LIHTC) investments as a result of the reduction in the U.S. federal
corporate tax rate, which was recorded in Other income (loss) on the
Consolidated Statement of Income. This impairment loss does not
include losses taken upon tax credit-related investments including
LIHTC on a normal course basis. Refer to Note 25 for further details
on the reduction of the U.S. federal corporate tax rate.
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 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 is 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. For the year ended October 31, 2017, 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.
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
183
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
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 $15.4 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.
Goodwill by Segment
(millions of Canadian dollars)
Carrying amount of goodwill as at November 1, 2016
Additions
Foreign currency translation adjustments and other
Carrying amount of goodwill as at October 31, 2017
Additions
Foreign currency translation adjustments and other
Carrying amount of goodwill as at October 31, 20182
Pre-tax discount rates
2017
2018
1 Goodwill predominantly relates to U.S. personal and commercial banking.
2 Accumulated impairment as at October 31, 2018, was nil (October 31, 2017 – nil).
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.
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 9 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.
Canadian
Retail
$ 2,337
–
(34)
2,303
82
18
$ 2,403
U.S.
Retail1
$ 14,175
34
(516)
13,693
–
280
$ 13,973
Wholesale
Banking
$ 150
10
–
160
–
–
$ 160
Total
$ 16,662
44
(550)
16,156
82
298
$ 16,536
9.1–10.7%
9.1–10.7
10.1–10.5%
10.1–11.8
12.2%
12.2
184
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
OTHER INTANGIBLES
The following table presents details of other intangibles as at October 31.
Other Intangibles
(millions of Canadian dollars)
Cost
As at November 1, 2016
Additions
Disposals
Fully amortized intangibles
Foreign currency translation adjustments
and other
As at October 31, 2017
Additions
Disposals
Fully amortized intangibles
Foreign currency translation adjustments
and other
As at October 31, 2018
Amortization and impairment
As at November 1, 2016
Disposals
Impairment losses
Amortization charge for the year
Fully amortized intangibles
Foreign currency translation adjustments
and other
As at October 31, 2017
Disposals
Impairment losses
Amortization charge for the year
Fully amortized intangibles
Foreign currency translation adjustments
and other
As at October 31, 2018
Net Book Value:
As at October 31, 2017
As at October 31, 2018
Core deposit
intangibles
Credit card
related
intangibles
Internally
generated
software
Other
software
Other
intangibles
$ 2,623
–
–
–
(100)
2,523
–
–
–
52
$ 2,575
$ 2,225
–
–
121
–
(86)
2,260
–
–
96
–
48
$ 2,404
$ 762
–
–
–
(6)
756
–
–
–
3
$ 759
$ 356
–
–
90
–
(4)
442
–
–
98
–
2
$ 542
$ 2,266
576
(93)
(171)
(29)
2,549
567
(82)
(275)
1
$ 2,760
$ 786
(91)
1
368
(171)
(5)
888
(11)
–
423
(275)
6
$ 1,031
$ 387
82
(16)
(142)
(3)
308
87
(2)
(89)
(4)
$ 300
$ 261
(16)
–
80
(142)
(3)
180
(2)
5
78
(89)
12
$ 184
$ 675
74
(58)
(110)
(16)
565
14
–
–
7
$ 586
$ 446
(58)
–
44
(110)
(9)
313
–
–
44
–
3
$ 360
Total
$ 6,713
732
(167)
(423)
(154)
6,701
668
(84)
(364)
59
$ 6,980
$ 4,074
(165)
1
703
(423)
(107)
4,083
(13)
5
739
(364)
71
$ 4,521
$ 263
171
$ 314
217
$ 1,661
1,729
$ 128
116
$ 252
226
$ 2,618
2,459
185
TD BANK GROUP ANNUAL REPORT 2018 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
assets
Leasehold
improvements
Cost
As at November 1, 2016
Additions
Disposals
Fully depreciated assets
Foreign currency translation adjustments and other
As at October 31, 2017
Additions
Disposals
Fully depreciated assets
Foreign currency translation adjustments and other
As at October 31, 2018
Accumulated depreciation and impairment/losses
As at November 1, 2016
Depreciation charge for the year
Disposals
Impairment losses
Fully depreciated assets
Foreign currency translation adjustments and other
As at October 31, 2017
Depreciation charge for the year
Disposals
Impairment losses
Fully depreciated assets
Foreign currency translation adjustments and other
As at October 31, 2018
Net Book Value:
As at October 31, 2017
As at October 31, 2018
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
$ 1,012
–
(2)
–
(41)
969
2
(5)
–
5
$ 971
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
$ 3,349
168
(19)
(73)
(110)
3,315
164
(37)
(90)
26
$ 3,378
$ 1,147
132
(15)
–
(73)
(40)
1,151
120
(14)
–
(90)
6
$ 1,173
$ 859
153
(21)
(122)
(16)
853
141
(13)
(143)
(9)
$ 829
$ 406
175
(22)
–
(122)
(4)
433
170
(13)
–
(143)
2
$ 449
$ 1,320
145
(30)
(101)
(49)
1,285
134
(44)
(69)
9
$ 1,315
$ 566
142
(29)
–
(101)
(26)
552
128
(22)
–
(69)
16
$ 605
$ 1,858
114
(31)
(48)
(9)
1,884
160
(33)
(57)
39
$ 1,993
$ 797
154
(30)
–
(48)
(16)
857
158
(32)
–
(57)
9
$ 935
Total
$ 8,398
580
(103)
(344)
(225)
8,306
601
(132)
(359)
70
$ 8,486
$ 2,916
603
(96)
–
(344)
(86)
2,993
576
(81)
–
(359)
33
$ 3,162
$ 969
971
$ 2,164
2,205
$ 420
380
$ 733
710
$ 1,027
1,058
$ 5,313
5,324
October 31
2018
$ 8,938
2,343
1,614
113
1,638
950
$ 15,596
As at
October 31
2017
$ 7,932
1,945
832
13
1,536
1,006
$ 13,264
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
purchased by customers to earn interest over a fixed period. The terms
are from one day to ten years. 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, 2018, was $293 billion
(October 31, 2017 – $258 billion).
Certain deposit liabilities are classified as Trading deposits on
the Consolidated Balance Sheet and accounted for at fair value with
the change in fair value recognized on the Consolidated Statement
of Income.
186
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
Deposits
(millions of Canadian dollars)
Personal
Banks1
Business and government2
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
Total2,3
By Type
By Country
October 31 October 31
2017
2018
As at
Demand
Notice
Term
Canada United States
International
Total
Total
$ 13,493 $ 411,087 $ 53,064 $ 218,772
13,080
7,873
261,282
76,093
54,563
–
$ 97,459 $ 541,514 $ 327,170 $ 547,697
55
130,372
–
8,784
150,618
114,704
$ 258,834
866
93,398
39,358
$ 392,456
38 $ 477,644 $ 468,155
$
25,887
16,712
2,766
338,782
357,083
2,403
20,783
79,940
114,704
$ 25,990 $ 966,143 $ 912,764
$ 42,402 $ 39,547
52,915
54,488
505,295
362,890
1,068
443,395
371,728
5,179
$ 966,143 $ 912,764
1 Includes deposits and advances with the Federal Home Loan Bank.
2 As at October 31, 2018, includes $36 billion relating to covered bondholders
(October 31, 2017 – $29 billion) and $2 billion (October 31, 2017 – $2 billion)
due to TD Capital Trust IV.
3 As at October 31, 2018, includes deposits of $548 billion (October 31, 2017 –
$522 billion) denominated in U.S. dollars and $55 billion (October 31, 2017 –
$44 billion) denominated in other foreign currencies.
Term Deposits by Remaining Term-to-Maturity
(millions of Canadian dollars)
As at
October 31 October 31
2017
2018
Within
1 year
$ 32,928
8,773
66,492
109,256
$ 217,449
Over
1 year to
2 years
$ 10,222
–
21,345
1,183
$ 32,750
Over
2 years to
3 years
Over
3 years to
4 years
$ 9,601
–
31,416
1,122
$ 42,139
$
197
–
9,605
981
$ 10,783
Over
4 years to
5 years
$
78
3
13,760
1,157
$ 14,998
Over
5 years
Total
Total
$
38 $ 53,064 $ 50,507
18,616
8,784
8
142,942
150,618
8,000
1,005
79,940
114,704
$ 9,051 $ 327,170 $ 292,005
October 31
2018
As at
October 31
2017
Within
3 months
$ 11,424
8,440
38,177
53,482
$ 111,523
Over 3
months to
6 months
Over 6
months to
12 months
Total
Total
$ 7,541
255
7,033
31,081
$ 45,910
$ 13,963
78
21,282
24,693
$ 60,016
$ 32,928
8,773
66,492
109,256
$ 217,449
$ 30,793
18,602
69,139
76,266
$ 194,800
Personal
Banks
Business and government
Trading
Total
Term Deposits due within a Year
(millions of Canadian dollars)
Personal
Banks
Business and government
Trading
Total
N O T E 1 8
OTHER LIABILITIES
Other Liabilities1
(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
Other financial liabilities designated at fair value through profit or loss
Provisions
Total
1 Certain comparative amounts have been reclassified to conform with the
presentation adopted in the current period.
October 31
2018
$ 4,958
1,283
3,344
454
84
175
1,747
5,627
16
1,502
$ 19,190
As at
October 31
2017
$ 4,492
988
3,348
2,060
82
178
2,463
5,835
8
1,016
$ 20,470
187
TD BANK GROUP ANNUAL REPORT 2018 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
July 9, 2023
May 26, 2025
June 24, 20253
September 30, 20253
September 14, 20283
July 25, 20293
March 4, 20313
September 15, 20313
December 18, 2106
Total
Interest
rate (%)
5.8281
9.150
2.6921
2.9821
3.5891
3.2241
4.8591
3.6255
5.7636
Earliest par
Reset
redemption
spread (%)
date
2.5501
July 9, 20182
n/a
–
1.2101
June 24, 2020
1.8301 September 30, 2020
1.0601 September 14, 20234
1.2501
July 25, 2024
3.4901
March 4, 2026
2.2055 September 15, 2026
1.9906 December 18, 20177
As at
October 31
2018
October 31
2017
$
–
198
1,474
982
1,711
1,427
1,124
1,824
–
$ 8,740
$
650
199
1,492
987
–
1,460
1,164
1,776
1,800
$ 9,528
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 July 9, 2018, the Bank redeemed all of its outstanding $650 million 5.828%
subordinated debentures due July 9, 2023, at a redemption price of 100% of the
principal amount plus accrued and unpaid interest.
