Adapting
with purpose
2020 Annual Report
For information on TD’s commitment to the community
and our environment visit
www.td.com/document/PDF/ESG/2019-TRC-Report.pdf
See the TD Annual Report
online by visiting
www.td.com/ar2020
Table of Contents
OUR STRATEGY
Group President and CEO’s Message
Chair of the Board’s Message
TD’s Response to the COVID-19 Pandemic
1
2
4
5
Proven Business Model
Purpose-Driven
Forward-Focused
10
Supporting a More Sustainable and Inclusive Tomorrow 12
8
6
MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL RESULTS
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Ten-Year Statistical Review
Glossary
Board Committees
Shareholder and Investor Information
14
125
137
216
218
220
221
Our Strategy
As a top 5 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
Purpose-Driven
Forward-Focused
Deliver consistent earnings
growth, underpinned
by a strong risk culture
Centre everything we do
on our vision, purpose and
shared commitments
Shape the future
of banking in the
digital age
Our Business
Every day, TD enriches the lives of millions of customers who rely on us for their
financial needs and to help them achieve their goals.
(as at October 31, 2020)
~90,000
TD colleagues
26.5 million
5th
customers served around
the globe
largest bank in North America1
1 By total assets
14 million+
active digital customers
2,300+
retail locations across
North America
6,200+
ATMs
1
TD BANK GROUP ANNUAL REPORT 2020 OUR STRATEGY Group President and CEO’s Message
TD delivered in a year of
unprecedented disruption
A year for the ages
2020 has been a year like no other and I am incredibly proud of how TD responded, guided
by our purpose: to enrich the lives of our customers, communities and colleagues. Through
it all, we demonstrated our ability to adapt with speed in response to the global pandemic.
There is no doubt that millions have been deeply affected by the
combined health and economic challenges of COVID-19. I want
to thank health care workers and all who served on the front
lines, including TD bankers. You kept us safe and supported
essential services despite significant personal challenges and
continue to do so today.
As a Bank, we have a critical role to play in the recovery – to
provide advice and services to the millions we serve, to help our
economies grow and our communities thrive.
Performance and strategic progress
Over the course of our 165-year history, TD’s business model has
continuously proven its strength, even in the face of global
uncertainty and significant economic headwinds. In a year
marked by a global health crisis, we delivered earnings of
approximately $11.9 billion ($10.0 billion, on an adjusted basis).
Although our adjusted earnings were lower in 2020 as households
and businesses were impacted by the economic downturn, our
Wealth, Insurance and Wholesale businesses delivered record
revenue and earnings performance.
We also made important strategic progress in 2020. The
transformative transaction between TD Ameritrade and The
Charles Schwab Corporation closed, making TD the largest
shareholder of a highly regarded U.S. investment firm with
US$6 trillion in client assets.
Our balance sheet ended the year strong, with a Common
Equity Tier 1 ratio of 13.1 per cent and a liquidity coverage ratio
of 145 per cent, positioning TD well for the future. Once again,
TD delivered for our shareholders, increasing our dividend by
8 per cent year-over-year.
This year was one of the most challenging in the history of the
Bank and our results demonstrated the strength of our franchise,
but there is more to the story of what we achieved this year.
Resilience and execution in a period of
unprecedented change
2020 brought many challenges, but also showcased our ability
to execute. We benefited from investments in new capabilities
to quickly shift our operations, enable more than 60,000
colleagues to work from home, and deploy new digital assets.
Bharat Masrani
Group President and Chief Executive Officer
2
TD BANK GROU P AN NUAL REPO RT 20 20 GR OUP PRESIDENT AND CEO’ S MESSA GE
“ I firmly believe that
banking serves a
higher purpose,
and this has never
been more true
than in 2020.”
TD was there for customers when they needed
us the most
Since the start of the pandemic, more than one million
customers enrolled in digital banking services for the first time
and digital engagement increased by 57 per cent. We also
worked closely with governments in the U.S. and Canada to
facilitate access to relief and support programs, and directly
addressed customer concerns with programs of our own,
tailoring solutions to their specific needs.
In every decision we made, we put the well-being
of our colleagues and customers at the forefront
Guided by medical advice from public health officials and our
own Chief Medical Director, we implemented health and safety
precautions at every TD location across our footprint. Though
recent news of potential vaccines is encouraging, COVID-19
remains a challenge and we will continue to focus on the safety
of our customers, colleagues, and the communities we serve.
A more inclusive and sustainable future
I firmly believe that banking serves a higher purpose, and
this has never been more true than in 2020.
As a result of COVID-19, many communities faced higher
unemployment, deeper economic impacts, and elevated
infection rates. Through the TD Ready Commitment, we
launched the TD Community Resilience Initiative, allocating
$25 million to organizations delivering immediate front-line
services and the longer-term support needed to promote
a more inclusive recovery.
Diversity and inclusion are central to our culture
We continue to work tirelessly to build a workplace and world
where all can thrive. As powerful demonstrations denouncing
anti-Black racism unfolded this year, we made clear where
we stand and took meaningful action. We announced new
commitments to grow minority executive representation and
launched Bank and community efforts to tackle the impacts
of anti-Black racism. At the same time, we pushed for
continued progress in support of all of our diversity and
inclusion objectives.
Addressing climate change is critical today and
to future generations, and in 2020 TD never lost
sight of this
TD recently launched a bold and ambitious climate action plan
to address the challenges of climate change. This includes a
target to achieve net-zero greenhouse gas emissions in our
operations and financing activities by 2050. We backed this
commitment with the creation of a new Sustainable Finance and
Corporate Transitions Group to support clients around the world,
and an Environmental, Social and Governance (ESG) Centre of
Expertise to participate in the global efforts required to deliver
on this long-term target.
For the seventh consecutive year, TD was recognized on the
Dow Jones Sustainability World Index and this year was the
only North American bank included in the ranking – a further
testament to our leadership incorporating ESG practices
into our business.
We face the challenges ahead with many advantages
We enter 2021 with a robust balance sheet, deep customer
relationships, a strong brand, and well-positioned businesses.
Though macroeconomic challenges and uncertainties remain,
I am confident in the future as we work to build the Better Bank.
Together, our 90,000 dedicated and talented TD bankers
around the world proved their mettle during a time of significant
change. I want to thank them for their tremendous efforts, our
customers for their trust, and you, our shareholders, for your
continued support.
Bharat Masrani
Group President and Chief Executive Officer
TD BANK GROUP ANNUAL REP O RT 20 2 0 GROUP PRESIDEN T AND CEO’S MESSAGE
3
Chair of the Board’s Message
This year, TD successfully steered through one of the greatest challenges in its long history.
The pandemic posed the challenge of a lifetime for the health and well-being of our customers,
our communities and our colleagues. Guided by our purpose and values, we delivered for
all our stakeholders.
While meeting the operational challenges posed by the
pandemic, the Bank made progress on critical strategic initiatives
to position itself for growth in the years to come. The pace and
scope of the Bank’s digital journey accelerated. The merger of
TD Ameritrade with The Charles Schwab Corporation was
concluded. The Bank enhanced its commitment to leadership
in Environmental, Social and Governance practices with the
launch of a climate action plan and a renewal and enhancement
of its commitments to diversity and inclusion in its executive
ranks. Investments to train and upskill our colleagues were
also increased.
On behalf of my Board colleagues and all the Bank’s
stakeholders, I would like to thank our Group President and CEO
and his Senior Executive Team for their engagement and calm
leadership in these uncertain times. We also recognize the hard
work and dedication of TD’s 90,000 colleagues, particularly
those on the front lines who, in the face of unprecedented
challenges, continued to deliver the customer experience that
is the TD hallmark.
I also want to express the Bank’s appreciation to our
shareholders for their ongoing support and to our customers
for the opportunity to serve them. We will continue to strive
to maintain your support and trust.
Brian M. Levitt
Chair of the Board
The Bank generated earnings that enabled it to build capital;
set aside unprecedented provisions for credit losses; pay
increased dividends to our shareholders; recognize the
contribution of our colleagues with special compensation;
and increase financial support for our communities. Moreover,
the extraordinary engagement of our colleagues and the
Bank’s investments in systems and infrastructure enabled us
to provide the full suite of services to our customers without
interruption and to deliver government relief programs to
millions of individuals and businesses.
THE BOARD OF DIRECTORS
The Board of Directors as at
December 2, 2020 is listed below.
A full list of its committees and key
committees’ responsibilities can be
found on page 220. Our Proxy Circular
for the 2021 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.
Amy W. Brinkley
Consultant,
AWB Consulting, LLC,
Charlotte,
North Carolina
Brian C. Ferguson
Corporate Director and
former President and
Chief Executive Officer,
Cenovus Energy Inc.,
Calgary, Alberta
Colleen A. Goggins
Corporate Director
and retired
Worldwide Chairman,
Consumer Group,
Johnson & Johnson,
Princeton, New Jersey
Jean-René Halde
Corporate Director and
retired President and
Chief Executive Officer,
Business Development
Bank of Canada,
Saint-Laurent, Québec
David E. Kepler
Corporate Director
and retired Executive
Vice President,
The Dow Chemical
Company,
Sanford, Michigan
Brian M. Levitt
Chair of the Board,
The Toronto-Dominion
Bank,
Kingston, Ontario
Alan N. MacGibbon
Corporate Director
and retired Managing
Partner and Chief
Executive of
Deloitte LLP (Canada),
Oakville, Ontario
Karen E. Maidment
Corporate Director
and former Chief
Financial and
Administrative Officer,
BMO Financial Group,
Cambridge, Ontario
Bharat B. Masrani
Group President and
Chief Executive Officer,
The Toronto-Dominion
Bank,
Toronto, Ontario
Irene R. Miller
Chief Executive Officer,
Akim, Inc.,
New York, New York
Nadir H. Mohamed
Corporate Director and
former President and
Chief Executive Officer,
Rogers
Communications Inc.,
Toronto, Ontario
Claude Mongeau
Corporate Director and
former President and
Chief Executive Officer,
Canadian National
Railway Company,
Outremont, Québec
S. Jane Rowe
Vice Chair,
Investments, Ontario
Teachers’ Pension
Plan Board,
Toronto, Ontario
4
TD BANK GROU P AN NUAL REPO RT 20 20 CHAIR OF THE BOARD’S MESSA GE
OUR STRATEGY
TD’s Response to the COVID-19 Pandemic
Customers | Colleagues | Communities
The pandemic is impacting every aspect of our lives – from our families, to our jobs,
to the way we interact and engage with our communities.
Customers
Helped our customers feel confident during a time of
uncertainty by providing advice, facilitating access
to government relief efforts and enhancing tools
and capabilities to bank with us when and how they
want to.
Through TD Helps in Canada and TD Cares in the
U.S., we have provided support to over 450,000
customers and accounts.
The total value of all insurance customer relief
programs exceeded $88 million in premiums.
Facilitated access to billions of dollars in government
funds to businesses through programs like the Canada
Emergency Business Account Program and the
Paycheck Protection Program in the U.S.
Helped the Canadian federal government deliver
income support to households through the Canada
Emergency Response Benefit program, with
$11.5 billion in direct deposits facilitated in 2020.
Deferred payments on approximately $84 billion in
loan balances as of October 31, 2020.
Increased average total gross lending exposure by
$12.9 billion in Wholesale Banking.
Colleagues
At TD, our people are our greatest asset and
throughout the pandemic, we continued to make
investments that prioritize their well-being.
Adapted our work environments, including
investing in protective equipment, enhanced
cleaning and a new app – TD BoardingPass –
to simplify health screening and to help support
safe workplaces.
Quickly enabled 60,000 of our colleagues to work
from home, including contact centre employees and
trading teams in Canada and the U.S.
Recognizing this is a challenging time, TD committed
to no COVID-19-related job losses in 2020 and
provided financial awards and additional time off,
as a result of the pandemic.
Created an internal resource hub with topics
ranging from mental, physical and financial health
to family and social support.
Provided virtual health care to colleagues in
Canada, U.S., U.K., and Singapore with 24/7
on-demand access to medical consultations
from the comfort of their homes.
Communities
COVID-19 has affected us all, but we know some
communities are being disproportionately
impacted. Through our global citizenship platform,
the TD Ready Commitment, we aim to provide important
financial commitments and programs designed to
support recovery and community resilience across
our footprint.
TD launched the TD Community Resilience Initiative,
allocating $25 million to organizations engaged in
COVID-19 response and community recovery.
As part of this program $10 million was allocated to
the TD Ready Challenge, an annual North American
initiative, focused on developing innovative solutions
for a changing world. The 2020 TD Ready Challenge quickly
adapted to address the impacts of the pandemic and
support recovery.
The remaining funds are focused towards community
giving ($13 million) and matching grants programs
($2 million).
5
TD BANK GROUP ANNUAL REPORT 2020 OUR STRATEGY OUR STRATEGY
Proven Business Model
Deliver consistent earnings growth, underpinned
by a strong risk culture
We have diversification, scale, and a unique footprint
$11.9 billion
2020 Reported Earnings
$10.0 billion
2020 Adjusted Earnings
2,308
retail locations in
North America
57%
86% Retail
14% Wholesale
1 Reported basis excluding Corporate segment.
We have a strong balance sheet
15
TD Securities
offices worldwide
$1.7 trillion
Assets
$1.1 trillion
Deposits
Up 21.2% YoY
Up 28.0% YoY
13.1%
CET1 Ratio
145%
Liquidity Coverage
Ratio
2.41%
Return on
Risk-Weighted Assets
(Financial information as at
October 31, 2020)
We have a deep commitment to sustaining the trust of those we serve
Three core
principles of our
Risk Appetite
We take risks required to build our business, but only if those risks:
1. Fit our business strategy and can be understood and managed
2. Do not expose the enterprise to any significant single loss events; we don’t
“bet the bank” on any single acquisition, business or product
3. Do not risk harming the TD brand
Refer to footnotes on page 15 of the 2020 Management’s Discussion & Analysis for information on how the results on this page are calculated.
6
TD BANK GROUP ANNUAL REPORT 2020 OUR STRATEGY14%29%Canadian RetailU.S. RetailWholesaleTD’S PREMIUM RETAILEARNINGS MIX 1 2020 Snapshot
Performance indicators focus effort, communicate our priorities, and
benchmark our results against key elements of our proven business model.
Results in 2020 were significantly affected by the COVID-19 pandemic.
PERFORMANCE INDICATORS 1
2020 RESULTS 1 (on an adjusted basis)
• Deliver above-peer-average Total Shareholder Return
• Grow medium-term EPS by 7% to 10%
• Grow revenue faster than expenses2
• -17.9% vs. Canadian peer average of -12.6%
• -19.9% EPS decline
• Revenue growth of 2.8% vs. expense growth of 1.2%
DILUTED EARNINGS
PER SHARE (E PS)
(Canadian dollars)
TD’s 5-year CAGR
TD’s 5-year CAGR
TD’s 2020 ROE
8.3% Reported
2.6% Adjusted
8.8% Reported
3.1 % Adjusted
13.6% Reported
1 1.4% Adjusted
DIVIDEND HISTORY
11% Dividend Growth3
25-year CAGR
$3.11
164-year
Continuous Dividend
History
5.1%
2020 Dividend Yield
5.9%
Total Shareholder Return4
(5-year CAGR)
1 Performance indicators that include an earnings component are based on TD’s full-year adjusted results as explained in footnote 1 on page 15.
2 Revenue is net of insurance claims and related expenses.
3 25-year CAGR is the compound annual growth rate calculated from 1995 to 2020.
4 5-year CAGR is the compound annual growth rate calculated from 2015 to 2020.
Refer to footnotes on page 15 of the 2020 Management’s Discussion & Analysis for information on how the results on this page are calculated.
7
TD BANK GROUP ANNUAL REPORT 2020 OUR STRATEGY20162017201820192020NET INCOMEavailable to common shareholders(millions of Canadian dollars)AdjustedReported0$12,50010,0007,5005,0002,50020162017201820192020$76543210AdjustedReported2016201720182019202018%6421210814160RETURN ON COMMON EQUITY(percent)AdjustedReported1.501.000.50$ 3.502.503.002.000.00$0.22200019952005201020152020 OUR STRATEGY
Purpose-Driven
Centre everything we do on our vision, purpose and
shared commitments
TD is committed to enriching the lives of those we serve, and we recognize that when
our communities thrive, we all thrive. We’re focused on providing our customers with
proactive advice and personalized solutions that help them feel confident about their
financial future, while working to open doors to a more inclusive tomorrow. This is brought
to life by our colleagues and the unique and inclusive employee culture that encourages
them to bring their best selves to work every day.
We are relentlessly focused on our customers
TD Ready Advice
Introduced in Canada in response to the
pandemic, TD Ready Advice helps customers
navigate their finances during these uncertain
times with personal advice and online resources.
Digital applications have been enhanced with
new features and self-serve capabilities.
Colleagues are engaging with customers and
clients virtually, with TD Wealth Advice holding
over 125,000 virtual client meetings, providing
trusted advice to clients when they need it most.
Our Chatbots – TD Clari in Canada
and Virtual Assistant in the U.S. –
are providing seamless, no-contact
information to thousands of customers
a week, enabling contact centre
colleagues to focus on providing
advice and support.
Recognizing the impact the pandemic has had on small
businesses, TD acted quickly to facilitate access to
government relief programs. In the U.S. TD launched
a digital loan application system within days to provide
fast and convenient access to the U.S. Paycheck
Protection Program.
loans have been funded and TD continues to work
with government groups to facilitate lending for
small businesses
New! TD Global
Money Transfer
Making it easier to send money internationally in
more ways to over 200 countries and territories.1
Customers can send money to a recipient’s
bank account, for cash pick-up with Western
Union or to an eligible Visa card.
1 For full details visit www.td.com/ca/en/personal-banking/
how-to/international-money-transfer/td-global-transfer/
8
TD BANK GROUP ANNUAL REPORT 2020 OUR STRATEGY We are invested in our communities
From delivering meals
to families in need
to ensuring access to
essential services
to sewing masks for
communities – customers
and colleagues stepped
up for our communities.
#TDThanksYou
TD’s annual appreciation campaign was focused
on individuals who are making an impact in their
communities. Nominated by TD colleagues, these
individuals and organizations have delivered care,
services and support that have helped many
overcome the unanticipated challenges caused
by the pandemic.
We are inspired by our unique and inclusive employee culture
We are also taking steps to confront more long-standing
injustices. We announced concrete targets and
important initiatives:
To grow
Black, Indigenous
and minority executive
representation
To invest
in organizations that
stand up to racism
and promote inclusion
To introduce
enhanced awareness
and cultural training
across the Bank
To contribute
directly to a future where
everyone can thrive and
achieve their goals
$17.5 million
to help address both the immediate and longer-term
impacts of racism and advance related goals:
$12.1 million
for Black-focused or
Black-led organizations
$5.4 million
for Indigenous
communities
Our annual colleague satisfaction survey saw the
highest engagement since inception in 2001 and the
overall employee experience measure increased
compared to last year.
TD has a long-standing commitment to
the active advancement, promotion
and celebration of Diversity and Inclusion
within the Bank and across society.
100+
virtual events held across TD focused
on Diversity and Inclusion during
the pandemic
TD recognized as one of Canada’s Best
Workplaces™ for the 15th consecutive year
TD named Most Innovative Digital Bank by
Global Finance for the second consecutive year
TD named the most valuable Canadian
brand – TD is now among the Top 15 most
valuable bank brands globally1
TD named to the Bloomberg Gender-Equality
Index for the fourth year in a row
1 Brand Finance Global 500 2020
9
TD BANK GROUP ANNUAL REPORT 2020 OUR STRATEGY OUR STRATEGY
Forward-Focused
Shape the future of banking in the 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. The
investments we made in response to the pandemic have enabled us to accelerate our
strategy, delivering for our customers today and into the future.
We are re-imagining the banking experience
The impact of the pandemic on our
day-to-day lives led many of our
customers to change how they manage
their finances, and we’ve seen significant
increases in digital engagement.
increase in digital adoption
1 million +
customers have enrolled in digital
banking since the start of the pandemic
Over 35
SimpleApps have
been launched
Making it easier for our customers
to apply for a range of relief
services, including mortgage and
credit card payment deferrals in
Canada and the U.S.
TD Direct Investing launched TD GoalAssist,
a first of its kind mobile app in Canada
that helps customers set goals, invest with
confidence and track progress simply
and easily.
Improving our operations
This year we refreshed our Technology Strategy to
accelerate our efforts to improve our infrastructure and
power new experiences for our customers. The strategy
is rooted in the principles of accessibility and agility, and
adopts an enterprise approach that’s focused on outcomes.
It also played a key role in our pandemic response.
Accessibility
& Agility
Digital
Enhancements
Cloud
Enablement
Security
10
TD BANK GROUP ANNUAL REPORT 2020 OUR STRATEGY We are relentlessly focused on our customers
In response to
COVID-19, we tripled
our digital capacity
for customer-facing
capabilities such as
mobile deposit and
email money transfer.
Using AI technologies from TD Layer 6
and fintech partner Flybits, TD introduced
a new program to proactively identify
customers who may be able to benefit
from COVID-19-related relief and resources.
Customers received
notifications, providing
them with real-time
advice and convenient
access to helpful
information and tools.
Through iD8 – TD’s employee
ideation program – colleagues
submitted over 16,000 ideas
for improvements in 2020.
Positively impacted
50,000
colleagues
2.2 million
customers
Working in new and increasingly agile ways
At the height of the pandemic,
over 5,000 colleagues were
redeployed to support high-
demand areas – accelerating
ongoing efforts to upskill and
prepare our workforce for
the future.
TD launched Career Solutions,
an internal online resource
focused on providing colleagues
with growth and development
tools as they plan for what’s next
in their careers.
11
TD BANK GROUP ANNUAL REPORT 2020 OUR STRATEGY OUR STRATEGY
Supporting a More Sustainable and Inclusive Tomorrow
Environmental | Social | Governance
As a purpose-driven organization, we understand the role of business to enrich
the lives of our customers, colleagues and the communities we serve. Our corporate
citizenship approach, through the TD Ready Commitment, leverages our business,
philanthropy and people to embed our efforts across the Bank. We believe that TD
can contribute in positive ways to a more sustainable and inclusive tomorrow and we
have integrated our Environmental, Social and Governance (ESG) principles into our
business practices in substantial ways.
Climate Action Plan
TD was the first North American-based
bank to become carbon neutral and
we are now the first Canadian bank
and one of the few global banks to
announce a climate action plan and
target for net-zero emissions associated
with our operating and financing
activities by 2050.
TD’s Climate Action Plan includes:
Creation of a new TD Sustainable Finance
and Corporate Transitions Group to
provide clients with advisory services and
important transition and sustainability-
focused financing globally.
A new TD ESG Centre of Expertise that
brings together experts across TD to
participate in global efforts to improve
data measurement and analytics, invest
in research and support academic
progress and technological innovation.
Not providing new project-specific
financial services for activities that
are directly related to the exploration,
development, or production of oil
and gas within the Arctic Circle, including
the Arctic National Wildlife Refuge (ANWR).
Other Key ESG Highlights
from 2020
With the launch of the TD Community Resilience Initiative, we worked
with not-for-profits to pivot existing programming and used insights
to inform new areas where support was needed most, like the Frontline
Fund and the Black Doctor COVID-19 Consortium.
Invested over $130 million, through the TD Ready Commitment, to
support non-profit organizations across North America and the U.K.
Our latest Fusion Centre in Singapore, joins Fusion teams in Toronto,
New Jersey and Tel Aviv, working towards developing new ways to
protect the Bank from cyber risks and other threats.
We issued an inaugural three-year US$500 million sustainability
bond with proceeds from this issuance allocated to finance projects
with environmental and/or social benefits. TD Asset Management
launched two new ESG-oriented mutual funds that provide unique
differentiated solutions to help investors achieve their financial
goals while aligning their investments with their values to make a
positive impact.
We launched new Environmental and Social (E&S) Risk Assessment
and Borrower Climate Change tools to enhance how we assess E&S
risks in a more consistent and standardized way at the borrower and
transaction level.
For the seventh consecutive year, TD is included on the Dow Jones
Sustainability Index – the only North American bank on the World
Index this year.
12
TD BANK GROUP ANNUAL REPORT 2020 OUR STRATEGY 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 2020 Annual Report or the 2020
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 2020 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
Funding
Market Risk
Credit Risk
Other Risks
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.
80-85, 89, 95-98,
108-110
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.
73-79
68, 102-103
81-84
80-81
Description of key risks that arise from the bank’s business models and activities.
67, 80, 85-110
Description of stress testing within the bank’s risk governance and
capital frameworks.
Pillar 1 capital requirements and the impact for global systemically important banks.
Composition of capital and reconciliation of accounting balance sheet to the
regulatory balance sheet.
Flow statement of the movements in regulatory capital.
66, 84,
92-93, 108
62-65, 69,
214
62
Discussion of capital planning within a more general discussion of management’s
strategic planning.
63-66, 108
Analysis of how RWA relate to business activities and related risks.
66-67
8-11
Analysis of capital requirements for each method used for calculating RWA.
86-89, 91-92, 105
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.
88, 92, 96
98-100
Encumbered and unencumbered assets in a table by balance sheet category.
101, 208-209
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.
105-107
104-105
90
90, 92-94
91-94, 96
Primary risk management techniques beyond reported risk measures and parameters.
91-94
1-3, 6
1-3, 5
4
10
23-37, 42-47
11-12
59-61
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Provide information that facilitates users’ understanding of the bank’s credit risk
profile, including any significant credit risk concentrations.
27
Description of the bank’s policies for identifying impaired loans.
20-35
1-5, 10-11, 13-61
48-61, 85-89,
165-171,181,
184-185, 212-213
56, 140-142,
147-148, 171
28
29
30
31
Reconciliation of the opening and closing balances of impaired loans in the period
and the allowance for loan losses.
53, 168-169
24, 28
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.
88, 152, 176-177,
181, 184-185
88, 144-145, 152
Description of ‘other risk’ types based on management’s classifications and discuss
how each one is identified, governed, measured and managed.
95-97, 108-110
32
Discuss publicly known risk events related to other risks.
79, 206-208
39-41, 48-52
TD BANK GROUP ANNUAL REP O RT 20 2 0 ENH AN CED D ISC LOSURE TASK FORCE
13
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, 2020, 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, 2020. This MD&A is dated December 2, 2020. 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 revised 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
2019 FINANCIAL RESULTS OVERVIEW
Summary of 2019 Performance
2019 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
14
23
24
25
26
27
28
30
32
36
40
43
44
45
47
48
62
69
72
73
73
80
111
115
116
117
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, statements made in the Bank’s Management’s Discussion and Analysis (“2020 MD&A”) in the Bank’s 2020 Annual Report under the headings
“Economic Summary and Outlook” and “The Bank’s Response to COVID-19”, for the Canadian Retail, U.S. Retail, and Wholesale Banking segments under headings “Key Priorities
for 2021”, and for the Corporate segment, “Focus for 2021”, and in other statements regarding the Bank’s objectives and priorities for 2021 and beyond and strategies to achieve
them, the regulatory environment in which the Bank operates, the Bank’s anticipated financial performance, and the potential economic, financial and other impacts of the Coronavirus
Disease 2019 (COVID-19). 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: strategic, credit, market (including equity, commodity, foreign exchange, interest rate, and credit spreads),
operational (including technology, cyber security, and infrastructure), model, insurance, liquidity, capital adequacy, legal, regulatory compliance and conduct, reputational, environmental
and social, and other risks. Examples of such risk factors include the economic, financial, and other impacts of the COVID-19 pandemic; general business and economic conditions in
the regions in which the Bank operates; geopolitical risk; the ability of the Bank to execute on long-term strategies and shorter-term key strategic priorities, including the successful
completion of acquisitions and dispositions, business retention plans, and strategic plans; technology and cyber security risk (including cyber-attacks or data security breaches) on
the Bank’s information technology, internet, network access or other voice or data communications systems or services; model risk; fraud 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, and other risks arising from the Bank’s use of
third-party service providers; 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; regulatory oversight and compliance risk; increased competition from incumbents and new entrants (including
Fintechs and big technology competitors); shifts in consumer attitudes and disruptive technology; environmental and social risk; exposure related to significant litigation and regulatory
matters; ability of the Bank to attract, develop, and retain key talent; 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; Interbank Offered Rate (IBOR) transition risk; critical accounting
estimates and changes to accounting standards, policies, and methods used by the Bank; existing and potential international debt crises; environmental and social risk; 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 2020 MD&A, as may be
updated in subsequently filed quarterly reports to shareholders and news releases (as applicable) related to any events or transactions discussed under the headings “Significant Events”
in the relevant MD&A, which applicable releases may be found on www.td.com. All such factors should be considered carefully, as well as other uncertainties and potential events,
and the inherent uncertainty of forward-looking statements, when making decisions with respect to the Bank and the Bank cautions readers not to place undue reliance on the Bank’s
forward-looking statements.
Material economic assumptions underlying the forward-looking statements contained in this document are set out in the 2020 MD&A under the headings “Economic Summary and
Outlook” and “The Bank’s Response to COVID-19”, for the Canadian Retail, U.S. Retail, and Wholesale Banking segments, “Key Priorities for 2021”, and for the Corporate segment,
“Focus for 2021”, 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.
14
TD BANK GROUP ANNUAL REPORT 2020 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 losses
Insurance claims and related expenses
Non-interest expenses – reported
Non-interest expenses – adjusted1
Net income – reported
Net income – adjusted1
Financial positions (billions of Canadian dollars)
Total loans net of allowance for loan losses
Total assets
Total deposits
Total equity
Total Common Equity Tier 1 Capital risk-weighted assets2
Financial ratios
Return on common equity – reported
Return on common equity – adjusted1,3
Return on tangible common equity1,3
Return on tangible common equity – adjusted1,3
Efficiency ratio – reported
Efficiency ratio – adjusted1
Provision for credit losses as a % of net average loans and acceptances4
Common share information – reported (Canadian dollars)
Per share earnings
Basic
Diluted
Dividends per common share
Book value per share
Closing share price5
Shares outstanding (millions)
Average basic
Average diluted
End of period
Market capitalization (billions of Canadian dollars)
Dividend yield6
Dividend payout ratio
Price-earnings ratio
Total shareholder return (1-year)7
Common share information – adjusted (Canadian dollars)1
Per share earnings
Basic
Diluted
Dividend payout ratio
Price-earnings ratio
Capital ratios
Common Equity Tier 1 Capital ratio2
Tier 1 Capital ratio2
Total Capital ratio2
Leverage ratio
2020
2019
2018
$ 43,646
42,225
7,242
2,886
21,604
21,338
11,895
9,968
$ 717.5
1,715.9
1,135.3
95.5
478.9
13.6%
11.4
18.7
15.3
49.5
50.5
1.00
$
6.43
6.43
3.11
49.49
58.78
1,807.3
1,808.8
1,815.6
$ 106.7
4.8%
48.3
9.2
(17.9)
$
5.37
5.36
57.9%
11.0
13.1%
14.4
16.7
4.5
$ 41,065
41,065
3,029
2,787
22,020
21,085
11,686
12,503
$ 684.6
1,415.3
887.0
87.7
456.0
14.5%
15.6
20.5
21.5
53.6
51.3
0.45
$
6.26
6.25
2.89
45.20
75.21
1,824.2
1,827.3
1,811.9
$ 136.3
3.9%
46.1
12.0
7.1
$
6.71
6.69
43.0%
11.2
12.1%
13.5
16.3
4.0
$ 38,892
38,981
2,480
2,444
20,195
19,943
11,334
12,183
$ 646.4
1,334.9
851.4
80.0
435.6
15.7%
16.9
22.7
23.9
51.9
51.2
0.39
$
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
1 The Toronto-Dominion Bank (“TD” or the “Bank”) prepares its Consolidated Financial
2019, the scalars for inclusion of CVA for Common Equity Tier 1 (CET1), Tier 1,
Statements in accordance with 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 MD&A for
further explanation, a list of the items of note, and a reconciliation of non-GAAP
financial measures.
2 Each capital ratio has its own risk-weighted assets (RWA) measure due to the
Office of the Superintendent of Financial Institutions Canada (OSFI) prescribed
scalar for inclusion of the Credit Valuation Adjustment (CVA). For fiscal 2020 and
and Total Capital RWA are all 100%. For fiscal 2018, the scalars were 80%, 83%,
and 86%, respectively.
3 Metrics are non-GAAP financial measures. Refer to the “Return on Common
Equity” and “Return on Tangible Common Equity” sections of this document for
an explanation.
4 Excludes acquired credit-impaired (ACI) loans.
5 Toronto Stock Exchange (TSX) closing market price.
6 Dividend yield is calculated as the dividend per common share for the year divided
by the daily average closing stock price during the year.
7 Total shareholder return is calculated based on share price movement and dividends
reinvested over a trailing one-year period.
15
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
In terms of U.S. fiscal policy, the first round of COVID-19-related
economic supports of over US$2.5 trillion helped households and
businesses to maintain spending even as economic activity was curtailed.
Many of these supports have now expired. As of October 31, 2020, there
was broad agreement across party lines on a support package that would
reinstate some enhanced federal unemployment insurance benefits,
authorize more funds for small business loans and increase funding
for COVID-19 testing, treatment and vaccine research and distribution.
Uncertainty around the prospect for further assistance has increased
following the November election.
Canada’s economy was impacted more negatively than the U.S. in
the first half of calendar 2020 and since then has recovered somewhat
faster. The Bank estimates real GDP grew by 44.2% (annualized) in the
third calendar quarter of the year. Despite this increase, real GDP was
approximately 4.5% below the pre-COVID level in the fourth calendar
quarter of 2019. The recovery in Canada’s job market, meanwhile, has
outperformed that of its U.S. counterpart. As of October 2020, almost
four-fifths of the jobs lost during the initial lockdown have been recovered
in Canada, which is a significantly better performance than in the U.S. The
Canadian unemployment rate has fallen from a peak of 13.7% in May to
8.9% in October.
The recent surge in COVID-19 cases also presents a downside risk to
the near-term Canadian outlook. In an effort to contain the spread of the
virus, since October, governments in Ontario, Quebec and Manitoba have
imposed restrictions on targeted industries. This is expected to slow the
pace of the economic and labour market recovery in the final months of
this calendar year.
Similar to the Federal Reserve, the Bank of Canada has acted
aggressively to support the economy, bringing interest rates down to
0.25% in March and rapidly expanding the size of its balance sheet. The
Canadian central bank has explicitly committed to hold its overnight rate
steady at its effective lower bound of 0.25% until at least 2023. In an
environment of stable short-term interest rate differentials between the
U.S. and Canada, the Bank projects the Canadian dollar will trade in the
moderate range of 76-78 US cents over the next four calendar quarters.
Fuelled partly by extraordinarily low interest rates, Canadian existing
home resales and average prices reached new record highs in September.
Demand has been particularly robust for ground-based housing types and
properties located outside denser downtown cores. The housing market
has also become more bifurcated by type, with evidence of elevated supply
in the condominium market, and strong price pressures for detached
homes. The Bank expects deteriorating affordability to become a growing
constraint in the detached home market. Coupled with flagging demand
for condominiums, this is expected to result in a cooling in activity over the
first half of calendar 2021.
Many of the government supports to households and businesses
implemented in the early stages of the health and economic crisis have
been extended into calendar 2021, putting a floor under spending and
limiting the knock-on impact to insolvencies. In October, the Canada
Emergency Response Benefit (CERB) transitioned to expanded employment
insurance and the Canada Recovery Benefit. These two programs, which
are temporary in nature, cast a wide net and offer protection to the
incomes of workers who have not been able to find new employment.
Highly supportive fiscal and monetary policy is expected to keep Canada’s
economy on a gradual recovery track in the coming quarters. However, like
the U.S. and the global economy, a more expansive recovery will require
an effective vaccine or treatment in order for business activity to normalize
more broadly.
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 over 26 million customers in three key
businesses operating in a number of locations in financial centres around
the globe: Canadian Retail, including TD Canada Trust, TD Auto Finance
Canada, TD Wealth (Canada), TD Direct Investing, and TD Insurance;
U.S. Retail, including TD Bank, America’s Most Convenient Bank®, TD Auto
Finance U.S., TD Wealth (U.S.), and an investment in The Charles Schwab
Corporation (“Schwab”); and Wholesale Banking, including TD Securities.
TD also ranks among the world’s leading online financial services firms,
with more than 14 million active online and mobile customers. TD had
CDN$1.7 trillion in assets on October 31, 2020. The Toronto-Dominion
Bank trades under the symbol “TD” on the Toronto and New York
Stock Exchanges.
Economic Summary and Outlook
The global economic recovery has slowed after an initial burst of growth
following the end of lockdowns in the early summer months. A resurgence
in COVID-19 cases across Europe and North America has prompted
renewed restraints on activity, leaving economic momentum vulnerable
in the fourth calendar quarter of 2020. Until an effective vaccine or
treatment is widely distributed, the global economy is likely to remain
susceptible to such periodic setbacks.
The Bank expects global real GDP to contract by 3.8% in calendar
2020, the largest annual decline in the post-war era. China is the only
major economy that is likely to record growth this year, with early control
of the virus, state-supported investment and rising exports supporting
economic activity.
The global economic outlook for 2021 remains very uncertain and will
depend on the timing and effectiveness of a vaccine. Assuming a vaccine
is widely distributed by the summer, the Bank expects global real GDP to
rebound by 6.2% in calendar 2021. Recent news of potentially earlier
vaccine roll out offers some upside risk to that estimate. However, non-
virus-related negative risks also exist, including the possibility of no-deal
Brexit, escalating U.S.-China tensions, and continued geopolitical risks.
U.S. real GDP continues to recover. The economy expanded by 33.1%
(annualized) in the third calendar quarter of 2020. Monthly data on
consumer spending shows growth was especially rapid through May
and June, while the unemployment rate has continued to improve. Since
hitting a peak of 14.7% in April, it has fallen to 6.9% as of October,
although this remains well above the 3.5% rate recorded in February.
Likewise, real GDP remains 3.5% below its level in the fourth calendar
quarter of 2019. The recent rise in COVID-19 cases is expected to slow
U.S. growth in the final months of the calendar year, but not stall it
outright. Business restrictions have so far been less severe and less
widespread than what has been observed in other major economies.
However, this also creates a risk that the intensity of business restrictions
may eventually rise should the medical system become overly burdened.
The Federal Reserve cut its policy interest rate to the 0% to 0.25%
range in March and continues to expand its balance sheet by purchasing
U.S. Treasuries and mortgage-backed securities. In late August, the U.S.
central bank announced an update to its long-run goals and monetary
policy strategy, committing to target an inflation rate that “averages two
percent over time.” With inflation currently well under two percent, this
revised strategy suggests interest rates will remain very low for some
time. The Bank expects the federal funds rate to remain at its current
setting until calendar 2024. Historically, low interest rates have helped
drive a rapid rebound in the housing market and this remains true today.
Home sales are already above pre-crisis levels and price growth has been
accelerating. Housing activity is expected to slow in calendar 2021, but
a low homeownership rate and a favourable starting point for housing
affordability suggests that growth will continue.
16
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS THE BANK’S RESPONSE TO COVID-19
Efforts to contain the COVID-19 pandemic have had a profound impact
on economies around the world. In North America, the banking sector
implemented a variety of measures to ease the strain on consumers and
businesses. Governments, together with crown corporations, central banks
and regulators, also introduced programs to mitigate the fallout of the
crisis and support the effective functioning of financial markets. TD has
been actively engaged in this collective effort, guided by the principles of
supporting the well-being of its customers and colleagues and maintaining
the Bank’s operational and financial resilience.
Supporting Customers and Colleagues
Beginning in TD’s fiscal second quarter, the Bank temporarily closed
parts of its branch and store network and limited hours in others. As
jurisdictions across TD’s footprint began to ease physical distancing
restrictions in the third quarter, the Bank re-opened a number of its
branches and stores and started restoring hours of service to meet
customer needs, in line with the directives of government, public health
authorities and TD’s Chief Medical Director. Extra precautions were taken
in locations that remained open, including adjusting staff levels, installing
protective equipment, enhancing cleaning, and implementing physical
distancing measures to reduce personal contact. By October 31, 2020,
virtually all Canadian branches and U.S. stores were open, and all ATMs
were operational.
Also beginning in the second quarter, the Bank enabled a substantial
majority of its contact center staff to work from home to maintain service
levels. A number of branch and store colleagues were given training
to respond to customer calls, and new digital capacity and self-serve
capabilities were introduced to provide customers with ongoing access
to financial service and advice. The Bank expanded its existing customer
assistance programs – TD Helps in Canada and TD Cares in the U.S. – and
redeployed colleagues across the organization to support these functions.
In addition, new online and mobile applications were launched to facilitate
the delivery of direct and government-introduced financial assistance
for households and businesses. Approximately 60,000 TD colleagues
continued to work from home as at October 31, 2020, and these
arrangements are expected to remain in place for some time.
In the early months of the pandemic, the Bank offered several forms of
direct financial assistance to customers experiencing financial hardship due
to COVID-19, including deferral of loan payments and minimum payments
on credit card balances, interest reductions, insurance premium deferrals
and premium reductions. As at October 31, 2020, the bulk of this
assistance had run its course, with deferrals largely expiring on schedule
and customers resuming payments. The table below summarizes the
accounts and corresponding gross loan balances that remained subject to
COVID-related deferral programs as of October 31, 2020 in the Canadian
and U.S. Retail businesses. Delinquency rates for customers exiting deferral
are higher than for the broader population but remain low in absolute
terms reflecting continued job gains, the continuation of government
support, the Bank’s proactive outreach to clients, and TD’s expanding suite
of advice offerings.
As at April 30, 2020
As at July 31, 2020
As at October 31, 2020
Deferral Term
Bank-Led Payment
Deferral Programs
Accounts1
$ Billion
(CAD)1
% of
portfolio2
Accounts1
$ Billion
(CAD)1
% of
portfolio2
Accounts1
$ Billion
(CAD)1
% of
portfolio2
CANADA
Real Estate
Secured Lending3
Other Consumer
Lending4
Small Business
Banking and
Commercial
Lending
126,000
$ 36.0
14.0%
107,000
$ 31.4
12.0%
13,000
$ 3.7
1.4%
122,000
$ 3.2
3.0%
54,000
$ 1.3
1.0%
17,000
$ 0.3
0.3%
12,000
$ 6.5
8.0%
13,000
$ 7.0
8.0%
400
$ 0.4
0.5%
Up to 6-month
payment deferral
Up to 4-month
payment deferral
Up to 6-month (up to 4-month
for Small Business Banking
for non-Real Estate Secured
Lending secured debt)
1 Reflects approximate number of accounts and approximate gross loan balance at the
time of payment deferral.
3 Includes residential mortgages and amortizing Home Equity Lines of Credit (HELOCs).
4 Other Consumer Lending includes credit cards, other personal lending, and auto. The
2 Reflects gross loan balance at the time of payment deferral as a percentage of the
deferral period varies by product.
quarterly average loan portfolio balance.
UNITED STATES
As at April 30, 2020
As at July 31, 2020
As at October 31, 2020
Deferral Term
Bank-Led Payment
Deferral Programs
Accounts1
$ Billion
(USD)1
% of
portfolio2
Accounts1
$ Billion
(USD)1
% of
portfolio2
Accounts1
$ Billion
(USD)1
% of
portfolio2
Real Estate
Secured Lending
Other Consumer
Lending3
Small Business
Banking and
Commercial
Lending
7,000
$ 2.5
7.0%
7,000
$ 2.4
6.0%
5,000
$ 1.7
4.4%
226,000
$ 2.9
7.0%
46,000
$ 0.7
2.0%
15,000
$ 0.2
0.5%
5,000
$ 6.5
7.0%
4,000
$ 3.0
3.0%
1,000
$ 0.3
0.3%
3-month minimum
forbearance
Up to 3-month
payment deferral
Up to 6-month payment
deferral (up to 3-month for
Commercial lending)
1 Reflects approximate number of accounts and approximate gross loan balance at the
3 Other Consumer Lending includes credit cards, other personal lending, and auto.
time of payment deferral.
The deferral period varies by product.
2 Reflects gross loan balance at the time of payment deferral as a percentage of the
quarterly average loan portfolio balance.
17
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
Maintaining the Bank’s Financial and Operational Resilience
Early in its second quarter, the Bank invoked its crisis management
protocols as the virus took root in the various jurisdictions in which TD
operates. Business continuity management plans were activated, and an
executive crisis management team was appointed to lead the response
effort. The Bank rapidly implemented split-site and work from home
arrangements and managed a surge in online and mobile traffic, including
double-digit increases in Canadian and U.S. mobile banking downloads
and digital usage, and up to a three-fold increase in direct investing
trading volumes at the peak of market volatility. The Bank also facilitated
the rapid activation and support of government relief programs and
worked with its third-party suppliers to maintain critical functions and
services throughout the disruption. TD’s operations, including the Bank’s
technology infrastructure, network capacity, enterprise cloud capabilities
and remote access systems, have remained stable in the months since,
providing ongoing support for work from home arrangements and a
continued high level of online and mobile customer traffic.
The Bank has been monitoring credit risk as it continues to support its
customers’ borrowing needs, incorporating both the economic outlook,
as well as the impact of government relief programs and regulatory
measures. While the outlook remains uncertain, the Bank considers
its coverage levels appropriate following substantial additions to the
allowance for performing loans in the second and third quarters.
Market risk continued to be well managed in the fourth quarter against
a backdrop of reduced volatility, and the Bank’s capital, liquidity and
funding positions remained strong.
The Bank continues to evaluate its preparedness for a more sustained
period of stress, refine its downturn readiness procedures and develop
its medium- and long-term plans, including for various ‘return to the
workplace’ scenarios.
Response from Regulators and Central Banks
Beginning in the Bank’s fiscal second quarter, in response to the challenges
created by COVID-19 and then current market conditions, OSFI and
the Bank of Canada took a number of actions designed to build resilience
of federally regulated financial institutions and improve the stability of the
Canadian financial system and economy. For additional information on
OSFI’s capital measures, refer to the “OSFI’s Capital Requirements under
Basel III” and “Future Regulatory Capital Developments” sections of the
“Capital Position” section of this document. For additional information
on OSFI’s liquidity measures, refer to the “Regulatory Developments
Concerning Liquidity and Funding” section of the “Managing Risk”
section of this document.
As of the fourth quarter, governments, regulators and central banks
globally continued to keep policy settings at accommodative levels. In
Canada, this included maintaining adjustments to regulatory requirements
to build resilience of federally regulated financial institutions and
improve the stability of the Canadian financial system and economy, and
continuing to make available asset purchase and lending programs to
support market liquidity.
Impact on Current Quarter Financial Performance
With the improvement in economic and business conditions this quarter,
provisions for credit losses (PCL) decreased sequentially and non-
interest income in the retail banking businesses stabilized on a recovery
in customer spending and payment activity. The Bank continued to
experience further margin pressure from the low interest rate environment.
Deposit volumes continued to grow, partly reflecting the impact of
government financial assistance programs, and capital markets and wealth
direct investing revenues remained strong, reflecting high levels of client
and market activity.
The Bank continues to support programs for individuals and businesses
introduced by the Canadian and U.S. governments.