3 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, 525 million for the 3.589% subordinated debentures due
September 14, 2028, 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.
4 On September 14, 2018, the Bank issued $1.75 billion of NVCC medium term
notes constituting subordinated indebtedness of the Bank (the “Notes”). The
Notes will bear interest at a fixed rate of 3.589% per annum (paid semi-annually)
until September 14, 2023, and at the three-month Bankers’ Acceptance rate plus
1.06% thereafter (paid quarterly) until maturity on September 14, 2028. With the
prior approval of OSFI, the Bank may, at its option, redeem the Notes on or after
September 14, 2023, 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.
5 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.
6 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.
7 On December 18, 2017, the Bank redeemed 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.
The total change in subordinated notes and debentures for the year
ended October 31, 2018 primarily relates to the issuance and
redemption of subordinated debentures, foreign exchange translation,
and the basis adjustment for fair value hedges.
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
2017
2018
$
–
–
–
–
8,740
$ 8,740
$
–
–
–
–
9,528
$ 9,528
188
TD BANK GROUP ANNUAL REPORT 2018 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.
On November 26, 2018, Trust III announced its intention to redeem all
of the outstanding TD CaTS III on December 31, 2018.
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, 2018, there was $450 million (October 31, 2017 –
$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
2017
of the issuer
yield
2018
Redemption
date
As at
1,000
June 30, Dec. 31
7.243%1 Dec. 31, 20132
$ 993
$ 983
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.
189
TD BANK GROUP ANNUAL REPORT 2018 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, 2018
October 31, 2017
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 S1
Series T2
Series Y3
Series Z4
Series 15
Series 35
Series 55
Series 75
Series 95
Series 115
Series 125
Series 145
Series 165
Series 185
Series 205
Balance as at end of year – preferred shares
Treasury shares – common6
Balance as at beginning of year
Purchase of shares
Sale of shares
Balance as at end of year – treasury shares – common
Treasury shares – preferred6
Balance as at beginning of year
Purchase of shares
Sale of shares
Balance as at end of year – treasury shares – preferred
Number
of shares
1,842.5
2.9
5.0
(20.0)
1,830.4
–
–
–
–
20.0
20.0
20.0
14.0
8.0
6.0
28.0
40.0
14.0
14.0
16.0
200.0
2.9
110.6
(111.4)
2.1
0.3
5.2
(5.2)
0.3
Amount
$ 20,931
152
366
(228)
$ 21,221
$
–
–
–
–
500
500
500
350
200
150
700
1,000
350
350
400
$ 5,000
$
$
$
$
(176)
(8,295)
8,327
(144)
(7)
(129)
129
(7)
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)
1 On July 31, 2018, the Bank redeemed all of its 5.4 million outstanding Class A First
Preferred Shares, Series S (“Series S Shares”), at the redemption price of $25.00
per Series S Share, for total redemption costs of approximately $135 million.
2 On July 31, 2018, the Bank redeemed all of its 4.6 million outstanding Class A First
Preferred Shares, Series T (“Series T Shares”), at the redemption price of $25.00
per Series T Share, for total redemption costs of approximately $115 million.
3 On October 31, 2018, the Bank redeemed all of its 5.5 million outstanding Class A
First Preferred Shares, Series Y (“Series Y Shares”), at a redemption price of
$25.00 per Series Y Share, for total redemption costs of approximately $137 million.
4 On October 31, 2018, the Bank redeemed all of its 4.5 million outstanding Class A
5 NVCC Series 1, 3, 5, 7, 9, 11, 12, 14, 16, 18, and 20 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, 70 million, 70 million,
and 80 million, respectively.
6 When the Bank purchases its own shares as part of its trading business, they are
First Preferred Shares, Series Z (“Series Z Shares”), at a redemption price of
$25.00 per Series Z Share, for total redemption costs of approximately $113 million.
classified as treasury shares and the cost of these shares is recorded as a reduction
in equity.
190
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
Preferred Shares Terms and Conditions
NVCC Fixed Rate Preferred Shares
Series 11
NVCC Rate Reset Preferred Shares3
Series 1
Series 3
Series 5
Series 7
Series 9
Series 12
Series 14
Series 16
Series 18
Series 20
Issue date
Annual
yield (%)1
Reset Next redemption/ Convertible
into1
conversion date1
spread (%)1
July 21, 2015
June 4, 2014
July 31, 2014
December 16, 2014
March 10, 2015
April 24, 2015
January 14, 2016
September 8, 2016
July 14, 2017
March 14, 2018
September 13, 2018
4.9
3.9
3.8
3.75
3.6
3.7
5.5
4.85
4.50
4.70
4.75
n/a October 31, 20202
n/a
2.24 October 31, 2019
July 31, 2019
2.27
January 31, 2020
2.25
July 31, 2020
2.79
October 31, 2020
2.87
April 30, 2021
4.66
October 31, 2021
4.12
October 31, 2022
3.01
April 30, 2023
2.70
October 31, 2023
2.59
Series 2
Series 4
Series 6
Series 8
Series 10
Series 13
Series 15
Series 17
Series 19
Series 21
1 Non-cumulative preferred dividends for each Series are payable quarterly, as and
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 Subject to regulatory consent, redeemable on or after October 31, 2020, at a
redemption price of $26.00, and thereafter, at a declining redemption price.
3 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.
NORMAL COURSE ISSUER BID
As approved by the Board on November 28, 2018, the Bank announced
its intention to amend its normal course issuer bid (NCIB) for up to an
additional 20 million of its common shares, subject to the approval of
OSFI and the Toronto Stock Exchange (TSX). The timing and amount of
any purchases under the program are subject to regulatory approvals
and to management discretion based on factors such as market
conditions and capital adequacy.
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.
On April 19, 2018, the Bank announced that the TSX and OSFI
approved the Bank’s previously announced NCIB to repurchase for
cancellation up to 20 million of the Bank’s common shares. During
the year ended October 31, 2018, the Bank repurchased 20 million
common shares under its NCIB at an average price of $75.07 per
share for a total amount of $1.5 billion.
The Bank had repurchased 22.98 million common shares under
its previous NCIB announced in March 2017, as amended in
September 2017, at an average price of $60.78 per share for a
total amount of $1.4 billion.
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, 5.0 million common shares at a discount of
0% were issued from the Bank’s treasury (2017 – 4.9 million common
shares at a discount of 0%) under the dividend reinvestment plan.
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)
TD Capital Trust III Securities – Series 20081
Total
As at
October 31 October 31
2017
2018
$ 993
$ 993
$ 983
$ 983
1 Refer to Note 20 for a description of the TD Capital Trust III securities.
191
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
N O T E 2 2
INSURANCE
INSURANCE REVENUE AND EXPENSES
Insurance 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.
This includes the results of property and casualty insurance, life and
health insurance, as well as reinsurance assumed and ceded in Canada
and internationally.
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 2018 were
$130 million (2017 – $127 million; 2016 – $142 million).
For the years ended October 31
2018
2017
2016
$ 4,398
915
3,483
562
4,045
2,676
232
$ 2,444
$ 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
RECONCILIATION OF CHANGES IN LIABILITIES
Insurance-related liabilities are comprised of provision for unpaid
claims (section (a) below), unearned premiums (section (b) below) and
other liabilities (section (c) below).
(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 inassumptions:
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, 2018
October 31, 2017
Reinsurance/
Other
recoverable
$ 192
42
(6)
–
(1)
35
(15)
(44)
(59)
(8)
$ 160
Gross
$ 4,965
2,673
(460)
(78)
(19)
2,116
(1,238)
(1,023)
(2,261)
(8)
$ 4,812
Net
$ 4,773
2,631
Gross
$ 5,214
2,425
(454)
(370)
(78)
(18)
2,081
(1,223)
(979)
(2,202)
–
$ 4,652
(83)
(11)
1,961
(1,052)
(1,153)
(2,205)
(5)
$ 4,965
Reinsurance/
Other
recoverable
$ 388
–
(52)
1
(6)
(57)
–
(134)
(134)
(5)
$ 192
Net
$ 4,826
2,425
(318)
(84)
(5)
2,018
(1,052)
(1,019)
(2,071)
–
$ 4,773
(b) Movement in 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, 2018
October 31, 2017
Gross
Reinsurance
Net
Gross
Reinsurance
$ 1,581
3,185
(3,092)
$ 1,674
$
–
114
(95)
$ 19
$ 1,581
3,071
(2,997)
$ 1,655
$ 1,575
2,993
(2,987)
$ 1,581
$
–
92
(92)
–
$
Net
$ 1,575
2,901
(2,895)
$ 1,581
192
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
(c) Other Movements in Insurance Liabilities
Other insurance liabilities were $212 million as at October 31, 2018
(October 31, 2017 – $229 million). The decrease of $17 million
(2017 – decrease of $28 million) is mainly due to changes in life
and health insurance 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
2009
and prior
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
Accident year
$ 3,699 $ 1,742 $ 1,724 $ 1,830 $ 2,245 $ 2,465 $ 2,409 $ 2,438 $ 2,425 $ 2,631
1,764
3,721
1,851
3,820
1,921
3,982
1,926
4,128
1,931
4,100
1,904
4,137
1,884
4,097
1,883
4,068
–
4,055
1,883
4,055
(3,907) (1,816)
67
148
1,728
1,823
1,779
1,768
1,739
1,702
1,696
–
–
1,696
(1,621)
75
1,930
1,922
1,885
1,860
1,818
1,793
–
–
–
1,793
(1,651)
142
2,227
2,191
2,158
2,097
2,047
–
–
–
–
2,047
(1,826)
221
2,334
2,280
2,225
2,147
–
–
–
–
–
2,147
(1,783)
364
–
2,367 2,421 2,307
–
–
2,310 2,334
–
–
–
2,234
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,631
2,234 2,334 2,307
(1,657) (1,568) (1,425) (1,223)
577
766
882
1,408 $ 4,650
(412)
414
$ 4,652
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, 2018
October 31, 2017
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
$ 121
(129)
(45)
45
$ (41)
41
(210)
210
$ 88
(95)
(33)
33
$ (30)
30
(153)
153
$ 117
(125)
(46)
46
$ (31)
31
(218)
218
$ 85
(91)
(34)
34
$ (23)
23
(159)
159
193
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
For life and health insurance, the processes used to determine critical
assumptions are as follows:
• Mortality, morbidity, and lapse assumptions are based on industry
and historical company data.
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.
• Expense assumptions are based on an annually updated expense
As at October 31, 2018, for the property and casualty insurance
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
business, 66.2% of net written premiums were derived from automobile
policies (October 31, 2017 – 65.9%) followed by residential with 33.3%
(October 31, 2017 – 33.6%). The distribution by provinces show that
business is mostly concentrated in Ontario with 55.0% of net written
premiums (October 31, 2017 – 55.7%). The Western provinces
represented 30.4% (October 31, 2017 – 30.0%), followed by the
Atlantic provinces with 8.5% (October 31, 2017 – 8.3%), and Québec
at 6.0% (October 31, 2017 – 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, 18.0 million common shares have
been reserved for future issuance (October 31, 2017 – 19.8 million).
The outstanding options expire on various dates to December 12, 2027.
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
2018
Weighted-
average
of shares exercise price
Number
14.3
1.9
(3.0)
(0.1)
13.1
$ 48.17
72.64
41.21
60.46
$ 53.12
2017
Weighted-
average
exercise price
$ 44.18
65.75
38.59
54.58
$ 48.17
Number
of shares
15.4
2.0
(3.0)
(0.1)
14.3
4.7
$ 40.61
5.4
$ 38.00
2016
Weighted-
average
exercise price
$ 40.65
53.15
35.21
48.29
$ 44.18
$ 37.19
Number
of shares
18.4
2.5
(4.9)
(0.6)
15.4
5.5
The weighted-average share price for the options exercised in 2018 was
$74.99 (2017 – $67.79; 2016 – $54.69).
The following table summarizes information relating to stock options
outstanding and exercisable as at October 31, 2018.
Options outstanding
Options exercisable
Number of
shares
outstanding
Weighted-
average
remaining
contractual
Weighted-
average
life (years) exercise price
2.1
2.6
4.6
1.9
1.9
2.4
4.5
6.5
8.0
9.0
36.06
44.27
52.80
65.75
72.64
Number of
shares
Weighted-
average
exercisable exercise price
2.1
2.6
–
–
–
36.06
44.27
–
–
–
Range of Exercise Prices
(millions of shares and Canadian dollars)
$32.99 – $36.64
$40.54 – $47.59
$52.46 – $53.15
$65.75
$72.64
194
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
For the year ended October 31, 2018, the Bank recognized
compensation expense for stock option awards of $11.5 million
(October 31, 2017 – $14.8 million; October 31, 2016 – $6.5 million).
For the year ended October 31, 2018, 1.9 million (October 31, 2017 –
2.0 million; October 31, 2016 – 2.5 million) options were granted
by the Bank at a weighted-average fair value of $6.28 per option
(2017 – $5.81 per option; 2016 – $4.93 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)
2018
2017
2016
Risk-free interest rate
Expected option life
Expected volatility1
Expected dividend yield
Exercise price/share price
1.71%
1.24%
1.00%
6.3 years
13.91%
3.50%
$ 72.64
6.3 years
14.92%
3.47%
$ 65.75
6.3 years
15.82%
3.45%
$ 53.15
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, 2018, was
23 million (2017 – 25 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
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, 2018,
6.2 million deferred share units were outstanding (October 31, 2017 –
6.4 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, 2018, the Bank recognized compensation
expense, net of the effects of hedges, for these plans of $509 million
(2017 – $490 million; 2016 – $467 million). The compensation
expense recognized before the effects of hedges was $607 million
(2017 – $917 million; 2016 – $720 million). The carrying amount of
the liability relating to these plans, based on the closing share price,
was $2.1 billion at October 31, 2018 (October 31, 2017 – $2.2 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, 2018,
the Bank’s contributions totaled $72 million (2017 – $70 million; 2016 –
$66 million) and were expensed as salaries and employee benefits. As at
October 31, 2018, an aggregate of 20 million common shares were held
under the Employee Ownership Plan (October 31, 2017 – 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.
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. Effective December 31, 2018, the defined benefit portion
of the TDPP will be closed to new employees hired after that date. All
new permanent employees hired in Canada on or after January 1, 2019
will be eligible to join the defined contribution portion of the TDPP
after one year of service.
Funding for the Bank’s principal pension plans is provided by
contributions from the Bank and members of the plans. 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 plans are adequately funded
over time. The Bank’s contributions to the principal pension plans
during 2018 were $355 million (2017 – $565 million). The 2018
and 2017 contributions were made in accordance with the actuarial
valuation reports for funding purposes as at October 31, 2017 and
October 31, 2016, respectively, for both of the principal pension plans.
The next valuation date for funding purposes is as at October 31, 2018,
for both of the principal pension plans.
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 rates of return, consistent with available
market opportunities, consideration of plan liabilities, 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 15% 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 and pooled funds.
195
TD BANK GROUP ANNUAL REPORT 2018 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 foreign government entities must not
exceed 20%;
• Debt instruments of either a single non-government or single
foreign 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 13%
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
• Limitation of 10% for any one issuer.
The remainder of the Society’s 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 small 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 or income trust 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, 2018
Debt
Equity
Alternative investments2
Other3
Total
As at October 31, 2017
Debt
Equity
Alternative investments2
Other3
Total
As at October 31, 2016
Debt
Equity
Alternative investments2
Other3
Total
Acceptable
range
40-70%
24-42
6-35
n/a
40-70%
24-42
0-35
n/a
40-70%
24-42
0-35
n/a
% of
total
55%
34
11
n/a
100%
57%
35
8
n/a
100%
62%
33
5
n/a
100%
Society1
Fair value
Quoted
Unquoted
$
–
897
–
–
$ 897
$
–
1,248
42
–
$ 1,290
$
–
1,165
31
–
$ 1,196
$ 2,885
869
551
(107)
$ 4,198
$ 2,903
511
376
46
$ 3,836
$ 2,962
407
208
43
$ 3,620
Acceptable
range
25-50%
30-65
3-25
n/a
25-56%
30-65
0-20
n/a
25-56%
44-65
0-20
n/a
% of
total
34%
58
8
n/a
100%
36%
59
5
n/a
100%
43%
56
1
n/a
100%
Quoted
$
–
396
–
–
$ 396
$
–
324
–
–
$ 324
$
–
51
–
–
$ 51
TDPP1
Fair value
Unquoted
$ 497
470
122
63
$ 1,152
$ 484
478
68
56
$ 1,086
$ 413
488
11
44
$ 956
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; and
• Monitoring the return on the plans’ assets relative to the
plans’ liabilities.
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 defined benefit pension plan. The defined benefit
plan was closed to new members after May 31, 1987. However, plan
members were permitted to continue in the plan for future service.
Funding for the plan is provided by contributions from the Bank and
members of the plan.
196
TD BANK GROUP ANNUAL REPORT 2018 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, 2018, were $134 million
(October 31, 2017 – $124 million; October 31, 2016 – $121 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 for eligible employees are not
funded by the Bank.
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)
Principal
pension plans
2018
2017
2016
Principal non-pension
post-retirement
benefit plan1
2016
2017
2018
Other pension and
retirement plans2
2016
2017
2018
Change in projected benefit obligation
Projected benefit obligation at beginning of year
Obligations included due to The Retirement
Benefit Plan merger3
Service cost – benefits earned
Interest cost on projected benefit obligation
Remeasurement (gain) loss – financial
Remeasurement (gain) loss – demographic
Remeasurement (gain) loss – experience
Members’ contributions
Benefits paid
Change in foreign currency exchange rate
Past service cost (credit)4
Projected benefit obligation as at October 31
Change in plan assets
Plan assets at fair value at beginning of year
Assets included due to The Retirement
Benefit Plan merger3
Interest income on plan assets
Remeasurement gain (loss) – return on plan assets
less interest income
Members’ contributions
Employer’s contributions
Benefits paid
Change in foreign currency exchange rate
Defined benefit administrative expenses
Plan assets at fair value as at October 31
Excess (deficit) of plan assets at fair value over
projected benefit obligation
Effect of asset limitation and minimum
funding requirement
Net defined benefit asset (liability)
Annual expense
Net employee benefits expense includes
the following:
Service cost – benefits earned
Net interest cost (income) on net defined benefit
liability (asset)
Past service cost (credit)4
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
$ 7,082 $ 6,805
$ 5,377
$ 558
$ 568
$ 553 $ 2,750
$ 2,863
$ 2,743
6
407
217
(969)
–
22
104
(330)
–
–
6,539
–
439
196
(148)
25
(15)
80
(291)
–
(9)
7,082
–
331
191
1,179
–
8
66
(347)
–
–
6,805
–
15
18
(42)
–
2
–
(16)
–
–
535
–
16
17
–
(42)
15
–
(16)
–
–
558
–
17
21
(9)
–
2
–
(16)
–
–
568
–
10
96
(190)
(8)
14
–
(137)
31
3
2,569
–
11
95
(27)
13
1
–
(138)
(68)
–
2,750
–
10
105
259
(11)
(12)
–
(265)
45
(11)
2,863
6,536
5,823
5,327
10
209
–
174
–
195
(231)
104
355
(330)
–
(10)
6,643
195
80
565
(291)
–
(10)
6,536
207
66
384
(347)
–
(9)
5,823
–
–
–
–
–
16
(16)
–
–
–
–
–
–
–
–
16
(16)
–
–
–
–
1,855
1,895
1,910
–
–
–
–
16
(16)
–
–
–
–
66
–
64
–
74
(109)
–
37
(137)
27
(6)
1,733
59
–
37
(138)
(58)
(4)
1,855
40
–
101
(265)
39
(4)
1,895
104
(546)
(982)
(535)
(558)
(568)
(836)
(895)
(968)
–
104
–
(546)
–
(982)
–
(535)
–
(558)
–
(568)
(13)
(849)
–
(895)
–
(968)
407
439
331
15
16
17
8
–
10
22
(9)
10
$ 425 $ 462
(4)
–
9
$ 336
18
–
–
$ 33
17
–
–
$ 33
21
–
–
$ 38 $
10
30
3
4
47
$
11
31
–
4
46
$
10
31
(11)
7
37
4.10%
2.54
3.60%
2.54
3.52%
2.66
4.10%
3.00
3.60%
3.00
3.60%
3.25
4.37%
3.74%
3.65%
1.03
1.14
1.18
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 4.28%. The rate is assumed to decrease gradually to 2.49% by
the year 2040 and remain at that level thereafter.