Canada Emergency Business Account Program
Under the Canada Emergency Business Account (CEBA) Program, with
funding provided by Her Majesty in Right of Canada (the “Government of
Canada”) and Export Development Canada (EDC) as the Government of
Canada’s agent, the Bank provides loans to its eligible business banking
customers. Under the CEBA Program, eligible businesses receive a $40,000
interest-free loan until December 31, 2022. If $30,000 is repaid on or
before December 31, 2022, the remaining amount of the loan is eligible
for complete forgiveness. If the loan is not repaid by December 31, 2022,
it will be extended for an additional 3-year term bearing an interest rate
of 5% per annum. The funding provided to the Bank by the Government
of Canada in respect of the CEBA Program represents an obligation to
pass-through collections on the CEBA loans and is otherwise non-recourse
to the Bank. Accordingly, the Bank is required to remit all collections of
principal and interest on the CEBA loans to the Government of Canada
but is not required to repay amounts that its customers fail to pay or that
have been forgiven. The Bank receives an administration fee to recover the
costs to administer the program for the Government of Canada. The Bank
continues to work with the Government of Canada and EDC as further
amendments to the CEBA Program are contemplated. Loans issued under
the program are not recognized on the Bank’s Consolidated Balance Sheet,
as the Bank transfers substantially all risks and rewards in respect of the
loans to the Government of Canada. As of October 31, 2020, the Bank
had provided approximately 184,000 customers (July 31, 2020 – 169,000;
April 30, 2020 – 117,000) with CEBA loans and had funded approximately
$7.3 billion (July 31, 2020 – $6.7 billion; April 30, 2020 – $4.7 billion) in
loans under the program.
U.S. Coronavirus Aid, Relief, and Economic Security Act,
Paycheck Protection Program
Under the Paycheck Protection Program (PPP) established by the U.S.
Coronavirus Aid, Relief, and Economic Security (CARES) Act and
implemented by the Small Business Administration (SBA), the Bank
provided loans up to US$10 million each to small businesses to assist them
in retaining workers, maintaining payroll, and covering other expenses. PPP
loans originated before June 5, 2020 have a 2-year term with an option
to extend to a 5-year term. PPP loans originated on or after June 5, 2020
have a 5-year term. All PPP loans bear an interest rate of 1% per annum,
and are 100% guaranteed by the SBA. The full principal amount of the
loan and any accrued interest are eligible for forgiveness if the loan is used
for qualifying expenses. The Bank will be paid by the SBA for any portion
of the loan that is forgiven. As of October 31, 2020, the Bank had funded
approximately 86,000 PPP loans (July 31, 2020 – 84,000; April 30, 2020 –
28,000). The gross carrying amount of loans originated under the
program was approximately US$8.2 billion (July 31, 2020 – US$8.2 billion;
April 30, 2020 – US$6.0 billion).
Other Programs
The Bank has been working with federal Crown Corporations, including
EDC and the Business Development Bank of Canada (BDC), as well as
provincial and state governments and central banks to deliver other
guarantee and co-lending programs for the Bank’s clients. In Canada, these
programs include the EDC Business Credit Availability Program (BCAP)
for small- and medium-sized enterprises, which offers eligible businesses
with credit partially guaranteed by EDC, the BDC Co-Lending Program,
which provides loans to small- and medium-sized businesses, and the
Investissement Québec (IQ) Programme d’action concertée temporaire
pour les entreprises (PACTE), which offers eligible businesses in Quebec
with credit partially guaranteed by IQ. For programs provided specifically
to eligible mid-market businesses, these include the EDC BCAP Large Loan
Program and BDC Junior Financing Program. In addition, TD is working
with Canada’s federal government to facilitate access to the Canada
Emergency Response Benefit (CERB) and Canada Emergency Wage Subsidy
(CEWS) through Canada Revenue Agency direct deposit. In the U.S.,
the Bank is working with the Federal Reserve Bank of Boston to facilitate
the Main Street Lending Program for small- and medium-sized businesses.
18
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS Impact on Financial Performance in Future Quarters
TD expects the Canadian and U.S. economies to continue their gradual
recovery in 2021, but the outlook remains uncertain. There is promising
news about potential vaccines, but much is still unknown about their
efficacy, availability, distribution and public acceptance. Phased re-
openings of the economy and targeted use of lockdowns have led to
an encouraging uptick in activity as compared to the second and third
quarters, but a second wave of infections is forcing many jurisdictions
to impose renewed restrictions, and the government programs that have
supported households and businesses through the slowdown may be
difficult to sustain.
Overall, TD expects the recovery in earnings to be uneven. Fiscal 2021
earnings should be supported by lower PCL, reflecting the ongoing impact
of bank and government relief and this year’s allowance build, as well
as improving customer activity and continued expense discipline. At the
same time, TD expects further deposit margin compression given the low
interest rate environment; some volumes may moderate from this year’s
levels, which were boosted by government stimulus, credit line draws
and a high customer preference for liquidity; and capital markets activity
may ease from this year’s record pace. With its strong capital and liquidity
levels, substantial loan loss reserves, and diversified and customer-focused
franchise, TD considers the Bank to be well-positioned to manage both
upside and downside risks and to execute on its growth opportunities.
HOW THE BANK REPORTS
The Bank prepares its Consolidated Financial Statements in accordance
with IFRS, the current 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 is comprised 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.
Investment in The Charles Schwab Corporation
On October 6, 2020, the Bank acquired an approximately 13.5%
stake in Schwab following the completion of Schwab’s acquisition of
TD Ameritrade Holding Corporation (“TD Ameritrade”) of which the Bank
was a major shareholder (the “Schwab transaction”). For further details,
refer to “Significant Events” in the “Financial Results Overview” section of
this document. The Bank’s share of TD Ameritrade’s earnings is reported
with a one-month lag. The same convention is being followed for Schwab,
and the Bank will begin recording its share of Schwab’s earnings on this
basis in the first quarter of fiscal 2021.
In addition, on November 25, 2019, the Bank and Schwab entered into
an insured deposit account agreement (the “Schwab IDA Agreement”),
which became effective upon closing of the Schwab transaction and
has an initial expiration date of July 1, 2031. The servicing fee under
the Schwab IDA Agreement is set at 15 basis points (bps) per annum
on the aggregate average daily balance in the sweep accounts. Prior
to the Schwab IDA Agreement becoming effective, the Bank was party
to an insured deposit account agreement with TD Ameritrade (the
“TD Ameritrade IDA Agreement”) and earned a servicing fee of 25 bps
per annum on the aggregate average daily balance in the sweep accounts
(subject to adjustment based on a specified formula). Refer to the “Related
Party Transactions” section of this document for further details.
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 continues to 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 and guidance that may be issued by
applicable regulatory authorities.
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
2020
2019
$ 25,611
18,035
$ 23,931
17,134
2018
$ 22,239
16,653
43,646
7,242
2,886
21,604
11,914
1,152
1,133
11,895
267
41,065
3,029
2,787
22,020
13,229
2,735
1,192
11,686
252
38,892
2,480
2,444
20,195
13,773
3,182
743
11,334
214
Net income available to common shareholders and non-controlling interests in subsidiaries
$ 11,628
$ 11,434
$ 11,120
Attributable to:
Common shareholders
Non-controlling interests
$ 11,628
$ 11,416
–
18
$ 11,048
72
19
TD BANK GROUP ANNUAL REPORT 2020 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)
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 for items of note
Amortization of intangibles4
Net gain on sale of the investment in TD Ameritrade5
Charges related to the long-term loyalty agreement with Air Canada6
Charges associated with the acquisition of Greystone7
Charges associated with the Scottrade transaction8
Impact from U.S. tax reform9
Less: Impact of income taxes
Amortization of intangibles4,10
Net gain on sale of the investment in TD Ameritrade5
Charges related to the long-term loyalty agreement with Air Canada6
Charges associated with the acquisition of Greystone7
Charges associated with the Scottrade transaction8
Impact from U.S. tax reform9
Total adjustments for items of note
2020
2019
2018
$ 25,611
16,614
$ 23,931
17,134
$ 22,239
16,742
42,225
7,242
2,886
21,338
10,759
2,020
1,229
9,968
267
9,701
–
9,701
(262)
1,421
–
(100)
–
–
(37)
(829)
–
(2)
–
–
1,927
41,065
3,029
2,787
21,085
14,164
2,949
1,288
12,503
252
12,251
18
12,233
(307)
–
(607)
(117)
–
–
(48)
–
(161)
(5)
–
–
(817)
38,981
2,480
2,444
19,943
14,114
2,898
967
12,183
214
11,969
72
11,897
(324)
–
–
–
(193)
(48)
(55)
–
–
–
(5)
344
(849)
Net income available to common shareholders – reported
$ 11,628
$ 11,416
$ 11,048
1 Adjusted non-interest income excludes the following items of note: Net gain
on sale of the investment in TD Ameritrade as explained in footnote 5 – 2020 –
$1,421 million. Adjustment to the carrying balances of certain tax credit-related
investments as explained in footnote 9 – 2018 – $(89) 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 – 2020 – $166 million, 2019 – $211 million,
2018 – $231 million; reported in the Corporate segment. Charges related to the
long-term loyalty agreement with Air Canada, as explained in footnote 6 – 2019 –
$607 million; this amount was reported in the Canadian Retail segment. Charges
associated with the acquisition of Greystone, as explained in footnote 7 – 2020 –
$100 million, 2019 – $117 million; this amount was reported in the Canadian Retail
segment. Charges associated with the Bank’s acquisition of Scottrade Bank, as
explained in footnote 8 – 2018 – $21 million reported in the U.S. Retail segment.
3 Adjusted equity in net income of an investment in TD Ameritrade excludes the
following items of note: Amortization of intangibles as explained in footnote 4 –
2020 – $96 million, 2019 – $96 million, 2018 – $93 million; and the Bank’s share
of TD Ameritrade’s deferred tax balances adjustment, as explained in footnote 9 –
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 8 – 2018 – $172 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 October 6, 2020, the Bank acquired an approximately 13.5% stake in Schwab
following completion of the Schwab transaction. As a result, the Bank recognized a
net gain on sale of its investment in TD Ameritrade primarily related to a revaluation
gain, the release of cumulative foreign currency translation gains offset by the release
of designated hedging items and related taxes, and the release of a deferred tax
liability related to the Bank’s investment in TD Ameritrade, net of direct transaction
costs. These amounts were reported in the Corporate segment.
6 On January 10, 2019, the Bank’s long-term loyalty program agreement with
Air Canada became effective in conjunction with Air Canada completing its
acquisition of Aimia Canada Inc., which operates the Aeroplan loyalty business
(the “Transaction”). In connection with the Transaction, the Bank recognized an
expense of $607 million ($446 million after-tax) in the Canadian Retail segment.
7 On November 1, 2018, the Bank acquired Greystone Capital Management Inc.,
the parent company of Greystone Managed Investments Inc. (“Greystone”).
The Bank incurred acquisition related charges including compensation to employee
shareholders issued in common shares in respect of the purchase price, direct
transaction costs, and certain other acquisition related costs. These amounts have
been recorded as an adjustment to net income and were reported in the Canadian
Retail segment.
8 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.
9 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. The earnings impact was reported in the Corporate segment.
10 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.
20
TD BANK GROUP ANNUAL REPORT 2020 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
2020
2019
$ 6.43
(1.06)
$ 5.37
$ 6.43
(1.07)
$ 5.36
$ 6.26
0.45
$ 6.71
$ 6.25
0.44
$ 6.69
2018
$ 6.02
0.46
$ 6.48
$ 6.01
0.46
$ 6.47
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
2020
$ 51
96
27
17
34
225
523
2019
$ 76
96
40
17
30
259
469
2018
$ 87
93
49
17
23
269
464
$ 748
$ 728
$ 733
1 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.
2 Amortization of intangibles, with the exception of software and asset servicing
rights, are included as items of note. For explanations of items of note, refer to
the “Non-GAAP Financial Measures – Reconciliation of Adjusted to Reported Net
Income” table in the “Financial Results Overview” section of this document.
3 Included in equity in net income of an investment in TD Ameritrade and therefore
reported with a one-month lag. Refer to “How the Bank Reports” in the “Financial
Results Overview” section of this document.
RETURN ON COMMON EQUITY
The Bank’s methodology for allocating capital to its business segments
is largely aligned with the common equity capital requirements under
Basel III. Capital allocated to the business segments was decreased to 9%
CET1 Capital effective the second quarter of 2020 compared with 10.5%
in the first quarter of 2020, and 10% in fiscal 2019.
Adjusted return on common equity (ROE) is adjusted net income available
to common shareholders as a percentage of average common equity.
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.
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.
2020
2019
2018
$ 85,203
$ 78,638
$ 70,499
11,628
(1,927)
11,416
817
11,048
849
$ 9,701
$ 12,233
$ 11,897
13.6%
11.4
14.5%
15.6
15.7%
16.9
21
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
RETURN ON TANGIBLE COMMON EQUITY
Tangible common equity (TCE) is calculated as common shareholders’
equity less goodwill, imputed goodwill and intangibles on the investments
in Schwab and 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.
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 investments in Schwab and 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
1 Excludes intangibles relating to software and asset servicing rights.
2 For explanations of items of note, refer to the “Non-GAAP Financial Measures –
Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results
Overview” section of this document.
2020
2019
2018
$ 85,203
$ 78,638
$ 70,499
17,261
4,369
509
(255)
63,319
11,628
225
11,853
(2,152)
17,070
4,146
662
(260)
57,020
11,416
259
11,675
558
16,197
4,100
676
(240)
49,766
11,048
269
11,317
580
$ 9,701
$ 12,233
$ 11,897
18.7%
15.3
20.5%
21.5
22.7%
23.9
SIGNIFICANT EVENTS
Acquisition of TD Ameritrade Holding Corporation by
The Charles Schwab Corporation
On October 6, 2020, Schwab completed its acquisition of TD Ameritrade,
of which the Bank was a major shareholder. Under the terms of the
Schwab transaction, all TD Ameritrade shareholders, including the Bank,
exchanged each TD Ameritrade share they owned for 1.0837 common
shares of Schwab. At closing, in exchange for the Bank’s approximately
43% ownership in TD Ameritrade, the Bank received an approximately
13.5% stake in Schwab, consisting of 9.9% voting common shares and
the remainder in non-voting common shares, convertible into voting
common shares upon transfer to a third party. The transaction resulted
in a net gain on sale of the Bank’s investment in TD Ameritrade of
$2.3 billion after-tax in the fourth quarter of 2020. The transaction had
an approximately neutral impact on CET1 at closing.
The Bank and Schwab are party to a stockholder agreement (the
“Stockholder Agreement”), which became effective upon closing of the
Schwab transaction. Under the Stockholder Agreement: (i) subject to
meeting certain conditions, the Bank has two seats on Schwab’s Board
of Directors, (ii) the Bank is not permitted to own more than 9.9% voting
common shares of Schwab, and (iii) the Bank is subject to customary
standstill and lockup restrictions, including, subject to certain exceptions,
transfer restrictions. In addition, the Bank and Schwab entered into
the Schwab IDA Agreement, which became effective upon closing and
has an initial expiration date of July 1, 2031. Starting on July 1, 2021,
deposits under the Schwab IDA Agreement, which were $195 billion
(US$146 billion) as at October 31, 2020, can be reduced at Schwab’s
option by up to US$10 billion a year (subject to certain adjustments based
on the change in the balance of the sweep deposits between closing and
July 1, 2021), with a floor of US$50 billion. The servicing fee under the
Schwab IDA Agreement is set at 15 bps per annum on the aggregate
average daily balance in the sweep accounts.
The Bank reports its investment in Schwab using the equity method of
accounting. The Bank’s share of Schwab’s earnings available to common
shareholders is reported with a one-month lag, and the Bank will begin
recording its share of Schwab’s earnings on this basis in the first quarter
of fiscal 2021.
22
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL RESULTS OVERVIEW
Net Income
Reported income for the year was $11,895 million, an increase of
$209 million, or 2%, compared with last year. The increase reflects a net
gain on sale of the Bank’s investment in TD Ameritrade and charges in the
prior year related to the agreement with Air Canada. On an adjusted basis,
income for the year was $9,968 million, a decrease of $2,535 million, or
20%, compared with last year reflecting higher PCL, lower revenue in the
personal and commercial banking businesses, and higher non-interest
expenses, partially offset by higher revenue in Wholesale Banking and
the wealth and insurance businesses. The reported ROE for the year was
13.6%, compared with 14.5% last year. The adjusted ROE for the year
was 11.4%, compared with 15.6% last year.
By segment, the increase in reported net income reflects an increase in
the Corporate segment of $2,191 million, and an increase in Wholesale
Banking of $810 million, partially offset by a decrease in U.S. Retail of
$1,955 million, and a decrease in Canadian Retail of $837 million.
Reported diluted EPS for the year was $6.43, an increase of 3%,
compared with $6.25 last year. Adjusted diluted EPS for the year was
$5.36, a 20% decrease, compared with $6.69 last year.
Impact of Foreign Exchange Rate on U.S. Retail Segment
Translated Earnings
The following table reflects the estimated impact of foreign currency
translation on key U.S. Retail segment income statement items.
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
Net income – after tax
Equity in net income of an investment in
TD Ameritrade1
U.S. Retail segment net income – after tax
Earnings per share (Canadian dollars)
Basic
Diluted
2020
vs. 2019
Increase
(Decrease)
2019
vs. 2018
Increase
(Decrease)
$ 138
83
$ 369
199
3
15
18
120
37
158
$ 0.01
0.01
$ 0.09
0.09
1 Equity in net income of an investment in TD Ameritrade and the foreign exchange
impact are reported with a one-month lag.
Average foreign exchange rate
(equivalent of CAD $1.00)
U.S. dollar
2020
0.743
2019
0.753
2018
0.777
NET INCOME – REPORTED BY BUSINESS SEGMENT
(as a percentage of total net income)
2
1
60%
50
40
30
20
10
0
2018
2019
2020
2018
2019
2020
2018
2019
2020
NET INCOME – ADJUSTED BY BUSINESS SEGMENT
(as a percentage of total net income)
1
60%
50
40
30
20
10
0
2018
2019
2020
2018
2019
2020
2018
2019
2020
Canadian Retail
U.S. Retail
Wholesale Banking
1 Amounts exclude Corporate segment.
23
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL RESULTS OVERVIEW
Revenue
Reported revenue was $43,646 million, an increase of $2,581 million, or
6%, compared with last year. Adjusted revenue was $42,225 million, an
increase of $1,160 million, or 3%, compared with last year.
NET INTEREST INCOME
Net interest income for the year was $25,611 million, an increase of
$1,680 million, or 7%, compared with last year. The increase reflects
higher trading-related net interest income, and volume growth in
the personal and commercial banking businesses, partially offset
by lower margins.
By segment, the increase in reported net interest income reflects an
increase in Wholesale Banking of $1,079 million, and an increase in
the Corporate segment of $1,006 million, partially offset by a decrease
in Canadian Retail of $288 million, and a decrease in U.S. Retail of
$117 million. Net interest income reported in the Corporate segment
includes the impact of treasury and balance sheet management activities,
which are largely offset in non-interest income.
NET INTEREST MARGIN
Net interest margin decreased by 16 bps during the year to 1.80%,
compared with 1.96% last year, primarily reflecting the impact of lower
interest rates and higher deposit balances in the personal and commercial
banking businesses.
NON-INTEREST INCOME
Reported non-interest income for the year was $18,035 million, an
increase of $901 million, or 5%, compared with last year reflecting the net
gain on sale of the Bank’s investment in TD Ameritrade, higher revenue in
the wealth and insurance businesses, higher trading-related revenue and
fee income in Wholesale Banking, partially offset by lower fee income in
the personal and commercial banking businesses.
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
By segment, the increase in reported non-interest income reflects an
increase in Wholesale Banking of $648 million, an increase in Canadian
Retail of $395 million, an increase in Corporate of $260 million, partially
offset by a decrease in U.S. Retail of $402 million. Non-interest income
reported in the Corporate segment includes the impact of treasury and
balance sheet management activities, which are largely offset in net
interest income.
NET INTEREST INCOME
(millions of Canadian dollars)
$27,000
24,000
21,000
18,000
15,000
12,000
9,000
6,000
3,000
0
2018 2019 2020
2020
2019
2018
% change
2020 vs. 2019
$
865
$
637
$
1,224
717
623
1,797
115
5,341
1,400
40
1,404
2,593
2,154
4,565
538
1,191
520
629
1,768
127
4,872
1,289
78
1,047
2,885
2,465
4,282
216
577
1,099
566
546
1,790
136
4,714
1,210
111
1,052
2,716
2,376
4,045
429
$ 18,035
$ 17,134
$ 16,653
36
3
38
(1)
2
(9)
10
9
(49)
34
(10)
(13)
7
149
5
24
TD BANK GROUP ANNUAL REPORT 2020 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 (FVTPL) 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)
Income (Loss) from financial instruments designated at fair value through profit or loss2
Total
By product
Interest rate and credit
Foreign exchange
Equity and other1
Total
1 Excludes taxable equivalent basis (TEB).
2 Excludes amounts related to securities designated at FVTPL 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 $7,242 million, an increase of $4,213 million,
compared with last year. PCL – impaired was $2,963 million, an increase
of $333 million, or 13%, reflecting credit migration in Wholesale Banking,
and higher provisions in the Canadian Retail segment. PCL – performing
was $4,279 million, an increase of $3,880 million, primarily related to a
significant deterioration in the economic outlook, including the impact of
credit migration. Total PCL as a percentage of credit volume was 1%, or
an increase of 55 bps.
By segment, the increase in PCL reflects an increase in U.S. Retail
of $1,843 million, an increase in Canadian Retail of $1,440 million, an
increase in the Corporate segment of $466 million, and an increase in
Wholesale Banking of $464 million.
For the years ended October 31
2020
2019
$ 1,325
1,404
53
$ 293
1,047
(10)
$ 2,782
$ 1,330
$ 1,717
766
299
$ 413
677
240
$ 2,782
$ 1,330
2018
$ 495
1,052
10
$ 1,557
$ 545
680
332
$ 1,557
PROVISION FOR
CREDIT LOSSES
(millions of Canadian dollars)
$8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2018 2019 2020
25
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL RESULTS OVERVIEW
Expenses
NON-INTEREST EXPENSES
Reported non-interest expenses for the year were $21,604 million,
a decrease of $416 million, or 2%, compared with last year primarily
reflecting charges related to the agreement with Air Canada recorded
in the prior year. On an adjusted basis, non-interest expenses were
$21,338 million, an increase of $253 million, or 1%, reflecting
higher spend supporting business initiatives, higher employee-related
costs including colleague appreciation awards, corporate real estate
optimization costs, and an increase in legal provisions, partially offset by
a decline in the retailer program partners’ net share of the profits from
the U.S. strategic cards portfolio, a reduction in discretionary spend, and
restructuring charges in the prior year.
By segment, the decrease in reported non-interest expenses reflects
a decrease in the Corporate segment of $415 million, and a decrease
in Canadian Retail of $294 million, partially offset by an increase in
U.S. Retail of $168 million, and an increase in Wholesale Banking of
$125 million.
INSURANCE CLAIMS AND RELATED EXPENSES
Insurance claims and related expenses were $2,886 million, an increase
of $99 million, or 4%, compared with last year. The increase reflects the
impact of business growth, an increase in certain current year claims
reserves, less favourable prior years’ claims development and more severe
weather-related events, partially offset by lower current year claims.
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
Occupancy1
Rent
Depreciation and impairment losses
Other
Total occupancy
Equipment1
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 – adjusted2
1 Upon adoption of IFRS 16, Leases (IFRS 16) interest expense is recognized on lease
liabilities in Net interest income and depreciation expense is recognized on right-of-
use (ROU) assets in Non-interest expense. Previously under IAS 17, net rental expense
on operating leases were recorded in Non-interest expense. Remaining rent expenses
reflect the payments exempt from IFRS 16.
26
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 49.5%, compared with 53.6% last year.
The adjusted efficiency ratio was 50.5%, compared with 51.3% last year.
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
2018
2019
2020
2018
2019
2020
Reported
Adjusted
Reported
Adjusted
2020
2019
2018
% change
2020 vs. 2019
$ 7,118
2,892
1,881
$ 6,879
2,724
1,641
11,891
11,244
$ 6,162
2,592
1,623
10,377
349
1,101
540
1,990
271
223
793
1,287
817
740
(16)
362
1,144
3,389
944
405
486
1,835
245
200
720
1,165
800
769
175
336
1,322
4,374
913
371
481
1,765
207
205
661
1,073
815
803
73
359
1,194
3,736
$ 21,604
$ 22,020
$ 20,195
3
6
15
6
(63)
172
11
8
11
12
10
10
2
(4)
(109)
8
(13)
(23)
(2)
49.5%
50.5
53.6%
51.3
51.9%
51.2
(410) bps
(80)
2 For explanations of items of note, refer to the “Non-GAAP Financial Measures –
Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results
Overview” section of this document.
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL RESULTS OVERVIEW
Taxes
Reported total income and other taxes decreased by $1,675 million,
or 38.0%, compared with last year, reflecting a decrease in income tax
expense of $1,583 million, or 57.9%, and a decrease in other taxes of
$92 million, or 5.5%. Adjusted total income and other taxes decreased
by $1,021 million from last year, or 22.1%, reflecting a decrease in income
tax expense of $929 million, or 31.5%.
The Bank’s reported effective tax rate was 9.7% for 2020, compared
with 20.7% last year. The year-over-year decrease primarily reflects the
impact of the sale of the Bank’s investment in TD Ameritrade, including
the non-taxable revaluation gain, the release of non-taxable cumulative
currency translation gains from accumulated other comprehensive income
(AOCI), a rate differential on the reclassification to earnings of taxes
deferred in AOCI on the designated hedging items, and the release of
a deferred tax liability. Other drivers of the lower effective tax rate are
lower pre-tax income and business mix, partially offset by higher provisions
related to changes in tax law. For a reconciliation of the Bank’s effective
income tax rate with the Canadian statutory income tax rate, refer to
Note 25 of the 2020 Consolidated Financial Statements.
The Bank’s adjusted effective income tax rate for 2020 was 18.8%,
compared with 20.8% last year. The year-over-year decrease primarily
reflects lower pre-tax income and business mix, partially offset by higher
provisions related to changes in tax law.
The Bank reported its investment in TD Ameritrade using the equity
method of accounting. TD Ameritrade’s tax expense of $378 million in
2020, compared with $389 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
2020
2019
$ 1,152
868
$ 2,735
214
2,020
2,949
2018
$ 3,182
(284)
2,898
602
186
539
257
587
168
678
243
538
148
487
237
1,584
1,676
1,410
$ 3,604
$ 4,625
$ 4,308
9.7%
18.8
20.7%
20.8
23.1%
20.5
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.
27
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL RESULTS OVERVIEW
Quarterly Financial Information
FOURTH QUARTER 2020 PERFORMANCE SUMMARY
Reported net income for the quarter was $5,143 million, an increase
of $2,287 million, or 80%, compared with the fourth quarter last year.
The increase reflects the net gain on sale of the Bank’s investment in
TD Ameritrade and lower insurance claims, partially offset by higher non-
interest expenses. Adjusted net income for the quarter was $2,970 million,
an increase of $24 million, or 1%, compared with the fourth quarter last
year. Reported diluted EPS for the quarter was $2.80, an increase of 82%,
compared with $1.54 in the fourth quarter of last year. Adjusted diluted
EPS for the quarter was $1.60, an increase of 1%, compared with $1.59
in the fourth quarter of last year.
Reported revenue for the quarter was $11,844 million, an increase
of $1,504 million, or 15%, compared with the fourth quarter last year.
Adjusted revenue for the quarter was $10,423 million, an increase of
$83 million, or 1%, compared with the fourth quarter last year.
Net interest income for the quarter was $6,367 million, an increase of
$192 million, or 3%, primarily reflecting higher trading-related net interest
income, and volume growth in the personal and commercial banking
businesses, partially offset by lower margins. By segment, the increase
in reported net interest income reflects an increase in Wholesale Banking
of $331 million, an increase in the Corporate segment of $213 million, a
decrease in Canadian Retail of $191 million, and a decrease in U.S. Retail
of $161 million. Adjusted net interest income for the quarter was
$6,367 million, an increase of $192 million, or 3%, compared with the
fourth quarter last year. The increase in the Corporate segment primarily
reflects treasury and balance sheet management activities, the impact of
which is largely offset in non-interest income.
Non-interest income for the quarter was $5,477 million, an increase
of $1,312 million, or 32%, reflecting the net gain on sale of the Bank’s
investment in TD Ameritrade, higher transaction and fee-based revenue
in the wealth business, higher trading-related revenue, including
derivative valuation charges in the prior year, and higher fee income in
Wholesale Banking, partially offset by lower fee income in the personal
and commercial banking businesses. By segment, the increase in reported
non-interest income reflects an increase in the Corporate segment of
$1,221 million, an increase in Canadian Retail of $87 million, an increase
in Wholesale Banking of $75 million, and a decrease in U.S. Retail
of $71 million. Adjusted non-interest income for the quarter was
$4,056 million, a decrease of $109 million, or 3%, compared with the
fourth quarter last year. Non-interest income reported in the Corporate
segment includes the impact of treasury and balance sheet management
activities, which are largely offset in net interest income.
PCL for the quarter was $917 million, an increase of $26 million, or
3%, compared with the fourth quarter last year. PCL – impaired for the
quarter was $359 million, a decrease of $380 million, or 51%, primarily
reflected in the consumer lending portfolios, largely reflecting the ongoing
impact of bank and government assistance programs. PCL – performing
for the quarter was $558 million, an increase of $406 million, primarily
related to a significant deterioration in the economic outlook, including
the impact of credit migration. Performing provisions in the current quarter
were largely recorded in the U.S. commercial lending portfolios. Total PCL
for the quarter as an annualized percentage of credit volume was 0.49%,
or a decrease of 2 bps.
By segment, the increase in PCL reflects an increase in U.S. Retail of
$277 million, a decrease in Canadian Retail of $149 million, a decrease
in Corporate of $55 million, and a decrease in Wholesale Banking of
$47 million.
Insurance claims and related expenses for the quarter were $630 million,
a decrease of $75 million, or 11%, compared with the fourth quarter last
year. The decrease reflects lower current accident year claims, no severe
weather-related events and favourable prior years’ claims development,
partially offset by an increase in certain current year claims reserves.
Reported non-interest expenses for the quarter were $5,709 million, an
increase of $166 million, or 3%, compared with the fourth quarter last year.
The increase reflects corporate real estate optimization costs, investments
in support of business growth, and higher employee-related compensation,
including colleague appreciation awards, partially offset by restructuring
charges in the prior year, and lower travel and other discretionary spend. By
segment, the increase in reported non-interest expenses reflects an increase
in Corporate segment of $147 million, and an increase in Canadian Retail
of $47 million, partially offset by a decrease in the Wholesale Banking
of $19 million, and a decrease in the U.S. Retail segment of $9 million.
Adjusted non-interest expenses for the quarter were $5,646 million, an
increase of $183 million, or 3%, compared with the fourth quarter last year.
The Bank’s reported effective tax rate was -4.4% for the quarter,
compared with 20.2% in the same quarter last year. The year-over-year
decrease primarily reflects the impact of the sale of the Bank’s investment
in TD Ameritrade, including the non-taxable revaluation gain, the release
of non-taxable cumulative currency translation gains from AOCI, a rate
differential on the reclassification to earnings of taxes deferred in AOCI
on the designated hedging items, and the release of a deferred tax liability.
The Bank’s adjusted effective tax rate was 19.7% for the quarter,
compared with 20.1% in the same quarter last year. The year-over-year
decrease primarily reflects business mix.
28
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS QUARTERLY TREND ANALYSIS
The COVID-19 pandemic has profoundly altered the economic landscape
and continues to have a significant impact on TD’s financial performance.
Earnings in 2020 were adversely impacted by the deterioration in the
economic outlook and its impact on credit migration which resulted in
significantly higher provisions for credit losses, particularly in the second
and third quarters, and reductions in interest rates have resulted in lower
net interest margins. Notwithstanding these impacts, revenue has grown
consistently, reflecting volume growth in the personal and commercial
banking businesses and strong contributions from our capital market
sensitive businesses. Expenses have grown moderately over the past eight
quarters primarily reflecting investments in support of business growth.
The Bank’s quarterly earnings are impacted by, among other things,
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
Net gain on sale of the investment in
TD Ameritrade
Charges related to the long-term loyalty
agreement with Air Canada
Charges associated with the acquisition
of Greystone
Less: Impact of income taxes
Net income – adjusted
Preferred dividends
Net income available to common
shareholders and non-controlling
interests in subsidiaries – adjusted
Attributable to:
Total pre-tax adjustments for items of note
(1,335)
For the three months ended
Oct. 31
Jul. 31
Apr. 30
Jan. 31
Oct. 31
Jul. 31
Apr. 30
$ 6,367
5,477
$ 6,483
4,182
$ 6,460
4,068
$ 6,301
4,308
$ 6,175
4,165
$ 6,024
4,475
$ 5,872
4,356
2020
11,844
917
630
5,709
(202)
353
5,143
61
(1,421)
–
25
838
2,970
64
10,665
2,188
805
5,307
445
328
2,248
63
–
–
25
88
9
10,528
3,218
671
5,121
250
247
1,515
68
–
–
26
94
10
10,609
919
780
5,467
659
205
2,989
70
–
–
24
94
11
2,327
68
1,599
68
3,072
67
10,340
891
705
5,543
646
301
2,856
74
–
–
30
104
14
2,946
68
10,499
655
712
5,374
813
303
3,248
75
–
–
26
101
11
3,338
62
10,228
633
668
5,248
773
266
3,172
78
–
–
30
108
14
3,266
62
2019
Jan. 31
$ 5,860
4,138
9,998
850
702
5,855
503
322
2,410
80
–
607
31
718
175
2,953
60
$ 2,906
$ 2,259
$ 1,531
$ 3,005
$ 2,878
$ 3,276
$ 3,204
$ 2,893
Common shareholders – adjusted
Non-controlling interests – adjusted
$ 2,906
$ 2,259
$ 1,531
$ 3,005
$ 2,878
$ 3,276
$ 3,204
–
–
–
–
–
–
–
$ 2,875
18
(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)
$
2.80
1.60
$
1.21
1.25
$
0.80
0.85
$
1.61
1.66
$
1.54
1.59
$
1.75
1.79
$
1.70
1.75
$ 1.27
1.57
2.80
1.60
23.3%
13.3
1.21
1.25
10.0%
10.4
0.80
0.85
6.9%
7.3
1.61
1.66
14.2%
14.6
1.54
1.59
13.6%
14.0
1.74
1.79
15.8%
16.2
1.70
1.75
16.5%
17.0
1.27
1.57
12.2%
15.0
Average earning assets
Net interest margin as a percentage
$ 1,531
1.65%
$ 1,494
1.73%
$ 1,374
1.91%
$ 1,292
1.94%
$ 1,264
1.94%
$ 1,240
1.93%
$ 1,191
2.02%
$ 1,200
1.94%
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.
29
TD BANK GROUP ANNUAL REPORT 2020 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 16 million customers in the Canadian
personal and commercial banking, wealth, and insurance businesses.
Personal Banking provides financial products and advice through its
network of 1,085 branches, 3,440 automated teller machines (ATM),
telephone, digital and mobile banking. The credit cards business
provides a comprehensive line-up of credit cards including proprietary,
co-branded, and affinity credit card programs. Auto Finance provides
flexible financing options to customers at point of sale for automotive
and recreational vehicle purchases. 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. Merchant Solutions provides point-of-sale
payment solutions for large and small businesses. The wealth business
offers wealth and asset management products and advice to 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 to
customers across 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 9 million retail customers
through multiple delivery channels, including a network of 1,223 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. 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
with a one-month lag. The same convention is being followed for Schwab,
and the Bank will begin recording its share of Schwab’s earnings on this
basis in the first quarter of fiscal 2021. Refer to “Significant Events” in the
“Financial Results Overview” section of this document.
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 corporates, 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, shared services, treasury and balance sheet management,
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 2020 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.
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 earnings impact
of these adjustments was reported in the Corporate segment. The lower
corporate tax rate had, and continues to 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 and guidance that may be issued by applicable regulatory authorities.
For additional details, refer to “How the Bank Reports” and “Non-GAAP
Financial Measures – Reconciliation of Adjusted to Reported Net Income”
table in the “Financial Results Overview” 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
$159 million, compared with $127 million last year.
The “Key Priorities for 2021” 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.
30
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 1 4 | RESULTS BY SEGMENT1
(millions of Canadian dollars)
Canadian Retail
U.S. Retail
Wholesale Banking2
Corporate2
2020
2019
2020
2019
2020
2019
2020
2019
2020
Total
2019
Net interest income (loss)
Non-interest income (loss)
Total revenue
$ 12,061 $ 12,349 $ 8,834 $ 8,951 $ 1,990 $
2,438
12,272
11,877
2,968
2,840
911 $ 2,726 $ 1,720 $ 25,611 $ 23,931
17,134
97
18,035
357
2,320
24,333
24,226
11,272
11,791
4,958
3,231
3,083
1,817
43,646
41,065
Provision for (recovery of) credit losses –
impaired
1,256
1,126
997
Provision for (recovery of) credit losses –
performing
1,490
180
1,928
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 note3
Amortization of intangibles
Net gain on sale of the investment in
TD Ameritrade
Charges related to the long-term loyalty
agreement with Air Canada
Charges associated with the acquisition
of Greystone
Total pre-tax adjustments for items
of note
Less: Impact of income taxes
2,746
2,886
10,441
8,260
2,234
1,306
2,787
10,735
9,398
2,535
–
–
6,026
6,863
2,925
–
6,579
1,768
(167)
1,091
3,026
–
–
–
100
100
2
–
–
607
117
724
166
–
–
–
–
–
–
936
146
1,082
–
6,411
4,298
471
1,154
4,981
–
–
–
–
–
–
279
229
508
–
2,518
1,932
514
–
1,418
–
–
–
–
–
–
20
24
44
–
2,393
794
186
–
608
–
–
–
–
–
–
431
632
1,063
–
2,066
548
2,963
2,630
49
4,279
399
597
–
2,481
7,242
2,886
21,604
11,914
1,152
3,029
2,787
22,020
13,229
2,735
(46)
(1,261)
(1,429)
(457)
42
1,425
38
1,133
1,192
(766)
11,895
11,686
262
307
262
(1,421)
–
–
–
–
–
(1,421)
–
100
307
–
607
117
(1,159)
866
307
48
(1,059)
868
1,031
214
Net income (loss) – adjusted
$ 6,124 $ 7,421 $ 3,026 $ 4,981 $ 1,418 $
608 $
(600)
$
(507)
$ 9,968 $ 12,503
Average common equity
CET1 Capital risk-weighted assets4
$ 18,049 $ 17,776 $ 39,825 $ 39,464 $ 8,374 $ 7,320 $ 18,881 $ 14,078 $ 85,129 $ 78,638
455,977
232,966
248,406
143,504
478,909
118,374
17,225
71,972
10,005
92,434
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.
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 For explanations of items of note, refer to the “Non-GAAP Financial Measures −
Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results
Overview” section of this document.
4 Each capital ratio has its own RWA measure due to OSFI prescribed scalar for
inclusion of the CVA. For fiscal 2020 and 2019 the scalars for inclusion of CVA for
CET1, Tier 1 and Total Capital RWA are all 100%. For fiscal 2018, the scalars were
80%, 83%, and 86%, respectively.
31
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS BUSINESS SEGMENT ANALYSIS
Canadian Retail
Canadian Retail offers a full range of financial products and services to over 16 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
$25,000
20,000
15,000
10,000
5,000
0
$400
350
300
250
200
150
100
50
0
2018
2019
2020
2018
2019
2020
2018
2019
2020
Reported
Adjusted
Personal
Business
Wealth
2020
2019
$ 11,321
3,383
4,840
4,789
$ 12,076
3,184
4,432
4,534
2018
$ 11,463
2,990
4,185
4,075
$ 24,333
$ 24,226
$ 22,713
T A B L E 1 5 | REVENUE
(millions of Canadian dollars)
Personal banking
Business banking
Wealth
Insurance
Total
32
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS HIGHLIGHTS
• Helped our customers navigate COVID-19 by supporting access
to bank and government relief and payment deferral programs,
as well as enhancing our online and mobile capabilities, which
led to a significant increase in self-serve transactions and
digital adoption.
• Supported our colleagues in the Work From Home environment
through numerous assistance programs and enhanced remote
access capabilities resulting in improved employee engagement
and experience scores.
• Launched the new TD Ready Advice program, including an online
resource hub, tools like the TD Helps Support Finder, and direct
outreach to customers to offer personalized advice.
• TD was recognized in the 2020 Ipsos Customer Service Index (CSI)
study2 by being a Financial Service Excellence award winner for
“Branch Service Excellence”3 among the Big 5 Canadian Retail
Banks4 and for “Automated Telephone Banking Excellence”5
among all Financial Institutions.
• TD Asset Management Inc. (TDAM) was recognized in the
Refinitiv Lipper Awards, for the 14th year in a row, with three
TD Mutual Funds winning in their respective categories at
the 2020 awards: TD Global Entertainment & Communications
Fund – Investor Series, TD Science & Technology Fund – Investor
Series, and TD U.S. Mid-Cap Growth – Investor Series.
• Acknowledged for our forward focus in digital banking by
multiple industry independent sources including:
– According to App Annie6, TD (Canada) is ranked #1 in customer
adoption, engagement and satisfaction among retail banking
apps in Canada. Over the last 12 months, the TD mobile app
achieved the top ranking with: highest number of downloads;
largest smartphone monthly active user base on average; most
sessions per user on average; longest time spent on the app;
and highest average review scores for the past 12 months;
– #1 in Canadian digital banking apps with the highest number
of digital unique visitors and the most digital time spent
according to Comscore7; and
– #1 for average digital reach of any bank in Canada, and
amongst one of the leaders for domestic digital reach among
major developed market banks, according to Comscore8.
• Continued to support new and existing customers as evidenced
by strong volume growth across key businesses:
– Strong retention rate across the portfolio, using newly
developed tools to engage and retain our customers;
– Personal chequing and savings deposit volumes growth
of 18%;
– Business Banking deposit volume growth of 24%;
– Real estate secured lending loan volume growth of 5%;
– Record accumulation of assets across our wealth businesses
including record assets under management (AUM) in TD Asset
Management (TDAM) and record assets under administration
(AUA) in TD Direct Investing and the Advice businesses; and
– Record auto finance and real estate secured lending
originations, and higher General Insurance premiums.
• Maintained strong market share9 positions across all
businesses, including:
– #1 market share in personal deposits, credit cards, and
Direct Investing;
– #2 market share in real estate secured lending, personal loans,
mutual funds, and Business Banking deposits and loans;
– Largest direct distribution insurer10 and leader in the affinity
market10 in Canadian insurance; and
– Largest money manager in Canada11.
CHALLENGES IN 2020
• Contractions in economic growth and employment in Canada
and around the world as a result of the COVID-19 pandemic.
• A significant increase in performing PCL primarily related to the
resulting deterioration in the economic outlook.
• Lower fee income and pay down of unsecured loan balances
reflecting consumer preference for elevated liquidity during
the pandemic.
• A dramatic decline in interest rates, which impacted net interest
income and margins.
• Changes in our retail network to adapt to the COVID-19
pandemic, including temporary branch closures, reduced hours
and introduction of additional safety measures.
• Significant business adjustments due to a changing economic
and regulatory environment, as well as evolving customer needs.
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 a full suite of competitively
priced products, outstanding customer service and convenience,
maintaining disciplined risk management practices, and prudent expense
management. The Canadian wealth management industry includes banks,
insurance companies, independent asset management companies, and
brokerages. Market share growth in the wealth management industry
relies on 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 the evolving
needs and goals of our client base. The property and casualty insurance
industry in Canada is fragmented and competitive, consisting of personal
and commercial line writers, whereas the life and health insurance industry
is comprised 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. The above
industries also include non-traditional competitors ranging from start-ups
to established non-financial companies expanding into financial services.
2 Ipsos 2020 Financial Service Excellence Awards are based on ongoing quarterly
Customer Service Index (CSI) survey results. Sample size for the total 2020 CSI
program year ended with the September 2020 survey wave was 48,284 completed
surveys yielding 73,601 financial institution ratings national.
3 TD Canada Trust has shared in the award for the Branch Service Excellence in the
syndicated Ipsos 2020 Customer Service Index Study (“2020 Ipsos Study”).
4 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.
5 TD Canada Trust has shared in the Automated Telephone Banking Excellence award
in the 2020 Ipsos Study.
6 TD ranked first according to App Annie, which measured time spent on Android
phones; reviews are iOS only among top 10 Canadian retail banking apps by average
smartphone MAUs for last 12-month period ending September 2020.
7 Source: from Comscore Mobile Metrix®, Financial Services – Banking (Mobile Apps),
Total Audience, 3-month average ending September 2020, Canada.
8 Source: from Comscore MMX® Multi-Platform, Financial Services – Banking, Total
audience, 3-month average ending September 2020, Canada, United States, Spain,
France and U.K.
9 Market share ranking is based on most current data available from OSFI for personal
deposits and loans as at August 2020, from The Nilson Report for credit cards as
at December 2019, from the Canadian Bankers Association for Real Estate Secured
Lending as at May 2020, from the Canadian Bankers Association for business
deposits and loans as at March 2020, from Investor Economics, a division of ISS
Market Intelligence, for Direct Investing asset, trades, and revenue metrics as at
June 2020, and from Investment Funds Institute of Canada for mutual funds when
compared to the Big 6 Banks as at August 2020. 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.
10 Based on Gross Written Premiums for Property and Casualty business. Ranks based
on data available from OSFI, insurers, Insurance Bureau of Canada, and provincial
regulators as at December 31, 2019.
11 Investor Economics, a division of ISS Market Intelligence, Managed Money Advisory
Service – Canada (Spring 2020 report, AUM effective December 2019), Benefits
Canada 2020 Top 40 Money Managers report (May 2020 report, AUM effective
December 2019).
33
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS 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, and connected customer
experiences across all channels.
• 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.
• Deepen customer relationships by delivering One TD and growing
• Contribute to the well-being of our communities.
in underrepresented products and markets.
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 – impaired
Provision for credit losses – performing
Total provision for credit losses1
Insurance claims and related expenses
Non-interest expenses – reported
Non-interest expenses – adjusted2
Provision for (recovery of) income taxes – reported
Provision for (recovery of) income taxes – adjusted2
Net income – reported
Net income – adjusted2
Selected volumes and ratios
Return on common equity – reported3
Return on common equity – adjusted2,3
Net interest margin (including on securitized assets)
Efficiency ratio – reported
Efficiency ratio – adjusted2
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
2020
2019
$ 12,061
12,272
$ 12,349
11,877
24,333
1,256
1,490
2,746
2,886
10,441
10,341
2,234
2,236
24,226
1,126
180
1,306
2,787
10,735
10,011
2,535
2,701
2018
$ 11,576
11,137
22,713
927
71
998
2,444
9,473
9,473
2,615
2,615
6,026
$ 6,124
6,863
$ 7,421
7,183
$ 7,183
33.4%
33.9
2.79
42.9
42.5
433
358
$
38.6%
41.7
2.96
44.3
41.3
422
353
$
1,085
40,872
1,091
40,936
47.8%
47.8
2.91
41.7
41.7
$
389
289
1,098
38,560
1 PCL − impaired represents Stage 3 PCL under IFRS 9 on financial assets. PCL −
performing represents Stage 1 and Stage 2 PCL under IFRS 9 on financial assets, loan
commitments, and financial guarantees.
2 Adjusted non-interest expenses exclude the following items of note: Charges
related to the long-term loyalty agreement with Air Canada in 2019 – $607 million
($446 million after tax); and charges associated with the acquisition of Greystone in
2020 – $100 million ($98 million after tax) and 2019 – $117 million ($112 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
“How We Performed” section of this document.
3 Capital allocated to the business segment was reduced to 9% CET1 Capital effective
the second quarter of fiscal 2020 compared with 10.5% in the first quarter of fiscal
2020, 10% in fiscal 2019, and 9% in fiscal 2018.
REVIEW OF FINANCIAL PERFORMANCE
Canadian Retail reported net income for the year was $6,026 million, a
decrease of $837 million, or 12%, compared with last year. The decrease
in earnings reflects higher PCL and higher insurance claims, partially
offset by revenue growth and higher non-interest expenses in the prior
year related to the agreement with Air Canada and the acquisition
of Greystone. On an adjusted basis, net income for the year was
$6,124 million, a decrease of $1,297 million, or 17%. The reported and
adjusted annualized ROE for the year was 33.4% and 33.9%, respectively,
compared with 38.6% and 41.7%, respectively, last year.
Canadian Retail revenue is derived from the Canadian personal and
commercial banking, wealth, and insurance businesses. Revenue for the
year was $24,333 million, an increase of $107 million, compared with last
year reflecting strong growth in wealth and insurance revenue as well as
volume driven growth in personal and commercial banking revenue, offset
by margin compression from lower interest rates in the year.
Net interest income decreased $288 million, or 2%, reflecting lower
margins, partially offset by volume growth. Average loan volumes
increased $16 billion, or 4%, reflecting 3% growth in personal loans
and 7% growth in business loans. Average deposit volumes increased
$46 billion, or 14%, reflecting 11% growth in personal deposits, 15%
growth in business deposits, and 28% growth in wealth deposits. Net
interest margin was 2.79%, or a decrease of 17 bps, reflecting lower
interest rates.
Non-interest income increased $395 million, or 3%, reflecting
higher transaction and fee-based revenue in the wealth business,
higher insurance revenue, partially offset by lower fee-based revenue
in the banking businesses reflecting lower customer activity.
AUA were $433 billion as at October 31, 2020, an increase of
$11 billion, or 3%, compared with last year, reflecting new asset growth.
AUM were $358 billion as at October 31, 2020, an increase of $5 billion,
or 1%, compared with last year, reflecting market appreciation.
34
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
PCL for the year was $2,746 million, an increase of $1,440 million,
compared with last year. PCL – impaired was $1,256 million, an increase
of $130 million, or 12%, reflecting higher provisions in the commercial
and consumer lending portfolios. PCL – performing was $1,490 million,
compared with $180 million last year, primarily related to a significant
deterioration in the economic outlook, including the impact of credit
migration, with the increase reflected in the consumer and commercial
lending portfolios. Annualized PCL as a percentage of credit volume was
0.62%, an increase of 31 bps.
Insurance claims and related expenses were $2,886 million, an increase
of $99 million, or 4%, compared with last year. The increase reflects the
impact of business growth, an increase in certain current year claims
reserves, less favourable prior years’ claims development and more severe
weather-related events, partially offset by lower current year claims.
Reported non-interest expenses for the year were $10,441 million, a
decrease of $294 million, or 3%, compared with last year. The decrease
reflects charges related to the agreement with Air Canada and the
acquisition of Greystone last year. On an adjusted basis, non-interest
expenses were $10,341 million, an increase of $330 million, or 3%,
reflecting higher people-related costs including variable compensation,
volume-driven expenses and technology investments, partially offset by
a reduction in other discretionary spend.
The reported and adjusted efficiency ratio for the year was 42.9%
and 42.5%, respectively, compared with 44.3% and 41.3%, respectively,
last year.
KEY PRODUCT GROUPS
Personal Banking
• Personal Deposits – offers a comprehensive line-up of chequing,
savings, and investment products to retail customers.
• Consumer Lending – offers a diverse range of unsecured financing
products to suit the needs of retail customers.
• Real Estate Secured Lending – offers homeowners a wide range
of lending products secured by residential properties.
• Credit Cards – offers a variety of credit card products including
proprietary, co-branded, and affinity credit card programs.
• 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 and Merchant Solutions – offers a wide
range of financial products and services to small businesses, as
well as point-of-sale technology and payment solutions for large
and small businesses.
Wealth
• Direct Investing – offers resources to self-directed retail investors to
facilitate research, investment management and trading in a range
of investment products through online, phone and mobile channels.
• Wealth Advice – provides wealth management advice and financial
planning solutions to mass affluent, High Net Worth and Ultra High
Net Worth clients. The Wealth Advice business is integrated with the
broader bank and other Wealth businesses.
• Asset Management – provides investment management and
structuring services to retail and institutional clients. TD Mutual Funds
provides a diversified range of mutual funds, ETFs, and professionally
managed portfolios.
Insurance
• Property and Casualty – offers home and auto insurance through
direct channels and to members of affinity groups such as professional
associations, universities and employer groups.
• Life and Health – offers credit protection to TD Canada Trust borrowing
customers. Other simple life and health insurance products, credit
card balance protection, and travel insurance products, are distributed
through direct channels.
KEY PRIORITIES FOR 2021
• Expand our advisory capabilities through TD Ready Advice and
continue to help our customers navigate the impact of COVID-19
and plan their financial futures;
• Enhance end-to-end omni-channel capabilities to support key
customer journeys, enabling a seamless, intuitive and legendary
customer experience;
• Grow our market share by providing best-in-class products and
services, when and where our customers need them, with an
emphasis on underrepresented products and markets;
• Accelerate growth and distribution capabilities in the Wealth
Advice channels, enrich the client offering in the Direct Investing
business, and innovate for leadership in Asset Management;
• Continue to invest in our insurance products and services,
ensuring that they are competitive, easy to understand, and
provide the protection our clients need;
• Invest in our business and infrastructure to keep pace with
evolving customer expectations, regulatory and security
requirements, and cyber risks;
• Enhance application of artificial intelligence, data and advanced
analytics to deliver best-in-class customer experiences and drive
high levels of engagement;
• Continue to evolve our brand as an employer of choice, where
colleagues achieve their full potential and where diversity and
inclusiveness are valued; and
• Adapt our operating models to further deliver efficiencies, drive
faster value to customers, and empower our colleagues.
35
TD BANK GROUP ANNUAL REPORT 2020 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
investment in TD Ameritrade, which was exchanged on October 6, 2020 for an investment in Schwab
upon the acquisition of TD Ameritrade by Schwab.
NET INCOME
(millions of Canadian dollars)
TOTAL REVENUE
(millions of Canadian dollars)
AVERAGE DEPOSITS
(billions of Canadian dollars)
$5,000
4,000
3,000
2,000
1,000
0
$12,000
10,000
8,000
6,000
4,000
2,000
0
$450
400
350
300
250
200
150
100
50
0
2018
2019
2020
2018
2019
2020
2018
2019
2020
Reported
Adjusted
Personal
Business
Sweep
T A B L E 1 7 | REVENUE – Reported1
(millions of dollars)
Personal Banking
Business Banking
Wealth
Other2
Total
1 Excludes equity in net income of an investment in TD Ameritrade.
2 Other revenue consists primarily of revenue from investing activities,
the TD Ameritrade IDA Agreement and the Schwab IDA Agreement.
Canadian dollars
2020
2019
2018
2020
2019
$ 6,649
3,919
447
257
$ 6,894
3,786
496
615
$ 6,140
3,527
511
766
$ 4,942
2,913
332
193
$ 5,189
2,850
373
464
$ 11,272
$ 11,791
$ 10,944
$ 8,380
$ 8,876
U.S. dollars
2018
$ 4,769
2,740
397
595
$ 8,501
36
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
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 deposits, 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, phone, 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 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 delivering
disciplined expense management and managing risk prudently.
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.
BUSINESS HIGHLIGHTS
• Delivered a focused and unified effort to provide an exceptional
Customer Experience during the COVID-19 pandemic:
– Quickly shifted store network operating model to adhere
to physical distancing guidelines to help support the safety
of our customers and colleagues;
– Funded approximately 86,000 PPP loans with a gross carrying
value of US$8.2 billion; and
– Revamped TD Cares, our customer assistance program,
providing access to payment deferrals, fee waivers and other
forms of assistance to meet the unique financial needs of more
than 400,000 customers affected by the COVID-19 pandemic.
• Rapidly deployed new capabilities including appointment booking,
virtual queue, chat bot, and curbside debit card pickup to minimize
physical contact to promote customer and colleague safety.
• Supported our colleagues in the Work From Home environment
through numerous assistance programs and enhanced remote
access capabilities resulting in improved employee engagement
and experience scores.
• On October 6, 2020, exchanged investment in TD Ameritrade
for an investment in Schwab. Refer to “Significant Events”
in the “Financial Results Overview” section of this document.
– Entered into an insured deposit account agreement with
Schwab with the initial term of the agreement to expire
July 1, 2031.
• Recognized as one of the Best Places to Work in the 2020
Disability Equality Index (DEI) for a fifth consecutive year.
• Continued to win the trust of new and existing customers as
evidenced by strong volume growth across key businesses:
– Personal Banking deposit volume growth of 10%;
– Business Banking deposit volume growth of 26%;
– Sweep deposits deposit volume growth of 25%;
– Residential mortgages loan volume growth of 15%; and
– Record residential mortgage originations and Core Personal
Checking Growth.
CHALLENGES IN 2020
• Contractions in economic growth and employment in
the United States and around the world as a result of the
COVID-19 pandemic.
• A dramatic decline in interest rates, including nine successive
Fed rate cuts which impacted net interest income and margins.
• A significant increase in PCL primarily related to the resulting
deterioration in the economic outlook.
• Lower fee income and increased operating costs related to the
COVID-19 pandemic.
• Continuing industry trend of AUM moving from active to passive
investment strategies.
• Increased competition from U.S. banks and non-bank competitors.
37
TD BANK GROUP ANNUAL REPORT 2020 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 income
Total revenue – reported
Provisions for credit losses – impaired1
Provisions for credit losses – performing1
Total provisions for credit losses
Non-interest expenses – reported
Non-interest expenses – adjusted2
Provisions for (recovery of) income taxes – reported
Provisions for (recovery of) income taxes – adjusted2
U.S. Retail Bank net income – reported
U.S. Retail Bank net income – adjusted2
Equity in net income of an investment in TD Ameritrade – reported3,4
Equity in net income of an investment in TD Ameritrade – adjusted3,4,5
Net income – reported
Net income – adjusted
U.S. Dollars
Net interest income
Non-interest income
Total revenue – reported
Provision for credit losses – impaired1
Provision for credit losses – performing1
Total provision for credit losses
Non-interest expenses – reported
Non-interest expenses – adjusted2
Provisions for (recovery of) income taxes – reported
Provisions for (recovery of) income taxes – adjusted2
U.S. Retail Bank net income – reported
U.S. Retail Bank net income – adjusted2
Equity in net income of an investment in TD Ameritrade – reported3,4
Equity in net income of an investment in TD Ameritrade – adjusted3,4,5
Net income – reported
Net income – adjusted
Selected volumes and ratios
Return on common equity – reported6
Return on common equity – adjusted2,5,6
Net interest margin7
Efficiency ratio – reported
Efficiency ratio – adjusted2
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
2020
2019
2018
$ 8,834
2,438
$ 8,951
2,840
$ 8,176
2,768
11,272
997
1,928
2,925
6,579
6,579
(167)
(167)
1,935
1,935
1,091
1,091
11,791
936
146
1,082
6,411
6,411
471
471
3,827
3,827
1,154
1,154
10,944
776
141
917
6,100
6,079
432
437
3,495
3,511
693
865
3,026
$ 3,026
4,981
$ 4,981
4,188
$ 4,376
$ 6,561
1,819
$ 6,737
2,139
$ 6,350
2,151
8,380
738
1,407
2,145
4,887
4,887
(119)
(119)
1,467
1,467
811
811
8,876
705
109
814
4,826
4,826
355
355
2,881
2,881
869
869
8,501
605
108
713
4,739
4,722
334
338
2,715
2,728
538
673
2,278
$ 2,278
3,750
$ 3,750
3,253
$ 3,401
7.7%
7.7
2.69
58.3
58.3
12.6%
12.6
3.31
54.4
54.4
12.2%
12.8
3.29
55.7
55.5
$
24
39
$
21
44
$
19
52
1,223
26,380
1,241
26,675
1,257
26,594
1 PCL − impaired represents Stage 3 PCL under IFRS 9 on financial assets. PCL −
5 Adjusted equity in net income of an investment in TD Ameritrade excludes the
performing represents Stage 1 and Stage 2 PCL under IFRS 9 on financial assets,
loan commitments, and financial guarantees.
2 Adjusted non-interest expense excludes the following items of note: Charges
associated with the Bank’s acquisition of Scottrade Bank in 2018 – $21 million
($16 million after tax) or US$17 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.
3 The Bank’s share of TD Ameritrade’s earnings is reported with a one-month lag. The
same convention is being followed for Schwab, and the Bank will begin recording its
share of Schwab’s earnings on this basis in the first quarter of fiscal 2021. Refer to
“Significant Events” in the “Financial Results Overview” section of this document.
4 The after-tax amounts for amortization of intangibles relating to the Equity in net
income of the investment in TD Ameritrade is recorded in the Corporate segment
with other acquired intangibles.
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. 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 Capital allocated to the business segments was reduced to 9% CET1 Capital effective
the second quarter of fiscal 2020 compared with 10.5% in the first quarter of fiscal
2020, 10% in fiscal 2019, and 9% in fiscal 2018.
7 Net interest margin excludes the impact related to sweep deposits arrangements 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.
38
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
REVIEW OF FINANCIAL PERFORMANCE
U.S. Retail net income for the year was $3,026 million (US$2,278 million),
a decrease of $1,955 million (US$1,472 million), or 39% (39% in
U.S. dollars), compared with last year. The ROE for the year was 7.7%,
compared with 12.6%, in the prior 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
U.S. Retail net income includes contributions from the U.S. Retail
the needs of retail customers.
Bank and the Bank’s investment in TD Ameritrade. Net income for
the year from the U.S. Retail Bank and the Bank’s investment in
TD Ameritrade were $1,935 million (US$1,467 million) and $1,091 million
(US$811 million), respectively.
The contribution from TD Ameritrade of US$811 million decreased
US$58 million, or 7%, compared with last year, primarily reflecting
reduced trading commissions, lower asset-based revenue, and higher
operating expenses, partially offset by higher trading volumes.
U.S. Retail Bank net income for the year was US$1,467 million,
a decrease of US$1,414 million, or 49%, compared with last year,
primarily reflecting higher PCL and lower revenue, partially offset
by lower tax expense.
U.S. Retail Bank revenue is derived from personal and business banking,
and wealth management. Revenue for the year was US$8,380 million,
a decrease of US$496 million, or 6%. Net interest income decreased
US$176 million, or 3%, as growth in loan and deposit volumes was
more than offset by deposit margin compression in the low interest rate
environment. Net interest margin was 2.69%, a decrease of 62 bps
primarily reflecting lower deposit margins and balance sheet mix. Non-
interest income decreased US$320 million, or 15%, reflecting lower
deposit and credit card activity as well as higher losses on low income
housing tax credit investments.
Average loan volumes increased US$12 billion, or 7%, compared with
last year, reflecting growth in personal and business loans of 6% and 8%,
respectively, with significant increases in business loans reflecting increased
draws on commercial lines of credit and originations under the SBA PPP.
Average deposit volumes increased US$53 billion, or 20%, compared
with last year, reflecting a 26% increase in business deposit volumes, a
25% increase in sweep deposit volumes, and a 10% increase in personal
deposit volumes.
• 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.
KEY PRIORITIES FOR 2021
• Deepen customer engagement through delivering a personalized
and connected experience across all channels;
• Continue to invest in data and technology to better understand
and serve our customers;
• Increase efficiency, innovation, and speed of delivery to unlock
colleague experience and deliver better customer outcomes;
• Grow our market share by deepening customer relationships and
AUA were US$24 billion as at October 31, 2020, an increase of
expanding into attractive markets;
• Prudently manage risk and meet regulatory expectations;
• Continue to make progress on our talent strategy with a focus
on diversity and inclusion;
• Continue to build capabilities to be digitally enabled; and
• Be a leader in colleague experience and a premier destination
for talent.
THE CHARLES SCHWAB CORPORATION AND TD AMERITRADE
HOLDING CORPORATION
Refer to Note 12 of the 2020 Consolidated Financial Statements for
further information on Schwab and TD Ameritrade.
US$3 billion, or 16%, compared with last year, reflecting loan and deposit
growth. AUM were US$39 billion as at October 31, 2020, a decrease of
US$5 billion, or 11%, reflecting net fund outflows.
PCL for the year was US$2,145 million, an increase of US$1,331 million,
compared with last year. PCL – impaired was US$738 million, an increase
of US$33 million, or 5%. PCL – performing was US$1,407 million, an
increase of US$1,298 million, primarily related to a significant deterioration
in the economic outlook, including the impact of credit migration, and
predominantly reflected in the commercial, credit card, and auto lending
portfolios. 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 1.30%, or an increase of 78 bps.
Non-interest expenses for the year were US$4,887 million, an increase
of US$61 million, or 1%, compared with last year, primarily reflecting
increases in legal provisions, employee-related expenses, and costs to
support customers and employees during the COVID-19 pandemic,
partially offset by productivity savings and restructuring charges incurred
in the prior year.
Income taxes reflect a recovery of US$119 million, compared to
a provision of US$355 million last year, a decrease of US$474 million,
primarily reflecting lower pre-tax income and changes to the estimated
liability for uncertain tax positions, partially offset by higher provisions
related to changes in tax law.
The reported and adjusted efficiency ratios for the year were 58.3%,
compared with 54.4%, in the prior year.
39
TD BANK GROUP ANNUAL REPORT 2020 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)
AVERAGE GROSS
LENDING PORTFOLIO
(billions of Canadian dollars)
$1,500
1,200
900
600
300
0
$5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
$65
60
55
50
45
40
35
30
25
2018
2019
2020
2018
2019
2020
2018
2019
2020
T A B L E 1 9 | REVENUE1
(millions of Canadian dollars)
Global markets
Corporate and investment banking
Other
Total
1 Certain comparative amounts have been reclassified to conform with the
presentation adopted in the current period.
2020
2019
$ 3,658
1,162
138
$ 2,155
990
86
2018
$ 2,433
996
88
$ 4,958
$ 3,231
$ 3,517
40
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS HIGHLIGHTS
• Delivered record earnings of $1,418 million and an ROE of 16.9%.
• Record revenue, reflecting the strength of our diversified
business mix and client focused franchise in Canada and
continued growth in our U.S. dollar business.
• Provided corporate, government, and institutional clients with
critical funding and liquidity support during a period of severe
market dislocation, including supplying access to markets when
it was most crucial.
• Established a Sustainable Finance and Corporate Transitions Group
within TD Securities to provide clients with advisory services and
transition and sustainability-focused financing globally.
• Received recognition for TD Securities’ expertise and execution
capabilities in Capital Markets:
– Recognized as #1 Canadian FX Services Quality and Share
Leader in the Greenwich Associates 2020 Canadian FX
Services Study;
– Named “Canada Derivatives House of the Year” for the third
year in a row by GlobalCapital, as well as “Most Impressive
SSA House in Dollars”, “Most Impressive SSA House in Non-
Core Currencies”, and “Most Impressive SSA House for Post-
Libor Solutions”; and
– Received the 2020 Energy Risk Award for “Precious Metals
House of the Year” for the second consecutive year.
• Notable deals in the year:
– Acted as Joint Active Bookrunner on Air Canada’s $1.6 billion
share offering and private placement of convertible notes, and
Joint Active Bookrunner on Brookfield Renewable Partner’s
$500 million secondary offering, reinforcing TD Securities’
leadership position in the Canadian market;
– Continued to strengthen our position in the environmental,
social and governance (ESG) space, by participating in over
40 green, social and sustainable bond transactions, including
Alphabet’s US$5.8 billion bond (the largest sustainable debt
product issued in the market), RioCan’s $350 million green
bond (its inaugural green bond transaction), and TD Bank’s
US$500 million bond (the first-ever U.S. dollar sustainable
bond offering in Secured Overnight Financing Rate Floating-
Rate Note format); and
• Continued to develop Wholesale Banking’s U.S. dollar strategy:
– Delivering on key mandates for Canadian, U.S., and
International clients;
– Increased our market share in U.S. Investment Grade and
High Yield underwriting;
– Onboarded over 25 new corporate clients and 13 new
TD Prime Services clients;
– Acted as Joint Bookrunner on over 25 asset-backed securities
(ABS) transactions;
– Acted as Bookrunner on Verizon’s inaugural $1.3 billion Maple
offering via 10- and 30-year tranches; and
– Acted as Lead Manager on World Bank’s US$8 billion
5-year global benchmark bond (the largest ever U.S. dollar
denominated bond issued by a supranational).
• Made focused investments supporting the global expansion of
Wholesale Banking’s U.S. dollar strategy, including the addition
of the Kimberlite Group, LLC advisory team to expand our real
estate banking franchise, and the addition of senior leaders in
the Health Care, Life Sciences and Sponsor sectors.
• Maintained top-two dealer status in Canada (for the calendar
period ended October 31, 2020)12:
– #2 in equity options block trading;
– #1 in syndicated loans (on a rolling twelve-month basis);
– #2 in government debt underwriting; and
– #2 in corporate debt underwriting.
CHALLENGES IN 2020
• Higher provision for credit losses as a result of the significant
deterioration in the economic outlook and oil prices.
• Increased market pressure from acceleration of structural
changes to traditional order flow trading from electronification
and increased competition as clients transitioned to work-
from-home.
• Increase in investments and capital required to meet continued
market and 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. Changing
regulatory requirements for wholesale banking businesses continue to
impact 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
Continue to build an integrated North American dealer franchise with
global reach.
•
In Canada, we will be the top-ranked investment dealer.
In the U.S., we will deliver value and trusted advice in sectors where
we have competitive expertise.
In Europe and Asia-Pacific, we will leverage our global capabilities
to build connected, sustainable franchises.
•
•
• We will continue to grow with and support our TD partners.
Invest in an efficient and agile infrastructure, innovation and data
capabilities, and adapt to industry and regulatory changes.
Be an extraordinary and inclusive place to work by attracting, developing,
and retaining the best talent.
12 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 Bookrunners, Source: Bloomberg. Government and
corporate debt underwriting: excludes self-led domestic bank deals and credit card
deals, bonus credit to lead, Source: Bloomberg.
41
TD BANK GROUP ANNUAL REPORT 2020 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 income
Total revenue
Provision for (recovery of) credit losses – impaired1
Provision for (recovery of) credit losses – performing1
Total provision for (recovery of) credit losses
Non-interest expenses
Provision for (recovery of) income taxes (TEB)
Net income
Selected volumes and ratios
Trading-related revenue (TEB)
Average gross lending portfolio (billions of Canadian dollars)2
Return on common equity3
Efficiency ratio
Average number of full-time equivalent staff
1 PCL − impaired represents Stage 3 PCL on financial assets. PCL − performing
represents Stage 1 and Stage 2 PCL on financial assets, loan commitments, and
financial guarantees.
2 Includes gross loans and bankers’ acceptances relating to Wholesale Banking,
excluding letters of credit, cash collateral, credit default swaps (CDS), and allowance
for credit losses.
2020
2019
$ 1,990
2,968
4,958
279
229
508
2,518
514
$
911
2,320
3,231
20
24
44
2,393
186
2018
$ 1,150
2,367
3,517
(8)
11
3
2,125
335
$ 1,418
$
608
$ 1,054
$ 2,940
62.7
16.9%
50.8
4,589
$ 1,573
49.8
8.3%
74.1
4,536
$ 1,749
45.5
17.7%
60.4
4,187
3 Capital allocated to the business segment was reduced to 9% CET1 Capital effective
the second quarter of fiscal 2020 compared with 10.5% in the first quarter of fiscal
2020, 10% in fiscal 2019, and 9% in fiscal 2018.
REVIEW OF FINANCIAL PERFORMANCE
Wholesale Banking net income for the year was a record $1,418 million,
an increase of $810 million, compared with the prior year reflecting higher
revenue, partially offset by higher PCL and higher non-interest expenses.
Revenue for the year was $4,958 million, an increase of $1,727 million,
or 53%, compared with the prior year reflecting higher trading-related
revenue, higher underwriting fees, and higher loan fees.
KEY PRIORITIES FOR 2021
• Attain top market share in our Canadian franchise.
• Grow our U.S. dollar business in sectors where we are
competitively positioned, adding new clients and deepening our
relationship value by maturing our product and advice offerings.
• Leverage our North American franchise and global capabilities to
grow our Europe and Asia-Pacific businesses.
PCL for the year was $508 million, an increase of $464 million
• Increase wallet share with sponsor, institutional, prime services
compared to the prior year. PCL – impaired was $279 million reflecting
credit migration largely in the oil and gas sector. PCL – performing
was $229 million, primarily related to a significant deterioration in the
economic outlook, including the impact of credit migration.
Non-interest expenses were $2,518 million, an increase of $125 million,
or 5%, compared with the prior year. The increase reflects higher variable
compensation, higher volume related expenses, and the impact of foreign
exchange translation.
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 services13.
• Corporate and Investment Banking includes corporate lending and
syndications, debt and equity underwriting, and advisory services13.
• Other includes the investment portfolio and other
accounting adjustments.
and government clients globally.
• Continue to develop ESG expertise and become a leader
in the space as we support clients on their transition to a
low-carbon economy.
• Drive innovation and build data and analytical capabilities to
improve end-to-end process efficiency and enhance client value.
• Continue to lower our cost structure to reflect reduced margins
and volumes in parts of our business and create capacity for
additional investments.
• 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.
13 Revenue is shared between Global Markets and Corporate and Investment Banking
lines of business in accordance with an established agreement.
42
TD BANK GROUP ANNUAL REPORT 2020 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) – reported
Adjustments for items of note1
Amortization of intangibles before income taxes
Net gain on sale of the investment in TD Ameritrade
Impact of U.S. tax reform
Less: impact of income taxes
Net income (loss) – adjusted
Decomposition of items included in net income (loss) – adjusted
Net corporate expenses
Other
Non-controlling interests
Net income (loss) – adjusted
Selected volumes
Average number of full-time equivalent staff
1 For explanations of items of note, refer to the “Non-GAAP Financial Measures –
Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results
Overview” section of this document.
Corporate segment includes expenses related to a number of service and
control functions, the impact of treasury and balance sheet management
activities, certain tax items at an enterprise level, and intercompany
adjustments such as elimination of TEB and the retailer program partners’
share relating to the U.S. strategic cards portfolio.
Corporate segment reported net income for the year was $1,425 million,
compared with a reported net loss of $766 million last year. The year-over-
year increase was primarily attributable to a net gain on sale of the Bank’s
investment in TD Ameritrade of $1,421 million ($2,250 million after-tax),
as well as a higher contribution from other items, partially offset by
higher net corporate expenses in the current year and a contribution from
non-controlling interests in the prior year. Other items increased reflecting
the impact of legal provisions and the negative impact of tax items in
the prior year, partially offset by lower contribution from treasury and
balance sheet management activities. Net corporate expenses increased
primarily reflecting the impact of corporate real estate optimization costs
of $163 million in the current year, partially offset by restructuring charges
of $51 million in the prior year. The adjusted net loss for the year was
$600 million, compared with an adjusted net loss of $507 million last year.
2020
2019
2018
$ 1,425
$
(766)
$ (1,091)
262
(1,421)
–
866
307
–
–
48
324
–
48
(289)
$
(600)
$
(507)
$
(430)
$
(833)
233
–
$
(715)
190
18
$
(822)
320
72
$
(600)
$
(507)
$
(430)
17,757
16,884
15,042
FOCUS FOR 2021
In 2021, service and control groups within the Corporate segment
will continue supporting our Business segments, 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 the operating
environment as well as changing demands and expectations of our
customers, communities, colleagues, governments and regulators.
We will maintain our focus on the design, development, and
implementation of processes, systems, technologies, enterprise and
regulatory controls and initiatives to enable the Bank’s businesses
to operate efficiently and effectively and to be in compliance with
all applicable regulatory requirements.
43
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
2019 FINANCIAL RESULTS OVERVIEW
Summary of 2019 Performance
T A B L E 2 2 | REVIEW OF 2019 FINANCIAL PERFORMANCE
(millions of Canadian dollars)
Net interest income
Non-interest income
Total revenue
Provision for (recovery of) credit losses – impaired
Provision for (recovery of) credit losses – performing
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
NET INCOME
Reported net income for the year was $11,686 million, an increase of
$352 million, or 3%, compared with the prior year. The increase reflects
higher revenue, a higher contribution from TD Ameritrade, and the
impact from U.S. tax reform in the prior year, partially offset by higher
non-interest expenses, including charges related to the agreement with
Air Canada, higher provisions for credit losses (PCL), and higher insurance
claims. Adjusted net income for the year was $12,503 million, an increase
of $320 million, or 3%, compared with the prior year.
Reported diluted EPS for the year was $6.25, an increase of 4%,
compared with $6.01 in the prior year. Adjusted diluted EPS for the year
was $6.69, a 3% increase, compared with $6.47 in the prior year.
Reported revenue was $41,065 million, an increase of $2,173 million, or
6%, compared with the prior year. Adjusted revenue was $41,065 million,
an increase of $2,084 million, or 5%, compared with the prior year.
NET INTEREST INCOME
Net interest income for the year was $23,931 million, an increase of
$1,692 million, or 8%, compared with the prior year. The increase reflects
loan and deposit volume growth and higher margins in the Canadian
and U.S. Retail segments, and the impact of foreign currency translation,
partially offset by lower revenue in Wholesale Banking reflecting
challenging market conditions in the first quarter of the year.
By segment, the increase in reported net interest income was due to an
increase in U.S. Retail of $775 million, an increase in Canadian Retail of
$773 million, and an increase in the Corporate segment of $383 million,
partially offset by a decrease in Wholesale Banking of $239 million.
NON-INTEREST INCOME
Reported non-interest income for the year was $17,134 million, an
increase of $481 million, or 3%, compared with the prior year. The
increase reflects higher fee-based revenue in the wealth and banking
businesses, higher revenue from the insurance business including changes
in the fair value of investments supporting claims liabilities, which resulted
in a similar increase to insurance claims, and the impact of foreign
currency translation. The increase is partially offset by lower revenue
from treasury and balance sheet management activities in the Corporate
segment, and lower revenue in Wholesale Banking.
By segment, the increase in reported non-interest income was due to an
increase in Canadian Retail of $740 million, and an increase in U.S. Retail
of $72 million, partially offset by a decrease in Corporate of $284 million,
and a decrease in Wholesale Banking of $47 million.
44
Canadian
Retail
U.S.
Retail
Wholesale
Banking
Corporate
$ 12,349
11,877
$ 8,951
2,840
24,226
1,126
180
1,306
2,787
10,735
9,398
2,535
–
6,863
558
11,791
936
146
1,082
–
6,411
4,298
471
1,154
4,981
–
$
911
$ 1,720
2,320
3,231
20
24
44
–
2,393
794
186
–
608
–
97
1,817
548
49
597
–
2,481
(1,261)
(457)
38
(766)
259
Total
$ 23,931
17,134
41,065
2,630
399
3,029
2,787
22,020
13,229
2,735
1,192
11,686
817
$ 7,421
$ 4,981
$
608
$
(507)
$ 12,503
PROVISION FOR CREDIT LOSSES
PCL for the year was $3,029 million, an increase of $549 million, or 22%,
compared with the same period in the prior year. PCL – impaired was
$2,630 million, an increase of $464 million, or 21%, reflecting higher
provisions in the consumer and commercial lending portfolios and volume
growth. PCL – performing was $399 million, an increase of $85 million,
or 27%, reflecting credit migration in the Canadian Retail and Wholesale
Banking segments, and volume growth, partially offset by lower provisions
in the U.S. strategic cards portfolio. Total PCL as a percentage of credit
volume was 0.45%.
By segment, the increase in PCL was due to an increase in Canadian
Retail of $308 million, an increase in U.S. Retail of $165 million, an
increase in Wholesale Banking of $41 million, and an increase in the
Corporate segment of $35 million.
INSURANCE CLAIMS AND RELATED EXPENSES
Insurance claims and related expenses were $2,787 million, an increase of
$343 million, or 14%, compared with the prior year. The increase reflects
changes in the fair value of investments supporting claims liabilities which
resulted in a similar increase to non-interest income, higher current year
claims reflecting business growth, and less favourable prior years’ claims
development, partially offset by fewer severe weather-related events.
NON-INTEREST EXPENSES
Reported non-interest expenses for the year were $22,020 million, which
included $154 million of restructuring charges. Non-interest expenses
increased $1,825 million, or 9%, compared with the prior year, primarily
reflecting charges related to the agreement with Air Canada and the
acquisition of Greystone, higher employee-related costs, additional
employees supporting business growth, investments in strategic initiatives,
volume growth, restructuring charges, and the impact of foreign currency
translation, partially offset by productivity savings. Adjusted non-interest
expenses for the year were $21,085 million, an increase of $1,142 million,
or 6%, compared with the prior year.
By segment, the increase in non-interest expenses was due to an
increase in Canadian Retail of $1,262 million, an increase in U.S. Retail of
$311 million, an increase in Wholesale Banking of $268 million, partially
offset by a decrease in the Corporate segment of $16 million.
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
PROVISION FOR INCOME TAXES
Reported total income and other taxes decreased by $181 million, or
3.9%, compared with the prior year, reflecting a decrease in income
tax expense of $447 million, or 14.0%, and an increase in other taxes
of $266 million, or 18.9%. Adjusted total income and other taxes were
up $317 million from the prior year, or 7.4%, reflecting an increase in
income tax expense of $51 million.
The Bank’s reported effective tax rate was 20.7% for 2019, compared
with 23.1% in the prior year. The year-over-year decrease largely reflected
the impact of U.S. tax reform in 2018, partially offset by business mix. For
a reconciliation of the Bank’s effective income tax rate with the Canadian
statutory income tax rate, refer to Note 25 of the 2019 Consolidated
Financial Statements.
The Bank’s adjusted effective income tax rate for 2019 was 20.8%,
compared with 20.5% in the prior year. The year-over-year increase largely
reflected business mix.
The Bank reported its investment in TD Ameritrade using the equity
method of accounting. TD Ameritrade’s tax expense of $389 million
in 2019, compared with $206 million in the prior year, was not part
of the Bank’s effective tax rate.
BALANCE SHEET
Total assets were $1,415 billion as at October 31, 2019, an increase of
$80 billion, or 6%, from October 31, 2018. The increase reflects securities
purchased under reverse repurchase agreements of $39 billion, loans, net
of allowance for loan losses of $38 billion, debt securities at amortized
cost (DSAC), net of allowance for credit losses of $23 billion, trading
loans, securities, and other of $18 billion, and non-trading financial assets
at FVTPL of $2 billion. The increase was partially offset by decreases in
financial assets at fair value through other comprehensive income (FVOCI)
of $19 billion, derivatives of $8 billion, cash and interest-bearing deposits
with banks of $5 billion, and other assets of $8 billion.
Total liabilities were $1,328 billion as at October 31, 2019, an increase of
$72 billion, or 6%, from October 31, 2018. The increase reflects financial
liabilities designated at FVTPL of $105 billion, deposits of $35 billion,
obligations related to securities sold under repurchase agreements of
$32 billion, derivatives of $2 billion, and subordinated notes and debentures
of $2 billion. The increase was partially offset by decreases in trading
deposits of $88 billion, and other liabilities of $16 billion.
Equity was $88 billion as at October 31, 2019, an increase of $8 billion,
or 10%, from October 31, 2018. The increase reflects other comprehensive
income from gains on cash flow hedges, retained earnings, the issuance of
Non-Cumulative 5-year Rate Reset Preferred Shares, Series 22 and 24, and
the issuance of common shares due to the acquisition of Greystone, partially
offset by the redemption of the TD Capital Trust III securities.
2019 FINANCIAL RESULTS OVERVIEW
2019 Financial Performance by Business Line
Canadian Retail reported net income for the year was $6,863 million,
a decrease of $320 million, or 4%, compared with the prior year. The
decrease in earnings reflects charges related to the agreement with Air
Canada and the acquisition of Greystone, higher non-interest expenses,
insurance claims, and PCL, partially offset by revenue growth. On an
adjusted basis, net income for the year was $7,421 million, an increase
of $238 million, or 3%. The reported and adjusted annualized ROE for the
year was 38.6% and 41.7%, compared with 47.8% the prior year.
Canadian Retail revenue is derived from Canadian personal and
commercial banking, wealth, and insurance businesses. Revenue for the
year was $24,226 million, an increase of $1,513 million, or 7%, compared
with the prior year.
Net interest income increased $773 million, or 7%, reflecting volume
growth and higher margins. Average loan volumes increased $21 billion,
or 5%, reflecting 5% growth in personal loans and 9% growth in business
loans. Average deposit volumes increased $11 billion, or 3%, reflecting
4% growth in personal deposits and 2% growth in business deposits.
Net interest margin was 2.96%, or an increase of 5 bps, reflecting higher
interest rates, partially offset by competitive pricing in loans.
Non-interest income increased $740 million, or 7%, reflecting higher
revenue from the insurance business, the acquisition of Greystone, higher
asset levels in the wealth management business, and higher fee-based
revenue in the banking businesses. 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 $171 million.
AUA were $422 billion as at October 31, 2019, an increase of $33 billion,
or 8%, compared with the prior year, reflecting new asset growth and
increases in market value. AUM were $353 billion as at October 31, 2019,
an increase of $64 billion, or 22%, compared with the prior year, reflecting
the acquisition of Greystone and increases in market value.
PCL for the year was $1,306 million, an increase of $308 million,
compared with the prior year. PCL – impaired was $1,126 million, an
increase of $199 million, or 21%, reflecting low prior period provisions
in the commercial portfolio, higher losses in the other personal and auto
portfolios, and volume growth across all portfolios. PCL – performing
was $180 million, an increase of $109 million, reflecting credit migration
in the consumer lending and commercial portfolios and volume growth.
Annualized PCL as a percentage of credit volume was 0.31%, an increase
of 6 bps.
Insurance claims and related expenses were $2,787 million, an increase
of $343 million, or 14%, compared with the prior year. The increase
reflects changes in the fair value of investments supporting claims
liabilities, higher current year claims reflecting business growth and less
favourable prior years’ claims development, partially offset by fewer severe
weather-related events.
Reported non-interest expenses for the year were $10,735 million,
an increase of $1,262 million, or 13%, compared with the prior year.
The increase reflects charges related to the agreement with Air Canada
and the acquisition of Greystone, higher spend supporting business
growth including employee-related expenses, and investment in strategic
initiatives, partially offset by higher restructuring and promotion costs
the prior year. On an adjusted basis, non-interest expenses were
$10,011 million, an increase of $538 million, or 6%.
The reported and adjusted efficiency ratio for the year was 44.3% and
41.3%, respectively, compared with 41.7% the prior year.
45
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS U.S. Retail reported net income for the year was $4,981 million
(US$3,750 million), an increase of $793 million (US$497 million), or 19%
(15% in U.S. dollars), compared with the prior year. On an adjusted basis,
net income for the year increased $605 million (US$349 million), or 14%
(10% in U.S. dollars). The reported and adjusted ROE for the year was
12.6%, compared with 12.2%, and 12.8%, 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. Net income for
the year from the U.S. Retail Bank and the Bank’s investment in
TD Ameritrade were $3,827 million (US$2,881 million) and $1,154 million
(US$869 million), respectively.
The reported contribution from TD Ameritrade of US$869 million
increased US$331 million, or 62%, compared with the prior year,
primarily reflects higher asset-based revenue and charges associated with
the Scottrade transaction in the prior year. On an adjusted basis, the
contribution from TD Ameritrade increased US$196 million, or 29%.
U.S. Retail Bank reported net income for the year was US$2,881 million,
an increase of US$166 million, or 6%, compared with the prior year,
primarily reflects higher revenue, partially offset by higher expenses and
PCL. U.S. Retail Bank adjusted net income increased US$153 million, or 6%.
U.S. Retail Bank revenue is derived from personal and business banking,
and wealth management. Revenue for the year was US$8,876 million,
an increase of US$375 million, or 4%, compared with the prior year. Net
interest income increased US$387 million, or 6%, reflecting growth in loan
and deposit volumes as well as higher deposit margins. Net interest margin
was 3.31%, a 2 bps increase primarily reflects higher deposit margins,
partially offset by balance sheet mix. Non-interest income decreased
US$12 million, or 1%, as lower wealth management fees and investment
income were partially offset by growth in personal banking fees.
Average loan volumes increased US$8 billion, or 5%, compared with
the prior year, reflecting growth in personal and business loans of 4% and
6%, respectively. Average deposit volumes increased US$4 billion, or 2%,
compared with the prior year, reflecting growth in personal and business
deposit volumes of 4% and 5%, respectively, partially offset by a 3%
decrease in sweep deposit volume from TD Ameritrade.
AUA were US$21 billion as at October 31, 2019, relatively flat compared
with the prior year. AUM were US$44 billion as at October 31, 2019, a
decrease of US$8 billion, or 16%, reflecting net fund outflows including the
impact of the strategic disposition of U.S. money market funds in the first
quarter of this year.
PCL for the year was US$814 million, an increase of US$101 million, or
14%, compared with the prior year. PCL – impaired was US$705 million,
an increase of US$100 million, or 17%, primarily reflecting higher
provisions for commercial and auto portfolios. PCL – performing was
US$109 million, an increase of US$1 million, or 1%. 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 0.52%, or an increase of 4 bps.
Reported non-interest expenses for the year were US$4,826 million,
which included US$52 million of restructuring charges. Non-interest
expense increased US$87 million, or 2%, compared with the prior year,
primarily reflecting higher investments in business initiatives and volume
growth, higher employee-related costs, and restructuring charges, partially
offset by productivity savings, the elimination of the Federal Deposit
Insurance Corporation (FDIC) deposit insurance surcharge, and recovery of
a legal provision. On an adjusted basis, non-interest expenses for the year
increased US$104 million, or 2%.
The reported and adjusted efficiency ratios for the year were 54.4%,
compared with 55.7% and 55.5%, respectively, in the prior year.
Wholesale Banking net income for the year was $608 million, a decrease
of $446 million, or 42%, compared with the prior year reflecting lower
revenue, higher non-interest expenses, and higher PCL.
Revenue for the year was $3,231 million, a decrease of $286 million,
or 8%, compared with the prior year reflecting challenging market
conditions in the first quarter of the year and derivative valuation charges
of $96 million in the fourth quarter of the year.
PCL for the year was $44 million, compared to $3 million in the prior
year. PCL – impaired was $20 million reflecting credit migration. PCL –
performing was $24 million reflecting credit migration.
Non-interest expenses were $2,393 million, an increase of $268 million,
or 13%, compared with the prior year. The increase reflects restructuring
charges of $23 million, a favourable revaluation of certain liabilities
for post-retirement benefits recognized in the prior year, continued
investments supporting the global expansion of Wholesale Banking’s U.S.
dollar strategy, higher initiative spend, and the impact of foreign exchange
translation, partially offset by lower variable compensation.
Corporate segment reported net loss for the year was $766 million,
compared with a reported net loss of $1,091 million the prior year. The
year-over-year decrease in reported net loss was attributable to the impact
from U.S. tax reform the prior year and lower net corporate expenses in
the current year, partially offset by lower contribution from other items
and non-controlling interests. Other items decreased reflecting lower
revenue from treasury and balance sheet management activities and the
impact of legal provisions in the current year. Net corporate expenses
decreased primarily reflecting lower net pension expenses in the current
year, partially offset by restructuring charges of $51 million. The adjusted
net loss for the year was $507 million, compared with an adjusted net loss
of $430 million the prior year.
46
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS GROUP FINANCIAL CONDITION
Balance Sheet Review
AT A GLANCE OVERVIEW
Total assets were $1,716 billion as at October 31, 2020, an increase
of $301 billion, or 21%, compared with October 31, 2019.
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
Debt securities at amortized cost, net of allowance for credit losses
Securities purchased under reverse repurchase agreements
Loans, net of allowance for loan losses
Investment in Schwab and TD Ameritrade
Other
Total assets
Liabilities
Trading deposits
Derivatives
Financial liabilities designated at fair value through profit or loss
Deposits
Obligations related to securities sold under repurchase agreements
Subordinated notes and debentures
Other
Total liabilities
Total equity
Total liabilities and equity
1 Certain comparative amounts have been reclassified to conform with the
presentation adopted in the current period.
As at
October 31
2020
October 31
2019
$ 170,594 $
148,318
8,548
54,242
4,739
103,285
227,679
169,162
717,523
12,174
99,601
30,446
146,000
6,503
48,894
4,040
111,104
130,497
165,935
684,608
9,316
77,947
$ 1,715,865 $ 1,415,290
$
19,177 $
53,203
59,665
1,135,333
188,876
11,477
152,635
26,885
50,051
105,131
886,977
125,856
10,725
121,964
1,620,366
1,327,589
95,499
87,701
$ 1,715,865 $ 1,415,290
Total assets were $1,716 billion as at October 31, 2020, an increase of
$301 billion, or 21%, from October 31, 2019. The increase reflects cash
and interest-bearing deposits with banks of $140 billion, DSAC, net of
allowance for credit losses, of $97 billion, loans, net of allowances for
loan losses of $33 billion, derivatives of $5 billion, securities purchased
under reverse repurchase agreements of $3 billion, investment in Schwab
and TD Ameritrade of $3 billion, non-trading financial assets at FVTPL
of $2 billion, trading loans, securities, and other of $2 billion, financial
assets designated at FVTPL of $1 billion, and other assets of $23 billion.
The increase was partially offset by a decrease in financial assets at FVOCI
of $8 billion. The change in the U.S. dollar from the prior fiscal year end
increased assets by $7 billion, or approximately 1%.
Cash and interest-bearing deposits with banks increased $140 billion
reflecting growth in customer deposits.
Trading loans, securities, and other increased $2 billion reflecting
an increase in government issued securities, partly offset by a decrease
in equity positions.
Non-trading financial assets at fair value through profit or loss
increased $2 billion reflecting new investments.
Derivatives increased $5 billion reflecting higher mark-to-market values
on interest rate swaps.
Financial assets designated at fair value through profit or loss
increased $1 billion reflecting new investments.
Financial assets at fair value through other comprehensive income
decreased $8 billion reflecting maturities and principal repayments,
partially offset by new investments.
Debt securities at amortized cost, net of allowance for credit
losses increased $97 billion reflecting new investments, partially offset
by maturities.
Securities purchased under reverse repurchase agreements increased
$3 billion reflecting an increase in volume.
Loans, net of allowance for loan losses increased $33 billion reflecting
growth in business and government loans, residential mortgages and the
impact of foreign exchange translation, partially offset by a reduction in
credit card loans.
Investment in Schwab and TD Ameritrade increased $3 billion
primarily reflecting the revaluation gain on sale of the Bank’s investment in
TD Ameritrade.
Other assets increased $23 billion reflecting amounts receivable from
brokers, dealers, and clients, and the impact of ROU assets recorded upon
adoption of IFRS 16.
47
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS Total liabilities were $1,620 billion as at October 31, 2020, an
increase of $293 billion, or 22%, from October 31, 2019. The increase
reflects deposits of $248 billion, obligations related to securities sold
under repurchase agreements of $63 billion, derivatives of $3 billion,
subordinated notes and debentures of $1 billion, and other liabilities
of $31 billion. The increase was partially offset by a decrease in financial
liabilities designated at FVTPL of $45 billion and trading deposits of
$8 billion. The change in the U.S. dollar from the prior fiscal year end
increased liabilities by $8 billion, or approximately 1%.
Trading deposits decreased $8 billion reflecting maturities.
Derivatives increased $3 billion reflecting higher mark-to-market values
on interest rate swaps.
Financial liabilities designated at fair value through profit or loss
decreased $45 billion reflecting maturities.
Deposits increased $248 billion reflecting growth in personal
deposits, business and government deposits, and the impact of foreign
exchange translation.