2 Includes Canada Trust (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 During 2018, The Retirement Benefit Plan of The Toronto-Dominion Bank (the
“RBP”) was deemed to be merged with the Society and previously undisclosed
obligations and assets of the RBP are now included for the current year.
4 Includes a settlement gain of $12 million related to a portion of the TDAF defined
benefit pension plan that was settled during 2016.
197
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
During the year ended October 31, 2019, the Bank expects to contribute
$352 million to its principal pension plans, $18 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)
Male aged 65 at measurement date
Female aged 65 at measurement date
Male aged 40 at measurement date
Female aged 40 at measurement date
Principal
pension plans
Principal non-pension
post-retirement
benefit plan
Other pension and
retirement plans
As at October 31
2018
23.3
24.1
24.5
25.2
2017
23.2
24.0
24.5
25.2
2016
22.1
24.0
23.4
25.1
2018
2017
2016
23.3
24.1
24.5
25.2
23.2
24.0
24.5
25.2
22.1
24.0
23.4
25.1
2018
22.1
23.7
23.0
24.8
2017
21.8
23.4
22.9
25.1
2016
21.4
23.4
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 (2017 – 15 years, 2016 – 16 years),
17 years (2017 – 18 years, 2016 – 17 years), and 12 years (2017 –
13 years, 2016 – 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, 2018
Principal
non-pension
post-
retirement
benefit plan
Principal
pension
plans
Obligation
Other
pension
and
retirement
plans
$ 1,092
(847)
(233)
232
(130)
128
n/a
n/a
$ 93
(73)
n/a1
n/a1
(16)
16
(71)
90
$ 336
(274)
–
–
(75)
74
(4)
5
198
TD BANK GROUP ANNUAL REPORT 2018 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
2018
October 31
2017
$
104
3
6
113
–
535
852
360
1,747
$ (1,634)
$
–
7
6
13
546
558
902
457
2,463
$ (2,450)
As at
October 31
2016
$
–
3
8
11
982
568
971
490
3,011
$ (3,000)
For the years ended
October 31
2018
October 31
2017
October 31
2016
$ 720
40
60
45
$ 865
$ 333
27
72
22
$ 454
$
(980)
7
(193)
(56)
$ (1,222)
199
TD BANK GROUP ANNUAL REPORT 2018 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 Taxes1
(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
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
1 Certain comparative amounts have been reclassified to conform with the
presentation adopted in the current period.
For the years ended October 31
2018
2017
2016
$ 2,873
(76)
2,797
$ 2,073
5
2,078
$ 2,106
(66)
2,040
76
302
7
385
3,182
(48)
(701)
(749)
(3)
(2)
(5)
2,428
1,491
1,055
200
2,746
(244)
(160)
86
(318)
$ 2,428
215
13
(53)
175
2,253
261
(755)
(494)
29
–
29
1,788
1,115
797
456
2,368
(233)
(156)
(191)
(580)
$ 1,788
50
2
51
103
2,143
57
(229)
(172)
26
(5)
21
1,992
1,003
693
427
2,123
(171)
(116)
156
(131)
$ 1,992
On December 22, 2017, the U.S. government enacted comprehensive
tax legislation commonly referred to as the Tax Cuts and Jobs Act
(the “U.S. Tax Act”), which made broad and complex changes to the
U.S. tax code.
The reduction of the U.S. federal corporate tax rate enacted by the
U.S. Tax Act resulted in an adjustment during 2018 to the Bank’s U.S.
deferred tax assets and liabilities to the lower base rate of 21%. The
impact for the year ended October 31, 2018 was a reduction in the
value of the Bank’s net deferred tax assets resulting in a $366 million
income tax expense recorded in the Provision for (recovery of) income
taxes on the Consolidated Statement of Income, a $22 million deferred
income tax benefit recorded in OCI and a $12 million deferred income
tax expense recorded in retained earnings.
The impact of the U.S. Tax Act on the Bank’s statutory and effective
tax rate is outlined in the following table as part of the Rate
differentials on international operations.
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
2018
2017
$ 3,648
26.5%
$ 3,262
26.5%
$ 2,819
(142)
(343)
19
$ 3,182
(1.0)
(2.5)
0.1
23.1%
(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%
The Canada Revenue Agency (CRA) and Alberta are denying certain
dividend deductions claimed by the Bank. In September 2018, Alberta
reassessed the Bank for $15 million of income tax for the years 2011
to 2013. In June 2018, the CRA reassessed the Bank for approximately
$198 million of additional income tax and interest in respect of
its 2013 taxation year. To date, the Bank has been reassessed for
approximately $553 million of income tax and interest for the years
2011 to 2013. The Bank expects the CRA and Alberta to reassess the
subsequent years on the same basis and that 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.
200
TD BANK GROUP ANNUAL REPORT 2018 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
Securities
Trading loans
Employee benefits
Pensions
Losses available for carry forward
Tax credits
Other
Total deferred tax assets
Deferred tax liabilities
Land, buildings, equipment, and other depreciable assets
Deferred (income) expense
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
2018
As at
October 31
2017
$ 845
920
54
739
59
94
326
92
3,129
223
12
163
94
492
2,637
2,812
175
$ 2,637
$ 924
215
90
814
269
131
22
144
2,609
7
(83)
244
122
290
2,319
2,497
178
$ 2,319
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 $806 million as at
October 31, 2018 (October 31, 2017 – $633 million), of which
$2 million (October 31, 2017 – $2 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, 2018. The total amount of these
temporary differences was $61 billion as at October 31, 2018
(October 31, 2017 – $55 billion).
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
2018
Total
Consolidated
statement of
income
Other
comprehensive
income
Business
combinations
and other
2017
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
$ 79
$
–
$ –
$ 79
$
(59)
$
–
$ –
$
(59)
216
95
36
(20)
61
37
(304)
54
240
(81)
(28)
–
–
–
230
14
–
–
–
(945)
–
–
–
–
–
–
–
–
–
(2)
–
–
–
216
95
36
210
75
37
(304)
52
(705)
(81)
(28)
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
expense (recovery)
$ 385
$ (701)
$ (2)
$ (318)
$ 175
$ (755)
$ –
$ (580)
201
TD BANK GROUP ANNUAL REPORT 2018 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.
weighted-average number of shares outstanding for the effects
of all dilutive potential common shares that are assumed to be issued
by the Bank.
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
The following table presents the Bank’s basic and diluted earnings
per share for the years ended October 31.
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, 2018, October 31, 2017, and October 31, 2016,
no outstanding options were excluded from the computation of diluted earnings
per share.
For the years ended October 31
2018
2017
2016
$ 11,048
1,835.4
6.02
$
$ 10,203
1,850.6
5.51
$
$ 8,680
1,853.4
4.68
$
$ 11,048
11,048
1,835.4
4.1
1,839.5
6.01
$
$ 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
$
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, 2017
Additions
Amounts used
Release of unused amounts
Foreign currency translation adjustments and other
Balance as of October 31, 2018, 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, 2018
1 Includes provisions for onerous lease contracts.
2 Refer to Note 8 for further details.
Restructuring1
Litigation
and Other
$ 117
84
(72)
(11)
3
$ 332
158
(121)
(24)
7
$ 121
$ 352
Total
$ 449
242
(193)
(35)
10
$ 473
1,029
$ 1,502
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, 2018, the Bank’s
RPL is from zero to approximately $763 million. This range does
not include potential punitive damages and interest and also does not
include matters for which an estimate cannot currently be made,
including actions that are in preliminary stages and certain matters
where no specific amount has been claimed. 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
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.
202
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
Stanford Litigation – The 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 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. The Bank 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.
On November 21, 2017, the class plaintiffs filed a Rule 23(f) petition
seeking permission to appeal the District Court’s denial of class
certification to the United States Court of Appeals for the Fifth Circuit.
The Bank filed an opposition to the class plaintiffs’ petition on
December 4, 2017. The Fifth Circuit denied the class plaintiffs’ petition
on April 20, 2018.
The 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 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.
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 was already the
subject of the consolidated amended class action complaint. This
action was consolidated into MDL 2613, and dismissed by the Court.
The plaintiff in that complaint has filed a notice of appeal with the
Fourth Circuit.
On December 5, 2017, TD Bank, N.A. was named as a defendant
in a thirteenth class action complaint challenging the Bank’s overdraft
practices. The new action, which was transferred to MDL 2613,
concerns the Bank’s treatment of certain transactions as “recurring”
for overdraft purposes. The Bank has moved to dismiss the claims.
On February 22, 2018, the Court issued an order certifying a class
as to certain claims and denying certification as to others. The United
States Court of Appeals for the Fourth Circuit denied the Bank’s 23(f)
petition seeking permission to appeal certain portions of the District
Court’s order.
Credit Card Fees – Between 2011 and 2013, seven proposed class
actions were commenced, five of which remain in British Columbia,
Alberta, Saskatchewan, Ontario and Québec: Coburn and Watson’s
Metropolitan Home v. Bank of America Corporation, et al.; Macaronies
Hair Club v. BOFA Canada Bank, 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 Québec Inc. v. Visa Canada
Corporation, et al. Subject to court approval of certain settlements,
the remaining defendants in each action are the Bank and several
other financial institutions. The plaintiff class members are Canadian
merchants who accept payment for products and services by Visa
Canada Corporation (Visa) and/or MasterCard International Incorporated
(MasterCard) (collectively, the “Networks”). 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 and were refused leave to appeal to the Supreme Court
of Canada. The trial of the British Columbia action is currently
scheduled to proceed in October 2019. In Québec, the motion for
authorization proceeded on November 6–7, 2017 and the matter was
authorized on similar grounds and for a similar period as in British
Columbia. The plaintiffs appealed this decision with a date to be set
by the court.
Consumer Class Actions – The Bank, along with several other
Canadian financial institutions, is a defendant in a number of matters
brought by consumers alleging provincial and/or national class claims
in connection with various fees, interest rate calculations, and credit
decisions. The cases are in various stages of maturity. In one matter,
the Bank is the sole defendant. Trial in that case has been scheduled
for November 2020.
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.
203
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Financial and performance standby letters of credit represent
irrevocable assurances that the Bank will make payments in the event
that a customer cannot meet its obligations to third parties and they
carry the same credit risk, recourse, and collateral security requirements
as loans extended to customers. Refer to the Guarantees section in
this Note for further details.
Documentary and commercial letters of credit are instruments issued
on behalf of a customer authorizing a third party to draw drafts on the
Bank up to a certain amount subject to specific terms and conditions.
The Bank is at risk for any drafts drawn that are not ultimately settled
by the customer, and the amounts are collateralized by the assets to
which they relate.
Commitments to extend credit represent unutilized portions of
authorizations to extend credit in the form of loans and customers’
liability under acceptances. A discussion on the types of liquidity
facilities the Bank provides to its securitization conduits is included
in Note 10.
The values of credit instruments reported as follows represent
the maximum amount of additional credit that the Bank could be
obligated to extend should contracts be fully utilized.
Credit Instruments
(millions of Canadian dollars)
Financial and performance standby
letters of credit
Documentary and commercial letters of credit
Commitments to extend credit1
Original term-to-maturity of one year or less
Original term-to-maturity of more than one year
Total
As at
October 31 October 31
2017
2018
$ 26,431 $ 23,723
198
197
41,587
50,028
134,148
115,692
$ 210,804 $ 181,200
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, 2018, the Bank is committed to
fund $205 million (October 31, 2017 – $123 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 $948 million for 2019; $902 million
for 2020, $815 million for 2021, $733 million for 2022, $640 million
for 2023, $3,229 million for 2024, and thereafter.
Future minimum finance lease commitments where the annual
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
2017
2018
Sources of pledged assets and collateral
Bank assets
Cash and due from banks
Interest-bearing deposits with banks
Loans
Securities
Other assets
$
1,219 $
3,301
83,637
83,370
442
3,329
75,682
74,511
635
172,805 154,599
1,278
Third-party assets2
Collateral received and available for sale or repledging 243,168
Less: Collateral not repledged
215,678
(57,845) (61,328)
185,323 154,350
358,128 308,949
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
8,083
7,905
105,665
85,544
39,007
32,067
38,033
7,540
1,390
94,945
61,856
35,281
33,527
30,273
5,686
1,222
40,799 38,254
$ 358,128 $ 308,949
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 $43.9 billion of on-balance sheet assets that the Bank has pledged
and that the counterparty can subsequently repledge as at October 31, 2018
(October 31, 2017 – $39.3 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.
payment is in excess of $100 thousand, is estimated at $26 million for
2019; $12 million for 2020, $8 million for 2021, $5 million for 2022,
$4 million for 2023, $5 million for 2024, and thereafter.
GUARANTEES
The following types of transactions represent the principal guarantees
that the Bank has entered into.
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, 2018
(October 31, 2017 – $1.1 billion; October 31, 2016 – $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.
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 unitholder 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. For further details on the Bank’s involvement with the
Fund, refer to Note 10.
204
TD BANK GROUP ANNUAL REPORT 2018 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, 2018, $149 million (October 31, 2017 – $180 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
2018
$ 34
3
37
$ 74
2017
$ 33
3
32
$ 68
2016
$ 25
3
32
$ 60
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.
TRANSACTIONS WITH SUBSIDIARIES, TD AMERITRADE,
AND SYMCOR INC.
Transactions between the Bank and its subsidiaries meet the definition
of related party transactions. If these transactions are eliminated
on consolidation, they are not disclosed as related party transactions.
The 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
2017
2018
$ 26,431 $ 23,723
15
12
$ 26,443 $ 23,738
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, 2018, 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, 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 fees of $1.9 billion during the year ended
October 31, 2018 (October 31, 2017 – $1.5 billion; October 31, 2016 –
$1.2 billion) to TD Ameritrade related to deposit accounts. The amount
paid by the Bank is based on the average insured deposit balance of
$140 billion for the year ended October 31, 2018 (October 31, 2017 –
$124 billion; October 31, 2016 – $112 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 the
balance tied to 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, 2018, amounts receivable from TD Ameritrade
were $137 million (October 31, 2017 – $68 million). As at
October 31, 2018, amounts payable to TD Ameritrade were $174 million
(October 31, 2017 – $167 million).
The Bank and other financial institutions provided TD Ameritrade
with unsecured revolving loan facilities. The total commitment
provided by the Bank was $338 million, which was undrawn as at
October 31, 2018, and October 31, 2017.
(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, 2018, the Bank paid $86 million
(October 31, 2017 – $93 million; October 31, 2016 – $97 million)
for these services. As at October 31, 2018, the amount payable
to Symcor was $14 million (October 31, 2017 – $15 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, 2018, and October 31, 2017.
205
TD BANK GROUP ANNUAL REPORT 2018 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.
Non-interest income is earned by the Bank primarily through
investment and securities services, credit fees, trading income, service
charges, card services, and insurance revenues. Revenues from
investment and securities services are earned predominantly in the
Canadian Retail segment with the remainder earned in Wholesale
Banking and U.S. Retail. Revenues from credit fees are primarily earned
in the Wholesale Banking and Canadian Retail segments. Trading
income is earned within Wholesale Banking. Both service charges
and card services revenue are mainly earned in the U.S. Retail and
Canadian Retail segments. Insurance revenue is earned in the
Canadian Retail segment.
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 changed its trading strategy with respect to certain trading
debt securities and reclassified these securities from trading to the
available-for-sale category under IAS 39 (classified as fair value through
other comprehensive income under IFRS 9) effective August 1, 2008.
These debt securities are economically hedged, primarily with CDS
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.
Upon adoption of IFRS 9, the current period provision for credit
losses related to performing (Stage 1 and Stage 2) and impaired
(Stage 3) financial assets, loan commitments, and financial guarantees
are recorded within the respective segment. Under IAS 39, and prior
to November 1, 2017, the provision for credit losses related to the
collectively assessed allowance for incurred but not identified credit
losses that related to Canadian Retail and Wholesale Banking
segments was recorded in the Corporate segment.
206
TD BANK GROUP ANNUAL REPORT 2018 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
$ 11,576
11,137
22,713
998
2,444
9,473
9,798
2,615
–
7,183
$
For the years ended October 31
Corporate2,3
$ 1,337 $
381
1,718
562
–
2,497
(1,341)
(200)
50
$ (1,091) $
2018
Total
22,239
16,595
38,834
2,480
2,444
20,137
13,773
3,182
743
11,334
$
Wholesale
Banking2,3
1,150
2,309
3,459
3
–
2,067
1,389
335
–
1,054
$
U.S.
Retail
$
8,176
2,768
10,944
917
–
6,100
3,927
432
693
4,188
$
Total assets as at October 31
$ 433,960
$ 417,292
$ 425,909
$ 57,742 $ 1,334,903
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)
$ 10,611
10,451
21,062
986
2,246
8,934
8,896
2,371
–
6,525
$
$
7,486
2,735
10,221
792
–
5,878
3,551
671
442
3,322
$
$
$
1,804
1,467
3,271
(28)
–
1,929
1,370
331
–
1,039
$
946 $
649
1,595
466
–
2,625
(1,496)
(1,120)
7
(369) $
$
2017
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
1 The retailer program partners’ share of revenues and credit losses is presented in
the Corporate segment, with an offsetting amount (representing the partners’
net share) recorded in Non-interest expenses, resulting in no impact to Corporate
reported Net income (loss). The Net income (loss) included in the U.S. Retail
segment includes only the portion of revenue and credit losses attributable to
the Bank under the agreements.
3 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 financial
assets at FVOCI (AFS securities under IAS 39) 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.
2 Net interest income within Wholesale Banking is calculated on a TEB. The TEB
4 Effective fiscal 2017, the impact from certain treasury and balance sheet
adjustment reflected in Wholesale Banking is reversed in the Corporate segment.
management activities relating to the U.S. Retail segment is recorded in the
Corporate segment.
207
TD BANK GROUP ANNUAL REPORT 2018 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
2018
2018
Total revenue
Income before
income taxes
$ 23,279
13,751
1,804
$ 38,834
$ 8,886
3,768
1,119
$ 13,773
$ 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
Net income
Total assets
$ 6,523
2,993
1,818
$ 11,334
2017
$ 5,660
3,075
1,782
$ 10,517
2016
$ 5,133
2,436
1,367
$ 8,936
$ 713,677
514,263
106,963
$ 1,334,903
2017
$ 648,924
515,478
114,593
$ 1,278,995
2016
$ 632,215
462,330
82,422
$ 1,176,967
N O T E 3 0
INTEREST INCOME AND EXPENSE
The following table presents interest income and interest expense by
basis of accounting measurement. Please refer to Note 2 for the type
of instruments measured at amortized cost and FVOCI under IFRS 9
and IAS 39.
(millions of Canadian dollars)
Measured at amortized cost
Measured at FVOCI
Not measured at amortized cost or FVOCI2
Total
Interest income
$
26,051
4,588
30,639
5,783
October 31, 20181
Interest expense
$ 9,286
–
9,286
4,897
For the year ended
October 31, 2017
Interest income
Interest expense
$ 22,596
3,426
26,022
3,810
$ 6,204
–
6,204
2,781
$
36,422
$ 14,183
$ 29,832
$ 8,985
1 Amounts for the year ended October 31, 2018 are prepared in accordance with
2 Includes interest income, interest expense, and dividend income for financial
IFRS 9. Prior period comparatives are based on IAS 39. Refer to Note 2 for
further details.
instruments that are measured or designated at fair value through profit or loss
and equities designated at fair value through other comprehensive income.