Obligations related to securities sold under repurchase agreements
increased $63 billion reflecting participation in Bank of Canada liquidity
and funding programs, and an increase in volumes.
Subordinated notes and debentures increased $1 billion reflecting new
issuances, partially offset by maturities.
Other liabilities increased $31 billion reflecting amounts payable to
brokers, dealers, and clients, the impact of lease liabilities recorded upon
adoption of IFRS 16, and obligations related to securities sold short.
Equity was $96 billion as at October 31, 2020, an increase of $8 billion,
or 9%, from October 31, 2019. The increase reflects growth in retained
earnings, higher AOCI reflecting gains on derivatives designated as cash
flow hedges, and the issuance of common shares.
GROUP FINANCIAL CONDITION
Credit Portfolio Quality
AT A GLANCE OVERVIEW
• Loans and acceptances net of allowance for loan losses were
$735 billion, an increase of $35 billion compared with last year.
• Impaired loans net of Stage 3 allowances were $2,323 million,
an increase of $25 million compared with last year.
• Provision for credit losses was $7,242 million, compared with
$3,029 million last year.
• Total allowance for credit losses including off-balance sheet
positions increased by $4,348 million to $9,384 million.
LOAN PORTFOLIO
The Bank increased its credit portfolio net of allowance for loan losses by
$35 billion, or 5%, from the prior year, largely reflects to volume growth
in the business and government and residential mortgage portfolios.
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 2020 Consolidated
Financial Statements.
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 63% of total loans net of Stage 3
allowances, down 1% from 2019. During the year, these portfolios
increased by $18 billion, or 4%, and totalled $469 billion at year end.
Residential mortgages represented 34% of total loans net of Stage 3
allowances in 2020, up 1% from 2019. Consumer instalment and other
personal loans, and credit card loans were 29% of total loans net of
Stage 3 allowances in 2020, down 2% from 2019.
The Bank’s business and government credit exposure was 37% of total
loans net of Stage 3 allowances, up 1% from 2019. The largest business
and government sector concentrations in Canada were the Real estate and
Financial sectors, which comprised 6% and 2% of net loans, respectively.
Real estate, Health and social services, and Government, public sector
entities and education, were the largest U.S. sector concentrations in 2020
representing 5%, 2%, and 2% of net loans, respectively.
Geographically, the credit portfolio remained concentrated in Canada.
In 2020, the percentage of loans net of Stage 3 allowances held in Canada
was 65%, down 1% from 2019. The largest Canadian regional exposure
was in Ontario, which represented 38% of total loans net of Stage 3
allowances for 2020, compared with 39% in the prior year.
The remaining credit portfolio was predominantly in the U.S., which
represented 34% of loans net of Stage 3 allowances, up 1% from 2019.
Exposures to ACI loans, and other geographic regions were relatively small.
The largest U.S. regional exposures were in New York, New England, and
New Jersey which represented 6%, 6%, and 5% of total loans net of
Stage 3 allowances, respectively, consistent with 2019.
Under IFRS 9, the Bank calculates allowances for expected credit losses
(ECLs) on DSAC and FVOCI. The Bank has $325,865 million in such debt
securities of which $325,865 million are performing securities (Stage 1
and 2) and none are impaired. The allowance for credit losses on debt
securities at amortized cost and debt securities at FVOCI was $2 million
and $5 million, respectively.
48
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 2 4 | LOANS AND ACCEPTANCES, NET OF STAGE 3 ALLOWANCE FOR LOAN LOSSES BY INDUSTRY SECTOR1,2,3
(millions of Canadian dollars, except as noted)
As at
Percentage of total
October 31
2020
October 31
2019
October 31
2018
October 31
2020
October 31
2019
October 31
2018
Stage 3
allowances
for loan
losses
impaired
Gross
loans
Net
loans
Net
loans
Net
loans
Canada
Residential mortgages
Consumer instalment and other personal
HELOC
Indirect Auto
Other
Credit card
Total personal
Real estate
Residential
Non-residential
Total real estate
Agriculture
Automotive
Financial
Food, beverage, and tobacco
Forestry
Government, public sector entities, and
education
Health and social services
Industrial construction and trade contractors
Metals and mining
Pipelines, oil, and gas
Power and utilities
Professional and other services
Retail sector
Sundry manufacturing and wholesale
Telecommunications, cable, and media
Transportation
Other
$ 213,239
$ 43 $ 213,196 $ 200,925 $ 193,810
28.7%
28.5%
28.9%
94,838
27,350
18,277
15,552
24
39
38
73
94,814
27,311
18,239
15,479
91,040
25,644
18,410
18,358
86,147
24,170
18,536
17,971
369,256
217
369,039
354,377
340,634
22,698
17,514
40,212
8,657
5,176
14,012
2,283
529
3,564
7,754
3,550
1,527
4,963
1,856
5,305
3,518
2,310
3,026
2,618
4,612
1
1
2
5
10
–
1
–
–
9
62
13
30
–
6
66
14
30
13
6
22,697
17,513
40,210
8,652
5,166
14,012
2,282
529
3,564
7,745
3,488
1,514
4,933
1,856
5,299
3,452
2,296
2,996
2,605
4,606
19,795
15,827
35,622
8,126
6,590
16,633
2,424
657
3,358
7,134
3,478
1,668
4,641
1,961
4,674
3,592
2,685
2,852
2,209
4,156
18,330
13,539
31,869
7,459
6,633
14,693
2,305
544
3,397
6,664
3,134
1,684
3,882
2,704
4,470
3,200
2,806
3,044
1,708
4,227
12.8
3.7
2.4
2.1
49.7
3.1
2.4
5.5
1.2
0.7
1.8
0.3
0.1
0.5
1.0
0.5
0.2
0.7
0.2
0.7
0.5
0.3
0.4
0.4
0.6
12.9
3.6
2.6
2.6
50.2
2.8
2.2
5.0
1.2
0.9
2.5
0.3
0.1
0.5
1.0
0.5
0.2
0.7
0.3
0.7
0.5
0.4
0.4
0.3
0.6
12.9
3.6
2.8
2.7
50.9
2.7
2.0
4.7
1.1
1.0
2.1
0.3
0.1
0.5
1.0
0.5
0.3
0.6
0.4
0.7
0.5
0.4
0.5
0.3
0.6
Total business and government
115,472
267
115,205
112,460
104,423
Total Canada
$ 484,728
$ 484 $ 484,244 $ 466,837 $ 445,057
15.6
65.3%
16.1
66.3%
15.6
66.5%
1 Certain comparatives have been recast 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 FVOCI.
49
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 2 4 | LOANS AND ACCEPTANCES, NET OF STAGE 3 ALLOWANCE FOR LOAN LOSSES BY INDUSTRY SECTOR (continued) 1,2,3
(millions of Canadian dollars, except as noted)
As at
Percentage of total
October 31
2020
October 31
2019
October 31
2018
October 31
2020
October 31
2019
October 31
2018
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
Acquired credit-impaired loans4
Total other loans
Total
Stage 1 and Stage 2 allowance for loan
losses – performing
Personal, business and government5
Total, net of allowance5
Percentage change over previous year – loans
and acceptances, net of Stage 3 allowance for
loan losses (impaired)
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
$ 38,832
$ 24 $ 38,808 $ 34,475 $ 31,099
5.2%
4.9%
4.7%
10,937
33,087
943
16,777
100,576
10,200
25,229
35,429
899
6,580
13,062
3,463
517
14,726
16,041
3,613
1,897
4,553
2,998
14,315
7,622
7,928
3,708
8,961
2,189
148,501
249,077
12
9,206
9,218
44
39
2
131
240
10,893
33,048
941
16,646
100,336
5
12
17
–
–
–
2
–
1
2
2
6
51
3
7
6
2
1
5
5
10,195
25,217
35,412
899
6,580
13,062
3,461
517
14,725
16,039
3,611
1,891
4,502
2,995
14,308
7,616
7,926
3,707
8,956
2,184
11,489
32,428
1,113
17,877
97,382
8,875
24,249
33,124
736
6,809
7,215
3,705
699
12,597
13,175
2,234
1,887
4,554
3,052
11,723
5,866
8,887
4,755
10,164
2,432
12,275
29,845
876
16,700
90,795
8,073
22,514
30,587
705
6,035
10,086
3,435
637
12,572
12,422
2,094
1,922
2,681
3,010
10,920
5,374
7,824
4,897
10,127
2,152
110
350
148,391
248,727
133,614
230,996
127,480
218,275
–
–
–
12
9,206
9,218
12
5,781
5,793
14
5,469
5,483
1.5
4.4
0.1
2.3
13.5
1.3
3.3
4.6
0.1
0.9
1.8
0.5
0.1
2.0
2.2
0.5
0.3
0.6
0.4
1.9
1.0
1.1
0.5
1.2
0.3
20.0
33.5
–
1.2
1.2
1.6
4.6
0.2
2.6
13.9
1.3
3.4
4.7
0.1
1.0
1.0
0.5
0.1
1.8
2.0
0.3
0.3
0.6
0.4
1.7
0.8
1.3
0.7
1.4
0.3
19.0
32.9
–
0.8
0.8
743,023
834
742,189
703,626
668,815
100.0
100.0
232
232
10
10
222
222
301
301
435
435
–
–
–
–
1.8
4.5
0.1
2.5
13.6
1.2
3.4
4.6
0.1
0.9
1.5
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
19.0
32.6
–
0.8
0.8
99.9
0.1
0.1
$ 743,255
$ 844 $ 742,411 $ 703,927 $ 669,250
100.0%
100.0%
100.0%
7,446
3,701
2,845
$ 734,965 $ 700,226 $ 666,405
5.5%
5.2%
5.8%
5.0
5.1
5.8
1 Certain comparatives have been recast 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 FVOCI.
4 Includes all FDIC covered loans and other ACI loans.
5 In the fourth quarter of 2019, the Bank revised its allocation methodology for the
reporting of Allowance for Credit Losses for off-balance sheet instruments for certain
retail portfolios.
50
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 2 5 | LOANS AND ACCEPTANCES, NET OF STAGE 3 ALLOWANCE FOR LOAN LOSSES BY GEOGRAPHY1,2,3
(millions of Canadian dollars, except as noted)
As at
Percentage of total
October 31
2020
October 31
2019
October 31
2018
October 31
2020
October 31
2019
October 31
2018
Canada
Atlantic provinces
British Columbia4
Ontario4
Prairies4
Québec
Total Canada
United States
Carolinas (North and South)
Florida
New England5
New Jersey
New York
Pennsylvania
Other
Total United States
International
Europe
Other
Total international
Total excluding other loans
Other loans
Total
Stage 1 and Stage 2 allowances6
Total, net of allowance6
Percentage change over previous year –
loans and acceptances, net of Stage 3
allowances for loan losses (impaired)
Canada
United States
International
Other loans
Total
Stage 3
allowances
for loan
losses
impaired
Net loans
Net loans
Net loans
$ 12 $ 12,767 $ 12,722 $ 12,366
64,147
256,764
75,084
36,696
67,415
271,220
75,932
39,548
70,245
279,355
81,203
40,674
34
342
72
24
484
484,244
466,837
445,057
13,483
20,314
42,465
35,425
46,154
15,267
75,619
12,711
18,181
42,508
31,504
40,382
12,999
72,711
11,537
17,595
41,557
33,415
36,707
11,884
65,580
248,727
230,996
218,275
3,229
5,989
9,218
2,634
3,159
5,793
2,553
2,930
5,483
13
26
41
28
47
18
177
350
–
–
–
834
10
Gross loans
$ 12,779
70,279
279,697
81,275
40,698
484,728
13,496
20,340
42,506
35,453
46,201
15,285
75,796
249,077
3,229
5,989
9,218
743,023
232
1.7%
9.5
37.6
10.9
5.6
65.3
1.8
2.7
5.7
4.8
6.2
2.1
10.2
33.5
0.4
0.8
1.2
1.8%
9.6
38.5
10.8
5.6
66.3
1.8
2.6
6.0
4.5
5.7
1.9
10.4
32.9
0.4
0.4
0.8
1.9%
9.6
38.3
11.2
5.5
66.5
1.7
2.6
6.2
5.0
5.5
1.8
9.8
32.6
0.4
0.4
0.8
99.9
0.1
742,189
703,626
668,815
222
301
435
100.0
–
100.0
–
$ 743,255
$ 844 $ 742,411 $ 703,927 $ 669,250
100.0%
100.0%
100.0%
7,446
3,701
2,845
$ 734,965 $ 700,226 $ 666,405
2020
3.7%
7.7
59.1
(26.3)
5.0%
2019
4.9%
5.8
5.7
(30.8)
5.1%
2018
7.6%
3.4
22.1
(88.3)
5.8%
1 Certain comparatives have been recast to conform with the presentation adopted in
5 The states included in New England are as follows: Connecticut, Maine,
the current period.
Massachusetts, New Hampshire, and Vermont.
2 Primarily based on the geographic location of the customer’s address.
3 Includes loans that are measured at FVOCI.
4 The territories are included as follows: Yukon is included in British Columbia; Nunavut
6 In the fourth quarter of 2019, the Bank revised its allocation methodology for the
reporting of Allowance for Credit Losses for off-balance sheet instruments for certain
retail portfolios.
is included in Ontario; and Northwest Territories is included in the Prairies region.
REAL ESTATE SECURED LENDING
Retail real estate secured lending includes mortgages and lines of credit
to North American consumers to satisfy financing needs including home
purchases and refinancing. While the Bank retains first lien on the majority
of properties held as security, there is a small portion of loans with second
liens, but most of these are behind a TD mortgage that is in first position.
In Canada, credit policies are designed so 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 borrowers’
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.
51
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 2 6 | CANADIAN REAL ESTATE SECURED LENDING1
(millions of Canadian dollars)
Total
Total
Residential
mortgages
Home equity
lines of credit
Total amortizing
real estate secured
lending
Home equity
lines of credit
Amortizing
Non-amortizing
As at
Total real estate
secured lending
October 31, 2020
$ 213,239
$ 61,790
$ 275,029
$ 33,048
$ 308,077
$ 200,952
$ 56,503
$ 257,455
$ 34,550
$ 292,005
October 31, 2019
1 Excludes loans classified as trading as the Bank intends to sell the loans immediately or
in the near term, and loans designated at FVTPL for which no allowance is recorded.
T A B L E 2 7 | REAL ESTATE SECURED LENDING1,2
(millions of Canadian dollars,
except as noted)
Residential mortgages
Home equity lines of credit
As at
Total
Insured3
Uninsured
Insured3
Uninsured
Insured3
Uninsured
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
$ 3,218
10,142
28,818
21,741
8,520
1.5% $
4.8
13.5
10.2
4.0
3,108
30,416
80,096
16,750
10,430
1.5%
$
14.3
37.4
7.9
4.9
316
1,670
5,925
2,726
993
0.3%
1.8
6.2
2.9
1.0
72,439
34.0% 140,800
66.0%
11,630
12.2%
1,008
$ 73,447
37,972
$ 178,772
–
$ 11,630
$ 3,340
10,944
31,299
22,283
8,823
1.7%
5.4
15.6
11.1
4.4
$ 2,861
26,395
69,399
16,062
9,546
1.4%
$
13.1
34.5
8.0
4.8
363
1,872
6,650
3,008
1,149
0.4%
2.1
7.3
3.3
1.3
76,689
38.2% 124,263
61.8%
13,042
14.4%
938
$ 77,627
33,750
$ 158,013
–
$ 13,042
October 31, 2020
$ 1,337
16,192
47,361
11,260
7,058
83,208
10,953
$ 94,161
$ 1,297
15,302
43,970
11,125
6,317
78,011
11,549
$ 89,560
1.4%
17.1
50.0
11.9
7.4
$ 3,534
11,812
34,743
24,467
9,513
1.1% $
3.8
11.3
7.9
3.1
4,445
46,608
127,457
28,010
17,488
1.4%
15.1
41.5
9.1
5.7
87.8%
84,069
27.2% 224,008
72.8%
1,008
$ 85,077
48,925
$ 272,933
October 31, 2019
1.4%
16.8
48.3
12.2
6.9
$ 3,703
12,816
37,949
25,291
9,972
1.3%
4.4
13.0
8.7
3.4
$ 4,158
41,697
113,369
27,187
15,863
1.4%
14.3
38.8
9.3
5.4
85.6%
89,731
30.8% 202,274
69.2%
938
$ 90,669
45,299
$ 247,573
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 FVTPL 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
<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
0.9%
5.3
1.6%
1.0%
4.8
1.6%
3.4%
4.5
3.5%
3.6%
6.3
4.0%
6.9%
4.6
6.5%
6.5%
4.8
6.3%
20.0%
6.0
17.8%
16.2%
6.1
14.7%
44.7%
20.8
41.2%
44.2%
25.8
41.4%
23.3%
56.3
28.4%
27.8%
49.9
31.1%
0.8%
2.3
1.0%
0.7%
2.0
0.9%
October 31, 2020
–%
0.2
–%
100.0%
100.0
100.0%
October 31, 2019
–%
0.3
–%
100.0%
100.0
100.0%
Canada
United States
Total
Canada
United States
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 FVTPL for which no allowance is recorded.
2 Percentage based on outstanding balance.
52
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 2 9 | UNINSURED AVERAGE LOAN-TO-VALUE – Newly Originated and Newly Acquired1,2,3
Canada
Atlantic provinces
British Columbia6
Ontario6
Prairies6
Québec
Total Canada
United States
Total
October 31, 2020
For the 12 months ended
October 31, 2019
Residential
mortgages
Home equity
lines of credit4,5
Total
Residential
mortgages
Home equity
lines of credit4,5
Total
74%
68
68
74
73
69
71
69%
71%
63
66
71
72
66
62
66%
73%
66
67
72
73
68
69
68%
73%
66
68
73
73
69
70
69%
69%
62
65
70
72
66
62
65%
72%
65
67
72
73
68
68
68%
1 Geographic location is based on the address of the property mortgaged.
2 Excludes loans classified as trading as the Bank intends to sell the loans immediately
or in the near term, and loans designated at fair value through profit or loss for
which no allowance is recorded.
4 HELOC loan-to-value includes first position collateral mortgage if applicable.
5 HELOC 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.
3 Based on house price at origination.
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 $125 million, or 4%, compared with the prior year.
In Canada, impaired loans net of Stage 3 allowances increased by
$87 million, or 12% in 2020. Residential mortgages, consumer instalment
and other personal loans, and credit cards, had net impaired loans of
$561 million, an increase of $70 million, or 14%, primarily reflecting
increases in the residential mortgage and home equity line of credit
portfolios reflecting new formations outpacing resolutions, including the
impact from the cessation of certain enforcement activities in response to
COVID-19, partially offset by the ongoing impact of bank and government
assistance programs. Business and government impaired loans net of
Stage 3 allowances were $270 million, an increase of $17 million, or 7%,
compared with the prior year, largely reflecting new formations outpacing
resolutions in the Canadian Commercial portfolio.
In the U.S., net impaired loans decreased by $62 million, or 4% in 2020.
Residential mortgages, consumer instalment and other personal loans,
and credit cards, had net impaired loans of $1,100 million, a decrease of
$100 million, or 8%, compared with the prior year largely reflecting the
ongoing impact of bank and government assistance programs. Business
and government net impaired loans were $392 million, an increase
of $38 million, or 11%, compared with the prior year reflecting new
formations outpacing resolutions in the U.S. Commercial portfolio.
Geographically, 36% of total net impaired loans were located in
Canada and 64% in the U.S. The largest regional concentration of net
impaired loans in Canada was in Ontario, increasing to 18% of total
net impaired loans, compared with 17% in the prior year. The largest
regional concentration of net impaired loans in the U.S. was in New York
representing 14% of total net impaired loans, consistent with 2019.
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 period
Transferred to not impaired during the period
Net repayments
Disposals of loans
Amounts written off
Exchange and other movements
Impaired loans as at end of year
1 Includes customers’ liability under acceptances.
2 Excludes ACI loans.
3 Includes loans that are measured at FVOCI.
2020
2019
2018
$ 3,032
6,305
(1,138)
(1,553)
(67)
(3,436)
14
$ 3,154
6,037
(1,272)
(1,492)
(292)
(3,175)
72
$ 3,085
5,012
(864)
(1,360)
(21)
(2,748)
50
$ 3,157
$ 3,032
$ 3,154
53
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 3 1 | IMPAIRED LOANS NET OF STAGE 3 ALLOWANCE FOR LOAN LOSSES BY INDUSTRY SECTOR1,2,3,4
(millions of Canadian dollars,
except as noted)
Oct. 31
2020
Oct. 31
2019
Oct. 31
2018
Oct. 31
2017
As at
Oct. 31
2016
Oct. 31
2020
Oct. 31
2019
Oct. 31
2018
Oct. 31
2017
Oct. 31
2016
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
$ 376
$ 43
$ 333
$ 253
$ 246
$ 279
$ 385
14.3%
11.0%
10.0%
11.6%
13.9%
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
201
60
38
103
778
8
7
15
21
26
–
6
–
–
30
133
17
55
–
13
120
24
49
17
11
24
39
38
73
217
177
21
–
30
561
1
1
2
5
10
–
1
–
–
9
62
13
30
–
6
66
14
30
13
6
7
6
13
16
16
–
5
–
–
21
71
4
25
–
7
54
10
19
4
5
134
29
9
66
491
2
2
4
13
25
1
2
–
–
4
142
6
19
–
13
11
–
6
4
3
118
23
12
55
454
3
2
5
4
9
2
1
1
–
4
136
7
9
–
5
5
6
1
2
1
102
11
19
51
462
3
3
6
5
2
–
1
–
–
11
2
15
22
–
6
8
7
–
5
2
140
9
20
46
600
3
7
10
9
1
2
2
–
–
11
11
18
51
–
4
11
3
–
–
4
7.6
0.9
–
1.3
5.8
1.3
0.4
2.9
4.8
0.9
0.5
2.2
4.3
0.5
0.8
2.1
5.0
0.3
0.7
1.7
24.1
21.4
18.4
19.3
21.6
0.3
0.3
0.6
0.7
0.7
–
0.2
–
–
0.9
3.0
0.2
1.1
–
0.3
2.3
0.4
0.8
0.2
0.2
0.1
0.1
0.2
0.6
1.1
–
0.1
–
–
0.2
6.2
0.2
0.8
–
0.6
0.5
–
0.2
0.2
0.1
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
–
8.0
0.1
0.1
0.2
0.2
0.1
–
–
–
–
0.5
0.1
0.7
0.9
–
0.2
0.3
0.3
–
0.2
0.1
3.8
0.1
0.3
0.4
0.3
–
0.1
0.1
–
–
0.4
0.4
0.7
1.8
–
0.1
0.4
0.1
–
–
0.1
4.9
and government
537
267
270
253
198
92
137
11.6
11.0
Total Canada
$ 1,315
$ 484
$ 831
$ 744
$ 652
$ 554
$ 737
35.7%
32.4%
26.4%
23.1%
26.5%
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, debt securities classified as loans under IAS 39, Financial Instruments:
Recognition and Measurement (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.
54
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 3 1 | IMPAIRED LOANS NET OF STAGE 3 ALLOWANCE FOR LOAN LOSSES BY INDUSTRY SECTOR (continued) 1,2,3,4
(millions of Canadian dollars,
except as noted)
Oct. 31
2020
Oct. 31
2019
Oct. 31
2018
Oct. 31
2017
As at
Oct. 31
2016
Oct. 31
2020
Oct. 31
2019
Oct. 31
2018
Oct. 31
2017
Oct. 31
2016
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
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
$ 449
$ 24 $ 425 $ 418 $ 416 $ 429 $ 418
18.3%
18.2%
16.9%
17.9%
15.0%
430
249
10
202
1,340
50
99
149
1
4
14
10
–
8
22
15
25
52
16
59
44
15
7
35
26
44
39
2
131
240
5
12
17
–
–
–
2
–
1
2
2
6
51
3
7
6
2
1
5
5
386
210
8
71
455
232
5
90
796
198
6
58
795
234
4
38
863
190
4
38
1,100
1,200
1,474
1,500
1,513
16.6
9.0
0.3
3.1
47.3
19.8
10.1
0.2
3.9
52.2
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
45
87
132
1
4
14
8
–
7
20
13
19
1
13
52
38
13
6
30
21
20
66
86
1
5
15
8
–
9
32
24
4
–
1
68
38
13
4
26
20
24
97
121
2
8
28
10
1
7
11
19
3
11
1
44
37
15
3
15
6
27
73
100
2
12
39
9
1
9
11
20
4
17
1
46
37
26
1
6
3
54
87
141
1
14
24
4
12
8
29
22
4
77
–
75
43
41
9
25
6
1.9
3.8
5.7
–
0.2
0.6
0.4
–
0.3
0.9
0.6
0.8
–
0.6
2.2
1.6
0.6
0.3
1.3
0.9
0.9
2.9
3.8
–
0.2
0.7
0.3
–
0.4
1.4
1.0
0.2
–
–
2.9
1.7
0.6
0.2
1.1
0.9
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
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
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
502
1,842
–
110
350
–
392
1,492
–
354
1,554
–
342
1,816
–
344
1,844
–
535
2,048
–
17.0
64.3
–
15.4
67.6
–
13.8
73.6
–
14.3
76.9
–
19.2
73.5
–
Total
$ 3,157
$ 834 $ 2,323 $ 2,298 $ 2,468 $ 2,398 $ 2,785
100.0% 100.0% 100.0% 100.0% 100.0%
Net impaired loans
as a % of common
equity
2.59%
2.81%
3.33%
3.45%
4.09%
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, debt securities classified as loans under IAS 39, Financial Instruments:
Recognition and Measurement (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.
55
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 3 2 | IMPAIRED LOANS NET OF STAGE 3 ALLOWANCE FOR LOAN LOSSES BY GEOGRAPHY1,2,3,4,5
(millions of Canadian dollars,
except as noted)
October 31
2020
October 31
2019
October 31
2018
October 31
2020
October 31
2019
October 31
2018
As at
Percentage of total
Stage 3
allowances
for loan
losses
impaired
$ 12
34
342
72
24
484
13
26
41
28
47
18
177
350
Gross
impaired
loans
$
35
129
757
310
84
1,315
112
180
340
220
371
117
502
1,842
Net
impaired
loans
Net
impaired
loans
Net
impaired
loans
$
$
23
95
415
238
60
831
$
24
71
382
211
56
744
99
154
299
192
324
99
325
104
141
367
219
324
84
315
30
52
315
177
78
652
108
156
442
333
354
113
310
1,492
1,554
1,816
1.0%
4.0
17.9
10.2
2.6
35.7
4.3
6.6
12.9
8.3
13.9
4.3
14.0
64.3
1.1%
3.1
16.6
9.2
2.4
32.4
4.5
6.1
16.0
9.5
14.1
3.7
13.7
67.6
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
$ 3,157
$ 834
$ 2,323
$ 2,298
$ 2,468
100.0%
100.0%
100.0%
0.32%
0.33%
0.37%
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
Net impaired loans as a %
of net loans
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.
5 Credit cards are considered impaired when they are 90 days past due and written off
at 180 days past due.
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.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses including off-balance sheet positions
of $9,384 million as at October 31, 2020, was comprised of Stage 3
allowance for impaired loans of $878 million, Stage 2 allowance of
$5,574 million, and Stage 1 allowance of $2,925 million, and allowance
for debt securities of $7 million. The Stage 1 and 2 allowances are for
performing loans and off-balance sheet instruments.
Stage 3 allowances (impaired)
The Stage 3 allowance for loan losses increased $117 million, or 15%,
compared with last year, primarily reflecting credit migration in the
Wholesale Banking and Canadian Commercial lending portfolios, partially
offset by the U.S. credit card portfolio, largely due to the ongoing impact
of bank and government assistance programs.
Stage 1 and Stage 2 allowances (performing)
As at October 31, 2020, the performing allowance was $8,499 million,
up from $4,271 million as at October 31, 2019. The increase was primarily
related to a significant deterioration in the economic outlook related to
the COVID-19 pandemic, including the impact of credit migration, and the
impact of foreign exchange. The allowance increase for consumer lending
was reflected across all products and included $535 million attributable to
the partners’ share of the U.S. strategic cards portfolios. The Business and
Government allowance increase was broadly reflected across industries.
The allowance for debt securities increased by $3 million compared with
last year.
Forward-looking information, including macroeconomic variables
deemed to be predictive of ECLs based on the Bank’s experience, is
used to determine ECL scenarios and associated probability weights
to determine the probability-weighted ECLs. Each quarter, all base
forecast macroeconomic variables are refreshed, resulting in new upside
and downside macroeconomic scenarios. Macroeconomic variables
are statistically derived relative to the base forecast based on historical
distributions for each variable. This process was followed for the upside
forecast. For the downside forecast, since the second quarter of 2020,
macroeconomic variables were based on plausible scenario analysis of
COVID-19 impacts, given the lack of comparable historical data for a
56
shock of this nature. The probability weightings assigned to each ECL
scenario are also reviewed each quarter and updated as required, as part
of the Bank’s ECL governance process. As a result of periodic reviews
and quarterly updates, the allowance for credit losses may be revised to
reflect updates in statistically derived loss estimates based on the Bank’s
recent loss experience and its forward-looking views, including the
impact of COVID-19. The Bank periodically reviews the methodology
and has performed certain additional qualitative portfolio and loan
level assessments of significant increase in credit risk. Refer to Note 3 of
the Bank’s 2020 Consolidated Financial Statements for further details on
forward-looking information.
The probability-weighted allowance for credit losses reflects the Bank’s
forward-looking views, including its estimate of the potential impact of
COVID-19. The Bank continues to monitor the effects of COVID-19. To
the extent that certain anticipated effects of COVID-19 cannot be fully
incorporated into quantitative models, management continues to exercise
expert credit judgment in determining the amount of ECLs by considering
reasonable and supportable information. There remains considerable
uncertainty regarding the impact of the COVID-19 pandemic, and as the
situation unfolds, the allowance for credit losses will be refined in future
quarters. Refer to Note 3 of the Bank’s 2020 Consolidated Financial
Statements for additional detail.
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 related to residential mortgages,
consumer instalment and other personal loans, and credit card loans
was $1,021 million, an increase of $30 million, or 3%, compared to
2019. PCL – impaired related to business and government loans was
$280 million, an increase of $132 million or 89%, compared with last
year, primarily reflecting credit migration.
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
In the U.S., PCL – impaired related to residential mortgages, consumer
Geographically, PCL – impaired in Canada and in the U.S. represented
instalment and other personal loans, and credit card loans was
$1,301 million, a decrease of $89 million, or 6%, compared to 2019,
reflected in the credit card portfolio, largely due to the ongoing impact
of bank and government assistance programs. PCL – impaired related
to business and government loans was $371 million, an increase of
$251 million compared to 2019, primarily reflecting credit migration.
18% and 23% of total PCL, respectively. The largest regional
concentration of PCL – impaired in Canada was in Ontario, which
represented 9.4% of total PCL, down from 16% in 2019. The largest
regional concentration of PCL – impaired in the U.S. was in New England
and New York, representing 2.6% and 2.5% of total PCL, respectively.
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
(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
1 Includes PCL on the retailer program partners’ share of the U.S. strategic
cards portfolio.
2 Includes financial asset, loan commitments, and financial guarantees.
2020
2019
2018
$ 1,256
997
279
431
$ 1,126
936
20
548
2,963
2,630
$ 927
776
(8)
471
2,166
1,490
1,928
229
632
4,279
180
146
24
49
399
71
141
11
91
314
$ 7,242
$ 3,029
$ 2,480
T A B L E 3 4 | PROVISION FOR CREDIT LOSSES BY INDUSTRY SECTOR1,2
(millions of Canadian dollars, except as noted)
For the years ended
Percentage of total
October 31
2020
October 31
2019
October 31
2018
October 31
2020
October 31
2019
October 31
2018
Stage 3 provision for credit losses (impaired)
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 FVOCI.
$
27
$
26
$ 15
0.9%
1.0%
0.7%
17
221
226
530
1,021
(4)
1
(3)
5
5
–
–
–
–
4
52
4
17
–
20
99
7
42
15
13
11
238
227
489
991
1
1
2
2
8
–
3
–
–
7
48
9
8
–
15
15
5
7
8
11
280
148
11
205
178
471
880
(2)
3
1
1
3
–
–
–
–
3
2
4
(2)
–
4
14
(2)
2
2
13
45
0.6
7.5
7.6
17.9
34.5
(0.1)
–
(0.1)
0.2
0.2
–
–
–
–
0.1
1.7
0.1
0.6
–
0.7
3.3
0.2
1.4
0.6
0.4
9.4
0.4
9.1
8.6
18.6
37.7
–
–
–
–
0.3
–
0.1
–
–
0.3
1.9
0.3
0.3
–
0.6
0.6
0.2
0.3
0.3
0.4
5.6
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
$ 1,301
$ 1,139
$ 925
43.9%
43.3%
42.7%
57
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 3 4 | PROVISION FOR CREDIT 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
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
Total excluding other loans
Other loans
Debt securities at amortized cost and FVOCI
Acquired credit-impaired loans3
Total other loans
October 31
2020
October 31
2019
October 31
2018
October 31
2020
October 31
2019
October 31
2018
$
9
$
10
$
13
0.3%
0.4%
0.7%
11
349
171
761
(12)
318
180
894
15
272
155
805
1,301
1,390
1,260
3
16
19
–
–
1
2
–
24
(4)
5
231
7
25
10
6
7
7
31
371
1,672
2
2,975
–
(12)
(12)
3
4
7
–
1
2
–
1
7
15
(1)
–
18
27
8
2
2
16
15
120
1,510
–
2,649
–
(19)
(19)
(2)
(4)
(6)
–
1
7
(1)
–
–
1
2
(7)
–
(1)
–
1
1
(4)
13
7
1,267
–
2,192
–
(26)
(26)
0.4
11.7
5.8
25.7
43.9
0.1
0.5
0.6
–
–
–
0.2
–
0.8
(0.1)
0.3
7.8
0.2
0.8
0.3
0.2
0.2
0.2
1.0
12.5
56.4
0.1
100.4
–
(0.4)
(0.4)
(0.4)
12.1
6.8
34.0
52.9
0.1
0.2
0.3
–
–
–
–
–
0.3
0.6
–
–
0.7
1.1
0.3
–
–
0.6
0.6
4.5
57.4
–
100.7
–
(0.7)
(0.7)
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)
Total Stage 3 provision for credit losses (impaired)
$ 2,963
$ 2,630
$ 2,166
100.0%
100.0%
100.0%
Stage 1 and 2 provision for credit losses
Personal, business, and government
Debt securities at amortized cost and FVOCI
Total Stage 1 and 2 provision for credit losses
Total provision for credit losses
1 Primarily based on the geographic location of the customer’s address.
2 Includes loans that are measured at FVOCI.
3 Includes all FDIC covered loans and other ACI loans.
$ 4,276
$ 400
3
4,279
(1)
399
$ 306
8
314
$ 7,242
$ 3,029
$ 2,480
58
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 3 5 | PROVISION FOR CREDIT LOSSES BY GEOGRAPHY1,2,3
(millions of Canadian dollars, except as noted)
For the years ended
Percentage of total
October 31
2020
October 31
2019
October 31
2018
October 31
2020
October 31
2019
October 31
2018
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
International
Total excluding other loans
Other loans7
Total Stage 3 provision for credit losses (impaired)
Stage 1 and 2 provision for credit losses
$
67
$
80
$
138
678
276
142
120
490
302
147
1,301
1,139
68
117
191
107
180
52
957
1,672
2
2,975
(12)
2,963
4,279
63
112
161
128
174
61
811
1,510
–
2,649
(19)
2,630
399
74
106
361
262
122
925
54
93
148
107
142
51
672
1,267
–
2,192
(26)
2,166
314
0.9%
1.9
9.4
3.8
2.0
18.0
0.9
1.6
2.6
1.5
2.5
0.7
13.2
23.0
–
41.0
(0.1)
40.9
59.1
2.6%
4.0
16.2
10.0
4.8
37.6
2.1
3.7
5.3
4.2
5.7
2.0
26.8
49.8
–
87.4
(0.6)
86.8
13.2
3.0%
4.3
14.5
10.6
4.9
37.3
2.2
3.7
6.0
4.3
5.7
2.1
27.1
51.1
–
88.4
(1.1)
87.3
12.7
Total provision for credit losses
$ 7,242
$ 3,029
$ 2,480
100.0%
100.0%
100.0%
Provision for credit losses as a % of average net loans
and acceptances6
October 31
2020
October 31
2019
October 31
2018
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 credit losses (impaired)
Stage 1 and 2 provision for credit losses
0.01%
0.66
0.22
0.27
0.03
2.10
0.26
0.70
0.10
0.41
(7.10)
0.41
0.59
0.01%
0.65
0.13
0.25
0.03
2.28
0.10
0.69
–
0.39
(5.29)
0.39
0.06
0.01%
0.63
0.04
0.21
0.04
2.18
0.01
0.63
–
0.34
(4.97)
0.34
0.05
Total provision for credit losses as a % of average net loans
and acceptances
0.99%
0.44%
0.39%
1 Primarily based on the geographic location of the customer’s address.
2 Includes loans that are measured at FVOCI.
3 Includes customers’ liability under acceptances.
4 The territories are included as follows: Yukon is included in British Columbia; Nunavut
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.
is included in Ontario; and Northwest Territories is included in the Prairies region.
7 Other loans include ACI.
59
TD BANK GROUP ANNUAL REPORT 2020 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 6 | EXPOSURE TO EUROPE – Total Net Exposure by Country and Counterparty
(millions of Canadian dollars)
Country
GIIPS
Greece
Italy
Ireland
Portugal
Spain
Total GIIPS
Rest of Europe
Austria
Belgium
Denmark
Finland
France
Germany
Netherlands
Norway
Sweden
Switzerland
United Kingdom
Other6
Loans and commitments1
Derivatives, repos, and securities lending2
Trading and investment portfolio3,4
Corporate Sovereign
Financial
Total Corporate Sovereign
Financial
Total Corporate Sovereign
Financial
Total
As at
Total
Exposure5
$
– $
–
–
–
–
–
– $
–
–
–
–
–
–
266
–
–
591
1,481
609
–
–
1,163
5,333
–
–
–
273
252
1,024
494
275
365
–
151
9,797
–
– $
– $
10
320
–
89
419
18
189
1
9
962
374
536
29
67
331
760
108
10
320
–
89
419
18
455
274
261
2,577
2,349
1,420
394
67
1,645
15,890
108
– $
–
11
–
–
– $
–
–
86
–
– $
3
331
24
86
11
86
444
–
3
342
110
86
541
3
824
–
–
55
895
383
–
–
327
1,592
9
4,088
122
30
95
52
1,075
697
179
439
109
19
847
108
3,772
33
175
480
63
1,253
725
1,086
42
174
856
8,424
219
158
1,029
575
115
2,383
2,317
1,648
481
283
1,202
10,863
336
13,530
21,390
October 31, 2020
– $
–
–
–
715
715
1,266
320
410
1,054
4,789
9,691
2,635
708
1,784
–
479
20
– $
– $
17
21
–
38
76
9
–
40
16
466
30
220
439
781
162
526
–
34
21
13
757
825
1,280
360
450
1,070
5,364
9,970
2,884
1,152
2,569
178
1,098
20
–
47
683
123
932
1,785
1,456
1,844
1,299
1,446
10,324
14,636
5,952
2,027
2,919
3,025
27,851
464
23,156
2,689
26,395
73,243
$
– $
17
–
13
4
34
5
40
–
–
109
249
29
5
4
16
93
–
550
Total Rest of Europe
9,443
12,631
3,384
25,458
Total Europe
$ 9,443 $ 12,631 $ 3,803 $ 25,877 $ 4,099 $ 3,858 $ 13,974 $ 21,931
$ 584 $ 23,871 $ 2,765 $ 27,220 $ 75,028
1 Exposures include interest-bearing deposits with banks and are presented net
of impairment charges where applicable. There were no impairment charges for
European exposures as at October 31, 2020, or October 31, 2019.
2 Exposures are calculated on a fair value basis and are net of collateral. Total market
value of pledged collateral is $1.5 billion (October 31, 2019 – $1.1 billion) for
GIIPS and $82.3 billion for the rest of Europe (October 31, 2019 – $84.5 billion).
Derivatives are presented as net exposures where there is an International Swaps
and Derivatives Association master netting agreement.
3 Trading and investment portfolio includes deposits. Trading exposures are net
of eligible short positions.
4 The fair values of the GIIPS exposures in Level 3 in the trading and investment
portfolio were not significant as at October 31, 2020 and October 31, 2019.
5 This quarter the Bank had nil related notional protection purchased through CDS.
(As at October 31, 2019, exposures did not include $26 million notional amount
of protection the Bank purchased through CDS).
6 Other European exposure is distributed across 12 countries (October 31, 2019 –
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, 2020.
60
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 3 6 | EXPOSURE TO EUROPE – Total Net Exposure by Country and Counterparty (continued)
(millions of Canadian dollars)
Loans and commitments1
Derivatives, repos, and securities lending2
Trading and investment portfolio3,4
Corporate Sovereign
Financial
Total Corporate Sovereign
Financial
Total Corporate Sovereign
Financial
Total
As at
Total
Exposure5
Country
GIIPS
Greece
Italy
Ireland
Portugal
Spain
Total GIIPS
Rest of Europe
Austria
Belgium
Denmark
Finland
France
Germany
Netherlands
Norway
Sweden
Switzerland
United Kingdom
Other6
– $
–
$
– $
$
– $
–
–
–
–
–
– $
–
–
–
–
–
–
263
–
–
576
1,272
485
–
–
664
3,227
–
–
–
92
77
1,163
520
392
397
–
58
6,736
–
9,435
– $
– $
10
298
–
116
424
18
189
–
9
811
364
236
31
27
324
717
116
10
298
–
116
424
18
452
92
86
2,550
2,156
1,113
428
27
1,046
10,680
116
2,842
18,764
4
803
2
–
23
683
412
1
–
363
1,457
11
3,759
– $
–
14
–
–
14
– $
–
–
56
–
56
27
311
1
125
464
16
511
283
141
2,131
1,163
687
38
109
981
7,889
489
27
325
57
125
534
81
1,326
350
190
2,659
2,678
1,576
346
302
1,344
10,039
600
61
12
65
49
505
832
477
307
193
–
693
100
– $
–
–
–
594
594
– $
6
1
–
56
63
668
82
464
969
3,508
8,662
3,096
576
1,433
–
983
35
20,476
–
5
49
29
244
139
361
678
651
144
1,656
10
3,966
October 31, 2019
– $
19
1
2
675
697
669
97
517
998
3,914
9,096
3,529
1,257
2,104
163
2,794
47
–
56
624
59
916
1,655
768
1,875
959
1,274
9,123
13,930
6,218
2,031
2,433
2,553
23,513
763
25,185
65,440
13
–
2
25
40
1
10
4
–
162
295
72
3
20
19
155
2
743
Total Rest of Europe
6,487
3,294
14,438
21,491
Total Europe
$ 6,487 $ 9,435 $ 3,266 $ 19,188 $ 3,773 $ 3,350 $ 14,902 $ 22,025
$ 783 $ 21,070 $ 4,029 $ 25,882 $ 67,095
1 Exposures include interest-bearing deposits with banks and are presented net
of impairment charges where applicable. There were no impairment charges for
European exposures as at October 31, 2020, or October 31, 2019.
2 Exposures are calculated on a fair value basis and are net of collateral. Total market
value of pledged collateral is $1.5 billion (October 31, 2019 – $1.1 billion) for
GIIPS and $82.3 billion for the rest of Europe (October 31, 2019 – $84.5 billion).
Derivatives are presented as net exposures where there is an International Swaps
and Derivatives Association master netting agreement.
3 Trading and investment portfolio includes deposits. Trading exposures are net
of eligible short positions.
4 The fair values of the GIIPS exposures in Level 3 in the trading and investment
portfolio were not significant as at October 31, 2020 and October 31, 2019.
5 This quarter the Bank had nil related notional protection purchased through CDS.
(As at October 31, 2019, exposures did not include $26 million notional amount
of protection the Bank purchased through CDS).
6 Other European exposure is distributed across 12 countries (October 31, 2019 –
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, 2020.
Of the Bank’s European exposure, approximately 97% (October 31, 2019 –
97%) is to counterparties in countries rated either Aa3 or better by
Moody’s Investor Services (Moody’s) or AA or better by Standard & Poor’s
(S&P), with the majority of this exposure to the sovereigns themselves or 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.
In addition to the European exposure identified above, the Bank
also has $14.8 billion (October 31, 2019 – $14.0 billion) of exposure
to supranational entities with European sponsorship and $6.2 billion
(October 31, 2019 – $2.9 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.
61
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
GROUP FINANCIAL CONDITION
Capital Position
T A B L E 3 7 | CAPITAL STRUCTURE AND RATIOS – Basel III
(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)1
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
Non-significant investments in the capital of banking, financial, and insurance entities, net of eligible short positions
(amount above 10% threshold)2
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)2
Other deductions or regulatory adjustments to CET1 as determined by OSFI3
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 Capital instruments before regulatory adjustments
Additional Tier 1 Capital instruments regulatory adjustments
Non-significant investments in the capital of banking, financial, and insurance entities, net of eligible short positions
(amount above 10% threshold)
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
Collective allowances
Tier 2 Capital before regulatory adjustments
Tier 2 regulatory adjustments
Investment in own Tier 2 instruments
Non-significant investments in the capital of banking, financial, and insurance entities, net of eligible short positions
(amount above 10% threshold)4
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 assets
Capital Ratios and Multiples5
Common Equity Tier 1 Capital (as percentage of risk-weighted assets)
Tier 1 Capital (as percentage of risk-weighted assets)
Total Capital (as percentage of risk-weighted assets)
Leverage ratio6
2020
2019
$ 22,570
53,845
13,437
$ 21,828
49,497
10,581
89,852
81,906
(17,019)
(2,030)
(177)
(3,720)
–
(57)
(9)
(36)
(6,321)
–
2,133
(27,236)
62,616
5,647
1,190
6,837
(12)
(350)
(362)
6,475
69,091
11,277
160
509
11,946
–
(856)
(160)
(1,016)
10,930
(19,712)
(2,389)
(245)
(1,389)
(1,148)
(132)
(13)
(22)
–
(1,814)
–
(26,864)
55,042
5,795
1,196
6,991
–
(350)
(350)
6,641
61,683
10,527
198
1,874
12,599
–
–
(160)
(160)
12,439
$ 80,021
$ 74,122
$ 478,909
$ 455,977
13.1%
14.4
16.7
4.5
12.1%
13.5
16.3
4.0
1 Goodwill deduction decreased due to the sale of the investment in TD Ameritrade.
2 Significant investment deduction was eliminated due to the sale of the investment
in TD Ameritrade and the non-significant investment deduction increased due to the
investment in Schwab.
4 Includes other TLAC-eligible instruments issued by global systemically important
banks (G-SIBs) and Canadian domestic systemically important banks (D-SIBs) that are
outside the scope of regulatory consolidation, where the institution does not own
more than 10% of the issued common share capital of the entity.
3 Represents ECL transitional arrangements provided by OSFI. Refer to the “OSFI’s
5 The CET1, Tier 1, Total Capital and Leverage ratios excluding the ECL transitional
Capital Requirements under Basel III” within the “Capital Position” section of this
document for additional details.
arrangements are 12.6%, 14.0%, 16.7%, and 4.4%, respectively.