208
TD BANK GROUP ANNUAL REPORT 2018 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)
Canada7
United States8
United Kingdom
Europe – other
Other international
Total
Loans and customers’ liability
under acceptances1,2
Credit instruments3,4
October 31
2018
October 31
2017
October 31
2018
October 31
2017
As at
Derivative financial
instruments5,6
October 31
2017
October 31
2018
67%
32
–
–
1
100%
66%
33
–
–
1
100%
40%
57
1
1
1
100%
42%
55
1
1
1
100%
24%
31
15
24
6
100%
29%
26
17
21
7
100%
$ 666,405
$ 629,888
$ 210,804
$ 181,200
$ 55,615
$ 53,645
1 Of the total loans and customers’ liability under acceptances, the only industry
segment which equalled or exceeded 5% of the total concentration as at
October 31, 2018, was: real estate 9% (October 31, 2017 – 10%).
2 Includes loans that are measured at fair value through other comprehensive income.
3 As at October 31, 2018, the Bank had commitments and contingent liability
contracts in the amount of $211 billion (October 31, 2017 – $181 billion). Included
are commitments to extend credit totalling $184 billion (October 31, 2017 –
$157 billion), of which the credit risk is dispersed as detailed in the table above.
4 Of the commitments to extend credit, industry segments which equalled or
exceeded 5% of the total concentration were as follows as at October 31, 2018:
financial institutions 19% (October 31, 2017 – 19%); pipelines, oil and gas 10%
(October 31, 2017 – 10%); power and utilities 9% (October 31, 2017 – 10%);
automotive 9% (October 31, 2017 – 7%); telecommunications, cable, and
media 7% (October 31, 2017 – 6%); sundry manufacturing and wholesale 7%
(October 31, 2017 – 7%); professional and other services 6% (October 31, 2017 –
6%); non-residential real estate development 5% (October 31, 2017 – 5%);
government, public sector entities, and education 5% (October 31, 2017 – 5%).
5 As at October 31, 2018, the current replacement cost of derivative financial
instruments amounted to $56 billion (October 31, 2017 – $54 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.
6 The largest concentration by counterparty type was with financial institutions
(including non-banking financial institutions), which accounted for 68% of the
total as at October 31, 2018 (October 31, 2017 – 75%). The second largest
concentration was with governments, which accounted for 26% of the total as
at October 31, 2018 (October 31, 2017 – 20%). No other industry segment
exceeded 5% of the total.
7 Debt securities classified as loans were 0.4% as at October 31, 2017, of the total
loans and customers’ liability under acceptances. Debt securities classified as loans
are reclassified as Debt securities at amortized cost under IFRS 9.
8 Debt securities classified as loans were 0.1% as at October 31, 2017, of the total
loans and customers’ liability under acceptances. Debt securities classified as loans
are reclassified as Debt securities at amortized cost under IFRS 9.
209
TD BANK GROUP ANNUAL REPORT 2018 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 Exposure
(millions of Canadian dollars)
Cash and due from banks
Interest-bearing deposits with banks
Securities1
Financial assets designated at fair value through profit or loss
Government and government-insured securities
Other debt securities
Trading
Government and government-insured securities
Other debt securities
Retained interest
Non-trading securities at fair value through profit or loss
Government and government-insured securities
Other debt securities
Securities at fair value through other comprehensive income
Government and government-insured securities
Other debt securities
Available-for-sale
Government and government-insured securities
Other debt securities
Debt securities at amortized cost
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
Derivatives2
Loans
Residential mortgages
Consumer instalment and other personal
Credit card
Business and government
Debt securities classified as loans
Trading loans
Non-trading loans at fair value through profit or loss
Loans at fair value through other comprehensive income
Customers’ liability under acceptances
Amounts receivable from brokers, dealers, and clients
Other assets
Total assets
Credit instruments3
Unconditionally cancellable commitments to extend credit
relating to personal lines of credit and credit card lines
Total credit exposure
October 31
2018
As at
October 31
2017
$
4,735
30,720
$
3,971
51,185
1,397
2,221
47,085
20,106
25
–
2,340
94,733
30,948
2,119
1,913
40,012
13,358
32
n/a
n/a
n/a
n/a
n/a
n/a
102,361
41,763
60,535
46,636
n/a
n/a
127,379
101,525
225,081
170,976
34,015
216,321
n/a
10,990
1,336
2,745
17,267
26,940
5,886
1,281,942
210,804
n/a
n/a
45,623
25,740
134,429
70,120
221,990
156,293
31,743
199,503
3,062
11,235
n/a
n/a
17,297
29,971
4,556
1,208,276
181,200
301,752
$ 1,794,498
290,123
$ 1,679,599
1 Excludes equity securities.
2 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.
3 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.
210
TD BANK GROUP ANNUAL REPORT 2018 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 Supervision
(BCBS) are commonly referred to as Basel III. Under Basel III, Total
Capital consists of three components, namely Common Equity Tier 1
(CET1), Additional Tier 1, and Tier 2 Capital. Risk sensitive regulatory
capital ratios are calculated by dividing CET1, Tier 1, and Total Capital
by their respective risk-weighted assets (RWA), inclusive of any
minimum requirements outlined under the regulatory floor. 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, 2018, 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. In addition, on June 25, 2018, OSFI provided
greater transparency related to previously undisclosed Pillar 2 CET1
capital buffers through the introduction of the public Domestic
Stability Buffer (DSB) which is held by D-SIBs against Pillar 2 risks. The
current buffer is set at 1.5% of total risk-weighted assets (RWA) and
must be met with CET1 Capital, effectively raising the CET1 target
to 9.5%. Effective the second quarter of 2018, the Bank is no longer
constrained by the regulatory floor as a result of implementing
OSFI’s revised capital floor requirements.
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 ratios1,2
Common Equity Tier 1 Capital
Tier 1 Capital
Total Capital
Capital and leverage ratios
Common Equity Tier 1 Capital ratio1,2
Tier 1 Capital ratio1,2
Total Capital ratio1,2
Leverage ratio
As at
October 31 October 31
2017
2018
$ 52,389 $ 46,628
59,735
53,751
70,434 65,038
$ 435,632 $ 435,750
435,780 435,750
435,927 435,750
12.0%
13.7
16.2
4.2
10.7%
12.3
14.9
3.9
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 2018, the scalars for inclusion of CVA for CET1, Tier 1, and Total
Capital RWA are 80%, 83%, and 86%, respectively. For fiscal 2017, the scalars
were 72%, 77%, and 81%, respectively.
2 As at October 31, 2017, RWA for all ratios were the same due to the regulatory
floor which was based on Basel I risk weights. As at October 31, 2018, the
regulatory floor is based on Basel II standardized risk weights and is no longer
triggered resulting in a separate RWA for each ratio due to the CVA scalar.
211
TD BANK GROUP ANNUAL REPORT 2018 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 2018 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 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.
Toronto Dominion Investments, 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 Corporation4
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 Limited
TD Financial International Ltd.
TD Reinsurance (Barbados) Inc.
Toronto Dominion International Inc.
TD Waterhouse Canada Inc.
Address of Head
or Principal Office2
Montréal, Québec
Montréal, Québec
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
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
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
Toronto, Ontario
Hamilton, Bermuda
St. James, Barbados
St. James, Barbados
Toronto, Ontario
As at October 31, 2018
Carrying value of shares
owned by the Bank3
$ 1,379
Description
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
Holding Company
Holding Company
Securities Dealer
Securities Dealer
Financial Services Entity
Financial Services Entity
Small Business Investment Company
Merchant Banking and Investments
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 Deposit-Taking Entity
Investment Dealer and Broker
Holding Company
Holding Company
Reinsurance Company
Intragroup Lending Company
Investment Dealer
328
2,344
1,350
68,903
26
70
9,201
2,191
21,520
2,799
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.
included herein which are eliminated for consolidated financial reporting purposes.
Certain amounts have been adjusted to conform with the presentation adopted in
the current period.
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 Carrying amounts are prepared for purposes of meeting the disclosure requirements
of Section 308 (3)(a)(ii) of the Bank Act. Intercompany transactions may be
4 As at October 31, 2018, the Bank’s reported investment in TD Ameritrade Holding
Corporation was 41.61% (October 31, 2017 – 41.27%) 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.
212
TD BANK GROUP ANNUAL REPORT 2018 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, 2018
Carrying value of shares
owned by the Bank3
$ 434
319
9
99
1,078
817
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 Carrying amounts are prepared for purposes of meeting the disclosure requirements
of Section 308 (3)(a)(ii) of the Bank Act. Intercompany transactions may be
included herein which are eliminated for consolidated financial reporting purposes.
Certain amounts have been adjusted to conform with the presentation adopted
in the current period.
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, 2018, the net assets of subsidiaries subject to
regulatory or capital adequacy requirements was $79.8 billion
(October 31, 2017 – $77.2 billion), before intercompany eliminations.
In addition to regulatory requirements outlined above, the Bank
may be subject to significant restrictions on its ability to use the assets
or settle the liabilities of members of its group. Key contractual
restrictions may arise from the provision of collateral to third parties in
the normal course of business, for example through secured financing
transactions; assets securitized which are not subsequently available
for transfer by the Bank; and assets transferred into other consolidated
and unconsolidated structured entities. The impact of these restrictions
has been disclosed in Notes 9 and 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.
213
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS
N O T E 3 5
SIGNIFICANT AND SUBSEQUENT EVENTS, AND PENDING ACQUISITIONS
Acquisition of Greystone Managed Investments Inc.