6 The Leverage ratio is calculated as Tier 1 Capital divided by leverage exposure, as defined.
62
TD BANK GROUP ANNUAL REPORT 2020 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, including
stress test analysis, 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 loss 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 internal assessment
of 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 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, 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 sets the minimum CET1, Tier 1, and Total Capital
ratios at 4.5%, 6%, and 8%, respectively. OSFI expects Canadian banks
to include an additional capital conservation buffer of 2.5%, effectively
raising the CET1, Tier 1 Capital, and Total Capital ratio minimum
requirements to 7%, 8.5%, and 10.5%, respectively.
In March 2013, OSFI designated the six major Canadian banks as
Domestic Systemically Important Banks (D-SIBs), for which a 1% common
equity capital surcharge is in effect from January 1, 2016. As a result, the
six Canadian banks designated as D-SIBs, including TD, are required to
meet Pillar 1 target CET1, Tier 1, and Total Capital ratios of 8%, 9.5%,
and 11.5%, respectively.
At the discretion of OSFI, a common equity countercyclical capital
buffer (CCB) within a range of 0% to 2.5% 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. Due to COVID-19, several foreign jurisdictions have
released, reduced or delayed planned increases in their CCBs. Canada’s
CCB remains unchanged at 0%.
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, 2020, the CCB is only applicable to private sector credit
exposures located in Hong Kong SAR, Luxembourg and Norway. Based
on the allocation of exposures and buffers currently in place in these
countries, the Bank’s countercyclical buffer requirement is 0% as at
October 31, 2020.
63
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS On June 25, 2018, OSFI provided greater transparency related to a
On November 22, 2019, the Bank was designated as a Global
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. 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. On March 13, 2020, OSFI
announced that the DSB, previously set to increase to 2.25% effective
April 30, 2020, was being lowered to 1.00% effective immediately and
would not be increased for at least 18 months from March 13, 2020. On
June 23, 2020, OSFI announced that the DSB will remain at 1.00% of total
risk-weighted assets, unchanged from the level set on March 13, 2020,
as part of OSFI’s response to COVID-19. Inclusive of the 1.00% DSB, the
CET1 regulatory minimum is 9.00%. These actions were undertaken to
support D-SIBs’ ability to supply credit to the economy during an expected
period of disruption related to COVID-19 and market conditions. OSFI
has encouraged banks to use the additional lending capacity to support
Canadian households and businesses and has set the expectation for all
federally regulated financial institutions that dividend increases and share
buybacks should be halted for the time being.
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 Basel II standardized approach, with the floor factor
transitioned in over three quarters. The floor was fully transitioned to a
factor of 75% in the fourth quarter of fiscal 2018. As noted below, the
floor factor was lowered to 70%, effective April 9, 2020. The Bank is not
currently constrained by the capital floor.
In the first quarter of 2019, the Bank implemented the revised CAR
guidelines related to the domestic implementation of the standardized
approach for measuring counterparty credit risk, capital requirements
for bank exposures to central counterparties, as well as revisions to
the securitization framework. On November 1, 2019, the one-year
grandfathering of the capital treatment eliminating the initial impact
of the revisions to the securitization framework expired.
The leverage ratio is calculated as per OSFI’s Leverage Requirements
guideline and has a regulatory minimum requirement of 3%.
On September 23, 2018, the Canadian Bail-in regime came into effect,
including OSFI’s Total Loss Absorbing Capacity (TLAC) guideline. Under
this guideline, the Bank is required to meet supervisory risk-based TLAC
and TLAC leverage ratio targets by November 1, 2021. As of September
2018, the targets were 23.0% of RWA for the risk-based TLAC ratio,
inclusive of the 1.50% DSB effective at that time, and 6.75% for the TLAC
leverage ratio. With the changes to the DSB described above, the Bank
will be required to meet a risk-based TLAC target ratio of 22.5% of RWA,
inclusive of the 1.00% DSB if it is still in effect, by November 1, 2021.
In July 2019, in consideration of the final Basel III revisions published
by the BCBS in December 2017, OSFI published guidance related to the
capital requirements for operational risk. Banks currently approved to use
the Advanced Measurement Approach (AMA) will be required to use a
revised Basel III standardized approach when the revised requirements are
implemented in Canada. In January 2020, OSFI moved the implementation
from the first quarter of 2021 to the first quarter of 2022 to coincide
with the implementation of the final Basel III credit risk and leverage ratio
requirements and provided a transition period for fiscal 2020 through to
2022, during which time banks currently approved to use AMA are required
to report operational risk capital using the current standardized approach.
Systemically Important Bank (G-SIB) by the Financial Stability Board (FSB).
The Bank maintained its G-SIB status when the FSB published the 2020
list of G-SIBs on November 11, 2020. As a result of the designation,
the Bank is subject to an additional loss absorbency requirement (CET1
as a percentage of RWA) of 1% under applicable FSB member authority
requirements; however, in accordance with OSFI’s CAR guideline, for
Canadian banks designated as a G-SIB, the higher of the D-SIB and G-SIB
surcharges will apply. As the D-SIB surcharge is currently equivalent to
the 1% G-SIB additional common equity ratio requirement, the Bank’s
G-SIB designation has no additional impact on the Bank’s minimum CET1
regulatory requirements, as set forth above. For further detail, please refer
to the “Global Systemically Important Banks Designation and Disclosures”
section of the Bank’s 2020 Annual Report.
In the second quarter of 2020, OSFI introduced a number of measures to
support D-SIBs’ ability to supply credit to the economy during an expected
period of disruption related to COVID-19 and market conditions. Measures
with immediate effect are summarized below. Measures that relate to
future regulatory capital requirements are summarized in the “Future
Regulatory Capital Developments” section.
• On March 13, 2020, as noted above, OSFI lowered the DSB to 1.00%.
• On March 27, 2020, OSFI announced the following additional measures:
– Under regulatory capital requirements, bank loans subject to
payment deferrals, such as mortgage loans, small business loans,
retail loans and mid-market commercial loans will continue to be
treated as performing loans under the CAR Guideline. Deposit-Taking
Institutions (DTIs) should continue to assess the credit quality of these
borrowers and follow sound credit risk management practices. This
temporary capital treatment will remain in place for the duration of
the payment deferral, up to a maximum of 6 months.
– OSFI announced that transitional arrangements for ECL provisioning
available under the Basel Framework would be introduced, with
details on the calculation clarified further on April 9, 2020, as
discussed below.
– On a temporary basis, institutions subject to market risk capital
requirements and using internal models are permitted to reduce the
stressed Value-at-Risk (VaR) multiplier, that they were subject to at
the end of the last fiscal quarter, by two. This means that the stressed
VaR multipliers will temporarily not be subject to a minimum value
of three.
– Institutions are expected to remove hedges of Funding Valuation
Adjustment (FVA) from the calculation of market risk capital to
address the asymmetry in the existing rule where these hedges of
FVA are included, while the underlying exposures to FVA are not.
This removal was made effective at the beginning of the second
fiscal quarter of 2020.
– OSFI issued guidance on the capital treatment for exposures acquired
through new Government of Canada programs referenced in
“The Bank’s Response to COVID-19” section of this document. The
new CEBA Program is funded by the Government of Canada, and
the loan exposures within this program can be excluded from the
risk-based capital ratios calculated under the CAR Guideline and from
the leverage ratio calculated under the LR Guideline. For the EDC
Business Credit Availability Program, the government-guaranteed
portion of the loan is treated as a sovereign exposure, with the
remaining portion treated as a loan to the borrower. The entire
amount of the loan is included in the leverage ratio calculation.
64
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS • On April 9, 2020, OSFI announced the following additional measures:
– Guidance was provided regarding the calculation of the transitional
adjustment to capital for ECL provisioning. The adjustment allows
a portion of the increase in Stage 1 and Stage 2 allowances relative
to a baseline level to be included in CET1 capital, rather than Tier 2
Capital, as the CAR guideline specifies. The baseline level is the sum
of Stage 1 and Stage 2 allowances as at the first quarter of 2020 (for
October year-end DTIs). This increase is tax effected and is subject
to a scaling factor, which is set at 70% in fiscal 2020, 50% in fiscal
2021, and 25% in fiscal 2022. As part of their Pillar 3 regulatory
capital disclosures, DTIs are required to disclose the transitional scalar
applied during the reporting period, as well as their CET1, Tier 1
Capital, Total Capital, Leverage and TLAC ratios had the transitional
arrangement not been applied.
– DTIs can temporarily exclude exposures from central bank reserves
and sovereign-issued securities that qualify as High Quality Liquid
Assets (HQLA) under the Liquidity Adequacy Requirements (LAR)
Guideline from the leverage ratio measure. This treatment is effective
immediately and will remain in place until April 30, 2021. On
November 5, 2020, OSFI extended this temporary exclusion treatment
to December 31, 2021. OSFI encourages institutions to use the
additional lending capacity resulting from the leverage ratio exclusions
to support lending and financial intermediation activities and expects
this not to be distributed (e.g. as dividends or bonus payments).
– The capital floor factor used in the Internal Ratings-Based (IRB)
approach to credit risk was lowered from 75% to 70%, effective
immediately, and is expected to stay in place until the domestic
implementation of the Basel III capital floor in the first quarter of 2023.
• On April 16, 2020, OSFI published a series of frequently asked
questions and answers (FAQs) on regulatory reporting requirements
and the measures it had announced to address issues stemming from
COVID-19. Since then, OSFI has continued to add to its FAQs as new
questions arise.
• On April 23, 2020, OSFI published guidance in its FAQs on the capital
treatment for users of the Boston Federal Reserve’s PPP Lending Facility,
clarifying that PPP loans pledged under this facility can be excluded
from the risk-based capital and leverage ratios.
During the third quarter of 2020, the Bank transitioned the U.S. Non-
Retail portfolios from the Standardized Approach to the Advanced Internal
Ratings-Based (AIRB) Approach for measuring credit risk RWA. As a result of
this transition, the increase in Stage 1 and Stage 2 allowances allocated to
the AIRB approach relative to the Q1 2020 baseline amount was capped at
the total increase in Stage 1 and Stage 2 allowances reported by the Bank,
for the purpose of the OSFI ECL provisioning transitional adjustment to
CET1 capital that would otherwise be included in Tier 2 capital.
On August 31, 2020, OSFI published guidance on the phase out of
the special capital treatment of loans subject to payment deferrals. Loans
granted payment deferrals:
– before August 31 will continue to be treated as performing loans
under the CAR Guideline for the duration of the deferral, up
to a maximum of 6 calendar months from the effective date of
the deferral;
– after August 30 and on or before September 30 will be treated as
performing loans under the CAR Guideline for the duration of the
deferral, up to a maximum of 3 calendar months from the approval
date of the deferral; and
– after September 30, 2020 will not be eligible for the special
capital treatment.
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, trading market,
and operational risks. The Bank uses the AIRB approach to credit risk
for all material portfolios. In the third quarter of 2020, OSFI approved
the Bank to calculate the non-retail portfolio credit RWA in the U.S. Retail
segment using the AIRB approach.
For accounting purposes, IFRS is followed for consolidation of
subsidiaries and joint ventures. For regulatory capital purposes, all the
subsidiaries of the Bank are consolidated except for insurance subsidiaries
which are deconsolidated and follow prescribed treatment per OSFI’s CAR
guidelines. Insurance subsidiaries are subject to their own capital adequacy
reporting, such as OSFI’s Life Insurance Capital Adequacy Test.
Some of the Bank’s subsidiaries are individually regulated by either OSFI
or other regulators. Many of these subsidiaries 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, 2020, the Bank’s CET1, Tier 1, and Total Capital ratios
were 13.1%, 14.4%, and 16.7%, respectively. The increase in the Bank’s
CET1 Capital ratio from 12.1% as at October 31, 2019 was attributable
primarily to the reduction in RWA resulting from the transition of the
U.S. Non-Retail portfolios to the AIRB Approach for measuring credit risk
RWA and the associated reclassification of Tier 2 capital to CET1 capital
under OSFI’s transitional arrangements for ECL provisioning, as well as the
issuance of common shares from the Bank’s dividend reinvestment plan
and organic capital growth.
As at October 31, 2020, the Bank’s leverage ratio was 4.5%.
Compared with the Bank’s leverage ratio of 4.0% at October 31, 2019,
the leverage ratio increased due primarily to capital generation and OSFI’s
temporary adjustment to exclude central bank deposits and sovereign
issued HQLA securities.
Common Equity Tier 1 Capital
CET1 Capital was $63 billion as at October 31, 2020. Earnings
contributed the majority of CET1 Capital growth in the year. Capital
management funding activities during the year included common share
issuance of $917 million under the dividend reinvestment plan and from
stock option exercises.
Tier 1 and Tier 2 Capital
Tier 1 Capital was $69.1 billion as at October 31, 2020, consisting of CET1
Capital and Additional Tier 1 Capital of $62.6 billion and $6.5 billion,
respectively. Tier 1 Capital management activities during the year
consisted of the redemption of all of the Bank’s 6 million outstanding
Non-Cumulative Fixed Rate Class A First Preferred Shares NVCC, Series 11
(“Series 11 Shares”), at a redemption price of $26.00 per Series 11
Share, for a total redemption cost of approximately $156 million. On
February 27, 2020, the Bank announced that, subject to regulatory
approval, it expects to exercise a regulatory event redemption right in
its fiscal 2022 year in respect of the TD Capital Trust IV Notes – Series 2
outstanding at that time, meaning that this redemption right could occur
as early as November 1, 2021. The Bank’s expectations regarding this
redemption are based on a number of factors and assumptions, including
the Bank’s current and expected future capital position and market
conditions, which are subject to change and may result in a change in
the Bank’s expectations regarding the redemption.
Tier 2 Capital was $10.9 billion as at October 31, 2020. Tier 2 Capital
management activities during the year consisted of the issuance of
$3 billion 3.105% subordinated debentures due April 22, 2030, which
included NVCC Provisions to ensure loss absorbency at the point of
non-viability, the redemption of $1 billion 2.982% NVCC subordinated
debentures due September 30, 2025, and the redemption of $1.5 billion
2.692% NVCC subordinated debentures due June 24, 2025.
65
TD BANK GROUP ANNUAL REPORT 2020 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 modelling 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 evaluates 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, 2020, the quarterly dividend was $0.79 per share. Cash
dividends declared and paid during the year totalled $3.11 per share
(2019 – $2.89), representing a payout ratio of 58%, above the upper
bound of the Bank’s target payout range of 40-50% of adjusted earnings.
For cash dividends payable on the Bank’s preferred shares, refer to Note 21
of the 2020 Consolidated Financial Statements. As at October 31, 2020,
1,816 million common shares were outstanding (2019 – 1,812 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 2020 Consolidated
Financial Statements for further information on dividend restrictions.
NORMAL COURSE ISSUER BID
On December 19, 2019, the Bank announced that the Toronto
Stock Exchange (TSX) and OSFI had approved the Bank’s previously
announced normal course issuer bid (NCIB) to repurchase for cancellation
up to 30 million of its common shares. The NCIB commenced on
December 24, 2019. During the year ended October 31, 2020, the Bank
repurchased 12 million common shares under its NCIB at an average
price of $70.55 per share for a total amount of $847 million. During the
year ended October 31, 2019, the Bank repurchased an aggregate of
30 million common shares under its then current NCIB and a prior NCIB, at
an average price of $74.48 per share, for a total amount of $2.2 billion.
On March 13, 2020, OSFI issued a news release announcing a series of
measures to support the resilience of financial institutions in response
to challenges posed by COVID-19 and current market conditions. One
such measure was a decrease in the Domestic Stability Buffer by 1.25%
of risk-weighted assets. In the news release, OSFI stated its expectation
that banks will use the additional lending capacity to support Canadian
households and businesses and set the expectation for all federally
regulated financial institutions that dividend increases and share buybacks
should be halted for the time being. For additional information regarding
the OSFI announcement, refer to the “Regulatory Capital” section of
this document.
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 ended October 31, 2020, 4.1 million common shares were
issued from the Bank’s treasury with no discount and 10.0 million common
shares were issued from the Bank’s treasury with a 2% discount under
the dividend reinvestment plan. During the year ended October 31, 2019,
4.8 million common shares were issued from the Bank’s treasury with no
discount under the dividend reinvestment plan.
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.
| COMMON EQUITY TIER 1 CAPITAL
T A B L E 3 8 | RISK-WEIGHTED ASSETS
(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
Total
As at
October 31
2020
October 31
2019
$ 33,372
36,448
42,182
$ 33,397
35,693
44,885
184,326
3,419
8,551
12,527
26,970
347,795
19,839
35,802
403,436
16,758
58,715
191,753
8,997
8,540
11,533
4,775
339,573
11,062
37,536
388,171
12,200
55,606
$ 478,909
$ 455,977
66
TD BANK GROUP ANNUAL REPORT 2020 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, 2020. 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 Risk
66%
18%
9%
7%
TD Bank Group
CET1 RWA1
Credit Risk
$ 403,436
Trading Market Risk $ 16,758
$ 58,715
Operational Risk
Corporate
Canadian Retail
U.S. Retail
Wholesale Banking
• Global Markets
• Corporate and
Investment Banking
• Other
• Treasury and Balance
Sheet Management
• Other Control and
Service Functions
• Personal Deposits
• Consumer Lending
• Credit Cards Services
• Auto Finance
• Commercial Banking
• Small Business Banking
• Advice-based
Wealth Business
• Asset Management
• Personal Deposits
• Consumer Lending
• Real Estate Secured Lending
• Credit Cards
• Auto Finance
• Commercial Banking
• Small Business Banking
• Merchant Solutions
• 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 Risk
69%
1%
18%
12%
Credit Risk
Market Risk
Operational Risk
Other Risk
64%
24%
8%
4%
Credit Risk
Market Risk
Operational Risk
Other Risk
67%
22%
5%
6%
Credit Risk
Market Risk
Operational Risk
Other Risk
45%
36%
1%
18%
CET1 RWA1
Credit Risk
Trading Market Risk $
Operational Risk
$ 114,259
–
$ 29,245
Credit Risk
Trading Market Risk $
Operational Risk
$ 211,625
–
$ 21,341
Credit Risk
$ 67,642
Trading Market Risk $ 16,758
$ 8,034
Operational Risk
Credit Risk
Trading Market Risk
Operational Risk
$ 9,910
–
$
95
$
1 Amounts are in millions of Canadian dollars
67
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 3 9 | 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 1
Series 3
Series 52
Series 73
Series 94
Series 115
Series 12
Series 14
Series 16
Series 18
Series 20
Series 22
Series 24
Total preferred shares – equity
Treasury shares – preferred
Total preferred shares
Debt issued by TD Capital Trust IV:
TD Capital Trust IV Notes – Series 26
TD Capital Trust IV Notes – Series 3
October 31
2020
Number of
shares/units
1,816.1
(0.5)
1,815.6
5.4
7.7
20.0
20.0
20.0
14.0
8.0
–
28.0
40.0
14.0
14.0
16.0
14.0
18.0
226.0
(0.1)
225.9
450.0
750.0
As at
October 31
2019
Number of
shares/units
1,812.5
(0.6)
1,811.9
4.7
8.1
20.0
20.0
20.0
14.0
8.0
6.0
28.0
40.0
14.0
14.0
16.0
14.0
18.0
232.0
(0.3)
231.7
450.0
750.0
1 For further details, including the principal amount, conversion and exchange features,
and distributions, refer to Note 21 of the 2020 Consolidated Financial Statements.
2 On January 16, 2020, the Bank announced that none of its 20 million Non-
Cumulative 5-Year Rate Reset Preferred Shares NVCC, Series 5 (the “Series 5
Shares”) would be converted on January 31, 2020, into Non-Cumulative Floating
Rate Preferred Shares NVCC, Series 6. As previously announced on January 2, 2020,
the dividend rate for the Series 5 Shares for the 5-year period from and including
January 31, 2020, to but excluding January 31, 2025, will be 3.876%.
3 On July 16, 2020, the Bank announced that none of its 14 million Non-Cumulative
5-Year Rate Reset Preferred Shares NVCC, Series 7 (the “Series 7 Shares”) would
be converted on July 31, 2020, into Non-Cumulative Floating Rate Preferred Shares
NVCC, Series 8. As previously announced on July 2, 2020, the dividend rate for
the Series 7 Shares for the 5-year period from and including July 31, 2020, to but
excluding July 31, 2025, will be 3.201%.
4 On October 16, 2020, the Bank announced that none of its 8 million Non-Cumulative
5-Year Rate Reset Preferred Shares NVCC, Series 9 (the “Series 9 Shares”) would be
converted on October 31, 2020, into Non-Cumulative Floating Rate Preferred Shares
NVCC, Series 10. As previously announced on October 1, 2020, the dividend rate
for the Series 9 Shares for the 5-year period from and including October 31, 2020,
to but excluding October 31, 2025, will be 3.242%.
5 On October 31, 2020, the Bank redeemed all of its 6 million outstanding
Non-Cumulative Fixed Rate Class A First Preferred Shares NVCC, Series 11
(“Series 11 Shares”), at a redemption price of $26.00 per Series 11 Share,
for a total redemption cost of approximately $156 million.
6 On February 27, 2020, the Bank announced that, subject to regulatory approval,
it expects to exercise a regulatory event redemption right in its fiscal 2022 year in
respect of the TD Capital Trust IV Notes – Series 2 outstanding at that time, meaning
that this redemption right could occur as early as November 1, 2021. The Bank’s
expectations regarding this redemption are based on a number of factors and
assumptions, including the Bank’s current and expected future capital position
and market conditions, which are subject to change and may result in a change
in the Bank’s expectations regarding the redemption.
All series of preferred shares – Class A 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 1.1 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 3.2 billion in aggregate.
The following subordinated debentures contain NVCC provisions: 3.589%
subordinated debentures due September 14, 2028, 3.224% subordinated
debentures due July 25, 2029, 3.105% subordinated debentures due
April 22, 2030, 4.859% subordinated debentures due March 4, 2031,
3.625% subordinated debentures due September 15, 2031, and the
3.06% subordinated debentures due January 26, 2032. Refer to Note 19
of the Bank’s 2020 Annual Consolidated Financial Statements for
additional details.
Future Regulatory Capital Developments
On March 11, 2020, OSFI issued a revised version of Guideline E-22,
effective March 11, 2020. The revisions consist of a clarification on the
treatment of securities issued by entities that receive capital support from
the U.S. government, and the extension of the final implementation of
the initial margin requirements by one year. The extension of the final
implementation of the initial margin requirements was aligned with the
internationally agreed upon one-year extension. With this extension the
final implementation phase will take place on September 1, 2021.
On March 27, 2020, as part of a series of measures introduced in
response to COVID-19, OSFI announced that implementation of the
remaining Basel III reforms published in December 2017 would be
deferred until 2023. This includes revisions to the Standardized Approach
and Internal Ratings-Based Approach to credit risk, the operational risk
framework, and the leverage ratio framework, as well as the introduction
of a more risk sensitive capital floor.
• The implementation date of the revised Pillar 3 disclosure requirements
finalized in December 2018 was deferred by one year to the first
quarter of 2023.
• The implementation date of the final set of revisions to the BCBS
market risk framework (known as the “fundamental review of the
trading book” or “FRTB”) published in January 2019 was deferred
until the first quarter of 2024.
• The implementation date of revised credit valuation adjustment risk
framework was also delayed to the first quarter of 2024.
On April 3, 2020, OSFI announced that the 2020 G-SIB assessment
exercise will resume based on financial fiscal year end 2019 data. BCBS
has postponed the implementation of the revised G-SIB framework by
one year, from 2021 to 2022.
On April 9, 2020, OSFI announced that in line with the BCBS
decision, OSFI is extending the deadline for the implementation of the
final two phases of the initial margin requirements for non-centrally
cleared derivatives outlined in OSFI’s Guideline E-22, by one year.
With this extension, the final implementation phase will take place on
September 1, 2022, at which point covered entities with an aggregate
average notional amount (AANA) of non-centrally cleared derivatives
greater than CAD $12 billion will be subject to the requirements. As an
intermediate step, from September 1, 2021, covered entities with an
AANA of non-centrally cleared derivatives greater than CAD $75 billion
will be subject to the requirements.
On June 23, 2020, OSFI announced that the DSB will remain at 1.00% of
total risk-weighted assets, unchanged from the level set on March 13, 2020
as part of OSFI’s response to COVID-19. Inclusive of the DSB, the CET1
regulatory minimum is 9.00%. Beginning the first quarter of 2022, D-SIBs
will be expected to meet a supervisory target TLAC ratio of 22.50% of
RWA, inclusive of the 1.00% DSB if still in effect. Investments in TLAC
issued by G-SIBs or Canadian D-SIBs are subject to the 10% or 5% CET1
threshold deduction rules for significant and non-significant investments.
68
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS Global Systemically Important Banks Designation and Disclosures
The FSB, in consultation with the BCBS and national authorities, identifies
G-SIBs. 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.
The Bank is required to publish 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.
The public communications on G-SIB status is issued annually each
November. On November 22, 2019, the Bank was designated as a G-SIB
by the FSB. The Bank maintained its G-SIB status when the FSB published
the 2020 list of G-SIBs on November 11, 2020. As a result of this
designation, the Bank would be subject to an additional loss absorbency
requirement (CET1 as a percentage of RWA) of 1% under applicable FSB
member authority requirements; however, in accordance with OSFI’s CAR
guideline, for Canadian banks designated as a G-SIB, the higher of the
D-SIB and G-SIB surcharges will apply. As the D-SIB surcharge is currently
equivalent to the incremental 1% G-SIB common equity ratio requirement,
the Bank’s designation has no additional impact on the Bank’s minimum
CET1 regulatory requirements. There is no impact to the supervisory
target risk-based TLAC ratio of 22.5% or TLAC leverage ratio of 6.75%
as a result of the Bank’s G-SIB requirements. The Bank continues to be in
discussions with regulatory bodies regarding the G-SIB requirements.
As a result of the Bank’s G-SIB designation, the U.S. Federal Reserve
requires TD Group US Holding LLC (TDGUS), as TD’s U.S. IHC, to maintain
a minimum amount of TLAC and long-term debt. From the date the Bank
was designated as a G-SIB, TDGUS has a three-year transitional period to
meet these requirements.
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 2022, using the 2021 year-end data.
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 (SEs). The Bank uses SEs 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 Notes 2, 9, and 10 of the
2020 Consolidated Financial Statements for further information regarding
the Bank’s involvement with SEs.
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 SEs 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 2020
Consolidated Financial Statements for further information.
69
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 4 0 | EXPOSURES SECURITIZED BY THE BANK AS ORIGINATOR1
(millions of Canadian dollars)
Significant
unconsolidated SEs
Significant
consolidated
SEs
As at
Non-SE third-parties
Residential mortgage loans
Consumer instalment and other personal loans2
Credit card loans
Business and government loans
Total exposure
Residential mortgage loans
Consumer instalment and other personal loans2
Credit card loans
Business and government loans
Total exposure
Securitized
assets
$ 23,583
–
–
–
$ 23,583
$ 23,065
–
–
–
$ 23,065
Carrying
value of
retained
interests
Securitized
assets
Securitized
assets
Carrying
value of
retained
interests
$ –
–
–
–
$ –
$ –
–
–
–
$ –
October 31, 2020
$
–
2,862
4,173
–
$ 1,688
–
–
1,004
$ 7,035
$ 2,692
$ –
–
–
14
$ 14
October 31, 2019
$
–
750
5,113
–
$ 624
–
–
1,118
$ 5,863
$ 1,742
$ –
–
–
19
$ 19
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 SEs and Canadian non-SE 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 a consolidated SE. The Bank consolidates the SE as it serves as a
financing vehicle for the Bank’s assets, the Bank has power over the key
economic decisions of the SE, and the Bank is exposed to the majority of
the residual risks of the SE. As at October 31, 2020, the SE had $2.9 billion
of issued notes outstanding (October 31, 2019 – $750 million). As at
October 31, 2020, the Bank’s maximum potential exposure to loss for
these conduits was $2.9 billion (October 31, 2019 – $750 million) with
a fair value of $2.9 billion (October 31, 2019 – $750 million).
Credit Card Loans
The Bank securitizes credit card loans through an SE. The Bank consolidates
the SE as it serves as a financing vehicle for the Bank’s assets, the Bank has
power over the key economic decisions of the SE, and the Bank is exposed
to the majority of the residual risks of the SE. As at October 31, 2020,
the Bank had $4 billion of securitized credit card receivables outstanding
(October 31, 2019 – $5 billion). As at October 31, 2020, the consolidated
SE had US$2 billion variable rate notes outstanding (October 31, 2019 –
US$3 billion). The notes are issued to third-party investors and have a
fair value of US$2 billion as at October 31, 2020 (October 31, 2019 –
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 SEs and Canadian non-SE 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 ECLs on the
retained interests of the securitized business and government loans as the
mortgages are all government insured.
70
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
Securitization of Third-Party Originated Assets
Significant Unconsolidated Structured 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 SEs, 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 $10.9 billion as at October 31, 2020 (October 31, 2019 –
$10.2 billion). Further, as at October 31, 2020, the Bank had committed to
provide an additional $3.2 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, 2019 – $3.2 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 1 | 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.
As at October 31, 2020, the Bank held $1,750.8 million of ABCP issued by
Bank-sponsored multi-seller conduits within the Trading loans, securities,
and other category on its Consolidated Balance Sheet (October 31, 2019 –
$39.4 million).
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
$4.0 billion as at October 31, 2020 (October 31, 2019 – $3.8 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, 2020, 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.
October 31, 2020
October 31, 2019
As at
Exposure
and ratings
profile of
unconsolidated
SEs
AAA1
Expected
weighted-
average life
(years)2
Exposure
and ratings
profile of
unconsolidated
SEs
AAA1
$ 6,411
3,802
381
306
$ 10,900
3.5
1.8
1.4
1.5
2.7
$ 5,569
4,002
451
143
$ 10,165
Expected
weighted-
average life
(years)2
2.3
1.8
2.4
1.6
2.0
COMMITMENTS
The Bank enters into various commitments to meet the financing needs
of the Bank’s clients, to earn fee income, and to lease premises and
equipment. Significant commitments of the Bank include financial and
performance standby letters of credit, documentary and commercial letters
of credit, commitments to extend credit, and obligations under long-
term non-cancellable leases for premises and equipment. These products
may expose the Bank to liquidity, credit, and reputational risks. There are
adequate risk management and control processes in place to mitigate
these risks. Certain commitments still remain off-balance sheet. Note 27 of
the 2020 Consolidated Financial Statements provides detailed information
about the maximum amount of additional credit the Bank could be
obligated to extend and future minimum lease commitments.
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, credit
enhancements, and indemnification agreements. Certain guarantees
remain off-balance sheet. Refer to Note 27 of the 2020 Consolidated
Financial Statements for further information.
71
TD BANK GROUP ANNUAL REPORT 2020 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 2020 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, SCHWAB,
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, Schwab, TD Ameritrade, and Symcor
Inc. (Symcor) also qualify as related party transactions. There were no
significant transactions between the Bank, Schwab, TD Ameritrade, and
Symcor during the year ended October 31, 2020, other than as described
in the following sections and in Note 12 of the 2020 Consolidated
Financial Statements.
i) TRANSACTIONS WITH SCHWAB AND TD AMERITRADE
The Bank has significant influence over Schwab and accounts for
its investment in Schwab using the equity method. Pursuant to the
Stockholder Agreement in relation to the Bank’s equity investment
in Schwab, subject to certain conditions, the Bank has the right to
designate two members of Schwab’s Board of Directors and has
representation on two Board Committees. As of October 31, 2020,
the Bank’s designated directors were the Bank’s Group President and
Chief Executive Officer and the Bank’s Chair of the Board.
Prior to completion of the Schwab transaction on October 6, 2020,
the Bank had significant influence over TD Ameritrade and accounted
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 had the right to designate five of twelve
members of TD Ameritrade’s Board of Directors. Immediately prior to
completion of the Schwab transaction, the Bank’s designated directors
were 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
In connection with the Schwab transaction, the Bank and Schwab entered
into the Schwab IDA Agreement which became effective on completion of
the Schwab transaction on October 6, 2020 and has an initial expiration
date of July 1, 2031. Pursuant to the Schwab IDA Agreement, the Bank
makes FDIC-insured (up to specified limits) money market deposit accounts
available to clients of Schwab. Schwab provides recordkeeping and
support services with respect to the Schwab IDA Agreement. The servicing
fee under the Schwab IDA Agreement is set at 15 bps per annum on the
aggregate average daily balance in the sweep accounts. The Bank paid
fees of $136 million to Schwab for the period from October 6, 2020 to
October 31, 2020 related to sweep deposit accounts. The amount paid by
the Bank is based on the average insured deposit balance of $194 billion
for the period from October 6, 2020 to October 31, 2020 and yields based
on agreed upon market benchmarks, less the actual interest paid to clients
of Schwab.
Prior to the Schwab IDA Agreement becoming effective on completion
of the Schwab transaction, the Bank was party to the TD Ameritrade
IDA Agreement with TD Ameritrade. Pursuant to the TD Ameritrade
IDA Agreement, the Bank made FDIC-insured (up to specified limits)
money market deposit accounts available to clients of TD Ameritrade
as either designated sweep vehicles or as non-sweep deposit accounts.
TD Ameritrade provided marketing and support services with respect to
the TD Ameritrade IDA Agreement. The Bank earned a servicing fee of
25 bps per annum on the aggregate average daily balance in the sweep
accounts (subject to adjustment based on a specified formula). The Bank
paid fees of $1.9 billion in 2020 prior to completion of the Schwab
transaction (2019 – $2.2 billion; 2018 – $1.9 billion) to TD Ameritrade
related to sweep deposit accounts. The amount paid by the Bank was
based on the average insured deposit balance of $176 billion in 2020 prior
to completion of the Schwab transaction (2019 – $140 billion; 2018 –
$140 billion) and yields based on agreed upon market benchmarks, less
the actual interest paid to clients of TD Ameritrade.
As at October 31, 2020, amounts receivable from Schwab under
the Schwab IDA Agreement were $75 million (amounts receivable
from TD Ameritrade under the TD Ameritrade IDA Agreement as at
October 31, 2019 – $41 million). As at October 31, 2020, amounts
payable to Schwab under the Schwab IDA Agreement were $344 million
(amounts payable to TD Ameritrade under the TD Ameritrade IDA
Agreement as at October 31, 2019 – $168 million).
The Bank and other financial institutions provided Schwab and its
subsidiaries with unsecured revolving loan facilities. The total commitment
provided by the Bank was $305 million, which was undrawn as at
October 31, 2020 (unsecured revolving loan facilities to TD Ameritrade
as at October 31, 2019 – $291 million undrawn).
ii) 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, 2020, the Bank paid $78 million (October 31, 2019 –
$81 million; October 31, 2018 – $86 million) for these services. As at
October 31, 2020, the amount payable to Symcor was $12 million
(October 31, 2019 – $12 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, 2020, and October 31, 2019.
72
TD BANK GROUP ANNUAL REPORT 2020 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 FVTPL, financial instruments designated at FVTPL,
financial assets at FVOCI, and all derivatives are measured at fair value
in the Bank’s 2020 Consolidated Financial Statements. DSAC, loans, and
other liabilities are carried at amortized cost using the effective interest
rate (EIR) 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 the Bank’s results to differ significantly from the Bank’s 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 plan, objectives, estimates
or 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
in 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 financial 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, reputational risk associated with
increased regulatory, public, and media focus, pandemics or other public
health emergencies, disruptions to public infrastructure, governmental
policy, international trade and political relations, natural disasters, and the
amount of business activities conducted in a specific region. Management
regularly monitors the macroeconomic environment and incorporates
potential material changes into business plans, strategies and stress tests.
As a result, the Bank is better able to understand the likely impact of these
scenarios and better manage the associated risks, although there can be
no assurance that these activities will mitigate these risks.
Geopolitical Risk
Government policy, international trade and political relations across the
globe may impact overall market and economic stability in the regions
where the Bank operates. While the nature and extent of risks may vary,
they have the potential to disrupt global economic growth, create volatility
in financial markets, interest rates, foreign exchange, commodity prices,
credit spreads, and equities that may affect the Bank’s trading and non-
trading activities, and directly and indirectly influence general business
and economic conditions in ways that impact the Bank and its customers.
Geopolitical risks in 2020 included heightened trade tensions and rising
protectionist measures, ongoing political fragmentation across Europe,
including the protracted negotiations over Brexit, uncertainty surrounding
the U.S. presidential election, and a sustained rise in civil and political
unrest in the U.S., Asia-Pacific and Middle Eastern regions. Management
regularly monitors geopolitical risks, assesses their potential impacts on
the Bank’s strategy and operations, and routinely incorporates these risks
into stress testing activities.
Impact of pandemics, including the COVID-19 pandemic
Pandemics, epidemics or outbreaks of an infectious disease in Canada or
worldwide could have an adverse impact on the Bank’s results, business,
financial condition or liquidity, and could result in changes to the way
the Bank operates. On March 11, 2020, the World Health Organization
declared the outbreak of a strain of novel coronavirus disease, COVID-19,
a global pandemic. The COVID-19 pandemic continues to adversely
affect the Bank’s business and some of its clients, and its severity and
scale pose ongoing risks to the global economy. The extent to which
the COVID-19 pandemic continues to impact the Bank’s results, business,
financial condition or liquidity will depend on future developments in
Canada, the U.S. and globally, including the development and widespread
availability of efficient and accurate testing options, and effective
treatment options or vaccines.
73
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS The COVID-19 pandemic has negatively impacted the Canadian, U.S.,
and global economies; disrupted Canadian, U.S., and global supply
chains; disrupted financial markets; contributed to a decrease in interest
rates and yields on Canadian and U.S. treasury securities; resulted in
ratings downgrades, credit deterioration and defaults in many industries;
forced the closure of many businesses, leading to loss of revenues,
increased unemployment and bankruptcies; necessitated the imposition of
quarantines, physical distancing, business closures, travel restrictions, and
sheltering-in-place requirements in Canada, the U.S., and other countries;
heightened concerns over household debt levels; and reduced customer
spending and consumer confidence.
If the pandemic is prolonged, including through subsequent waves, or
if further diseases emerge with similar effects, the adverse impact on
the economy could worsen. The Bank would expect this to have adverse
effects on its business and results of operations, including decreased
demand for products and services; increased vulnerability of the Bank’s
customer to negative or unexpected events; increased loan delinquencies;
lower asset management fees; lower trading-related, advisory and
underwriting revenue; increased risk of impairment recognition on
securities or other assets and potential reductions in income; increased
non-interest expenses; downgrades to credit ratings; and higher credit
losses due to deterioration in the financial condition of borrowers, which
may necessitate further increases in provision for credit losses and net
charge-offs. The Bank’s liquidity and/or capital could also be adversely
impacted by customers’ withdrawal of deposits; difficulty in accessing
liquidity at reasonable cost through the Bank’s funding programs; volatility
in financial markets; adverse risk migration; and increased customer draws
on lines of credit. In addition, actual stress levels experienced by the Bank’s
borrowers may differ from assumptions incorporated in estimates or
models used by the Bank during or prior to the pandemic. As the impacts
of the COVID-19 pandemic continue to materialize, the effects of the
disruption on the Bank’s business strategies and initiatives have been and
may continue to be adversely impacted.
Governmental and regulatory authorities have implemented, and are
continuing to implement, significant measures to provide economic
assistance to individual households and businesses, stabilize the financial
markets, and support economic growth. While, in the short-term, these
measures have mitigated some effects of the crisis, over the long-term,
they may not be sufficient to fully offset its negative impact or avert
continued recessionary conditions. In addition, upon cessation of these
measures, the Bank may see an increase in borrower delinquencies
or impairments, which could negatively impact its business, financial
condition, liquidity and results of operations. Furthermore, the Bank’s
participation in these assistance programs has exposed the Bank to
heightened risk of fraudulent behaviour by persons purporting to be
eligible for such programs. Finally, it is unclear what impact, if any, the
cost of implementing these programs will have on future fiscal, tax and
regulatory policy, and the implications this may have for the Bank, its
customers, and the financial services industry.
The pandemic has created additional operational and compliance risks,
including the need to quickly implement and execute new programs
and procedures for the Bank’s products and services; provide enhanced
safety measures for its employees and customers; comply with rapidly
changing regulatory guidance; address the risk and increased incidence
of, attempted fraudulent activity and cybersecurity threat behaviour; and
protect the integrity and functionality of the Bank’s systems, networks,
and data as a larger number of employees work remotely. The Bank is
also exposed to human capital risks due to issues related to health and
safety matters, and other environmental stressors as a result of measures
implemented in response to the COVID-19 pandemic, as well as the
potential for a significant proportion of the Bank’s employees, including
key executives, to be unable to work effectively, because of illness,
quarantines, sheltering-in-place arrangements, government actions
or other restrictions in connection with the pandemic. The Bank also
faces increased risk as a result of its reliance on third parties to support
its businesses. Just as the Bank is subject to additional operational and
compliance risks, including those listed above, its suppliers may be exposed
to similar and other risks which could in turn impact the Bank’s operations.
The COVID-19 pandemic has and may continue to result in disruptions
to the way in which the Bank conducts business, including the closure
of certain branches and stores, changes in the availability of products
and services that customers can access in-person, work from home
arrangements for certain or significant portion of staff, higher volumes
of customer requests, as well as disruptions to key suppliers of the Bank’s
goods and services, which have adversely impacted, and may continue
to adversely impact, the Bank’s business operations and the quality and
continuity of service it provides to customers. In addition, consumer
behaviour has changed during the COVID-19 pandemic (and may
remain so changed even if economic conditions rebound and COVID-19
restrictions are lifted), and it is unclear how the macroeconomic and
business environment, societal and business norms, and fiscal, tax and
regulatory policy may change after the pandemic. Such developments
could have an adverse impact on the Bank’s results of operations and
financial condition, including making the Bank’s longer-term business,
balance sheet and budget planning more difficult or costly. The Bank may
also experience increased or different competitive and other challenges.
To the extent that the Bank is not able to adapt or compete effectively, it
could experience loss of business and its results of operations and financial
condition could suffer.
The Bank may be criticized or face increased risk of litigation and
governmental and regulatory scrutiny, client disputes, negative publicity,
or exposure to litigation (including class actions, or regulatory and
government actions and proceedings) as a result of the effects of the
COVID-19 pandemic on market and economic conditions, including as a
result of the Bank’s participation (directly or on behalf of customers and
clients) in governmental assistance programs, the Bank’s deferral and other
types of customer assistance programs, and the impact or effectiveness of
the Bank’s health and safety measures on its customers and employees.
These risks could increase the Bank’s operational, legal and compliance
costs and damage its reputation.
The COVID-19 pandemic has resulted in an increase, and may result
in further increases, in certain of the risks outlined in the Risk Factors
and Management section of this document, including the Bank’s top
and emerging, strategic, credit, market, operational, model, insurance,
liquidity, capital adequacy, legal, regulatory compliance and conduct, and
reputational risks.
Executing on Long-Term Strategies, Shorter-Term Key Strategic
Priorities, and Acquisitions
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.
The Bank regularly explores opportunities to acquire companies, or
businesses, directly or indirectly through the acquisition strategies of its
subsidiaries. In respect of acquisitions, the Bank undertakes transaction
assessments and due diligence before completing a merger or an
acquisition and closely monitors integration activities and performance
post acquisition. However, the Bank’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.
74
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS In general, while significant management attention is placed on the
governance, oversight, methodology, tools, and resources needed to
manage the Bank’s priorities and strategies, the Bank’s ability to execute
on them is dependent on a number of assumptions and factors. These
include those set out in the “Key Priorities for 2021”, “Focus for 2021”,
and “Managing Risk” sections of this document, as well as disciplined
resource and expense management and the Bank’s 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.
There is no assurance that the Bank will achieve its financial or strategic
objectives, including anticipated cost savings or revenue synergies
following acquisition and integration activities. In addition, from time
to time, the Bank may invest in companies without taking a controlling
position in those companies, which may subject the Bank to the operating
and financial risks of those companies’ businesses, the risk that the
relevant company may make business, financial or management decisions
that the Bank does not agree with, and the risk that the Bank may have
differing objectives than the companies in which the Bank has interests.
As noted above under the header “Significant Events”, on
October 6, 2020, in exchange for the Bank’s approximately 43% equity
interest in TD Ameritrade, the Bank received approximately 13.5%
equity interest in Schwab, consisting of 9.9% voting common stock
and the remainder in non-voting common stock of Schwab. The value
of the Bank’s investment in Schwab and its contribution to the Bank’s
financial results are vulnerable to poor financial performance or other
issues at Schwab affecting its business. In addition, the Bank relies on
Schwab for its financial results that are included in the Bank’s financial
statements. Although the Bank has director designation rights to the
Schwab board of directors and certain other rights under the Stockholder
Agreement with Schwab so long as it holds at least a 5% equity interest
in Schwab (and currently has designated two directors to serve on the
Schwab board), there can be no assurance that these rights will mitigate
the Bank’s exposure to poor financial performance or other issues at
Schwab that may affect the Bank’s financial results.
If any of the Bank’s acquisitions, strategic plans or priorities are not
successfully executed, or do not achieve their financial or strategic
objectives, there could be an impact on the Bank’s operations and financial
performance and the Bank’s earnings could grow more slowly or decline.
Technology and 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, malicious insiders, or service providers, nation states, hackers
and other internal or external parties. The increased risks are also a factor
of the Bank’s size and scale of operations, geographic footprint, the
complexity of its technology infrastructure, and the Bank’s use of internet
and telecommunications technologies to conduct financial transactions,
such as its continued development of mobile and internet banking
platforms as well as opportunistic threats by actors seeking to exploit the
recent COVID-19 pandemic via phishing campaigns and cyber espionage.
The Bank’s technologies, systems and networks, and those of the Bank’s
customers (including their own devices) and third parties providing
services to the Bank, continue to be subject to cyber-attacks, and may
be subject to disruption of services, data security or other breaches
(including loss or exposure of confidential information, including customer
or employee information), identity theft and corporate espionage, or
other compromises. The Bank’s use of third-party service providers, which
are subject to these potential compromises, increases the Bank’s risk of
potential attack, breach or disruption as the Bank has less extensive,
immediate or continuous oversight over their technology infrastructure
or information security.
Although the Bank has not experienced any material financial losses
relating to technology failure, cyber-attacks or data security or other
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, malicious
insider or service provider exfiltrating data and phishing attacks, any of
which could result in the fraudulent use, disclosure or theft of data or
customer or Bank funds. These may also include attempts by employees,
agents or third-party service providers of the Bank to access or disclose
sensitive information or other data of the Bank, its customers or its
employees. Attempts to illicitly or misleadingly 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’ or employees’ data or
customer or Bank funds. In addition, the Bank’s customers often use
their own devices, such as computers, smartphones, and tablets, which
limits the Bank’s ability to mitigate certain risks introduced through these
personal 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 accepted practices, and
industry accepted threat, and vulnerability assessments and responses,
but there can be no assurance that these programs, assessments and
responses will mitigate all risks, or that the Bank will not experience loss
or damage arising from technology or cyber security threats.
The Bank continues to monitor and make strategic investments to mature
its cyber defences in accordance with industry accepted standards and
practices, including recent practices implemented in response to threats
prompted by the COVID-19 pandemic, to enable rapid detection and
response to internal and external cyber incidents and unauthorized access
or exfiltration of the Bank’s data. The adoption of certain technologies,
such as cloud computing, artificial intelligence, machine learning, robotics,
and process automation call for continued focus and investment to
manage the Bank’s risks effectively. 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 tactics, techniques, and procedures used change
frequently and risks can originate from a wide variety of sources that
have also become increasingly sophisticated. Furthermore, the Bank’s
cyber insurance purchased to mitigate risk may not be sufficient to cover
all financial losses. As such, with any cyber-attack, disruption of services,
data, security or other breaches (including loss or exposure of confidential
information), identity theft, corporate espionage or other compromise
of technology or information systems, hardware or related processes,
or any significant issues caused by weakness in information technology
infrastructure and systems, 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 the Bank’s 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 resources to
investigate the incident to obtain full and reliable information necessary to
assess the impact. 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, pandemics or
other public health emergencies, malicious insiders, cyber-attacks or other
criminal or terrorist acts, or non-compliance with regulations, which may
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 its
businesses and financial loss.
75
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS Model Risk
The pandemic and the associated governmental assistance program have
introduced a heightened level of uncertainty in models and impacted
model reliability across various business areas. Models impacted by the
negative/low interest rate environment are required to be redeveloped
quickly. Additionally, model performance issues are expected for models
with macroeconomic sensitivity, and more broadly, for models that were
trained on historical data that may become less relevant under the current
environment (e.g. IFRS 9 and stress testing models).
In response, Model Risk Management (MRM) established the Model
Risk Command Center (MRCC), which is comprised of key First and
Second Line model stakeholders. This initiative enables the effective
identifications of the impact on models due to the pandemic as well
as the execution of appropriate short- and long-term mitigants so as to
improve model resilience. Following on efforts from the MRCC, 68% of
all impacted models have had their mitigants already executed, including
redevelopments, enhanced monitoring, expert judgment overrides, and
overlays. The remaining work is largely related to enhanced monitoring
for Scorecard models, where MRM is working with the First Line to
finalize a risk-based approach to prioritize activities. Command Center
activities will continue to focus on executing longer-term redevelopments
and reassessing mitigants given the evolving operating environment.
Despite these activities, there can be no assurance that they will mitigate
all model risk.
Fraud Activity
As a financial institution, the Bank is inherently exposed to various types
of fraud. The sophistication, complexity, and materiality of fraud evolves
quickly, may arise from numerous sources, including potential or existing
clients or customers, agents, third parties, including suppliers, service
providers and outsourcers, other external parties, contractors, employees
and third-party service providers to the Bank’s customers which store bank
account credentials and harvest data based on customers’ web banking
information and activities. 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 from fraudulent activity, 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 globally. This
included an investment in the fraud environment with the establishment
of the Fraud Risk Management group to reinforce fraud risk oversight,
and formalized programs, including a Fraud Risk Assessment program,
to help the Bank measure fraud risk. The Bank continues to introduce new
capabilities and defenses to strengthen the Bank’s controls with a focus
on combatting more complex fraud, including cyber fraud. The Bank has
seen an increase in the threat environment emanating from the COVID-19
pandemic against both customers and the Bank and is monitoring
trends and adjusting fraud prevention and detection strategies across
channels and products to help mitigate this fraud risk. Despite the Bank’s
investments in these programs, capabilities and defences, there can be no
assurance that they will successfully mitigate fraudulent activity that could
lead to disruptions in the Bank’s businesses and financial loss.
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, 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, pandemics or other public health
emergencies, malicious insiders, 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 its 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 business
continuity management plans which contemplate customer, employee,
and operational implications, including technology and other infrastructure
contingencies, although there can be no assurance that these activities will
mitigate all risks.
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 central banks, 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 on the basis of pricing, products and services
(including, in jurisdictions outside Canada, the favouring of certain
domestic institutions); and increasing risks associated with potential non-
compliance. In addition to the adverse impacts described above, the Bank’s
failure to comply with applicable laws and regulations could result in
sanctions and financial penalties that could adversely impact its earnings
and its operations and damage its reputation.
The global anti-money laundering and economic sanctions landscape
continues to experience regulatory change, with significant, complex
new laws and regulations that have, or are anticipated to come into
force in the short and medium-term in many of the jurisdictions in which
the Bank operates.
In addition, the global data and privacy landscape has and continues
to experience regulatory change, with significant new and amendments
to existing legislation anticipated in some of the jurisdictions in which
the Bank does business.
76
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS In addition, despite the Bank’s monitoring and evaluation of the potential
impact of rules, proposals, consent orders and regulatory guidance,
governments and regulators around the world may introduce, and the
issuance of judicial decisions may result in, unanticipated new regulations
that are applicable to the Bank. 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
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.
The Canadian Securities Administrators recently introduced regulatory
reforms to enhance the client-registrant relationship, referred to as the
Client Focused Reforms. Enhanced requirements under the Client Focused
Reforms create a higher standard of conduct across all categories of
registered dealers and advisors. This will result in new training, operational
and systems costs, as well as changes in the types of products and services
that are offered through the Bank’s registered affiliates.
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,
consumer protection, protection of customer data, and anti-money
laundering. In addition, new regulations related to consumer protection
in the banking industry will come into effect on a date to be set by
regulation, and the Bank is currently assessing the impact of such
regulations on its operations.
U.S. Regulatory Reform
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank), a 2010 U.S. federal law, required significant structural
reform to the U.S. financial services industry and affects every banking
organization operating in the U.S., including the Bank. Due to certain
aspects with extraterritorial effect, Dodd-Frank also impacts the Bank’s
operations outside the U.S., including in Canada. 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 2018 Economic Growth, Regulatory Relief and Consumer Protection
Act (Reform Act) included modifications to aspects of Dodd-Frank, including
stress testing. In addition, the applicable U.S. Federal regulatory agencies
have adopted regulatory amendments to certain of these requirements. In
October 2019, the Federal Reserve issued a final rule that implements the
Reform Act’s changes to the application of enhanced prudential standards
with respect to U.S. and non-U.S. banking organizations (the “Tailoring
Rule”). The Tailoring Rule revised the enhanced prudential standards
applicable to non-U.S. banking organizations, including the Bank, based on
the risk profile of the organization. The Bank has incurred, and will continue
to incur, operational, capital, liquidity, and compliance costs resulting from
these standards.
The current U.S. regulatory environment for banking organizations may
be further impacted by additional legislative or regulatory developments.
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
The Government of Canada’s (GOC’s) bail-in regime, which became
effective in September 2018, was implemented through regulations
published under the Canada Deposit Insurance Corporation Act (the
“CDIC Act”) and the Bank Act, providing the final details of conversion
and issuance regimes for bail-in instruments issued by D-SIBs including
the Bank (collectively, the Bail-in Regulations).
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 certain 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 are 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 are subject to a Bail-in
Conversion. Preferred shares and subordinated debt issued on or after
September 23, 2018 that are not NVCC instruments would also be subject
to a Bail-in Conversion. As at October 31, 2020, the Bank did not have any
outstanding preferred shares or subordinated debt securities that would be
subject to a Bail-in Conversion. Certain other debt obligations of the Bank
such as structured notes (as defined in the Bail-in Regulations), covered
bonds, and certain derivatives are not subject to a Bail-in Conversion.
The bail-in regime could adversely affect the Bank’s cost of funding.
Regulatory Oversight and Compliance Risk
The Bank and its businesses are subject to extensive regulation and
oversight. Regulatory change and changes in regulator expectations occur
in all jurisdictions in which the Bank operates. Governments and regulators
around the world have demonstrated an increased focus on conduct risk,
data control, use and security, and money laundering and terrorist financing
risks and threats. There is heightened scrutiny by regulators globally on the
impact of COVID-19 on customers as well as the Bank’s operations and its
management and oversight of risks associated with the pandemic.
The Bank monitors and evaluates the potential impact of applicable
regulatory developments (including rules, proposed rules, standards,
and regulatory guidance). However, while the Bank devotes substantial
compliance, legal, and operational business resources to facilitate
compliance with these developments by their respective effective dates, and
also to the consideration of other governmental and regulator expectations,
it is possible that the Bank may not be able to accurately predict the impact
of final rules implementing such developments, the interpretation or
enforcement actions taken by governments, regulators and courts regarding
such rules, or may not be able to develop or enhance the platforms,
technology, or operational procedures and frameworks necessary to comply
with, or adapt to, such rules or expectations in advance of their effective
dates. This could require the Bank to take further actions or incur more costs
than expected and may expose the Bank to enforcement and reputational
risk. Regulatory change will continue to increase the Bank’s compliance and
operational risks and costs. In addition, if governments or regulators take
formal enforcement action against the Bank, the Bank’s operations, business
strategies and product and service offerings may be adversely impacted,
therefore impacting financial results.
Also, it may be determined that the Bank has not adequately, completely
or timely addressed regulatory developments or enforcement actions to
which it is subject, in a manner which meets governmental or regulator
expectations. As such, the Bank may continue to face a greater number
or wider scope of investigations, enforcement actions, and litigation. In
addition, public notifications of enforcement actions are becoming more
prevalent which could negatively impact the Bank’s reputation.
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.
77
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS Level of Competition, Shifts in Consumer Attitudes, 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
the Bank’s products and services.
Enhanced competition from incumbents and new entrants may impact
the Bank’s pricing of products and services and may cause it to lose
revenue and/or market share. Increased competition requires the Bank to
make additional short and long-term investments to remain competitive
and continue delivering differentiated value to its customers, 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 the U.S., 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 competitors may also operate at much lower costs
relative to revenue or balances than traditional banks. These third parties
can seek to acquire customer relationships, react quickly to changes in
consumer attitudes, and disintermediate customers from their primary
financial institution, which 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 and identify how the
changing landscape can enhance the Bank’s value proposition, including
delivering new revenue streams for the Bank and greater value for
customers, stakeholders across each of the Bank’s business segments seek
to understand and leverage emerging technologies and trends together
with how they impact consumer behaviour patterns. This includes
monitoring the competitive environment in which the Bank operates
and reviewing or amending its customer acquisition, management, and
retention strategies as appropriate and building optionality and flexibility
in the operating environment and into the products and services offered
to keep pace with evolving customer expectations. However, there is no
assurance that these activities will mitigate these effects and risks.
The Bank is committed to investing in differentiated and personalized
experiences for its customers, putting a particular emphasis on mobile
technologies, enabling customers to transact seamlessly across their
preferred channels.
The Bank is also advancing artificial intelligence (AI) capabilities, to
help further inform the Bank’s business decisions and risk management
practices. While the Bank is seeking to drive adoption and use of AI in
a responsible way, there is no assurance that AI will appropriately or
sufficiently replicate certain outcomes or accurately predict future events
or exposures.
The Bank is also looking at emerging trends, some accelerated by the
disruption caused by the COVID-19 pandemic, that may disrupt traditional
interfaces, interaction preferences, or customer expectations. The Bank
considers various options to accelerate innovation, including making
strategic investments in innovative companies, exploring partnership
opportunities, and experimenting with new technologies and concepts
internally, but there can be no assurance that these investments and
activities will be successful. Legislative or regulatory action relating to
such new technologies could emerge and continue to evolve, potentially
increasing compliance costs and risks.
Environmental and Social Risk
Environmental and social risk is the potential for loss of strategic,
financial, operational, legal or reputational value resulting from the
impact of environmental and social issues or concerns, including climate
change, within the scope of short-term and long-term cycles. The Bank
is exposed to environmental and social risks both through its businesses
and operations and through its clients and customers. Environmental
and social risks may lead to potential losses, resulting from the Bank’s
direct and indirect impact on the environment and society, and impact
of environmental and social issues on the Bank.
Direct risks are associated with the ownership and operation of
the Bank’s businesses, which include management and operation of
company-owned or managed real estate, business operations, and
associated services. Acute physical climate risks as a result of the increased
severity of extreme weather events such as hurricanes, wildfires and
floods, could result in operational risks for the Bank through business
disruptions and financial losses. The Bank’s enterprise-wide Business
Continuity and Crisis Management Program supports management’s ability
to operate the Bank’s businesses and operations in the event of a business
disruption incident.
Indirect risks are associated with environmental and societal issues,
perceptions and developments that may have an impact on the Bank’s
customers and clients to whom the Bank provides financial services or
in which the Bank invests.
Climate change and events such as pandemics and social unrest could
result in strategic and credit risks for the Bank by impacting its customers’
earnings and losses, and the Bank’s action or inaction, response and
disclosure on these matters can also give rise to legal and reputational risks
for the Bank.
Environmental and social risks are managed under the Bank’s
Environmental and Social Risk Framework and through related business
segment level policies and procedures across the enterprise. Additionally,
emerging social risks are managed through governance forums, including
Reputational Risk Committees.
Climate risk has emerged as one of the top environmental risks for
the Bank. This includes physical risks related to the chronic and acute
physical impacts of climate change (e.g., shifts in climate norms, and
extreme weather events such as hurricanes, wildfires and floods), and
transition risks associated with the global transition to a low-carbon
economy (e.g., climate-related policy actions and litigation claims,
technological innovations, and shifts in supply and demand for certain
commodities, products and services). Both physical and transition risks
could result in strategic, credit, operational, legal, and reputational risks
for the Bank and its clients in climate sensitive sectors. TD supports
Canada’s objectives to meet the goals of the Paris Agreement and
recognizes the Bank’s responsibility to contribute by integrating climate
considerations across its business. The Bank continues to monitor industry
and regulatory developments and assess the potential impacts of climate
change and related risks on its operations, lending portfolios, investments,
and businesses.
The Bank is developing standardized methodologies and approaches for
climate scenario analysis through participation in industry-wide working
groups and is working to embed the assessment of climate-related risks
and opportunities into relevant Bank processes.
78
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS OTHER RISK FACTORS
Legal Proceedings
The Bank or its subsidiaries are from time to time named as defendants or
are otherwise involved in various class actions and other litigation or disputes
with third parties, including regulatory investigations and enforcement
proceedings, related to its businesses and operations. The Bank manages the
risks associated with these proceedings through a litigation management
function. 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 2020 Consolidated Financial Statements.
Ability to Attract, Develop, and Retain Key Talent
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 across
a number of sectors including financial services. As a result, the Bank
undertakes an annual talent review process to assess critical capability
requirements for all areas of the business. 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. 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. The Bank continues to rely on the Bank’s
annual talent review program as well as the Bank’s regular, effective
management practices to proactively assess and address retention and
recruitment risk and emphasize ongoing communication with talent to
ensure appropriate responses on a case-by-case basis.
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 and its future earnings. Changes in the
value of the Canadian dollar relative to the Global foreign exchange rates
may also affect the earnings of the Bank’s small business, commercial,
and corporate clients. A change in the level of interest rates, negative
interest rates or a prolonged low interest rate environment affects the
interest spread between the Bank’s deposits and other liabilities, 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 risk, interest rate risk, and credit
spread risk exposures in accordance with the TD Non-Trading Market Risk
Management Framework and the non-trading market risk management
policies established by the Risk Committee.
IBOR Transition
Various interest rates and other indices that are deemed to be
“benchmarks” (including IBOR benchmarks) have been, and continue
to be, the subject of international regulatory guidance and proposals
for reform. 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 London Interbank
Offered Rate (“LIBOR”) post December 31, 2021, efforts to transition away
from IBORs to alternative reference rates (“ARR”) have been continuing in
various jurisdictions. The Bank continues to monitor industry consultations
initiated by the ICE Benchmark Administration Limited, which serves as
the administrator for the IBORs, regarding the process and timing for the
orderly wind-down of LIBOR, as well as guidance from relevant regulatory
agencies to cease issuance of such LIBOR products in 2021 despite the
potential continuance of certain currencies and tenors of LIBOR beyond
December 31, 2021. 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. Moreover, the
replacement of IBORs or other benchmark rates could result in market
dislocation and have other adverse consequences to market participants.
As the Bank has significant contractual rights, obligations and exposures
referenced to IBOR benchmarks, discontinuance of, or changes to,
benchmark rates could adversely affect the Bank’s business and results of
operations. The Bank has established an enterprise-wide, cross functional
initiative with senior management and Board oversight to evaluate the
impact of the market, financial, operational, legal, technology and other
risks on its products, services, systems, models, documents, processes,
and risk management frameworks with the intention of managing the
impact through appropriate mitigating actions. The Bank is also actively
participating in trade associations, industry working groups, such as
the Alternative Reference Rate Committee (“ARRC”) in the U.S., and
the Canadian Alternative Reference Rate (“CARR”) Committee and is
incorporating best practice guidance from these working groups and
regulators globally, such as the FCA, on transition activities, including
incorporating appropriate ARR fallback language in contracts, making
available new products referencing ARRs, ceasing the issuance of IBOR
based financial instruments and preparing for overall operational readiness.
There is no assurance that these activities will mitigate these risks.
In addition to operational challenges, there are also market risks that
arise because the new reference rates are likely to differ from the prior
benchmark rates resulting in differences in the calculation of the applicable
interest rate or payment amount. The difference could result in different
financial performance for previously booked transactions, require different
hedging strategies, or affect the Bank’s capital and liquidity planning
and management. Additionally, any adverse impacts on the value of and
return on existing instruments and contracts for the Bank’s clients may
present an increased risk of litigation, regulatory intervention, and possible
reputational damage.
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 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
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, and significant
accounting judgments, estimates, and assumptions are described in Note 3
of the 2020 Consolidated Financial Statements.
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TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 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 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.
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, and capacity to bear risk under
both normal and recessionary conditions. 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’s Risk Appetite Governance Framework, describes the
assumptions, responsibilities, and processes established to define,
maintain, and govern TD’s risk appetite. 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 Risk
Management function also monitors and evaluates the effectiveness of
these practices and processes, as well as the RAS measures. Compliance
with RAS principles and measures is 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.
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TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS In addition, governance, risk, and oversight functions operate
The Bank’s risk governance model includes a senior management
independently from business segments supported by an organizational
structure that provides 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
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
is the risk owner, the second line provides risk oversight, and the third line
is internal audit.
committee structure that is designed to support transparent risk reporting
and discussions. The Bank’s overall risk and control oversight is provided
by the Board and its 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 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
Corporate Governance
Committee
Risk
Committee
Audit
Committee
Human Resources
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 (DC)
Enterprise Reputational
Risk Committee (ERRC)
Governance, Risk and Oversight Functions
Internal
Audit
Canadian Retail
U.S. Retail
Wholesale Banking
Internal
Audit
Business Segments
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TD BANK GROUP ANNUAL REPORT 2020 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, Risk, Corporate
Governance, and Human Resources 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 is responsible for overseeing the
management of the Bank’s culture. In addition to its other responsibilities,
it 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 Enterprise Capital Committee
(ECC) 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.
• ERRC – chaired by the Group Head and CRO, the Enterprise
Reputational Risk Committee (ERRC) oversees the management of
reputational risk within the Bank’s risk appetite, and also provides a
forum for discussion, review, and escalation for non-traditional risks.
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 leads and directs a
diverse 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 and providing reliable and objective
guidance and reporting to senior leadership and the Board of Directors
on state of regulatory compliance and conduct risk, based on independent
monitoring and testing conducted and advising whether the Regulatory
Compliance Management controls are sufficient to achieve compliance
with applicable regulatory requirements enterprise-wide.
Global Anti-Money Laundering (GAML)
The GAML Department is responsible for Anti-Money Laundering, Anti-
Terrorist Financing, Economic Sanctions, and anti-bribery/anti-corruption
regulatory compliance and broader prudential risk management across
the Bank in alignment with enterprise policies so that the money
laundering, terrorist financing, economic sanctions, and bribery and
corruption risks are appropriately identified and mitigated.
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TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 evaluate whether 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 non-traditional or 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.
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TD BANK GROUP ANNUAL REPORT 2020 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 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 Bank’s 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.
Stress Testing
Stress testing is an integral component of the Bank’s risk management
framework and serves as a key component of the Bank’s capital, strategic
and financial planning processes. Stress testing at the Bank comprises
an annual enterprise-wide stress test featuring a range of severities,
prescribed regulatory stress tests in multiple jurisdictions for various legal
entities, and various ad hoc stress tests. The results of these stress tests
enable management to assess the impact of geopolitical events and
changes to economic and other market factors on the Bank’s financial
condition and assist in the determination of capital targets, capital risk
appetite limits and liquidity adequacy. These exercises also complement
the identification and quantification of vulnerabilities, the monitoring of
changes in risk profile, the establishment of risk appetite limits and the
assessment of the impact of strategic business decisions and potential
management actions.
The Bank utilizes a combination of quantitative modelling and
qualitative approaches to estimate the impact on the Bank’s performance
under hypothetical stress situations. Stress testing engages senior
management across the lines of business, Finance, TBSM, Economics,
and Risk Management. Oversight committees range from those at the
individual segment/business level to the Bank’s Risk Committee of the
Board. The results of stress tests are submitted, disclosed or shared with
regulators as required or requested.
Enterprise-Wide Stress Testing
The Bank conducts an annual EWST as part of a comprehensive capital
planning, strategic, and financial exercise that is a key component of the
Internal Capital Adequacy Assessment Programs (ICAAP) framework. The
EWST results are considered in establishing the Bank’s capital targets and
risk appetite limits. The program is subject to a well-defined governance
structure that facilitates oversight and engagement throughout the
organization. The Bank’s EWST program involves the development,
application, and assessment of severe, but plausible, stress scenarios on
the balance sheet, income statement, capital, liquidity, and leverage. It
enables management to identify and articulate enterprise-wide risks and
understand potential vulnerabilities, and changes to the risk profile of
the Bank. Stress scenarios are developed with consideration of the Bank’s
key business activities, exposures and vulnerabilities. The scenarios cover
a wide variety of risk factors meaningful to the Bank’s risk profile in both
the North American and global economies including unemployment, GDP,
home prices, and interest rates.
Typical EWSTs feature two scenarios. One, is a plausible scenario
calibrated to historical recessions in Canada and the U.S. and is used to
evaluate downside risks. The second scenario is an extremely high severity,
low probability scenario targeted towards stressing TD-specific risks and
vulnerabilities in support of the ICAAP.
The 2020 EWST program has been modified in light of the current
government, regulatory and Bank relief actions, and unique economic
conditions of the COVID-19 pandemic. As part of the 2020 EWST
program, the Bank developed and assessed multiple internally generated
macroeconomic stress scenarios. These scenarios focused on COVID-19
and alternative downside scenarios designed to reflect various severities,
duration of stress, and recovery paths. The assessment of the scenarios
concluded that at that time, the Bank operated within its risk appetite
and had sufficient capital to withstand severe and lasting stress conditions
during the COVID-19 pandemic.
Other Stress Tests
Stress tests are also conducted on certain legal entities and jurisdictions,
in line with prescribed regulatory requirements. The Bank’s U.S.-based
operating bank subsidiaries’ capital planning process includes activities and
results from the OCC’s Dodd-Frank Act stress testing (DFAST) requirements.
The Bank’s U.S. holding company capital planning process includes
the stress testing activities and results from the Federal Reserve Board’s
capital plan rule and related Comprehensive Capital Analysis and Review
(CCAR) requirements. In addition, certain Bank subsidiaries in Singapore,
the Netherlands, Ireland, and the United Kingdom conduct stress testing
exercises as part of their respective ICAAP. The Bank undertakes other
internal and regulatory based stress tests including but not limited to
liquidity and market risk, which are detailed in the respective sections.
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, as required. In
addition, the Bank conducts ad hoc stress tests, which include enterprise
or targeted portfolio testing, to evaluate potential vulnerabilities to specific
changes in economic and market conditions.
84
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS Strategic Risk
Strategic risk is the risk of sub-optimal outcomes (including financial loss
or reputational damage) arising from the Bank’s choice of strategies, the
improper implementation of chosen strategies, the inability to implement
chosen strategies, or the taking of tail risk (i.e. low probability events that
can result in extremely large quantifiable losses). Strategies include current
operations and 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 segment or corporate function), and that such
strategies are aligned with the Bank’s overall long-term strategy and
short-term strategic priorities, and within 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 related risks,
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 so 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 RAS establishes strategic risk measures at the enterprise and
business segment-level.
The Bank’s annual integrated financial and strategic planning process
establishes enterprise and segment-level long-term and shorter-term
strategies that are within the risk appetite and evaluates consistency and
alignment among strategies.
Operating results are reviewed 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: vision, 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, 2020 and 2019.
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 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 also report to Risk Management.
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.
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.
Credit risk policies and credit decision-making strategies, as well as
the discretionary limits of officers throughout the Bank for extending
lines of credit are centrally approved by Risk Management, and the Board
where applicable.
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 align 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. Material policy
exceptions are tracked and reported and larger dollar exposures and
material exceptions to policy are escalated to Retail Risk Management.
85
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS The Bank’s Commercial Banking and Wholesale Banking businesses
use credit risk models and policies to establish borrower and facility risk
ratings (FRR), quantify and monitor the level of risk, and facilitate the
associated risk management. Risk ratings are also used to determine the
amount of credit exposure the Bank 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 this 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.
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.
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, with certain exemptions. Effective
the third quarter of 2020, OSFI approved the use of the AIRB approach
for the non-retail portfolio in the U.S. Retail segment. With this approval,
the Bank now uses the AIRB approach for all material portfolios.
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 2020 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:
• Probability of default (PD) – the likelihood that the borrower will not be
able to meet its scheduled repayments within a one-year time horizon.
• Loss given default (LGD) – the amount of loss the Bank would likely
incur when a borrower defaults on a loan, which is expressed as a
percentage of exposure at default (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 verify that it remains within pre-determined thresholds.
Retail Exposures
In the retail portfolio, including individuals and small businesses, the Bank
manages exposures on a pooled basis, using predictive credit scoring
techniques. There are three sub-types of retail exposures: residential
secured (for example, individual mortgages and home equity lines of
credit), qualifying revolving retail (for example, individual credit cards,
unsecured lines of credit, and overdraft protection products), and other
retail (for example, personal loans, including secured automobile loans,
student lines of credit, and small business banking credit products).
The Bank calculates RWA for its retail exposures using the AIRB
Approach. All retail PD, LGD, and EAD parameter models are based
exclusively on the internal default and loss performance history for each
of the three retail exposure sub-types.
Account-level PD, LGD, and EAD models are built for each product
portfolio and calibrated based on the observed account-level default and
loss performance for the portfolio.
Consistent with the AIRB Approach, the Bank defines default for
exposures as delinquency of 90 days or more for the majority of retail
credit portfolios. LGD estimates used in the RWA calculations reflect
economic losses, such as, direct and indirect costs as well as any
appropriate discount to account for time between default and ultimate
recovery. EAD estimates reflect the historically observed utilization of credit
limits at default. PD, LGD, and EAD models are calibrated using established
statistical methods, such as 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 book; a customer’s
credit bureau attributes; and a customer’s other holdings with the Bank,
and macroeconomic inputs, such as unemployment rate. 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 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 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.
86
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS The following table maps PD ranges to risk levels:
Risk Assessment
Low Risk
Normal Risk
Medium Risk
High Risk
Default
PD Segment
1
2
3
4
5
6
7
8
9
PD Range
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 18.24
18.25 to 99.99
100.00
Non-Retail Exposures
In the non-retail portfolio, the Bank manages exposures on an individual
borrower basis, using industry and sector-specific credit risk models, and
expert judgment. The Bank has categorized non-retail credit risk exposures
according to the following Basel counterparty types: corporate, including
wholesale and commercial customers, sovereign, and bank. Under the
AIRB Approach, CMHC-insured mortgages are considered sovereign risk
and are therefore classified as non-retail.
The Bank evaluates credit risk for non-retail exposures by using both a
BRR and 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.
In Canada, for both the wholesale and commercial lending portfolios,
credit risk models are calibrated based on internal data beginning in 1994.
In U.S., credit risk models are calibrated based on internal data beginning
in 2007. 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 allowance for credit losses.
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. TD’s 21-point
BRR scale broadly aligns to external ratings as follows:
Description
Investment grade
Non-investment grade
Watch and classified
Impaired/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. 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.
To reflect this, 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%.
Rating Category
Standard & Poor’s
Moody’s Investor Services
0 to 1C
2A to 2C
3A to 3C
4A to 4C
5A to 5C
AAA to AA-
A+ to A-
BBB+ to BBB-
BB+ to BB-
B+ to B-
Aaa to Aa3
A1 to A3
Baa1 to Baa3
Ba1 to Ba3
B1 to B3
6 to 8
CCC+ to CC and below
Caa1 to Ca and below
9A to 9B
Default
Default
BRR and drawn ratio up to one-year prior to default are predictors for
UGD. Consequently, the UGD estimates are calibrated by BRR and drawn
ratio, the latter representing the ratio of the drawn to authorized amounts.
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 from average UGD, therefore the UGDs are
set at the average calibrated level, by drawn ratio and/or BRR, plus an
appropriate adjustment for statistical and model uncertainty.
Credit Risk Exposures Subject to the Standardized Approach (SA)
Currently SA to credit risk is used on exempted portfolios which are either
immaterial or expected to wind down. Under SA, 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 SA:
Sovereign
Bank
Corporate
1 The risk weight may vary according to the external risk rating.
0%1
20%1
100%
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TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS 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
standardized approach for counterparty credit risk to calculate the EAD
amount, which is defined by OSFI as a multiple of the summation of
replacement cost and potential future exposure, to estimate the risk and
determine regulatory capital requirements for derivative exposures. The
Counterparty Credit Risk 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 to bilateral counterparts due to the ability
to net offsetting positions amongst counterparty participants that settle
within clearing houses. Derivative-related credit risks are subject to the
same credit approval, limit, monitoring, and exposure guideline standards
that the Bank uses for managing other transactions that create credit
risk exposure. These standards include evaluating the creditworthiness of
counterparties, measuring and monitoring exposures, including wrong-
way risk exposures, and managing the size, diversification, and maturity
structure of the portfolios.
There are two types of wrong-way risk exposures, namely general and
specific. General wrong-way risk arises when the PD of the counterparties
moves in the same direction as a given market risk factor. Specific wrong-
way risk arises when the exposure to a particular counterparty moves in
the same direction as the PD of the counterparty due to the nature of the
transactions entered into with that counterparty. These exposures require
specific approval within the credit approval process. The Bank measures and
manages specific wrong-way risk exposures in the same manner as direct
loan obligations and controls them by way of approved credit facility limits.
As part of the credit risk monitoring process, management meets on
a periodic basis to review all exposures, including exposures resulting
from derivative financial instruments to higher risk counterparties. As at
October 31, 2020, 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 verify that 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 verifies 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.
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 are 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 the AIRB approach,
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.
88
TD BANK GROUP ANNUAL REPORT 2020 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 2 | GROSS CREDIT RISK EXPOSURES – Standardized and Advanced Internal Ratings-Based Approaches1
(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, 2020
As at
October 31, 2019
Standardized
AIRB
Total
Standardized
AIRB
Total
$ 3,594 $ 409,564 $ 413,158
153,820
88,185
153,820
91,320
–
3,135
$
4,380 $ 386,840 $ 391,220
131,863
92,673
131,863
84,658
–
8,015
6,729
651,569
658,298
12,395
603,361
615,756
11,774
1
446
12,221
588,331
528,598
149,117
600,105
528,599
149,563
1,266,046
1,278,267
135,283
104,412
18,165
257,860
401,096
140,304
118,418
659,818
536,379
244,716
136,583
917,678
$ 18,950 $ 1,917,615 $ 1,936,565
$ 270,255 $ 1,263,179 $ 1,533,434
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
Prior to the fourth quarter of 2020, the Bank’s non-trading equity
exposures qualified for the equity materiality exemption and were risk
weighted at 100%. Given the Bank’s investment in Schwab shares,
the Bank now applies the simple risk weight method under the market-
based approach to calculate RWA on the non-trading equity exposures.
Under the simple risk weight method, a 300% risk weight is applied to
equity holdings that are publicly traded and a 400% risk weight is applied
to all other equity holdings. Equity exposures to sovereigns and holdings
made under legislated programs continue to follow the appropriate OSFI
prescribed risk weights of 0%, 20% or 100%.
Securitization Exposures
Effective November 1, 2018, the Bank applies risk weights to all
securitization exposures under the revised securitization framework
published by OSFI. The revised securitization framework includes a
hierarchy of approaches to determine capital treatment, and transactions
that meet the simple, transparent, and comparable requirements that are
eligible for preferential capital treatment.
For externally rated exposures, the Bank uses an External Ratings-Based
Approach (SEC-ERBA). Risk weights to exposures are assigned using
external ratings by external rating agencies, including Moody’s and S&P.
The SEC-ERBA also takes into account additional factors, including the
type of the rating (long-term or short-term), maturity, and the seniority of
the position.
For exposures that are not externally rated and are held by an ABCP
issuing conduit, the Bank uses the Internal Assessment Approach (IAA).
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.
Under the IAA, exposures are multiplied by OSFI prescribed risk weights to
calculate RWA for capital purposes.
For exposures that are not externally rated and are not held by an
ABCP-issuing conduit, the Bank uses the Standardized Approach (SEC-SA).
Under SEC-SA, the primary factors that determine the risk weights include
the asset class of the underlying loans, the seniority of the position, the
level of credit enhancements, and historical delinquency rates.
Irrespective of the approach being used to determine the risk weights,
all exposures are assigned an internal risk rating based on the Bank’s
assessment, which must be reviewed at least annually. The ratings scale TD
uses corresponds to the long-term ratings scales used by the rating agencies.
The Bank’s internal rating 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 internal rating in all aspects of its credit
risk management, including performance tracking, control mechanisms,
and management reporting.
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. The Bank is an
active participant in the market through its trading and investment
portfolios, 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, 2020, using the Internal Models Approach.
89
TD BANK GROUP ANNUAL REPORT 2020 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 3 | MARKET RISK LINKAGE TO THE BALANCE SHEET
(millions of Canadian dollars)
Balance
sheet
Trading
market risk
Non-trading
market risk
Other
Balance
sheet
Trading
market risk
Non-trading
market risk
Other
October 31, 2020
October 31, 2019
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
$ 164,149
148,318
$
435 $ 163,714
4,937
143,381
$
– $
–
25,583
146,000
$
215 $
143,342
25,368
2,658
$
8,548
–
8,548
Derivatives
54,242
51,675
2,567
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
repurchase agreements
Loans, net of allowance for loan losses
Customers’ liability under acceptances
Investment in Schwab and TD Ameritrade
Other assets1
Assets not exposed to market risk
4,739
103,285
227,679
169,162
717,523
14,941
12,174
2,277
88,828
–
–
–
7,395
–
–
–
–
–
4,739
103,285
227,679
161,767
717,523
14,941
12,174
2,277
–
–
–
–
–
–
–
–
–
–
–
88,828
6,503
–
6,503
48,894
45,716
3,178
4,040
111,104
130,497
165,935
684,608
13,494
9,316
1,774
67,542
–
–
–
4,843
–
–
–
–
–
4,040
111,104
130,497
161,092
684,608
13,494
9,316
1,774
–
As at
Non-trading
market risk – primary
risk sensitivity
Interest rate
Interest rate
Equity,
foreign exchange,
interest rate
Equity,
foreign exchange,
interest rate
Interest rate
Equity,
foreign exchange,
interest rate
Foreign exchange,
interest rate
Interest rate
Interest rate
Interest rate
Equity
Interest rate
–
–
–
–
–
–
–
–
–
–
–
–
67,542
Total Assets
$ 1,715,865
$ 202,886 $ 1,424,151
$ 88,828 $ 1,415,290 $ 194,116 $ 1,153,632
$ 67,542
Liabilities subject to market risk
Trading deposits
Derivatives
$
19,177
53,203
$ 12,608 $
50,046
6,569
3,157
$
– $
–
26,885
50,051
$ 10,182 $
45,361
16,703
4,690
$
Securitization liabilities at fair value
Financial liabilities designated at fair value
through profit or loss
Deposits
13,718
13,718
–
59,665
1,135,333
15
–
59,650
1,135,333
Acceptances
Obligations related to securities sold short
Obligations related to securities sold under
repurchase agreements
Securitization liabilities at amortized cost
Subordinated notes and debentures
Other liabilities1
14,941
34,999
188,876
15,768
11,477
18,431
–
34,307
3,675
–
–
–
14,941
692
185,201
15,768
11,477
18,431
–
–
–
–
–
–
–
–
–
13,058
13,058
–
105,131
886,977
13,494
29,656
125,856
14,086
10,725
17,597
9
–
105,122
886,977
–
28,419
2,973
–
–
–
13,494
1,237
122,883
14,086
10,725
17,597
–
–
–
–
–
–
–
–
–
–
–
Interest rate
Equity,
foreign exchange,
interest rate
Interest rate
Interest rate
Interest rate,
foreign exchange
Interest rate
Interest rate
Interest rate
Interest rate
Interest rate
Equity,
interest rate
Liabilities and Equity not exposed
to market risk
150,277
–
–
150,277
121,774
–
–
121,774
Total Liabilities and Equity
$ 1,715,865
$ 114,369 $ 1,451,219
$ 150,277 $ 1,415,290
$ 100,002 $ 1,193,514
$ 121,774
1 Relates to retirement benefits, insurance, and structured entity liabilities.
90
TD BANK GROUP ANNUAL REPORT 2020 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, 2020.
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, 2020, there were 32 days of
trading losses and trading net revenue was positive for 88% of the trading
days, reflecting normal trading activity. Losses in the year exceeded VaR on
4 trading days.
TOTAL VALUE-AT-RISK AND TRADING NET REVENUE
(millions of Canadian dollars)
Trading Revenue
Value-at-Risk
$100
50
0
(50)
(100)
(150)
9
1
0
2
/
1
/
1
1
9
1
0
2
/
8
/
1
1
9
1
0
2
/
5
1
/
1
1
9
1
0
2
/
2
2
/
1
1
9
1
0
2
/
9
2
/
1
1
9
1
0
2
/
6
/
2
1
9
1
0
2
/
3
1
/
2
1
9
1
0
2
/
0
2
/
2
1
9
1
0
2
/
1
3
/
2
1
0
2
0
2
/
8
/
1
0
2
0
2
/
5
1
/
1
0
2
0
2
/
2
2
/
1
0
2
0
2
/
9
2
/
1
0
2
0
2
/
5
/
2
0
2
0
2
/
2
1
/
2
0
2
0
2
/
9
1
/
2
0
2
0
2
/
6
2
/
2
0
2
0
2
/
4
/
3
0
2
0
2
/
1
1
/
3
0
2
0
2
/
8
1
/
3
0
2
0
2
/
5
2
/
3
0
2
0
2
/
1
/
4
0
2
0
2
/
8
/
4
0
2
0
2
/
5
1
/
4
0
2
0
2
/
2
2
/
4
0
2
0
2
/
9
2
/
4
0
2
0
2
/
6
/
5
0
2
0
2
/
3
1
/
5
0
2
0
2
/
0
2
/
5
0
2
0
2
/
7
2
/
5
0
2
0
2
/
3
/
6
0
2
0
2
/
0
1
/
6
0
2
0
2
/
7
1
/
6
0
2
0
2
/
4
2
/
6
0
2
0
2
/
1
/
7
0
2
0
2
/
8
/
7
0
2
0
2
/
5
1
/
7
0
2
0
2
/
2
2
/
7
0
2
0
2
/
9
2
/
7
0
2
0
2
/
5
/
8
0
2
0
2
/
2
1
/
8
0
2
0
2
/
9
1
/
8
0
2
0
2
/
6
2
/
8
0
2
0
2
/
2
/
9
0
2
0
2
/
9
/
9
0
2
0
2
/
6
1
/
9
0
2
0
2
/
3
2
/
9
0
2
0
2
/
0
3
/
9
0
2
0
2
/
7
/
0
1
0
2
0
2
/
4
1
/
0
1
0
2
0
2
/
1
2
/
0
1
0
2
0
2
/
8
2
/
0
1
91
TD BANK GROUP ANNUAL REPORT 2020 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. In 2020, the Bank implemented
infrastructure enhancements that provided for improvements to its interest
rate and foreign exchange VaR modelling.
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 (SVaR)
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
T A B L E 4 4 | PORTFOLIO MARKET RISK MEASURES
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 2020, Stressed
VaR was calculated using the one-year period that includes the COVID-19
stress period. The appropriate historical one-year period to use for Stressed
VaR is determined on a bi-weekly basis. Stressed VaR is a part of regulatory
capital requirements.
Calculating the Incremental Risk Charge (IRC)
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.
(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
$ 20.6
37.3
12.0
4.0
3.8
48.9
(75.2)
51.4
49.5
301.6
$ 19.1
35.1
12.7
3.9
3.7
37.0
(64.9)
46.6
57.4
325.2
$ 36.8
109.3
42.8
10.4
7.9
69.5
n/m2
118.8
126.9
482.9
$
2020
Low
7.6
6.9
3.5
0.9
1.2
10.9
n/m
15.1
31.3
164.8
As at
Average
High
$
8.6
$
9.4
13.8
7.1
4.3
2.2
16.5
(32.1)
20.4
51.5
230.7
13.2
6.5
4.7
2.1
15.6
(30.3)
21.2
47.9
225.0
$ 17.2
22.5
11.5
10.2
4.8
23.5
n/m
31.8
84.4
279.6
$
2019
Low
4.3
7.5
3.6
1.0
1.0
10.6
n/m
13.6
33.4
173.1
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 the
to risk offsets resulting from portfolio diversification.
high and low may occur on different days for different risk types.
In March 2020, the COVID-19 pandemic disrupted global markets
and resulted in increased market risk due to increases in price volatility
experienced across all asset classes. Key factors impacting the VaR models
during the period were wider credit spreads, new scenario shocks rolling
into the most recent 259-day trading window and change in the stress
period, from the second quarter of 2020. As a result of these factors,
the Bank expects VaR to remain at an elevated level until at least the
second quarter of 2021.
The Bank has effectively managed the market risk by maintaining stable
risk exposures, with daily trading net revenue losses exceeding daily VaR
in only a few instances amidst significant market volatility during the year.
Average VaR and Average Stressed VaR increased compared to prior
year. This was mainly due to an increase in the credit spread risk and
equity risk due to credit spreads widening and significant equity market
volatility experienced during the COVID-19 pandemic being included in
the VaR and SVaR historical periods.
Average IRC increased year over year driven by widening credit spreads
due to Government and Corporate bond 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.
92
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
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 modelled include the 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, the Brexit referendum of June 2016, and the
COVID-19 pandemic of 2020.
Stress tests are produced and reviewed regularly with the Market Risk
Control Committee.
MARKET RISK IN OTHER WHOLESALE BANKING ACTIVITIES
The Bank is also exposed to market risk arising from its investment
portfolio and other non-trading portfolios. Risk Management reviews
and approves policies and procedures, which are established to monitor,
measure, and mitigate these risks.
Structural (Non-Trading) Market Risk
Structural (Non-Trading) Market Risk 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). It does not include exposures from TD’s Wholesale Banking
or Insurance businesses. Structural market risks primarily include interest
rate risk and foreign exchange risk.
WHO MANAGES STRUCTURAL (NON-TRADING) MARKET RISK
The TBSM group measures and manages the market risks of the Bank’s
non-trading banking activities outside of Wholesale Banking, with
oversight from the ALCO, 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 of the Board periodically reviews and
approves key non-trading market risk policies and receives reports on
compliance with approved risk limits.
HOW TD MANAGES STRUCTURAL (NON-TRADING) MARKET RISK
Non-trading interest rate risk is viewed as a non-productive risk as it has
the potential to increase earnings volatility and generate losses 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 to be
consistent with the Bank’s risk appetite.
Managing Structural 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 generate stable and predictable earnings over
time. The Bank has adopted a disciplined hedging approach to manage
the net interest income from its asset and liability positions. 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;
• Modelling the expected impact of customer behaviour on TD’s products
(e.g. how actively customers exercise embedded options, such as
prepaying a loan or redeeming a deposit before its maturity date);
• Assigning target-modelled maturity profiles for non-maturity assets,
liabilities, and equity;
• Measuring the margins of TD’s banking products on a risk-adjusted,
fully-hedged basis, including the impact of financial options 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 from “mismatched positions”
when asset and liability principal and interest cash flows have different
interest payment, repricing or maturity dates. The Bank measures this risk
based on an assessment of: contractual cash flows, product embedded
optionality, customer behaviour expectations and the modelled maturity
profiles for non-maturity products. To manage this risk, the Bank primarily
uses financial derivatives, wholesale investments, funding instruments, and
other capital market alternatives.
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.
Banking product optionality, whether from freestanding options such
as mortgage rate commitments or options embedded within loans and
deposits, expose the Bank to a significant financial risk. To manage these
exposures, the Bank purchases options or uses a dynamic hedging process
designed to replicate the payoff of a purchased option.
• 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.
Structural Interest Rate Risk Measures
As of January 31, 2020, the Bank’s structural interest rate risk measures
changed in connection with the updated OSFI Guideline B-12 for Interest
Rate Risk in the Banking Book. The primary measures for this risk are
Economic Value of Shareholders’ Equity (EVE) Sensitivity and Net Interest
Income Sensitivity (NIIS).
The EVE Sensitivity measures the impact of a specified interest rate
shock to the change in the net present value of the Bank’s banking
book assets, liabilities, and certain off-balance sheet items. The measure
excludes product margins and shareholders’ equity. The updated EVE
Sensitivity reflects a measurement of the potential present value impact on
shareholders’ equity without an assumed term profile for the management
of the Bank’s own equity. A target term profile for equity was included in
the Bank’s previous Economic Value at Risk (EVaR) measure.
The NIIS measures the NII change over a twelve-month horizon for a
specified change in interest rates for banking book assets, liabilities, and
certain off-balance sheet items assuming a constant balance sheet over
the period. The Bank’s previous NIIS primarily focused on the risk arising
from mismatched positions.
The Bank’s Market Risk policy sets overall limits on the structural interest
rate risk measures. These limits are periodically reviewed and approved
by the Risk Committee of the Board. In addition to the Board policy limits,
book-level risk limits are set for the Bank’s management of non-trading
interest rate risk by Risk Management. Exposures against these limits are
routinely monitored and reported, and breaches of the Board limits, if any,
are escalated to both the ALCO and the Risk Committee of the Board.
93
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS The following table shows the potential before-tax impact of an immediate
and sustained 100 bps increase or decrease in interest rates on the Bank’s
EVE and NII. Interest rate floors are applied by currency to the decrease in
rates such that they do not exceed expected lower bounds, with the most
material currencies set to a floor of -25 bps.
T A B L E 4 5 | STRUCTURAL INTEREST RATE SENSITIVITY MEASURES
(millions of Canadian dollars)
October 31, 2020
October 31, 2019
As at
Canada
U.S.
Total
Canada
U.S.
Total
Total
Total
EVE Sensitivity
NII1 Sensitivity
EVE Sensitivity
NII Sensitivity
Before-tax impact of
100 bps increase in rates
100 bps decrease in rates
$
(19)
(244)
$ (1,857)
521
$ (1,876)
277
$ 926
(459)
$ 1,000
(413)
$ 1,926
(872)
$ (1,832)
618
$
890
(1,231)
1 Represents the twelve-month NII exposure to an immediate and sustained shock in rates.
As at October 31, 2020, an immediate and sustained 100 bps increase
in interest rates would have had a negative impact to the Bank’s EVE of
$1,876 million, an increase of $44 million from last year, and a positive
impact to the Bank’s NII of $1,926 million, an increase of $1,036 million
from last year. An immediate and sustained 100 bps decrease in interest
rates would have had a positive impact to the Bank’s EVE of $277 million,
a decrease of $341 million from last year, and a negative impact to
the Bank’s NII of $872 million, a decrease of $359 million from last year.
The year-over-year increase in up shock EVE Sensitivity is primarily due to
increased sensitivity from loan optionality in the U.S. region. The year-over-
year decrease in down shock NIIS is primarily due to the -25 bps floor on
shocked rates for material currencies, partially offset by changes in deposit
balances. As at October 31, 2020, reported EVE and NII Sensitivities remain
within the Bank’s risk appetite and established Board limits. Note that the
October 31, 2019 EVE and revised NII Sensitivities were not previously
reported but are included for comparative purposes.
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.
Managing Investment Portfolios
The Bank manages a securities portfolio that is integrated into the
overall asset and liability management process. The securities portfolio
is comprised of high-quality, low-risk securities and managed 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 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 of the Board reviews and
approves the Enterprise Investment Policy that sets out limits for the Bank’s
investment portfolio. In addition, the Wholesale Banking and Insurance
businesses also hold investments that are managed separately.