On November 1, 2018, the Bank acquired 100% of the outstanding
equity of Greystone Capital Management Inc., the parent company of
Greystone Managed Investments Inc. (Greystone) for consideration of
$817 million, of which $475 million was paid in cash and $342 million
was paid in the Bank’s common shares. The value of 4.7 million
common shares issued as consideration was based on the volume
weighted-average market price of the Bank’s common shares over the
10 trading day period immediately preceding the fifth business day
prior to the acquisition date and was recorded based on market price
at close. Common shares of $167 million issued to employee
shareholders in respect of the purchase price will be held in escrow
for two years post-acquisition, subject to their continued employment,
and will be recorded as a compensation expense over the two-year
escrow period.
The acquisition is accounted for as a business combination under
the purchase method. As at November 1, 2018, the acquisition
contributed $169 million of assets and $55 million of liabilities. The
excess of accounting consideration over the fair value of the
identifiable net assets is allocated to customer relationship intangibles
of $140 million, deferred tax liability of $37 million and goodwill
of $433 million. Goodwill is not deductible for tax purposes. The
results of the acquisition will be consolidated from the acquisition
date and reported in the Canadian Retail segment. The purchase
price allocation 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.
Agreement for Air Canada Credit Card Loyalty Program
On November 26, 2018, the Bank finalized a long-term loyalty
program agreement (the “Loyalty Agreement”) with Air Canada.
Under the terms of the Loyalty Agreement, the Bank will become the
primary credit card issuer for Air Canada’s new loyalty program when
it launches in 2020 through to 2030. The Loyalty Agreement was
finalized in conjunction with Air Canada entering into a definitive
share purchase agreement with Aimia Inc. (“Aimia”) for the acquisition
of Aimia Canada Inc., which operates the Aeroplan loyalty business
(the “Transaction”), for an aggregate purchase price of $450 million
in cash and the assumption of approximately $1.9 billion of
Aeroplan Miles liability. The closing of the Transaction is subject to
the satisfaction of certain conditions, including receipt of Aimia
shareholder approval and customary regulatory approvals. The Loyalty
Agreement will become effective upon the closing of the Transaction
and TD Aeroplan cardholders will become members of Air Canada’s
new loyalty program and their miles will be transitioned when
Air Canada’s new loyalty program launches in 2020.
If the proposed Transaction is completed, the Bank will pay
$622 million plus applicable sales tax to Air Canada, of which
$547 million ($446 million after sales and income taxes) will be
recognized as an expense during the first quarter of 2019 to
be reported in the Canadian Retail segment, and $75 million will
be recognized as an intangible asset amortized over the Loyalty
Agreement term. In addition, the Bank will prepay $308 million plus
applicable sales tax for the future purchase of loyalty points over
a ten year period. The Bank also expects to incur additional pre-tax
costs of approximately $100 million over two years to build the
functionality required to facilitate the new program.
Normal Course Issuer Bid
As approved by the Board on November 28, 2018, the Bank
announced its intention to amend its normal course issuer bid (NCIB)
for up to an additional 20 million of its common shares, subject to
the approval of OSFI and the TSX. The timing and amount of any
purchases under the program are subject to regulatory approvals and
to management discretion based on factors such as market conditions
and capital adequacy.
Redemption of TD CaTS III Securities
On November 26, 2018, TD Capital Trust III announced its intention
to redeem all of the outstanding TD Capital Trust III Securities –
Series 2008 (TD CaTS III) on December 31, 2018, at a redemption
price per TD CaTS III of $1,000, plus the unpaid distribution payable
on the redemption date of December 31, 2018.
214
TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Ten-year Statistical Review – IFRS
Condensed Consolidated Balance Sheet
(millions of Canadian dollars)
2018
2017
2016
2015
2014
2013
2012
2011
ASSETS
Cash resources and other
Trading loans, securities, and other1
Non-trading financial assets at fair value
through profit or loss
Derivatives
Debt securities at amortized cost,
net of allowance for credit losses
Held-to-maturity securities
Securities purchased under reverse
repurchase agreements
Loans, net of allowance for loan losses
Other
Total assets
LIABILITIES
$
35,455 $
262,115
55,156
254,361
$
57,621
211,111
$
45,637
188,317
$ 46,554
168,926
$ 32,164
188,016
$ 25,128
199,280
$ 24,112
171,109
4,015
56,996
n/a
56,195
107,171
n/a
n/a
71,363
127,379
646,393
95,379
134,429
612,591
94,900
n/a
72,242
n/a
84,395
86,052
585,656
79,890
n/a
69,438
n/a
74,450
n/a
55,796
n/a
56,977
n/a
49,461
n/a
29,961
n/a
60,919
n/a
59,845
n/a
–
n/a
–
97,364
544,341
84,826
82,556
478,909
70,793
64,283
444,922
53,214
69,198
408,848
47,680
56,981
377,187
46,259
$ 1,334,903 $ 1,278,995
$ 1,176,967
$ 1,104,373
$ 960,511
$ 862,021
$ 811,053
$ 735,493
Trading deposits
Derivatives
Deposits
Other
Subordinated notes and debentures
$ 114,704 $
48,270
851,439
231,710
8,740
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
1,254,863 1,203,805
1,102,753
1,037,345
904,280
810,638
762,948
691,489
Total liabilities and equity
$ 1,334,903 $ 1,278,995
$ 1,176,967
$ 1,104,373
$ 960,511
$ 862,021
$ 811,053
$ 735,493
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
993
983
Total equity
80,040
75,190
Condensed Consolidated Statement of Income – Reported
(millions of Canadian dollars)
2017
2018
Net interest income
Non-interest income
$
22,239 $
16,595
20,847
15,302
$
21,221
5,000
(151)
193
46,145
20,931
4,750
(183)
214
40,489
6,639
8,006
79,047
74,207
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
51,383
18,691
3,395
(167)
196
20,868
17,491
3,395
(116)
212
18,213
3,645
3,326
46,628
42,521
1,477
1,483
48,105
44,004
$
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
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
$ 13,661
10,179
23,840
1,490
2,178
13,047
7,125
1,326
246
6,045
180
38,834
2,480
2,444
20,137
36,149
2,216
2,246
19,366
13,773
3,182
12,321
2,253
743
449
11,334
214
10,517
193
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
$
11,120 $
10,324
$
8,795
$
7,925
$
7,740
$
6,455
$
6,264
$
5,865
$
11,048 $
72
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
2018
2016
2015
2014
2013
2012
2011
Shareholders’ Equity
Common shares
Preferred shares
Treasury shares
Contributed surplus
Retained earnings
Accumulated other comprehensive
income (loss)
Total
$
$
21,221 $
5,000
(151)
193
46,145
20,931
4,750
(183)
214
40,489
6,639
8,006
79,047
74,207
Non-controlling interests in subsidiaries
993
983
$
20,711
4,400
(36)
203
35,452
11,834
72,564
1,650
20,294
2,700
(52)
214
32,053
10,209
65,418
1,610
$ 19,811
2,200
(55)
205
27,585
$ 19,316
3,395
(147)
170
23,982
$ 18,691
3,395
(167)
196
20,868
$ 17,491
3,395
(116)
212
18,213
4,936
54,682
1,549
3,159
49,875
1,508
3,645
3,326
46,628
42,521
1,477
1,483
Total equity
$
80,040 $
75,190
$
74,214
$
67,028
$ 56,231
$ 51,383
$ 48,105
$ 44,004
1 Includes financial assets designated at fair value through profit or loss and
financial assets at fair value through other comprehensive income
(available-for-sale securities under IAS 39).
TD BANK GROUP ANNUAL RE POR T 2 0 18 TEN-YEAR STATISTICAL R EVIEW 215
2011
2010
2009
$ 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
$ 686,360
$ 619,545
$ 557,219
$ 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
639,508
577,243
518,499
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
46,852
42,302
38,720
$ 686,360
$ 619,545
$ 557,219
2011
2010
2009
$ 12,831
8,763
21,594
1,465
13,083
$ 11,543
8,022
19,565
1,625
12,163
$ 11,326
6,534
17,860
2,480
12,211
7,046
1,299
104
246
5,889
180
5,777
1,262
106
235
4,644
194
3,169
241
111
303
3,120
167
$
5,709
$
4,450
$
2,953
2011
2010
2009
$ 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
$ 46,852
$ 42,302
$ 38,720
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)
Total liabilities and shareholders’ equity
Condensed Consolidated Statement of Income – Reported
(millions of Canadian dollars)
Net interest income
Non-interest income
Total revenue
Provision for credit losses
Non-interest expenses
Income before income taxes, non-controlling interests in subsidiaries
and equity in net income of an associated company
Provision for (recovery of) income taxes
Non-controlling interests in subsidiaries, net of income taxes
Equity in net income of an associated company, net of income taxes
Net income
Preferred dividends
Net income available to common shareholders
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
216
TD BANK GROU P AN NUAL REPO RT 20 18 TEN- YEAR S TATIS TICAL RE VIEW
Ten-year Statistical Review
Other Statistics – IFRS Reported
Per common share 1 Basic earnings
$
Performance
ratios
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
9 Return on common equity
10 Return on Common Equity Tier 1
Capital risk-weighted assets2,3
11 Efficiency ratio
12 Net interest margin
13 Common dividend payout ratio
14 Dividend yield4
15 Price-earnings ratio5
$
2018
6.02
6.01
2.61
40.50
73.03
1.80
(0.4)%
3.1
15.7%
2.56
51.9
1.95
43.3
3.5
12.2
2017
2016
2015
2014
2013
2012
2011
$
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
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
$
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%
$
3.40
3.38
1.45
23.60
40.62
1.72
8.0%
$
3.25
3.21
1.31
21.72
37.62
1.73
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
2.78
60.2
2.30
40.2
3.4
11.7
Asset quality
16 Net impaired loans as a % of
net loans6,7
0.37%
0.38%
0.46%
0.48%
0.46%
0.50%
0.52%
0.56%
17 Net impaired loans as a % of
common equity6,7
3.33
3.45
4.09
4.24
4.28
4.83
Capital ratios
Other
18 Provision for loan losses as a % of
net average loans6,7
19 Common Equity Tier 1 Capital ratio3,8
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
0.39
12.0%
13.7
16.2
5.5
0.37
10.7%
12.3
14.9
5.4
0.41
10.4%
12.2
15.2
5.8
0.34
0.34
0.38
9.9%
11.3
14.0
5.7
9.4%
9.0%
n/a%
n/a%
10.9
13.4
5.5
11.0
14.2
5.4
12.6
15.7
5.3
13.0
16.0
5.3
4.86
0.43
5.27
0.39
1,828.3
1,839.6
1,857.2
1,855.1 1,844.6
1,835.0
1,832.3
1,802.0
(millions of Canadian dollars)
$ 133,519
$ 134,915
$ 113,028
$ 99,584 $ 102,322
$ 87,748
$ 74,417
$ 67,782
25 Average number of
full-time equivalent staff9
26 Number of retail outlets10
27 Number of retail brokerage offices
28 Number of automated
84,383
2,411
109
83,160
2,446
109
81,233
2,476
111
81,483 81,137
2,534
2,514
111
108
78,748
2,547
110
78,397
2,535
112
75,631
2,483
108
banking machines
5,587
5,322
5,263
5,171
4,833
4,734
4,739
4,650
1 Return is calculated based on share price movement and dividends reinvested over
5 The price-earnings ratio is computed using diluted net income per common share
the trailing twelve-month period.
over the trailing 4 quarters.