WHY NET INTEREST MARGIN FLUCTUATES OVER TIME
As previously noted, the Bank’s approach to structural (non-trading)
market risk is designed to generate stable and predictable earnings over
time, regardless of cash flow mismatches and the exercise of options
granted to customers. This approach also creates margin certainty on
loan and deposit profitability as they are booked. Despite this approach
however, the Bank’s NIM is subject to change over time for the following
reasons (among others):
• Differences in margins earned on new and renewing products relative
to the margin previously earned on matured products;
• The weighted-average margin will shift as the mix of business changes;
• Changes in the basis between various benchmark rates (e.g. Prime,
In order to minimize the impact of an adverse foreign exchange rate
CDOR, or LIBOR);
• The lag in changing product prices in response to changes in
wholesale rates;
• Changes from the repricing of hedging strategies to manage the
investment profile of the Bank’s non-rate sensitive deposits; and
• Margin changes from the portion of the Bank’s deposits that are
non-rate sensitive but not expected to be longer term in nature,
resulting in a shorter term investment profile and higher sensitivity
to short term rates.
The general level of interest rates will affect the return the Bank generates
on its modelled maturity profile for core non-rate sensitive 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 modelled 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.
change on certain capital ratios, the Bank’s net investments in foreign
operations are hedged to the point where certain capital ratios change
by no more than an acceptable amount for a given change in foreign
exchange rates. The Bank does not generally hedge the earnings of
foreign subsidiaries which results in changes to the Bank’s consolidated
earnings when relevant foreign exchange rates change.
Other Non-Trading Market Risks
Other structural 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. In addition, the Bank is
exposed to equity risk from investment securities designated at FVOCI.
94
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed
internal processes or technology or from human activities or from external
events. This definition includes legal risk but excludes strategic and
reputational risk.
Operational risk is inherent in all of the Bank’s business activities,
including the practices and controls used to manage other risks such as
credit, market, and liquidity risk. Failure to manage operational risk can
result in financial loss (direct or indirect), reputational harm, or regulatory
censure and penalties.
The Bank seeks to actively mitigate and manage 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 2020, operational risk losses remained within the Bank’s risk
appetite. Refer to Note 27 of the 2020 Consolidated Financial Statements
for further information on material legal or regulatory actions.
WHO MANAGES OPERATIONAL RISK
Operational Risk Management is an independent function that owns
and maintains the Bank’s Operational Risk Management Framework.
This framework sets out the enterprise-wide governance processes,
policies, and practices to identify and assess, measure, control, monitor,
escalate, report, and communicate on operational risk. Operational Risk
Management is designed to provide 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 including
those that govern business continuity and crisis management, third-party
management, data management, financial crime and fraud management,
project management, and technology and cyber security management.
The senior management of individual business units and corporate
areas is responsible for the day-to-day management of operational risk
following the Bank’s established operational risk management 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 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 of obtaining
expert business and risk opinion to derive assessments of the likelihood
and potential loss estimates of high impact operational events that are
unexpected and outside the normal course of business. 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 support 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 and industry-accepted cyber threat management practices
to enable rapid detection and response.
95
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS The Bank’s Cybersecurity Subcommittee provides dedicated senior
executive oversight, direction and guidance regarding management of risks
relating to cybersecurity, including cyber terrorism and activism, cyber fraud,
cyber espionage, extortion, identity theft and data theft. The Cybersecurity
Subcommittee endorses actions and makes recommendations to the CEO
and the ERMC as appropriate, including in some instances, supporting
onward recommendations to the Risk Committee. 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 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 data
and information assets which could result in financial and reputational
impacts. The Bank’s Office of the Chief Data Officer, Corporate and
Technology partners develop and implement enterprise-wide standards
and practices that describe how data and information assets are created,
used, or maintained on behalf of the Bank.
Business Continuity and Crisis Management
The Bank maintains an enterprise-wide Business Continuity and Crisis
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
crisis 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 products, services
or other business activities, functions or processes 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 a level of risk
management and senior management oversight which is appropriate
to the size, risk, and criticality of the third-party arrangement.
Project Management
The Bank has established a disciplined approach to project management
across the enterprise coordinated by the Bank’s Enterprise Project
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.
Fraud Management
The Bank develops and implements enterprise-wide 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 fraud.
Operational Risk Capital Measurement
The Bank’s operational risk capital is determined using the Basel II
Standardized Approach (TSA).Under this approach, the Bank applies
prescribed factors to a three-year average of annual gross income
for each of eight different business lines representing the different
activities of the institution such as Corporate Finance, Retail Banking,
and Asset Management.
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 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 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, materiality and criticality, set
model 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, materiality
and criticality;
• 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
modelling 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 identified as obsolete or no longer appropriate
for use through changes in industry practice, the business environment,
or Bank strategies are subject to decommissioning.
The Bank has policies and procedures in place designed to properly discern
models from non-models so that the level of independent challenge and
oversight corresponds to the materiality and complexity of models.
96
TD BANK GROUP ANNUAL REPORT 2020 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 and/or design,
underwriting, claims at the inception of an insurance contract or reserving
during the lifecycle of the claim. 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 independent
oversight and control of risk within the insurance business. The
TD Insurance Risk Committee and its subcommittees 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 policy (premium and claims) liabilities is central to
the insurance operation. The Bank establishes reserves to cover estimated
future payments (including loss adjustment expenses) on all claims or
terminations/surrenders of premium arising from insurance contracts
underwritten. The reserves cannot be established with complete certainty,
and represent management’s best estimate for future payments. As
such, the Bank regularly monitors estimates against actual and emerging
experience and adjusts reserves as appropriate if experience emerges
differently than anticipated. Claim and premium 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, pandemics or other applicable public health emergencies,
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
LAR guidelines. Under the LAR guidelines, Canadian banks are required to
maintain a Liquidity Coverage Ratio (LCR) at the minimum of 100% other
than during periods of financial stress and to maintain a Net Stable Funding
Ratio (NSFR) at the minimum of 100%. The Bank’s funding program
emphasizes 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 Bank’s strategies and actions comprise an integrated
liquidity risk management program that is designed to ensure low exposure
to liquidity risk and compliance with regulatory requirements.
97
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS The Bank maintains an internal view for measuring and managing
liquidity that uses an assumed Severe Combined Stress Scenario (SCSS).
The SCSS considers potential liquidity requirements during a crisis resulting
from 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 support business growth, and to cover identified stressed
liquidity requirements under the SCSS, for a period of up to 90 days.
The Bank calculates stressed liquidity requirements for the SCSS related
to the following conditions:
• wholesale funding maturing in the next 90 days (assumes maturing
debt will be repaid instead of rolled over);
•
• accelerated attrition or “run-off” of deposit balances;
•
increased utilization of available credit and liquidity facilities; 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 (the LCR, the NSFR, and the Net Cumulative
Cash Flow (NCCF) monitoring tool). The LCR requires that banks maintain
a minimum liquidity coverage of 100% over a 30-day stress period, the
NSFR requires that banks maintain available stable funding in excess of
required stable funding for periods up to one year (a minimum NSFR of
100%), and the NCCF monitors the Bank’s detailed cash flow gaps for
various time bands. As a result, the Bank’s liquidity is managed to the
higher of its internal liquidity requirements and target buffers over the
regulatory minimums.
The Bank considers potential regulatory restrictions on liquidity
transferability in the calculation of enterprise liquidity positions.
Accordingly, surplus liquidity domiciled in regulated subsidiaries may
be excluded from consolidated liquidity positions as appropriate.
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
banking 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.
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. The liquidity value of unencumbered liquid assets considers 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.
LIQUIDITY RISK MANAGEMENT RESPONSIBILITY
The Bank’s ALCO oversees the Bank’s liquidity risk management program.
It ensures there are effective management structures and practices in place
to properly measure and manage liquidity risk. The GLF, a subcommittee of
the ALCO comprised of senior management from TBSM, Risk Management
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 has established TDGUS, as TD’s U.S. Intermediate Holding
Company (IHC), as well as 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 established to ensure
that consistent and efficient liquidity management approaches are
applied across all of the Bank’s operations. Risk Management jointly
owns the liquidity risk management framework, along with the Chief
Financial Officer. Enterprise Market Risk Control provides oversight
of liquidity risk across the enterprise and provides independent risk
assessment and effective challenge of liquidity risk management.
Capital Markets Risk Management is responsible for independent
liquidity risk metric reporting.
• TBSM Liquidity Management manages the liquidity position of the
Canadian Retail (including wealth businesses), Corporate, Wholesale
Banking, and U.S. Retail segments, as well as the liquidity position
of CUSO.
• Other regional operations, including those within TD’s insurance
business, foreign branches, and/or subsidiaries are responsible for
managing their liquidity risk in compliance with their own policies,
and local regulatory requirements, while maintaining alignment with
the enterprise framework.
HOW TD MANAGES LIQUIDITY RISK
The Bank manages the liquidity profile of its businesses to be within
the defined liquidity risk appetite, and maintains target requirements
for liquidity survivability using a combination of internal and regulatory
measures. 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.
98
TD BANK GROUP ANNUAL REPORT 2020 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 6 | SUMMARY OF LIQUID ASSETS BY TYPE AND CURRENCY1,2
(millions of Canadian dollars, except as noted)
Cash and central bank reserves
Canadian government obligations
National Housing Act Mortgage-Backed Securities (NHA MBS)
Provincial government obligations
Corporate issuer obligations
Equities
Other marketable securities and/or loans
Total Canadian dollar-denominated
Cash and central bank reserves
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
Securities
received as
collateral from
securities
financing and
derivative
transactions
Bank-owned
liquid assets
$ 94,640
39,008
30,763
18,862
11,310
13,146
4,137
211,866
68,783
82,701
74,131
56,533
77,319
29,758
7,457
$
–
83,258
23
24,141
2,841
2,618
300
113,181
–
53,755
9,566
55,432
2,108
38,684
17
Total non-Canadian dollar-denominated
396,682
159,562
As at
Total liquid
assets
% of total
Encumbered
liquid assets
Unencumbered
liquid assets
October 31, 2020
$ 94,640
122,266
30,786
43,003
14,151
15,764
4,437
325,047
68,783
136,456
83,697
111,965
79,427
68,442
7,474
556,244
11%
14
3
5
1
2
1
37
8
15
9
13
9
8
1
63
$
1,689
80,934
2,294
32,812
2,331
8,248
2,178
130,486
51
53,585
21,495
49,546
8,297
36,716
225
$ 92,951
41,332
28,492
10,191
11,820
7,516
2,259
194,561
68,732
82,871
62,202
62,419
71,130
31,726
7,249
169,915
386,329
Total
$ 608,548
$ 272,743
$ 881,291
100%
$ 300,401
$ 580,890
October 31, 2019
Cash and central bank reserves
Canadian government obligations
NHA MBS
Provincial government obligations
Corporate issuer obligations
Equities
Other marketable securities and/or loans
Total Canadian dollar-denominated
Cash and central bank reserves
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
$
5,140
$
–
$
13,872
38,138
15,679
11,149
13,636
2,512
100,126
19,225
34,103
58,222
47,854
84,835
40,550
4,658
77,275
15
25,151
3,623
2,770
311
109,145
–
47,803
11,873
49,304
1,856
34,607
667
5,140
91,147
38,153
40,830
14,772
16,406
2,823
209,271
19,225
81,906
70,095
97,158
86,691
75,157
5,325
Total non-Canadian dollar-denominated
289,447
146,110
435,557
1%
$
566
$
56,337
3,816
31,287
3,882
11,225
1,078
108,191
33
37,367
20,939
39,500
7,070
39,403
712
4,574
34,810
34,337
9,543
10,890
5,181
1,745
101,080
19,192
44,539
49,156
57,658
79,621
35,754
4,613
145,024
290,533
14
6
6
2
3
–
32
3
13
11
15
13
12
1
68
Total
$ 389,573
$ 255,255
$ 644,828
100%
$ 253,215
$ 391,613
1 Positions stated include gross asset values pertaining to securities
2 Liquid assets include collateral received that can be re-hypothecated or
financing transactions.
otherwise redeployed.
The increase of $189 billion in total unencumbered liquid assets from
October 31, 2019, was mainly due to deposit volume growth in the
retail and commercial banking businesses in the wake of the COVID-19
pandemic. Unencumbered 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 7 | SUMMARY OF UNENCUMBERED LIQUID ASSETS BY BANK, SUBSIDIARIES, AND BRANCHES
(millions of Canadian dollars)
The Toronto-Dominion Bank (Parent)
Bank subsidiaries
Foreign branches
Total
October 31
2020
$ 230,369
334,308
16,213
As at
October 31
2019
$ 139,550
228,978
23,085
$ 580,890
$ 391,613
99
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
The Bank’s monthly average liquid assets (excluding those held in
insurance subsidiaries) for the years ended October 31, 2020, and
October 31, 2019, are summarized in the following table.
T A B L E 4 8 | SUMMARY OF AVERAGE LIQUID ASSETS BY TYPE AND CURRENCY1,2
(millions of Canadian dollars, except as noted)
Average for the years ended
Total liquid
assets
% of total
Encumbered
liquid assets
Unencumbered
liquid assets
October 31, 2020
7%
$
1,755
Cash and central bank reserves
Canadian government obligations
NHA MBS
Provincial government obligations
Corporate issuer obligations
Equities
Other marketable securities and/or loans
Total Canadian dollar-denominated
Cash and central bank reserves
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
Securities
received as
collateral from
securities
financing and
derivative
transactions
Bank-owned
liquid assets
$ 51,894
28,388
36,761
18,115
11,531
11,568
3,353
161,610
62,831
55,676
68,991
51,667
82,704
34,279
5,769
$
–
80,484
15
25,296
3,646
3,259
290
112,990
–
50,406
9,950
49,092
2,005
35,264
980
Total non-Canadian dollar-denominated
361,917
147,697
$ 51,894
108,872
36,776
43,411
15,177
14,827
3,643
274,600
62,831
106,082
78,941
100,759
84,709
69,543
6,749
509,614
Cash and central bank reserves
Canadian government obligations
NHA MBS
Provincial government obligations
Corporate issuer obligations
Equities
Other marketable securities and/or loans
Total Canadian dollar-denominated
Cash and central bank reserves
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
$
3,404
$
–
$
13,779
41,436
14,042
8,311
10,742
3,130
94,844
27,019
32,168
51,854
51,841
80,482
37,818
4,680
69,160
32
23,145
3,907
3,876
397
100,517
–
44,473
7,139
45,645
2,391
36,572
770
3,404
82,939
41,468
37,187
12,218
14,618
3,527
195,361
27,019
76,641
58,993
97,486
82,873
74,390
5,450
Total non-Canadian dollar-denominated
285,862
136,990
422,852
66,335
2,207
32,791
3,249
10,014
1,574
117,925
40
49,734
21,202
42,892
7,520
37,253
729
49,895
3,607
27,559
4,038
9,540
566
95,662
34
37,573
16,393
36,818
7,028
39,191
955
$ 50,139
42,537
34,569
10,620
11,928
4,813
2,069
156,675
62,791
56,348
57,739
57,867
77,189
32,290
6,020
2,947
33,044
37,861
9,628
8,180
5,078
2,961
99,699
26,985
39,068
42,600
60,668
75,845
35,199
4,495
159,370
350,244
1%
$
457
$
14
5
5
2
2
–
35
8
13
10
13
11
9
1
65
13
7
6
2
2
1
32
4
12
10
16
13
12
1
68
Total
$ 523,527
$ 260,687
$ 784,214
100%
$ 277,295
$ 506,919
October 31, 2019
137,992
284,860
Total
$ 380,706
$ 237,507
$ 618,213
100%
$ 233,654
$ 384,559
1 Positions stated include gross asset values pertaining to securities
2 Liquid assets include collateral received that can be re-hypothecated or
financing transactions.
otherwise redeployed.
Average unencumbered 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 4 9 | SUMMARY OF AVERAGE UNENCUMBERED LIQUID ASSETS BY BANK, SUBSIDIARIES, AND BRANCHES
(millions of Canadian dollars)
The Toronto-Dominion Bank (Parent)
Bank subsidiaries
Foreign branches
Total
100
Average for the years ended
October 31
2020
$ 194,726
290,573
21,620
October 31
2019
$ 140,192
224,533
19,834
$ 506,919
$ 384,559
TD BANK GROUP ANNUAL REPORT 2020 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 0 | 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 Schwab
Goodwill
Other intangibles
Land, buildings, equipment, and other depreciable assets
Deferred tax assets
Other assets9
Encumbered2
Unencumbered
Pledged as
collateral3
Other4
Available as
collateral5
$
205
$
–
$
–
$
5,237
90,161
–
–
51,151
–
–
–
–
–
–
422
91
13,058
–
–
61,039
–
–
–
–
–
–
–
156,823
357,871
–
–
81,709
–
–
–
–
–
–
–
Other6
Total assets
6,240 $
1,998
31,479
54,242
169,162
523,624
14,941
12,174
17,148
2,125
10,136
2,444
52,385
6,445
164,149
492,569
54,242
169,162
717,523
14,941
12,174
17,148
2,125
10,136
2,444
52,807
As at
October 31, 2020
Encumbered
assets as a %
of total assets
–%
0.3
6.0
–
–
6.6
–
–
–
–
–
–
–
Total on-balance sheet assets
$ 147,176
$ 74,188
$ 596,403
$ 898,098 $ 1,715,865
12.9%
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
164,469
56,120
5,581
226,170
–
–
–
–
43,286
23,983
26,378
93,647
(169,162)
–
(15,212)
(184,374)
$ 373,346
$ 74,188
$ 690,050
$ 713,724
Total on-balance sheet assets
Total off-balance sheet items
Total
$ 105,512
$ 74,065
$ 384,443
$ 851,270 $ 1,415,290
12.7%
October 31, 2019
211,882
3,707
71,797
(180,084)
$ 317,394
$ 77,772
$ 456,240
$ 671,186
1 Certain comparatives 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 DSAC that are available for collateral purposes however not
regularly utilized in practice.
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.
The Bank has liquidity contingency funding plans (CFP) in place at the
overall Bank level and for subsidiaries operating in foreign jurisdictions
(“Regional CFPs”). The Bank’s 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
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 or for pledging to central banks (for example, CMHC
insured mortgages that can be securitized into NHA MBS).
7 Securities include trading loans, securities, non-trading financial assets at FVTPL
and other financial assets designated at FVTPL, 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.
required to execute the action. Regional CFPs identify recovery actions to
address region-specific stress events. The actions and governance structure
outlined in the Bank’s CFP are aligned with the Bank’s Crisis Management
Recovery Plan.
The COVID-19 pandemic disrupted the financial markets and the Bank
managed risks associated with this disruption in line with the framework
of the CFP. During the year ended October 31, 2020, the Bank continued
to rely on deposits as a primary source of core stable funding and accessed
facilities offered by governments and central banks to augment available
deposit and wholesale market funding in order to support the needs
of households and businesses and the effective functioning of financial
markets. As at October 31, 2020, the financial markets were no longer
disrupted and the Bank continued to hold a significant amount of HQLA
consistent with regulatory requirements and internal policies.
101
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
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 requirements 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 1 | CREDIT RATINGS1
Deposits/Counterparty2
Legacy Senior Debt3
Senior Debt4
Covered Bonds
Subordinated Debt
Subordinated Debt – NVCC
Preferred Shares – NVCC
Short-Term Debt (Deposits)
Outlook
1 The above ratings are for The Toronto-Dominion Bank legal entity. Subsidiaries’ ratings
are 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 in as
much 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 Represents Moody’s Long-Term Deposits Ratings and Counterparty Risk Rating, S&P’s
Issuer Credit Rating, and DBRS’ Long-Term Issuer Rating.
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 legacy senior debt 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.
| ADDITIONAL COLLATERAL REQUIREMENTS
T A B L E 5 2 | FOR RATING DOWNGRADES1
(millions of Canadian dollars)
One-notch downgrade
Two-notch downgrade
Three-notch downgrade
Average for the years ended
October 31
2020
October 31
2019
$ 212
275
1,013
$ 98
118
648
1 The above collateral requirements are based on trading counterparty Credit Support
Annex and the Bank’s credit rating across applicable rating agencies.
As at
October 31, 2020
S&P
AA-
AA-
A
-
A
A-
BBB
A-1+
Stable
DBRS
AA (high)
AA (high)
AA
AAA
AA (low)
A
Pfd-2 (high)
R-1 (high)
Stable
Moody’s
Aa1
Aa1
Aa3
Aaa
A2
A2 (hyb)
Baa1 (hyb)
P-1
Stable
3 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.
4 Subject to conversion under the bank recapitalization “bail-in” regime.
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.
Other than during periods of financial stress, the Bank must maintain
the LCR above 100% 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 held
by the Bank that are eligible for the LCR calculation under the LAR are
primarily central bank reserves, sovereign-issued or sovereign-guaranteed
securities, and high-quality securities issued by non-financial entities.
102
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table summarizes the Bank’s average daily LCR as of the
relevant dates.
T A B L E 5 3 | 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, 2020
Total
unweighted
value
(average)2
Total
weighted
value
(average)3
$
n/a
$ 343,498
$ 626,179
235,595
390,584
313,322
136,795
130,480
46,047
n/a
252,622
46,437
5,338
200,847
12,502
600,016
$ 61,769
7,068
54,701
151,253
32,849
72,357
46,047
19,441
68,520
25,668
5,338
37,514
7,012
9,724
$
n/a
$ 317,719
$ 205,304
14,472
52,178
$ 20,572
7,653
52,178
$ 271,954
$ 80,403
Average for the
three months ended
October 31
2020
July 31
2020
Total adjusted
value
Total adjusted
value
$ 343,498
237,316
$ 329,655
219,275
145%
150%
1 The LCR for the quarter ended October 31, 2020, is calculated as an average of the
6 Includes uncommitted credit and liquidity facilities, stable value money market mutual
62 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 or
inflow and outflow rates, as prescribed by OSFI LAR guideline.
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 makes
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 activities such
as clearing, custody, or cash management services.
funds, outstanding debt securities with remaining maturity greater than 30 days,
and other contractual cash outflows. With respect to outstanding debt securities
with remaining maturity greater than 30 days, 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.
7 Adjusted Total HQLA includes both asset haircuts and applicable caps, as prescribed
by the OSFI LAR guideline (HQLA assets after haircuts are capped at 40% for Level 2
and 15% for Level 2B).
8 Adjusted Total Net Cash Outflows include both inflow and outflow rates and
applicable caps, as prescribed by the OSFI LAR guideline (inflows are capped at 75%
of outflows).
The Bank’s average LCR of 145% for the quarter ended October 31, 2020
continues to meet the regulatory requirements.
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 guideline. The average HQLA of the Bank for
the quarter ended October 31, 2020 was $343 billion (July 31, 2020 –
$330 billion), with Level 1 assets representing 88% (July 31, 2020 – 89%).
The Bank’s reported HQLA excludes excess HQLA from the U.S. Retail
operations, as required by the OSFI LAR guideline, to reflect liquidity
transfer considerations between U.S. Retail and its affiliates as a result
of the 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.
103
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
FUNDING
The Bank has access to a variety of unsecured and secured funding
sources. The Bank’s funding activities are conducted in accordance with
the liquidity management policy that requires assets be funded to the
appropriate term and to a prudent diversification profile.
The Bank’s primary approach to managing funding activities is to
maximize the use of deposits raised through personal and commercial
banking channels. The following table illustrates the Bank’s large base of
personal and commercial, wealth, and sweep deposits (collectively, “P&C
deposits”) that make up over 70% of the Bank’s total funding. Prior to
October 6, 2020, the sweep deposits were placed with the Bank pursuant
to the TD Ameritrade IDA agreement. Starting October 6, 2020, the sweep
deposits are placed with the Bank pursuant to the Schwab IDA agreement.
As a result of the economic impact of COVID-19, the Bank of Canada
took a number of actions to help Canadians bridge this difficult period
by making credit affordable and available. The Bank of Canada set up or
expanded numerous programs which involve acquiring financial assets and
lending to financial institutions to support the proper functioning of the
financial system and the ability of financial institutions to continue lending.
The Bank has used certain of these programs including the Term Repo
operations, the Standing Term Liquidity Facility, the Bankers’ Acceptance
Purchase Facility, and the Commercial Paper Purchase Facility.
CMHC launched a revised Insured Mortgage Purchase Program (IMPP)
as part of Canada’s COVID-19 Economic Response Plan. Under the IMPP,
CMHC purchases insured mortgage pools to provide stable funding to
banks and mortgage lenders to ensure continued lending to Canadians.
The Bank used the IMPP during the second quarter of fiscal 2020 and has
not participated in subsequent purchase operations.
Globally, central banks and governments have made available similar
asset purchase and lending programs to support market liquidity. Where
appropriate, the Bank has accessed certain of these programs.
T A B L E 5 4 | SUMMARY OF DEPOSIT FUNDING
(millions of Canadian dollars)
P&C deposits – Canadian Retail
P&C deposits – U.S. Retail
Other deposits
Total
October 31
2020
$ 471,543
477,738
–
As at
October 31
2019
$ 382,252
360,761
23
$ 949,281
$ 743,036
WHOLESALE FUNDING
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 raises term funding through Senior
Notes, NHA MBS, Canada Mortgage Bonds, 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$45 billion)
United Kingdom Listing Authority (UKLA)
Registered Legislative Covered Bond Program
($80 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 as at October 31, 2020, was
$121.1 billion (October 31, 2019 – $129.8 billion).
Other than the IMPP, the funding provided by various central bank and
other government programs is not reflected in Table 55: Long-Term
Funding or Table 56: Wholesale Funding because funding provided as of
the relevant dates is provided by way of asset purchase transactions and
repurchase transactions.
T A B L E 5 5 | 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
2020
October 31
2019
32%
40
20
4
4
32%
37
21
6
4
100%
100%
50%
33
13
4
100%
54%
31
11
4
100%
1 Mortgage securitization excludes the residential mortgage trading business.
104
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
The Bank maintains depositor concentration limits in respect of short-
term wholesale deposits so that it is not overly reliant on individual
depositors for funding. The Bank further limits short-term wholesale
funding maturity concentration in an effort to mitigate refinancing risk
during a stress event.
The following table represents the remaining maturity of various sources
of funding outstanding as at October 31, 2020, and October 31, 2019.
T A B L E 5 6 | WHOLESALE FUNDING
(millions of Canadian dollars)
Deposits from banks1
Bearer deposit note
Certificates of deposit
Commercial paper
Covered bonds
Mortgage securitization
Legacy senior unsecured medium-term notes2
Senior unsecured medium-term notes3
Subordinated notes and debentures4
Term asset backed securitization
Other5
Total
Of which:
Secured
Unsecured
Total
Less than
1 month
1 to 3
months
3 to 6
months
6 months
to 1 year
Up to
1 year
Over 1 to
2 years
Over
2 years
$ 13,044 $ 1,856 $ 3,042 $
642
9,627
8,914
1,551
1,664
5,607
–
–
1,424
713
387
9,199
11,290
2,952
464
7,738
1,665
–
799
240
558
4,312
19,245
–
–
–
–
–
–
8,982
71 $ 18,013 $
8
18,785
8,918
9,377
1,822
5,694
–
–
712
611
1,595
41,923
48,367
13,880
3,950
19,039
1,665
–
2,935
10,546
–
–
–
–
8,659
4,137
5,105
–
–
570
1,630
$
–
–
–
–
17,998
21,399
11,781
23,341
11,477
666
1,736
As at
October 31
2020
October 31
2019
Total
Total
$ 18,013 $ 11,893
5,442
61,995
48,872
39,873
27,144
55,277
14,407
10,725
5,857
11,172
1,595
41,923
48,367
40,537
29,486
35,925
25,006
11,477
4,171
13,912
$ 46,141 $ 31,998 $ 37,776 $ 45,998 $ 161,913 $ 20,101 $ 88,398 $ 270,412 $ 292,657
$
–
46,141
$ 4,639 $ 4,215 $ 11,911 $ 20,765 $ 13,366 $ 40,072 $ 74,203 $ 72,884
219,773
141,148
196,209
27,359
34,087
33,561
48,326
6,735
$ 46,141 $ 31,998 $ 37,776 $ 45,998 $ 161,913 $ 20,101 $ 88,398 $ 270,412 $ 292,657
1 Includes fixed-term deposits with banks.
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.
3 Comprised of senior debt subject to conversion under the bank recapitalization
“bail-in” regime. Excludes $2.6 billion of structured notes subject to conversion
under the “bail-in” regime (October 31, 2019 – $2.2 billion).
Excluding the Wholesale Banking mortgage aggregation business, the Bank’s
total 2020 mortgage-backed securities issuance was $4.0 billion (2019 –
$2.3 billion), and other asset-backed securities was nil (2019 – $2.7 billion).
The Bank also issued $11.1 billion of unsecured medium-term notes (2019 –
$19.3 billion) and $4.4 billion of covered bonds (2019 – $8.9 billion), in
various currencies and markets during the year ended October 31, 2020.
REGULATORY DEVELOPMENTS CONCERNING LIQUIDITY
AND FUNDING
In March 2020, OSFI issued a letter announcing a comprehensive suite
of adjustments to existing capital and liquidity requirements in response
to the situation with COVID-19. As it relates to liquidity and funding, the
letter’s key measures included:
• Encouraging institutions to use their liquidity buffers as appropriate
to support further lending;
4 Subordinated notes and debentures are not considered wholesale funding as they
may be raised primarily for capital management purposes.
5 Includes fixed-term deposits from non-bank institutions (unsecured) of $13.9 billion
(October 31, 2019 – $11.2 billion).
• Temporarily increasing the covered bond limit to facilitate increased
pledging of covered bonds as collateral to the Bank of Canada;
• Confirming LCR treatment for secured funding transactions with
the Bank of Canada and use of the Bank of Canada’s Bankers’
Acceptance Purchase Facility; and
• Providing guidance with respect to the NSFR treatment for assets
encumbered as part of central bank liquidity operations during
stress periods.
In April 2019, OSFI included in LAR the revised treatment of deposit
reserves and the final guidelines for the Canadian application of NSFR,
which requires that Canadian D-SIBs maintain a ratio of available stable
funding over required stable funding at the minimum of 100%.
These changes went into effect in January 2020 as required by LAR.
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 certain lease-related 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 including
personal and business term loans and the stable balance of revolving
lines of credit. The Bank issues long-term funding based primarily on
the projected net growth of non-trading assets and 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 funding.
105
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 5 7 | REMAINING CONTRACTUAL MATURITY
(millions of Canadian dollars)
As at
October 31, 2020
Assets
Cash and due from banks
Interest-bearing deposits with banks
Trading loans, securities, and other1
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
repurchase agreements2
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 Schwab
Goodwill3
Other intangibles3
Land, buildings, equipment, and other
depreciable assets3,4
Deferred tax assets
Amounts receivable from brokers, dealers, and clients
Other assets
Total assets
Liabilities
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
$
6,437 $
8 $
161,326
4,363
80
5,299
656
6,920
–
7,167
– $
–
7,866
– $
–
6,913
– $
–
3,867
– $
–
9,732
– $
–
23,624
– $
–
27,554
– $
2,167
57,479
600
4,554
2,271
2,810
69
2,525
1,430
6,314
1,425
10,004
1,879
15,569
794
–
Total
6,445
164,149
148,318
8,548
54,242
820
183
631
234
107
930
1,253
581
–
4,739
2,501
2,799
8,490
6,101
4,886
25,305
23,667
26,957
2,579
103,285
6,444
23,449
16,052
5,855
5,498
12,386
62,145
95,852
(2)
227,679
98,721
30,246
23,879
11,776
4,204
29
307
–
–
169,162
472
706
–
27,193
28,371
–
28,371
12,699
–
–
–
–
–
33,951
3,521
2,845
1,423
–
4,938
9,206
–
9,206
2,036
–
–
–
1
–
–
1,060
7,286
3,437
–
8,973
19,696
–
9,994
3,941
–
11,653
25,588
–
10,481
3,893
–
8,672
23,046
–
38,182
14,594
–
35,439
138,912
68,961
–
70,478
44,047
28,038
–
65,144
–
60,467
32,334
23,309
252,219
185,460
32,334
255,799
88,215
278,351
137,229
116,110
725,812
–
–
–
(8,289)
(8,289)
19,696
25,588
23,046
88,215
278,351
137,229
107,821
717,523
204
–
–
–
6
–
–
643
2
–
–
–
91
–
–
2,783
–
–
–
–
9
–
–
470
–
–
–
–
29
–
–
150
–
–
–
–
299
–
–
125
–
–
–
–
4,384
–
–
171
–
12,174
17,148
2,125
5,317
2,444
–
9,933
14,941
12,174
17,148
2,125
10,136
2,444
33,951
18,856
$ 364,533 $ 83,731 $ 82,621 $ 64,424 $ 44,681 $ 144,520 $ 401,200 $ 310,176 $ 219,979 $ 1,715,865
Trading deposits
Derivatives
Securitization liabilities at fair value
Financial liabilities designated at fair value through
$
1,802 $ 2,429 $ 2,065 $ 3,057 $ 1,639 $
4,718
–
6,783
608
2,012
345
3,997
243
1,917
652
3,510 $
5,438
2,495
3,455 $
1,220 $
11,084
6,706
17,254
2,669
– $
–
–
19,177
53,203
13,718
profit or loss
Deposits5,6
Personal
Banks
Business and government
Total deposits
Acceptances
Obligations related to securities sold short1
Obligations related to securities sold under
repurchase agreements2
Securitization liabilities at amortized cost
Amounts payable to brokers, dealers, and clients
Insurance-related liabilities
Other liabilities4
Subordinated notes and debentures
Equity
18,654
7,290
12,563
15,892
5,251
–
4
11
–
59,665
6,240
12,870
25,387
44,497
12,699
698
122,433
–
35,143
306
7,672
–
–
8,996
1,592
24,703
35,291
2,036
1,095
23,944
1,055
–
350
3,630
–
–
9,139
313
24,841
34,293
204
993
30,879
221
–
382
1,744
–
–
9,550
56
15,274
24,880
2
823
1,791
422
–
316
701
–
–
7,288
28
7,214
14,530
–
707
4,952
404
–
305
1,048
–
–
10,095
–
14,378
24,473
–
4,888
4,873
1,642
–
963
1,304
–
–
7,923
4
52,852
60,779
–
9,789
4
8,799
–
1,676
1,402
200
–
37
5
3,386
565,932
14,101
313,129
625,200
28,969
481,164
3,428
893,162
1,135,333
–
14,986
–
3,225
–
1,033
5,633
11,277
–
1,020
–
–
–
2,259
7,342
–
14,941
34,999
188,876
15,768
35,143
7,590
30,476
11,477
–
95,499
95,499
Total liabilities and equity
$ 248,622 $ 84,511 $ 87,584 $ 50,453 $ 31,193 $ 49,586 $ 103,898 $ 60,736 $ 999,282 $ 1,715,865
Off-balance sheet commitments
Credit and liquidity commitments7,8
Other commitments9
Unconsolidated structured entity commitments
$ 19,568 $ 23,526 $ 25,918 $ 20,089 $ 14,289 $ 43,760 $ 107,951 $
77
903
169
342
183
1,367
188
227
165
408
657
–
875
–
4,343 $
553
–
1,309 $ 260,753
2,867
3,247
–
–
Total off-balance sheet commitments
$ 20,548 $ 24,037 $ 27,468 $ 20,504 $ 14,862 $ 44,417 $ 108,826 $
4,896 $
1,309 $ 266,867
1 Amount has been recorded according to the remaining contractual maturity of the
6 Includes $41 billion of covered bonds with remaining contractual maturities of
underlying security.
2 Certain contracts considered short-term are presented in ‘less than 1 month’ category.
3 Certain non-financial assets have been recorded as having ‘no specific maturity’.
4 Upon adoption of IFRS 16, ROU assets recognized are included in ‘Land, buildings,
$2 billion in ‘over 1 months to 3 months’, $3 billion in ‘over 3 months to 6 months’,
$5 billion in ‘over 6 months to 9 months’, $4 billion in ‘over 9 months to 1 year’,
$9 billion in ‘over 1 to 2 years’, $16 billion in ‘over 2 to 5 years’, and $2 billion in
‘over 5 years’.
equipment, and other depreciable assets’ and lease liabilities recognized are included
in ‘Other liabilities’.
7 Includes $290 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 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’.
which are unconditionally cancellable at the Bank’s discretion at any time.
9 Includes various purchase commitments as well as commitments for leases not yet
commenced, and lease-related payments.
106
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 5 7 | REMAINING CONTRACTUAL MATURITY (continued)1
(millions of Canadian dollars)
Less than
1 month
1 to 3
months
3 to 6
months
6 to 9
months
9 months
to 1 year
Over 1 to
2 years
Over 2 to
5 years
Over
5 years
As at
October 31, 2019
No
specific
maturity
Total
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
repurchase agreements3
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
Goodwill4
Other intangibles4
Land, buildings, equipment, and other depreciable assets4
Deferred tax assets
Amounts receivable from brokers, dealers, and clients
Other assets
Total assets
Liabilities
$
4,857 $
6 $
– $
23,412
1,197
147
5,786
1,137
3,990
2
8,472
77
3,916
37
3,255
– $
–
3,171
– $
–
2,873
– $
–
15,672
– $
–
25,939
– $
–
19,014
– $
957
70,228
4,863
25,583
146,000
195
696
156
82
83
404
1,725
699
668
2,109
314
2,222
1,301
5,610
1,803
8,652
1,488
12,788
743
–
–
6,503
48,894
4,040
1,431
3,818
4,161
6,339
6,426
18,205
40,289
28,594
1,841
111,104
1,878
5,233
2,254
1,050
764
8,791
45,127
65,401
(1)
130,497
98,904
34,839
24,000
6,331
1,765
44
52
–
–
165,935
2,006
850
–
29,460
32,316
–
32,316
11,127
–
–
–
–
–
20,575
2,548
5,595
1,819
–
5,573
8,013
3,170
–
7,970
9,832
3,620
–
9,496
12,987
19,153
22,948
–
–
–
11,719
3,544
–
8,830
24,093
–
34,029
17,256
–
21,078
101,591
61,736
–
71,071
62,855
28,236
–
61,266
–
60,103
36,564
21,773
235,640
180,334
36,564
236,517
72,363
234,398
152,357
118,440
689,055
–
–
–
(4,447)
(4,447)
12,987
19,153
22,948
24,093
72,363
234,398
152,357
113,993
684,608
2,211
–
–
–
–
–
–
1,391
152
–
–
–
–
–
–
2,830
4
–
–
–
–
–
–
168
–
–
–
–
–
–
–
103
–
–
–
–
–
–
–
169
–
–
–
–
–
–
–
157
–
–
–
–
–
–
–
97
–
9,316
16,976
2,503
5,513
1,799
–
9,624
13,494
9,316
16,976
2,503
5,513
1,799
20,575
17,087
$ 204,373 $ 74,782 $ 59,991 $ 42,870 $ 38,643 $ 122,559 $ 358,142 $ 280,438 $ 233,492 $ 1,415,290
Trading deposits
Derivatives
Securitization liabilities at fair value
Financial liabilities designated at fair value through
$
5,837 $ 3,025 $ 4,166 $ 2,606 $ 3,185 $
7,180
–
7,968
668
3,603
412
2,062
494
1,763
387
2,430 $
5,546
1,656
4,014 $
8,148
7,499
1,622 $
13,781
1,942
– $
–
–
26,885
50,051
13,058
profit or loss
Deposits5,6
Personal
Banks
Business and government7
Total deposits
Acceptances
Obligations related to securities sold short2
Obligations related to securities sold under
repurchase agreements3
Securitization liabilities at amortized cost
Amounts payable to brokers, dealers, and clients
Insurance-related liabilities
Other liabilities8
Subordinated notes and debentures
Equity
22,193
25,370
15,799
20,496
20,907
356
1
9
–
105,131
5,218
6,771
18,576
30,565
11,127
384
101,856
–
23,746
190
2,845
–
–
8,990
1,459
10,049
20,498
2,211
654
20,224
513
–
315
3,142
–
–
9,459
150
7,569
17,178
152
398
2,993
1,274
–
388
1,334
–
–
7,691
1
10,482
18,174
4
819
694
355
–
330
1,293
–
–
7,583
6
10,670
18,259
–
1,171
30
342
–
318
641
–
–
9,374
–
34,130
43,504
–
3,351
47
2,098
–
940
3,339
–
–
9,670
3
46,188
55,861
–
9,882
12
6,586
–
1,612
1,663
–
–
21
7
7,594
445,424
8,354
221,538
503,430
16,751
366,796
7,622
675,316
886,977
–
12,115
–
2,918
–
874
138
10,725
–
882
–
–
–
1,953
6,609
–
13,494
29,656
125,856
14,086
23,746
6,920
21,004
10,725
–
87,701
87,701
Total liabilities and equity
$ 205,923 $ 84,588 $ 47,697 $ 47,327 $ 47,003 $ 63,267 $ 95,278 $ 51,746 $ 772,461 $ 1,415,290
Off-balance sheet commitments
Credit and liquidity commitments9,10
Operating lease commitments11
Other purchase obligations
Unconsolidated structured entity commitments
$ 19,388 $ 21,652 $ 18,391 $ 13,537 $ 12,034 $ 27,207 $ 111,281 $
82
82
408
165
182
793
250
185
1,360
247
206
461
244
177
97
936
753
81
2,332
1,031
–
5,856 $
3,365
556
–
1,294 $ 230,640
7,621
3,172
3,200
–
–
–
Total off-balance sheet commitments
$ 19,960 $ 22,792 $ 20,186 $ 14,451 $ 12,552 $ 28,977 $ 114,644 $
9,777 $
1,294 $ 244,633
1 Certain comparative amounts have been reclassified to conform with the
presentation adopted in the current period.
2 Amount has been recorded according to the remaining contractual maturity of the
underlying security.
3 Certain contracts considered short-term are presented in ‘less than 1 month’ category.
4 Certain non-financial assets have been recorded as having ‘no specific maturity’.
5 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’.
6 Includes $40 billion of covered bonds with remaining contractual maturities of
$1 billion in less than 1 month, $2 billion in over 3 months to 6 months, $2 billion in
over 6 months to 9 months, $14 billion in ‘over 1 to 2 years’, $18 billion in ‘over 2 to
5 years’, and $3 billion in ‘over 5 years’.
7 On June 30, 2019, TD Capital Trust IV redeemed all of the outstanding $550 million
TD Capital Trust IV Notes – Series 1 at a redemption price of 100% of the principal
amount plus any accrued and unpaid interest payable on the date of redemption.
8 Includes $83 million of capital lease commitments with remaining contractual
maturities of $2 million in ‘less than 1 month’, $4 million in ‘1 month to 3 months’,
$5 million in ‘3 months to 6 months’, $5 million in ‘6 months to 9 months’,
$5 million in ‘9 months to 1 year’, $22 million in ‘over 1 to 2 years’, $39 million in
‘over 2 to 5 years’, and $1 million in ‘over 5 years’.
9 Includes $374 million in commitments to extend credit to private equity investments.
10 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.
11 Includes rental payments, related taxes, and estimated operating expenses.
107
TD BANK GROUP ANNUAL REPORT 2020 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 CAR.
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 requires that the Bank holds sufficient capital,
in normal and stress environments, to avoid the risk of breaching minimum
capital levels prescribed by regulators and internal Board limits.
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
and CFO oversee that the Bank’s ICAAP is effective in meeting CAR.
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, including appropriate changes
to capital issuance, repurchase and redemption. The capital forecast is
reviewed by ALCO. 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 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
Banking Organizations, applicable to U.S. Bank Holding Companies.
Refer to the sections on “Future Regulatory Capital Developments”,
“Enterprise-Wide Stress Testing”, and “Risk Factors That May Affect
Future Results” for further details.
HOW TD MANAGES CAPITAL ADEQUACY RISK
Capital resources are managed in a manner designed so that 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, so 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 so that
the Bank meets minimum capital requirements under stress conditions.
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 results of the EWST are considered in the determination of
capital targets and capital risk appetite limits.
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 maintain capital adequacy through periods
of bank-specific or systemic market stress. The Capital Contingency Plan
outlines the governance and procedures to be followed if the Bank’s
consolidated capital levels are forecast to fall below capital targets or
when there are capital concerns from disruptive events or trends. It also
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 Bank’s 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
mitigate LRCC risk and 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 and also
because LRCC risk generally cannot be effectively mitigated by trying to
limit its impact to any one business or jurisdiction, as realized LRCC risk
may adversely impact unrelated business or jurisdictions. LRCC risk is
inherent in the normal course of operating the Bank’s businesses.
WHO MANAGES LEGAL, REGULATORY COMPLIANCE,
AND CONDUCT 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,
and to its subsidiaries. All of the Bank’s businesses are responsible for
operating their business in 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 LRCC risk management. This accountability involves
assessing the risk, designing and implementing controls, and monitoring
and reporting on their ongoing effectiveness to safeguard the businesses
from operating outside of the Bank’s risk appetite. The Compliance, Global
Anti-Money Laundering (GAML) and Regulatory Risk departments provide
objective guidance, and oversight with respect to managing LRCC risk.
The Legal and Regulatory Relationships and Government Affairs groups
provide advice 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, 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 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 also
108
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS reports regularly to the Corporate Governance Committee, which oversees
conduct risk management in the Bank. 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 and/or independent challenge and oversight to identify, assess,
control, and monitor LRCC risk, and (c) an approved set of frameworks,
policies, procedures, guidelines, and practices. While each business line
is accountable for operating in compliance with applicable laws and
regulations and for effectively managing LRCC risk, each of the Legal,
Compliance, GAML, and Regulatory Risk 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 performs the following
functions: it acts as an independent Regulatory Compliance and Conduct
Risk management oversight function; it fosters a culture of integrity,
ethics and compliance across the organization to manage and mitigate
Regulatory Compliance and Conduct Risks; it assesses the adequacy of,
adherence to, and effectiveness of the Bank’s day-to-day Regulatory
Compliance Management (RCM) controls; it is accountable for leading
the enterprise Conduct Risk governance and oversight; and it supports
the Global 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 management 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 Anti-Money Laundering, Anti-Terrorist Financing, Sanctions, and Anti-
Bribery/Anti-Corruption programs (the “GAML Programs”), including their
design, content, and enterprise-wide implementation; develops standards,
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 regulatory compliance risks
and conduct risks on an ongoing basis as a 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, support regulatory discussions on new or proposed
products or business initiatives, and advance the public policy objectives
of the Bank.
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 the Bank’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
and 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 Enterprise Reputational Risk
Committee (ERRC) is the most senior executive committee for the review
of reputational risk matters at TD. The mandate of the ERRC 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. The ERRC also provides a forum for
discussion, review, and escalation for non-traditional risks.
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
are also 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 the Bank’s 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 The Bank’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 (where required by the Policy) to review and assess reputational
risks and escalation to the ERRC 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.
109
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS Climate Risk
Climate risk is the risk of financial loss or reputational damage resulting
from the physical and transitional impacts of climate change to the Bank
and its customers and clients. The Bank reports on climate-related risk in its
ESG Report. In the 2019 ESG Report, the Bank provided disclosure on its
alignment with the recommendations of the Financial Stability Board’s Task
Force on Climate-related Financial Disclosures (TCFD) which seek to provide
a more consistent approach in assessing and reporting climate-related risks,
including physical and transition risks and opportunities. The Bank is a
member of the United Nations Environment Programme Finance Initiative
(UNEP-FI) and is participating in 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
ESG issues into investment analysis and decision-making. TDAM has
adopted its Sustainable Investing Policy across its operations since
2009. The Policy provides a high-level overview of how TDAM fulfils its
commitment to the six guiding principles set out by the UNPRI. In 2015,
TD Insurance became a signatory to the UNEP-FI Principles for Sustainable
Insurance, which provides a global framework for managing ESG risks
within the insurance industry.