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 were 72%, 77%, and 81%, respectively,
and for fiscal 2018, are 80%, 83%, and 86%, respectively. Prior to the second
quarter of 2018, the RWA as it relates to the regulatory floor was calculated based
on the Basel I risk weights which are the same for all capital ratios.
6 Includes customers’ liability under acceptances.
7 Excludes acquired credit-impaired loans, and prior to November 1, 2017, certain
debt securities classified as loans (DSCL). DSCL are now classified as debt
securities at amortized cost under IFRS 9.
8 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).
9 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.
10 Includes retail bank outlets, private client centre branches, and estate and
4 Dividend yield is calculated as the dividend per common share paid during the year
trust branches.
divided by the daily average closing stock price during the year.
TD BANK GROUP ANNUAL RE POR T 2 0 18 TEN-YEAR STATISTICAL R EVIEW 217
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
15 Price-earnings ratio4
Asset quality
16 Impaired loans net of specific allowance as a % of net loans5,6
17 Net impaired loans as a % of common equity5,6
18 Provision for credit losses as a % of net average loans5,6
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 staff7
25 Number of retail outlets8
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
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
1 Return is calculated based on share price movement and dividends reinvested over
6 Effective fiscal 2013, the Bank implemented the Basel III regulatory framework.
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.
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).
3 Dividend yield is calculated as the dividend per common share paid during the year
7 In fiscal 2014, the Bank conformed to a standardized definition of full-time
divided by the daily average closing stock price during the year.
4 The price-earnings ratio is computed using diluted net income per common share
over the trailing 4 quarters.
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 Excludes acquired credit-impaired loans, and prior to November 1, 2017, certain
8 Includes retail bank outlets, private client centre branches, and estate and
debt securities classified as loans (DSCL). DSCL are now classified as debt securities
at amortized cost under IFRS 9.
trust branches.
218218
TD BANK GROU P AN NUAL REPO RT 20 18 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 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.
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 CAR guideline, CVA capital add-on charge
was effective January 1, 2014.
Dividend Yield: Dividends paid during the year divided by average
of high and low common share prices for the year.
Effective Interest Rate (EIR): The rate that discounts expected future
cash flows for the expected life of the financial instrument to its
carrying value. The calculation takes into account the contractual
interest rate, along with any fees or incremental costs that are directly
attributable to the instrument and all other premiums or discounts.
Effective Interest Rate Method (EIRM): A technique for calculating
the actual interest rate in a period based on the amount of a financial
instrument’s book value at the beginning of the accounting period.
Under EIRM, the effective interest rate, which is a key component
of the calculation, discounts the expected future cash inflows and
outflows expected over the life of a financial instrument.
Efficiency Ratio: Non-interest expenses as a percentage of
total revenue; the efficiency ratio measures the efficiency of
the Bank’s operations.
Enhanced Disclosure Task Force (EDTF): Established by the
Financial Stability Board in May 2012 with the goal of improving the
risk disclosures of the banks and other financial institutions.
Expected Credit Loss (ECL): Is a calculation of the present
value of the amount expected to be lost on a financial asset,
for financial reporting purposes. It is calculated as:
ECL = PD (probability of default) x EAD (exposure at default) x LGD
(loss given default) x Discount Factor. Discount Factor is based on
the expected date 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).
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.
Fair value reported in profit and loss (FVPL): Under IFRS 9, the
classification is dependent on two tests, a contractual cash flow
test (named SPPI) and a business model assessment. Unless the asset
meets the requirements of both tests, it is measured at fair value
with all changes in fair value reported in profit and loss.
TD BANK GROUP ANNUAL RE POR T 2 018 GLO SSARY
219219
GLOSSARY (continued)
Fair value through other comprehensive income (FVOCI): Under
IFRS 9, if the asset passes the contractual cash flows test (named SPPI),
the business model assessment determines how the instrument is
classified. If the instrument is being held to collect contractual cash
flows, that is, if it is not expected to be sold, it is classified as
amortized cost. If the business model for the instrument is to both
collect contractual cash flows and potentially sell the asset, it is
reported at FVOCI.
Forward Contracts: Over-the-counter contracts between two parties
that oblige one party to the contract to buy and the other party to sell
an asset for a fixed price at a future date.
Futures: Exchange-traded contracts to buy or sell a security at a
predetermined price on a specified future date.
Hedging: A risk management technique intended to mitigate the
Bank’s exposure to fluctuations in interest rates, foreign currency
exchange rates, or other market factors. The elimination or reduction
of such exposure is accomplished by engaging in capital markets
activities to establish offsetting positions.
Impaired Loans: Loans where, in management’s opinion, there has
been a deterioration of credit quality to the extent that the Bank no
longer has reasonable assurance as to the timely collection of the full
amount of principal and interest.
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.
Return on Tangible Common Equity (ROTCE): A non-GAAP financial
measure calculated as reported net income available to common
shareholders after adjusting for the after-tax amortization of acquired
intangibles, which are treated as an item of note, as a percentage of
average Tangible common equity.
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.
Solely Payments of Principal and Interest (SPPI): IFRS 9 requires
that the following criteria be met in order for a financial instrument to
be classified at amortized cost:
• The entity’s business model relates to managing financial assets
(such as bank trading activity), and, as such, an asset is held
with the intention of collecting its contractual cash flows; and
• An asset’s contractual cash flows represent SPPI.
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.
Tangible common equity (TCE): A non-GAAP financial measure
calculated as common shareholders’ equity less goodwill, imputed
goodwill, and intangibles on an investment in TD Ameritrade and other
acquired intangible assets, net of related deferred tax liabilities.
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.
220
TD BANK GROU P AN NUAL REPO RT 20 18 GLOSSA RY
OUR STRATEGY
Proven business model
Purpose-driven
Forward-focused
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
6
8
9
13
118
127
215
219
221
For more information, see the interactive
TD Annual Report online by visiting
td.com/investor-relations/ir-homepage/
annual-reports/2018/index.jsp
For information on TD’s commitment to the
community and our environment, see the
Corporate Responsibility Report online by
visiting www.td.com/responsibility
(2018 interactive report available February 2019)
(2018 report available April 2019)
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 2018
Ernst & Young LLP
DIVIDENDS
Direct dividend depositing: Registered
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. Beneficial shareholders
should contact their intermediary.
U.S. dollar dividends: For registered shareholders,
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. Registered shareholders
whose dividends are sent to non-U.S. addresses
can also 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. Beneficial shareholders should
contact their intermediary.
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/investor
Beneficially own TD shares that are held in the
name of an intermediary, such as a bank, a trust
company, a securities broker or other nominee
Your TD shares, including questions regarding
the dividend reinvestment plan and mailings
of shareholder materials
Your intermediary
TD SHAREHOLDER RELATIONS
For all other shareholder inquiries, please contact
TD Shareholder Relations at 416-944-6367 or
1-866-756-8936 or e-mail tdshinfo@td.com.
Please note that by leaving us an e-mail or
voicemail message you are providing your
consent for us to forward your inquiry to the
appropriate party for response.
Shareholders may communicate directly with
the independent directors through the
Chairman of the Board, by writing to:
Chairman of the Board
The Toronto-Dominion Bank
P.O. Box 1
Toronto-Dominion Centre
Toronto, Ontario M5K 1A2
or you may send an e-mail c/o TD Shareholder
Relations at tdshinfo@td.com. E-mails addressed
to the Chairman received from shareholders and
expressing an interest to communicate directly
with the independent directors via the Chairman
will be provided to Mr. Levitt.
HEAD OFFICE
The Toronto-Dominion Bank
P.O. Box 1
Toronto-Dominion Centre
King St. W. and Bay St.
Toronto, Ontario M5K 1A2
Product and service information 24 hours a day,
seven days a week:
In Canada contact TD Canada Trust
1-866-222-3456
In the U.S. contact TD Bank,
America’s Most Convenient Bank®
1-888-751-9000
French: 1-800-895-4463
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, April 4, 2019
9:30 a.m. (Eastern)
Design Exchange
Toronto, Ontario
SUBORDINATED NOTES SERVICES
Trustee for subordinated notes:
Computershare Trust Company of Canada
Attention: Manager,
Corporate Trust Services
100 University Avenue, 11th Floor
Toronto, Ontario M5J 2Y1
Vous pouvez vous procurer des exemplaires en
français du rapport annuel au service suivant :
Affaires internes et publiques
La Banque Toronto-Dominion
P.O. Box 1, Toronto-Dominion Centre
Toronto (Ontario) M5K 1A2
TD B ANK GR OUP ANNUAL REPORT 20 18 SHAREHO LDER AND INVESTOR INFO RMATI ON 221
g
n
i
t
n
i
r
P
l
a
t
n
e
n
i
t
n
o
c
s
n
a
r
T
C
T
:
g
n
i
t
n
i
r
P
,
.
c
n
i
n
g
i
s
e
d
0
3
q
:
n
g
i
s
e
D
T
D
B
A
N
K
G
R
O
U
P
2
0
1
8
A
N
N
U
A
L
R
E
P
O
R
T
Own the future
2018 Annual Report
® 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.
1
9
5
0
4