Codes of Conduct and Human Rights
The Bank has several policies, including the Bank’s Code of Conduct
and Ethics that reflect the Bank’s commitment to manage its business
responsibly and in compliance with applicable law. For additional
information on the Code of Conduct and Ethics, refer to the “Legal,
Regulatory Compliance and Conduct Risk” section above. In addition,
when registering suppliers, the Bank requests that suppliers confirm
that they operate in accordance with the expectations described in our
Supplier Code of Conduct. The Bank applies enhanced due diligence
to sourcing products and services when social, ethical, environmental
and geographical factors suggest higher risk. The Bank has a Human
Rights Statement that also reflects the Bank’s commitment to manage
its business responsibly.
The Bank’s North American Supplier Diversity Program seeks to promote
a level playing field and encourage the inclusion of women, visible
minorities, Indigenous Peoples, the LGBTQ2+ community, people with
disabilities, veterans and other diverse groups in its procurement process.
The Bank publicly reports under the United Kingdom Modern Slavery Act
2015, and the Bank’s Supplier Code of Conduct reflects this legislation.
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 and social risk
management and performance is included in the ESG Report, which is
available on the Bank’s website.
Environmental and Social Risk
Environmental and social risk is the potential for loss of strategic, financial,
operational, legal or reputational value resulting from the Bank’s direct
and indirect impact on the environment and society, and impact of
environmental and social issues on the Bank, within the scope of short-
term and long-term cycles.
Management of environmental and social risk is an enterprise-wide
priority. Key environmental and social 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, business operations, and associated services;
(2) indirect risks associated with environmental and social issues or
events (including climate change) that may impact the Bank’s customers
and clients to whom the Bank provides financial services or in which
the Bank invests; (3) identification and management of new or emerging
environmental and social regulatory issues; and (4) failure to understand
and appropriately leverage environmental or social-related trends to meet
customer and consumer demands for products and services.
WHO MANAGES ENVIRONMENTAL AND SOCIAL RISK
The Global Head, Sustainability and Corporate Citizenship and the Senior
Vice President, Operational Risk Management hold senior executive
accountability for environmental and social risk management. The
Corporate Environmental Affairs team is responsible for developing
environmental, social and related governance strategy, setting performance
standards and targets, and reporting on performance. In addition,
the Bank’s Environmental and Social Risk Management group, operating
under Operational Risk Management, has environmental and social risk
oversight accountabilities, including establishing risk frameworks, policies,
processes and governance to actively manage, monitor and report on these
risks at the Bank. The Bank’s various business-specific and enterprise risk
committees are also involved in monitoring material risks and acting as
governance bodies for escalation and oversight of material environmental
and social risk issues.
HOW TD MANAGES ENVIRONMENTAL AND SOCIAL RISK
The Bank manages environmental and social risks through an enterprise-
wide Environmental and Social Risk Framework which is supported by
business segment level policies and procedures across the Bank.
The Bank’s environmental and social metrics, targets, and performance
are publicly reported within its annual Environmental, Social and Governance
(ESG) Report. Key performance measures are reported according to the
Global Reporting Initiative (GRI) and are 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 the Bank’s clients’
policies, procedures, and performance on significant environmental and
social issues, such as air, land, and water risk, biodiversity, stakeholder
engagement, and free prior and informed consent (FPIC) of Indigenous
Peoples. The Bank has developed a list of prohibited business activities
and transactions based on environmental and social risks, including
those related to human rights. In addition, within Wholesale and
Commercial Banking, sector-specific guidelines have been developed for
environmentally sensitive sectors. In the area of project finance, the Bank
has been a signatory to the Equator Principles since 2007 and reports
on Equator Principles projects within its annual ESG Report. The Equator
Principles help financial institutions determine, assess, manage and report
environmental and social risk in respect of projects that are in scope
of the Equator Principles. The Bank uses a comprehensive set of tools
and guidance documents to identify and categorize Equator Principle
deals appropriately.
110
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS ACCOUNTING STANDARDS AND POLICIES
Critical Accounting Policies and Estimates
The Bank’s accounting policies and estimates are essential to understanding
its results of operations and financial condition. A summary of the Bank’s
significant accounting policies and estimates are presented in the Notes of
the 2020 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 the classification and
measurement of financial assets, 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, the consolidation of structured
entities, and accounting for revenue from contract with customers.
ACCOUNTING POLICIES AND ESTIMATES
The Bank’s 2020 Consolidated Financial Statements have been prepared in
accordance with IFRS. For details of the Bank’s accounting policies under
IFRS, refer to Note 2 of the Bank’s 2020 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
of the Bank’s 2020 Consolidated Financial Statements 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 represent solely payments
of principal and interest (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 assesses 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. Significant increase in credit risk
since initial recognition has occurred when one of the criteria is met.
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. Significant increase in credit
risk since initial recognition has occurred when one of the criteria is
met. Refer to the “Impact of COVID-19” section of this document for
considerations as a result of COVID-19.
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
forward-looking 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.
111
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 forward-looking 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 ECLs, 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 macroeconomic 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 possible economic conditions.
All macroeconomic 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 ECLs.
Macroeconomic variables are statistically derived relative to the base
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 the
“Impact of COVID-19” section of this document for considerations as a
result of COVID-19 and Note 8 of the Consolidated Financial Statements
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 the 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. Refer
to the “Impact of COVID-19” section of this document for considerations
as a result of COVID-19.
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.
Impact of COVID-19
As a result of COVID-19, there is a higher degree of uncertainty in
determining reasonable and supportable forward-looking information used
in assessing significant increase in credit risk and measuring ECLs. The Bank
introduced relief programs in the second quarter that allow borrowers
to temporarily defer payments of principal and/or interest on their loans
and is supporting various government-assistance programs which reduce
the Bank’s exposure to expected losses. Under these retail and non-
retail programs and notwithstanding any other changes in credit risk,
opting into a payment deferral program does not in and of itself trigger
a significant increase in credit risk since initial recognition (which would
result in stage migration) and does not result in additional days past due.
Macroeconomic variables for the upside scenario are statistically derived
relative to the base forecast based on historical distributions for each
variable. For the downside scenario, since the second quarter of 2020,
macroeconomic variables were based on plausible scenario analysis of
COVID-19 impacts, given the lack of comparable historical data for a shock
of this nature. Refer to Note 8 for additional details on the macroeconomic
variables used in the forward-looking macroeconomic forecasts.
The current environment is subject to rapid change and to the extent
that certain effects of COVID-19 are not fully incorporated into the model
calculations, increased temporary quantitative and qualitative adjustments
have been applied. This includes borrower credit scores, industry and
geography specific COVID-19 impacts, payment support initiatives
introduced by the Bank and governments, and the persistence of the
economic shutdown, the effects of which are not yet fully reflected in the
quantitative models. The Bank has performed certain additional qualitative
portfolio and loan level assessments of significant increase in credit risk.
LEASES
The Bank applies judgment in determining the appropriate lease term on
a lease-by-lease basis. All facts and circumstances that create an economic
incentive to exercise a renewal option or not to exercise a termination
option including investments in major leaseholds, branch performance and
past business practice are considered. The periods covered by renewal or
termination options are only included in the lease term if it is reasonably
certain that the Bank will exercise the options; management considers
“reasonably certain” to be a high threshold. Changes in the economic
environment or changes in the industry may impact the Bank’s assessment
of lease term, and any changes in the Bank’s estimate of lease terms may
have a material impact on the Bank’s Consolidated Balance Sheet and
Consolidated Statement of Income.
In determining the carrying amount of ROU assets and lease liabilities,
the Bank is required to estimate the incremental borrowing rate specific to
each leased asset or portfolio of leased assets if the interest rate implicit in
the lease is not readily determinable. The Bank determines the incremental
borrowing rate of each leased asset or portfolio of leased assets by
incorporating the Bank’s creditworthiness, the security, term, and value of
the ROU asset, and the economic environment in which the leased asset
operates. The incremental borrowing rates are subject to change mainly
due to changes in the macroeconomic environment.
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 instruments, 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.
112
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 used in recording valuation adjustments to model fair
values to account for system limitations or measurement uncertainty, such
as when valuing complex and less actively traded financial instruments.
Valuation adjustments reflect the Bank’s assessment of factors that market
participants would use in pricing the asset or liability. The Bank recognizes
various types of valuation adjustments including, but not limited to,
adjustments for bid-offer spreads, adjustments for the unobservability
of inputs used in pricing models, and adjustments for assumptions about
risk, such as the creditworthiness of either counterparty and market
implied funding costs for uncollateralized derivatives. 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, IBOR reform may also have an impact on the fair value of
products that reference or use valuation models with IBOR inputs.
The Bank recognized valuation adjustments of $543 million as at
October 31, 2020 (October 31, 2019 – $69 million) against the fair value
of financial instruments, related mainly to credit risk, funding risk, and bid-
offer spreads on derivatives.
An analysis of fair values of financial instruments and further details
as to how they are measured are provided in Note 5 of the Bank’s 2020
Consolidated Financial Statements.
DERECOGNITION OF FINANCIAL INSTRUMENTS
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 assets 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 AOCI. 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, ECLs, 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 CGUs is determined from internally
developed valuation models that consider various factors and assumptions
such as forecasted earnings, growth rates, discount rates, and terminal
values reflecting terminal growth rates or terminal price-earnings 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, assumptions 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.
113
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS 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
into account 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 of the 2020 Consolidated Financial Statements.
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.
REVENUE FROM CONTRACTS WITH CUSTOMERS
The Bank applies judgment to determine the timing of satisfaction of
performance obligations which affects the timing of revenue recognition,
by evaluating the pattern in which the Bank transfers control of services
promised to the customer. A performance obligation is satisfied over time
when the customer simultaneously receives and consumes the benefits
as the Bank performs the service. For performance obligations satisfied
over time, revenue is generally recognized using the time-elapsed method
which is based on time elapsed in proportion to the period over which
the service is provided, for example, personal deposit account bundle
fees. The time-elapsed method is a faithful depiction of the transfer of
control for these services as control is transferred evenly to the customer
when the Bank provides a stand-ready service or effort is expended
evenly by the Bank to provide a service over the contract period. In
contracts where the Bank has a right to consideration from a customer
in an amount that corresponds directly with the value to the customer of
the Bank’s performance completed to date, the Bank recognizes revenue
in the amount to which it has a right to invoice.
The Bank satisfies a performance obligation at a point in time if
the customer obtains control of the promised services at that date.
Determining when control is transferred requires the use of judgment.
For transaction-based services, the Bank determines that control is
transferred to the customer at a point in time when the customer obtains
substantially all of the benefits from the service rendered and the Bank
has a present right to payment, which generally coincides with the
moment the transaction is executed.
The Bank exercises judgment in determining whether costs incurred
in connection with acquiring new revenue contracts would meet the
requirement to be capitalized as incremental costs to obtain or fulfil
a contract with customers.
114
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS ACCOUNTING STANDARDS AND POLICIES
Current and Future Changes in Accounting Policies
CURRENT CHANGES IN ACCOUNTING POLICIES
The following new standards have been adopted by the Bank on
November 1, 2019.
Leases
In January 2016, the IASB issued IFRS 16, Leases, which replaced IAS 17,
Leases (IAS 17) and became effective for annual periods beginning on
or after January 1, 2019, which was November 1, 2019 for the Bank.
IFRS 16 introduces a single lessee accounting model for all leases
by eliminating the distinction between operating and financing leases.
IFRS 16 requires lessees to recognize ROU assets and lease liabilities for
arrangements that meet the definition of a lease on the commencement
date. The ROU asset is initially measured as the lease liability, subject to
certain adjustments, if any, and is subsequently measured at such cost less
accumulated depreciation and any related accumulated impairment. The
lease liability is initially measured at the present value of the future lease
payments over the remaining lease term and is discounted using the Bank’s
incremental borrowing rate. The lease term includes renewal and
termination options that the Bank is reasonably certain to exercise, and
the lease liability is remeasured when there are adjustments to future lease
payments, changes in the Bank’s assumptions or strategies relating to the
exercise of purchase, extension, or termination options, or updates to the
incremental borrowing rate. ROU assets are recorded in Land, buildings,
equipment, and other depreciable assets and lease liabilities are included
in Other liabilities on the Consolidated Balance Sheet. The Consolidated
Statement of Income recognizes interest expense on lease liabilities, which
is calculated on an EIR basis. Secondly, depreciation expense is recognized
on the ROU assets and is calculated on a straight-line basis in non-interest
expense. ROU assets are depreciated over the shorter of the useful life
of the underlying asset and the lease term. Any changes in useful life are
applied on a prospective basis. Previously, under IAS 17, net rental expense
on operating leases was recorded in non-interest expense. The net impact
of these changes shifts the timing and geography of expense recognition.
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, with
their payments being recognized in Non-interest expense on a straight-
line basis within the Bank’s Consolidated Statement of Income. Lessor
accounting remains substantially unchanged.
Upon transition to IFRS 16, the Bank adopted the new standard using
the modified retrospective approach and recognized the cumulative
effect of the transitional impact in opening retained earnings on
November 1, 2019 with no restatement of comparative periods. The Bank
has applied certain permitted practical expedients and elections including:
using hindsight to determine the lease term where lease contracts contain
options to extend or terminate; measuring the ROU asset retrospectively
for certain leases; not reassessing contracts identified as leases under
the previous accounting standards; not applying IFRS 16 to leases of
intangible assets; and applying onerous lease provisions recognized as at
October 31, 2019 as an alternative to performing an impairment review
on the ROU assets as at November 1, 2019.
The main impact of IFRS 16 was on the Bank’s real estate leases,
which were previously classified as operating leases. The Bank also
leases certain equipment and other assets. On November 1, 2019,
the Bank recognized $4.46 billion of ROU assets, $5.66 billion of lease
liabilities, and other balance sheet adjustments and reclassifications of
$0.65 billion. The decrease in retained earnings was $0.55 billion after
tax. The impact to Common Equity Tier 1 (CET1) capital was a decrease
of 24 basis points (bps). The following table sets forth the adjustments
to the Bank’s operating lease commitments disclosed under IAS 17 as
at October 31, 2019, which were used to derive the lease liabilities
recognized by the Bank as at November 1, 2019:
(millions of Canadian dollars)
Operating lease commitments disclosed as at October 31, 2019
Commitments for leases that have not commenced at
Amount1
$ 7,621
November 1, 2019, and commitments for non-lease payments2
(2,577)
Effect of recognition exemption for short-term and
low value leases
Effect of extension and termination options reasonably certain
to be exercised and other
Effect of discounting using the incremental borrowing rate3
Lease liabilities recognized as at November 1, 2019
(29)
4,732
(4,083)
$ 5,664
1 Certain amounts have been reclassified to conform with the presentation adopted
in the current period.
2 Non-lease payments include taxes and estimated operating expenses.
3 The weighted average incremental borrowing rate was 2.8%.
Uncertainty over Income Tax Treatments
In June 2017, the IASB issued IFRIC (IFRS Interpretations Committee)
Interpretation 23, Uncertainty over Income Tax Treatments, which clarifies
application of recognition and measurement requirements in IAS 12,
Income Taxes, when there is uncertainty over income tax treatments.
The Bank adopted this interpretation on November 1, 2019 and it did
not have a significant impact on the Bank.
FUTURE CHANGES IN ACCOUNTING POLICIES
The following standards and framework 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 and framework on the Consolidated
Financial Statements.
IBOR Reform and its Effects on Financial Reporting
The IASB finalized its standard setting relating to the effects of IBOR
reform and on August 27, 2020, the IASB issued Interest Rate Benchmark
Reform – Phase 2, Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and
IFRS 16 (Interest Rate Benchmark Reform Phase 2), for which the Bank is
currently assessing the impact of adoption. The Bank adopted the IASB’s
first phase of interest rate benchmark reform standard setting, Interest
Rate Benchmark Reform, Amendments to IFRS 9, IAS 39, and IFRS 7
(Interest Rate Benchmark Reform Phase 1), effective October 31, 2019.
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TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
Interest Rate Benchmark Reform Phase 2 addresses issues affecting
financial reporting when changes are made to contractual cash flows
of financial instruments or hedging relationships as a result of IBOR
reform. The amendments are effective for annual periods beginning
on or after January 1, 2021, with early adoption permitted. The changes
relate to the modification of financial assets, financial liabilities and
lessee lease liabilities, as well as providing specific hedge accounting
relief and disclosure requirements. The amendments permit modification
to financial assets, financial liabilities and lessee lease liabilities required
as a direct consequence of IBOR reform made on an economically
equivalent basis to be accounted for by updating the EIR prospectively.
If the modification does not meet the practical expedient requirements,
existing IFRS requirements are applied. Reliefs are also provided for an
entity’s hedge accounting relationships in circumstances where changes
to hedged items and hedging instruments arise as a result of IBOR reform.
The amendments enable entities to amend the formal designation
and documentation of a hedging relationship to reflect these changes
without discontinuing the hedging relationship or designating a new
hedging relationship. Permitted changes include redefining the hedged
risk to reference an ARR (contractually or non-contractually specified),
amending the description of the hedged item and hedging instrument
to reflect the ARR, and amending the description of how the entity will
assess hedge effectiveness. Additional reliefs are also provided for specific
hedge accounting requirements if certain conditions are met. Hedging
relationships within the scope of Interest Rate Benchmark Reform Phase 2
are the same as those within the scope of Interest Rate Benchmark Reform
Phase 1. Interest Rate Benchmark Reform Phase 2 also amended IFRS 7,
introducing expanded qualitative and quantitative disclosures about the
risks arising from IBOR reform, how an entity is managing those risks,
its progress in completing the transition to ARRs, and how it is managing
the transition.
Insurance Contracts
The IASB issued IFRS 17, Insurance Contracts (IFRS 17), amended in
June 2020, which replaces the guidance in IFRS 4, Insurance Contracts
and establishes principles for recognition, measurement, presentation,
and disclosure of insurance contracts. The standard is effective for annual
reporting periods beginning on or after January 1, 2023, which will
be November 1, 2023 for the Bank. OSFI’s related Advisory precludes
early adoption.
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.
The adoption of the Revised Conceptual Framework is not expected
to have a significant impact on the Bank.
Business Combinations
In October 2018, the IASB issued a narrow-scope amendment to IFRS 3,
Business Combinations (IFRS 3). The amendments provide additional
guidance on the definition of a business which determines whether an
acquisition is of a business or a group of assets. An acquirer recognizes
goodwill only when acquiring a business, not when acquiring a group of
assets. The amendment to IFRS 3 are effective for annual reporting periods
beginning on or after January 1, 2020, which will be November 1, 2020
for the Bank. These amendments will be applied prospectively and are not
expected to have a significant impact on the Bank.
ACCOUNTING STANDARDS AND POLICIES
Controls and Procedures
DISCLOSURE CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of the Bank’s management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the Bank’s
disclosure controls and procedures, as defined in the rules of the SEC and
Canadian Securities Administrators, as of October 31, 2020. 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, 2020.
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, 2020, the Bank’s internal control over financial reporting
was effective based on the applicable criteria. The effectiveness of
the Bank’s internal control over financial reporting has been audited by the
independent auditors, Ernst & Young LLP, a registered public accounting
firm that has also audited the Consolidated Financial Statements of
the Bank as of, and for the year ended October 31, 2020. 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, 2020.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the year and quarter ended October 31, 2020, 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.
116
TD BANK GROUP ANNUAL REPORT 2020 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 5 8 | INVESTMENT PORTFOLIO – Securities Maturity Schedule1,2
(millions of Canadian dollars)
Within
1 year
Over 1 year
to 3 years
Over
3 years to
5 years
Over
5 years to
10 years
Over
10 years
With no
specific
maturity
Remaining terms to maturities3
As at
Total
Total
October 31
2020
October 31
2019
October 31
2018
Securities at fair value through other
comprehensive income
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 CMO4
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
Total securities at fair value through
other comprehensive income
Fair value
Amortized cost
Yield
$ 2,144 $ 2,922 $ 6,120 $ 2,434 $
2,141
1.61%
2,904
1.72%
6,076
1.58%
2,403
2.41%
$
506
443
2.72%
1,368
1,365
2,308
2,279
4,430
4,362
7,920
7,860
1.43%
2.68%
2.86%
3.41%
8,415
8,405
9,825
9,811
1,420
1,378
2,490
2,464
1.66%
1.82%
2.10%
1.57%
2,101
2,101
1,672
1,665
1,047
1,047
1.34%
1.91%
2.33%
3,988
3,983
6,025
6,006
1.25%
1.65%
1,166
1,162
2,699
2,693
1.48%
1.61%
539
528
2.52%
–
–
–%
541
527
2.60%
204
203
3.19%
–
–
–%
476
476
1.92%
18
16
1.99%
5,505
5,461
1.25%
–
–
–%
–
–
–%
954
954
0.42%
–
–
–%
1,978
1,976
1,906
1,902
1,649
1,645
3,519
3,574
2.45%
2.17%
1.96%
0.88%
–
–
–%
–
–
–%
–
–
–%
2,174
2,169
3,570
3,549
2,519
2,500
1,612
1,605
2.34%
2.76%
2.44%
2.78%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
20
30
1.43%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
$ 14,126 $
13,967
9,663 $ 12,731
12,740
9,603
1.79%
2.15%
2.12%
16,502
16,342
12,927
12,890
9,507
9,443
2.95%
3.20%
3.12%
22,168
22,074
25,176
25,166
27,060
26,898
1.75%
1.67%
1.58%
10,866
10,801
15,561
15,537
18,706
18,959
1.54%
2.33%
2.44%
10,756
10,720
14,407
14,394
20,096
20,034
1.58%
1.68%
1.53%
3,865
3,855
5,437
5,407
6,633
6,575
1.57%
1.63%
1.67%
10,006
10,051
15,888
15,890
21,969
21,901
1.57%
2.27%
2.37%
–
–
–%
247
247
2.52%
472
471
3.06%
9,895
9,853
7,834
7,832
8,507
8,534
2.58%
2.56%
2.82%
2,387
2,641
2,387
2,641
1,598
1,594
1,804
1,725
2.03%
2.03%
3.07%
3.43%
212
303
3.38%
212
303
3.38%
242
302
4.07%
370
376
4.17%
$ 22,310 $ 30,999 $ 17,981 $ 16,850 $ 10,044
17,793
22,280
16,707
10,000
30,883
$ 2,599 $ 100,783 $ 108,980 $ 127,855
127,656
108,862
100,607
2,944
1.54%
1.98%
2.19%
2.76%
1.22%
2.17%
1.98%
2.17%
2.13%
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, 2020, there were no securities from a single issuer where the book
value was greater than 10% (as at October 31, 2019, includes securities issued by the
Government of Japan $9.6 billion, where the book value was greater than 10% of
the shareholders’ equity).
3 Represents contractual maturities. Actual maturities may differ due to prepayment
privileges in the applicable contract.
4 Collateralized mortgage obligation (CMO).
117
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 5 8 | INVESTMENT PORTFOLIO – Securities Maturity Schedule (continued)1,2
(millions of Canadian dollars)
As at
Within
1 year
Over 1 year
to 3 years
Over
3 years to
5 years
Over
5 years to
10 years
Over
10 years
With no
specific
maturity
Remaining terms to maturities3
Debt securities at amortized cost
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
Amortized cost
Yield
Canadian issuers
Fair value
Amortized cost
Yield
Other issuers
Fair value
Amortized cost
Yield
Total debt securities at amortized cost
Fair value
Amortized cost
Yield
$ 11,041 $
11,046
1,194 $
1,201
3,034 $
3,036
0.18%
1.01%
0.19%
626 $
643
1.53%
2,094 $
2,055
1.87%
77
77
0.46%
293
293
1.59%
2,102
2,075
2,787
2,784
2.44%
3.47%
35,352
35,348
3,224
3,196
0.15%
0.66%
745
715
1.69%
14,253
14,161
0.55%
407
398
4.86%
–
–
–%
1,444
1,440
4,905
4,791
11,487
11,330
8,970
8,925
33,949
33,939
2.35%
2.05%
2.69%
2.10%
0.60%
8,110
8,105
16,589
16,438
11,295
11,077
1,524
1,520
0.15%
0.70%
0.31%
0.92%
–
–
–%
9
9
1.40%
–
–
–%
203
203
3.19%
5,861
5,856
8,839
8,811
2,128
2,102
10,289
10,419
1.98%
2.45%
2.49%
1.17%
–
–
–%
49
49
3.42%
–
–
–%
55
54
3.19%
81
80
2.39%
574
573
2.58%
1,059
1,059
3,805
3,788
1,760
1,746
1,420
1,415
–%
0.56%
0.74%
1.48%
17,229
16,912
2.85%
8
8
1.40%
2
2
5.39%
$ 57,295 $ 35,920 $ 39,317 $ 32,363 $ 63,978 $
38,844
57,287
35,612
32,203
63,733
0.22%
1.10%
1.64%
1.47%
1.36%
Total
Total
October 31
2020
October 31
2019
October 31
2018
$ 17,989 $
17,981
4,759 $
4,771
4,914
4,922
0.48%
2.19%
1.97%
5,666
5,627
2,268
2,271
3.05%
3.92%
53,574
53,420
2,809
2,806
0.30%
1.67%
783
782
3.07%
111
114
0.03%
60,755
60,425
40,349
40,408
28,372
29,034
1.37%
2.42%
2.47%
37,518
37,140
28,190
28,019
25,768
25,683
0.47%
0.63%
0.72%
27,126
27,197
28,698
28,763
23,728
23,709
1.86%
2.69%
2.91%
17,310
16,992
16,384
16,236
15,525
15,867
2.85%
2.83%
2.85%
889
887
2.79%
99
99
2.56%
–
–
–%
8,046
8,010
7,189
7,124
7,064
7,060
0.69%
1.07%
1.17%
$ 228,873 $ 130,745 $ 106,265
107,171
227,679
130,497
1.10%
2.07%
2.09%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
–
–
–%
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, 2020, there were no securities from a single issuer where the book
value was greater than 10% (as at October 31, 2019, includes securities issued by the
Government of Japan $9.6 billion, where the book value was greater than 10% of
the shareholders’ equity).
3 Represents contractual maturities. Actual maturities may differ due to prepayment
privileges in the applicable contract.
118
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 5 9 | LOAN PORTFOLIO – Maturity Schedule1
(millions of Canadian dollars)
Remaining term-to-maturity
Under
1 year
1 to
5 years
Over
5 years
Total
As at
Total
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
October 31
2020
October 31
2019
October 31
2018
October 31
2017
October 31
2016
$ 29,951 $ 177,618 $
5,670 $ 213,239 $ 200,952 $ 193,829 $ 190,325 $ 189,299
44,993
593
17,596
15,552
49,809
13,722
(55)
–
108,685
241,094
7,807
9,674
17,481
8,844
4,583
13,427
36
13,035
736
–
19,477
6,047
3,257
9,304
94,838
27,350
18,277
15,552
91,053
25,697
18,453
18,428
86,159
24,216
18,570
18,046
74,937
22,282
17,347
18,028
65,068
20,577
16,443
18,226
369,256
354,583
340,820
322,919
309,613
22,698
17,514
40,212
19,801
15,827
35,628
18,336
13,540
31,876
17,951
12,721
30,672
15,965
12,686
28,651
67,362
176,047
34,864
275,958
13,246
32,723
115,472
484,728
112,600
467,183
104,501
445,321
90,793
413,712
83,775
393,388
993
202
37,637
38,832
34,501
31,128
31,460
27,662
9,536
337
452
16,777
28,095
1,600
3,813
5,413
30,520
58,615
12
8,008
8,020
n/a
8
8
69
19,897
479
–
20,647
3,997
12,580
16,577
69,117
89,764
–
1,180
1,180
n/a
22
22
1,332
12,853
12
–
51,834
4,603
8,836
13,439
10,937
33,087
943
16,777
100,576
10,200
25,229
35,429
11,526
32,454
1,115
18,129
97,725
8,880
24,255
33,135
12,334
29,870
878
16,964
91,174
8,078
22,521
30,599
12,434
29,182
854
14,972
88,902
7,346
22,274
29,620
13,208
28,370
758
13,680
83,678
6,888
21,769
28,657
48,864
100,698
148,501
249,077
133,659
231,384
127,523
218,697
122,691
211,593
119,052
202,730
–
18
18
n/a
202
202
12
9,206
9,218
n/a
232
232
12
5,781
5,793
n/a
313
313
14
5,469
5,483
n/a
453
453
14
4,478
4,492
3,209
665
3,874
16
6,453
6,469
1,674
974
2,648
$ 242,690 $ 366,924 $ 133,641 $ 743,255 $ 704,673 $ 669,954 $ 633,671 $ 605,235
1 Certain comparatives have been recast to conform with the presentation adopted
in the current period.
T A B L E 6 0 | LOAN PORTFOLIO – Rate Sensitivity
(millions of Canadian dollars)
As at
October 31, 2020
October 31, 2019
October 31, 2018
October 31, 2017
October 31, 2016
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
Fixed rate
Variable rate
Total
$ 269,533 $ 97,698 $ 228,904 $ 91,698 $ 218,098 $ 84,450 $ 197,483 $ 84,080 $ 212,257 $ 82,507
34,260
97,391
35,943
79,447
95,861
85,139
34,018
36,093
34,991
99,430
$ 366,924 $ 133,641 $ 328,334 $ 126,689 $ 313,959 $ 118,468 $ 276,930 $ 120,173 $ 297,396 $ 116,767
119
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
The changes in the Bank’s allowance for loan losses for the years ended
October 31 are shown in the following table.
T A B L E 6 1 | ALLOWANCE FOR LOAN LOSSES1
(millions of Canadian dollars, except as noted)
2020
2019
2018
2017
2016
Allowance for loan losses – Balance at beginning of year
$ 4,447
$ 3,549
$ 3,475
$ 3,873
$ 3,434
7,239
3,030
2,472
2,216
2,330
13
9
303
267
620
17
11
284
256
585
15
8
251
216
557
22
11
337
216
595
18
11
334
221
623
1,212
1,153
1,047
1,181
1,207
1,654
1,393
1,019
3
2
5
107
1,314
22
38
232
121
530
943
3
11
14
76
2
1
3
127
1,339
13
9
476
197
1,100
1,795
5
11
16
302
2,097
–
–
–
n/a
1
1
2
1
3
96
2
1
3
75
1
2
3
75
1,249
1,122
1,256
14
15
450
204
1,114
1,797
2
7
9
129
1,926
–
–
–
n/a
3
3
16
22
387
192
958
19
39
315
152
777
1,575
1,302
1
10
11
79
3
6
9
91
–
–
–
n/a
2
2
3,437
3,178
2,778
1
–
68
39
91
199
–
1
1
15
–
–
54
36
87
177
–
–
–
20
1
1
58
37
87
184
–
–
–
17
–
–
–
9
1
10
2,659
2
1
90
41
98
232
1
–
1
20
–
–
–
14
4
18
2,351
1
–
91
52
118
262
1
3
4
27
$ 214
$ 197
$ 201
$ 252
$ 289
2 Includes all FDIC covered loans and other ACI loans.
3 Other adjustments are required as a result of the accounting for FDIC covered loans.
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 loans2,3
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 Opening balance of allowance for loan losses effective November 1, 2017
was booked in accordance with IFRS 9. Allowance for loan losses prior to
November 1, 2017 was booked in accordance with IAS 39.
120
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 6 1 | ALLOWANCE FOR LOAN LOSSES (continued)1
(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 loans2,3
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: Change in allowance for off-balance sheet positions4,5
2020
2019
2018
2017
2016
$
2
$
1
$
2
$
4
$
9
5
141
25
216
389
2
2
4
28
417
–
–
–
n/a
9
9
640
4
132
26
210
373
2
2
4
23
396
–
–
–
n/a
16
16
609
4
116
35
173
330
2
7
9
42
372
–
–
–
n/a
16
16
589
11
100
24
154
293
2
8
10
58
351
–
–
–
–
22
22
625
5
85
26
114
239
4
4
8
54
293
–
–
–
–
20
20
602
(2,797)
(2,569)
(2,189)
(22)
(75)
8,792
502
(3)
(4)
4,003
(444)
(46)
49
3,761
212
(2,034)
(83)
(122)
3,850
67
(1,749)
(2)
47
4,060
187
Total allowance for loan losses, at end of period5
$ 8,290
$ 4,447
$ 3,549
$ 3,783
$ 3,873
Ratio of net write-offs in the period to average loans outstanding
0.41%
0.38%
0.34%
0.33%
0.30%
1 Opening balance of allowance for loan losses effective November 1, 2017
was booked in accordance with IFRS 9. Allowance for loan losses prior to
November 1, 2017 was booked in accordance with IAS 39.
4 The allowance for loan losses for off-balance sheet positions is recorded in Other
liabilities on the Consolidated Balance Sheet.
5 In the fourth quarter of 2019, the Bank revised its allocation methodology for the
2 Includes all FDIC covered loans and other ACI loans.
3 Other adjustments are required as a result of the accounting for FDIC covered loans.
reporting of Allowance for Credit Losses for off-balance sheet instruments for certain
retail portfolios.
T A B L E 6 2 | AVERAGE DEPOSITS
(millions of Canadian dollars, except as noted)
October 31, 2020
October 31, 2019
Average
balance
Total
interest
expense
Average
rate paid
Average
balance
Total
interest
expense
Average
rate paid
Average
balance
For the years ended
October 31, 2018
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
$
17,331 $
95,184
256,708
251,314
–
1,057
384
4,138
620,537
5,579
10,899
10,075
405,965
64,182
491,121
14
2,415
–
25,280
27,709
–
50
446
837
1,333
–
4
–
247
251
–% $ 14,058 $
1.11
0.15
1.65
0.90
–
0.50
0.11
1.30
0.27
–
0.17
–
0.98
0.91
75,709
222,249
246,078
558,094
9,745
5,147
330,301
59,534
404,727
162
627
–
26,449
27,238
–
1,579
786
5,609
7,974
1
43
3,795
1,435
5,274
–
1
–
426
427
–% $ 13,156 $
2.09
0.35
2.28
1.43
0.01
0.84
1.15
2.41
1.30
–
0.16
–
1.61
1.57
57,030
222,394
223,295
515,875
10,037
2,859
317,218
52,461
382,575
155
1,025
–
37,435
38,615
–
1,094
567
4,215
5,876
–
16
3,233
958
4,207
–
1
–
405
406
–%
1.92
0.25
1.89
1.14
–
0.56
1.02
1.83
1.10
–
0.10
–
1.08
1.05
Total average deposits
$ 1,139,367 $ 7,163
0.63% $ 990,059 $ 13,675
1.38% $ 937,065 $ 10,489
1.12%
1 As at October 31, 2020, deposits by foreign depositors in TD’s Canadian bank offices
amounted to $154 billion (October 31, 2019 – $152 billion, October 31, 2018 –
$152 billion).
121
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 6 3 | DEPOSITS – Denominations of $100,000 or greater1
(millions of Canadian dollars)
Canada
United States
Other international
Total
Canada
United States
Other international
Total
Canada
United States
Other international
Total
Remaining term-to-maturity
Within
3 months
3 months to
6 months
6 months to
12 months
Over
12 months
As at
Total
$ 72,278
19,326
11,261
$ 30,196
9,577
4,135
$ 36,774
17,495
3,039
$ 79,758
3,288
–
$ 219,006
49,686
18,435
$ 102,865
$ 43,908
$ 57,308
$ 83,046
$ 287,127
October 31, 2020
$ 64,039
19,616
17,234
$ 17,069
12,220
2,880
$ 43,559
28,143
3,601
$ 97,659
2,755
–
$ 222,326
62,734
23,715
$ 100,889
$ 32,169
$ 75,303
$ 100,414
$ 308,775
October 31, 2019
$ 65,253
20,203
20,225
$ 22,761
16,547
2,016
$ 37,652
11,654
2,787
$ 92,105
2,166
–
$ 217,771
50,570
25,028
$ 105,681
$ 41,324
$ 52,093
$ 94,271
$ 293,369
October 31, 2018
1 Deposits in Canada, U.S., and Other international include wholesale and retail deposits.
T A B L E 6 4 | 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
October 31
2020
October 31
2019
October 31
2018
As at
$ 188,876
165,653
198,705
$ 125,856
119,782
126,115
$ 93,389
95,286
98,539
0.27%
0.72
1.54%
1.98
1.63%
1.65
122
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
T A B L E 6 5 | NET INTEREST INCOME ON AVERAGE EARNING BALANCES1,2
(millions of Canadian dollars, except as noted)
Average
balance
Interest3
2020
Average
rate
Average
balance
Interest3
2019
Average
rate
Average
balance
Interest3
2018
Average
rate
$
50,740 $
55,810
142
194
0.28% $
0.35
6,846 $
24,078
128
532
1.87% $
2.21
5,204 $
34,424
102
592
1.96%
1.72
Interest-earning assets
Interest-bearing deposits with Banks
Canada
U.S.
Securities
Trading
Canada
U.S.
Non-trading
Canada
U.S.
Securities purchased under reverse
repurchase agreements
Canada
U.S.
Loans
Residential mortgages4
Canada
U.S.
Consumer instalment and other personal
Canada
U.S.
Credit card
Canada
U.S.
Business and government4
Canada
U.S.
International
70,972
22,997
64,357
199,395
1,985
386
1,257
2,948
76,533
47,797
752
592
217,734
37,871
135,265
44,886
17,512
16,976
116,263
141,387
106,613
5,459
1,374
5,450
1,911
2,245
2,764
2,975
4,352
861
Total interest-earning assets
1,423,108
35,647
Interest-bearing liabilities
Deposits
Personal5
Canada
U.S.
Banks6,7
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.
International6,7
252,704
297,021
1,116
85
14,376
1,424
303,449
127,150
11,922
95,110
61,484
28,220
7,267
3,047
70,007
77
3
4,386
1,245
425
1,044
583
363
173
99
437
Total interest-bearing liabilities
1,273,181
10,036
Total net interest income on average
2.80
1.68
1.95
1.48
0.98
1.24
2.51
3.63
4.03
4.26
12.82
16.28
2.56
3.08
0.81
2.50
0.44
0.03
0.54
0.21
1.45
0.98
3.56
1.10
0.95
1.29
2.38
3.25
0.62
0.79
62,433
20,254
46,854
169,275
1,973
506
1,387
4,641
66,015
45,423
1,250
1,381
207,289
32,821
130,719
43,372
19,197
17,679
100,408
125,914
105,401
6,133
1,253
5,762
2,015
2,422
2,913
3,506
4,800
1,397
1,223,978
41,999
224,374
246,986
11,414
2,346
279,571
101,874
9,589
60,173
57,028
27,023
5,669
35
67,833
1,634
3,179
169
44
6,171
2,051
395
1,281
1,602
524
154
4
860
1,093,915
18,068
3.16
2.50
2.96
2.74
1.89
3.04
2.96
3.82
4.41
4.65
12.62
16.48
3.49
3.81
1.33
3.43
0.73
1.29
1.48
1.88
2.21
2.01
4.12
2.13
2.81
1.94
2.72
11.43
1.27
1.65
55,519
20,496
47,761
155,892
1,684
517
1,219
3,719
41,518
44,238
665
1,020
201,772
29,514
120,273
41,762
18,708
15,853
92,348
115,147
102,855
5,656
1,110
5,215
1,711
2,323
2,550
2,943
4,203
1,193
1,143,284
36,422
215,320
238,005
11,612
7,214
248,013
84,575
7,946
46,981
57,384
27,805
5,706
34
68,074
1,228
2,788
135
135
4,513
1,284
337
1,091
1,274
586
132
4
676
1,018,669
14,183
3.03
2.52
2.55
2.39
1.60
2.31
2.80
3.76
4.34
4.10
12.42
16.09
3.19
3.65
1.16
3.19
0.57
1.17
1.16
1.87
1.82
1.52
4.24
2.32
2.22
2.11
2.31
11.76
0.99
1.39
earning assets
$ 1,423,108 $ 25,611
1.80% $ 1,223,978 $ 23,931
1.96% $ 1,143,284 $ 22,239
1.95%
1 Net interest income includes dividends on securities.
2 Geographic classification of assets and liabilities is based on the domicile of the
booking point of assets and liabilities.
3 Interest income includes loan fees earned by the Bank, which are recognized in net
interest income over the life of the loan through the effective interest rate method.
4 Includes average trading loans of $13 billion (2019 – $12 billion, 2018 – $11 billion).
5 Includes charges incurred on the TD Ameritrade IDA agreement of $1.9 billion and
Schwab IDA Agreement of $136 million (charges on TD Ameritrade IDA Agreement
2019 – $2.2 billion, 2018 – $1.9 billion).
6 Includes average trading deposits with a fair value of $24 billion (2019 – $61 billion,
2018 – $102 billion).
7 Includes average deposit designated at FVTPL of $95 billion (2019 – $59 billion).
8 Includes average securitization liabilities at fair value of $13 billion (2019 –
$13 billion, 2018 – $12 billion) and average securitization liabilities at amortized
cost of $15 billion (2019 –$14 billion, 2018 – $16 billion).
123
TD BANK GROUP ANNUAL REPORT 2020 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 6 | ANALYSIS OF CHANGE IN NET INTEREST INCOME1,2
(millions of Canadian dollars)
2020 vs. 2019
2019 vs. 2018
Increase (decrease) due to changes in
Increase (decrease) due to changes in
Average
volume
Average
rate
Net
change
Average
volume
Average
rate
Net
change
Interest-earning assets
Interest-bearing deposits with banks
Canada
U.S.
Securities
Trading
Canada
U.S.
Non-trading
Canada
U.S.
Securities purchased under reverse
repurchase agreements
Canada
U.S.
Loans
Residential mortgages
Canada
U.S.
Consumer instalment and other personal
Canada
U.S.
Credit card
Canada
U.S.
Business and government
Canada
U.S.
International
Total interest income
Interest-bearing liabilities
Deposits
Personal
Canada
U.S.
Banks
Canada
U.S.
Business and government
Canada
U.S.
Subordinated notes and debentures
Obligations related to securities
sold short and under
repurchase agreements
Canada
U.S.
Securitization liabilities
Other liabilities
Canada
U.S.
International
Total interest expense
Net interest income
$ 823
702
$
(809)
(1,040)
$
14
$
32
$
(338)
(178)
270
69
518
826
199
72
309
193
200
70
(212)
(116)
554
590
(41)
(258)
(189)
(648)
(2,519)
(697)
(861)
(983)
(72)
(512)
(174)
35
(33)
(1,085)
(1,038)
(495)
12
(120)
(130)
(1,693)
(498)
(789)
(674)
121
(312)
(104)
(177)
(149)
(531)
(448)
(536)
210
(6)
(23)
319
392
27
154
124
453
66
60
294
257
393
112
(6)
118
79
(5)
191
603
193
334
323
19
94
238
39
69
306
204
92
$
26
(60)
289
(11)
168
922
585
361
477
143
547
304
99
363
563
597
204
5,026
(11,378)
(6,352)
2,686
2,891
5,577
206
644
44
(17)
527
509
96
744
125
23
43
366
20
(724)
(3,738)
(136)
(24)
(2,312)
(1,315)
(66)
(981)
(1,144)
(184)
(24)
(271)
(443)
(518)
(3,094)
(92)
(41)
(1,785)
(806)
30
(237)
(1,019)
(161)
19
95
(423)
52
106
(2)
(92)
574
263
70
306
(7)
(17)
(1)
–
(15)
3,330
(11,362)
(8,032)
1,237
354
285
36
1
1,084
504
(12)
(116)
335
(45)
23
–
199
2,648
406
391
34
(91)
1,658
767
58
190
328
(62)
22
–
184
3,885
$ 1,696
$
(16)
$ 1,680
$ 1,449
$ 243
$ 1,692
1 Geographic classification of assets and liabilities is based on the domicile of the
booking point of assets and liabilities.
2 Interest income includes loan fees earned by the Bank, which are recognized in net
interest income over the life of the loan through the effective interest rate method.
124
TD BANK GROUP ANNUAL REPORT 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL RESULTS
Consolidated Financial Statements
PAGE
Management’s Responsibility for Financial Information
126
Independent Auditor’s Report – Canadian Generally
Accepted Auditing Standards
Report of Independent Registered Public Accounting
Firm – Public Company Accounting Oversight Board
Standards (United States)
Report of Independent Registered Public Accounting
Firm – Internal Control over Financial Reporting
127
129
131
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
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
137
137
147
150
151
160
162
165
172
173
176
185
187
187
189
190
190
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
Other Liabilities
Subordinated Notes and Debentures
Capital Trust Securities
Equity
Insurance
Share-Based Compensation
Employee Benefits
Income Taxes
Earnings Per Share
Provisions, Contingent Liabilities, Commitments,
Guarantees, Pledged Assets, and Collateral
Related Party Transactions
Segmented Information
Interest Income and Expense
Credit Risk
Regulatory Capital
Risk Management
Information on Subsidiaries
PAGE
132
133
134
135
136
PAGE
192
192
193
194
196
198
199
204
206
206
209
210
212
212
214
214
215
125
TD BANK GROUP ANNUAL REPORT 2020 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, 2020, 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, 2020, 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, 2020, 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 therefrom, 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
Toronto, Canada
December 2, 2020
Riaz Ahmed
Group Head and
Chief Financial Officer
126
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
INDEPENDENT AUDITOR’S REPORT
To the Shareholders and Directors of
The Toronto-Dominion Bank
Opinion
We have audited the consolidated financial statements of The Toronto-
Dominion Bank and its subsidiaries (TD) which comprise the Consolidated
Balance Sheet as at October 31, 2020 and 2019, and the Consolidated
Statement of Income, Consolidated Statement of Comprehensive
Income, Consolidated Statement of Changes in Equity, and Consolidated
Statement of Cash Flows for each of the years in the three-year period
ended October 31, 2020, and notes to the consolidated financial
statements, including a summary of significant accounting policies
(collectively referred to as the “consolidated financial statements”).
In our opinion, the accompanying consolidated financial statements
present fairly, in all material respects, the consolidated financial position
of TD as at October 31, 2020 and 2019, and its consolidated financial
performance and its consolidated cash flows for each of the years
in the three-year period ended October 31, 2020, in accordance with
International Financial Reporting Standards (IFRS) as issued by the
International Accounting Standards Board.
Basis for Opinion
We conducted our audit in accordance with Canadian generally
accepted auditing standards. Our responsibilities under those standards
are further described in the Auditor’s Responsibilities for the Audit of
the Consolidated Financial Statements section of our report. We are
independent of TD in accordance with the ethical requirements that are
relevant to our audit of the consolidated financial statements in Canada,
and we have fulfilled our other ethical responsibilities in accordance with
these requirements. We believe that the audit evidence we have obtained
is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were
of most significance in our audit of the consolidated financial statements
of the year ended October 31, 2020. These matters were addressed in the
context of our audit of the consolidated financial statements as a whole,
and in forming our opinion thereon, and we do not provide a separate
opinion on these matters. For each matter below, our description of how
our audit addressed the matter is provided in that context.
We have fulfilled the responsibilities described in the Auditor’s
Responsibilities for the Audit of the Consolidated Financial Statements
section of our report, including in relation to these matters. Accordingly,
our audit included the performance of procedures designed to respond to
our assessment of the risks of material misstatement of the consolidated
financial statements. The results of our audit procedures, including the
procedures performed to address the matters below, provide the basis for
our audit opinion on the accompanying consolidated financial statements.
Allowance for credit losses
Key audit matter
TD describes its significant accounting judgments, estimates, and
assumptions in relation to the allowance for credit losses in Note 3 of the
consolidated financial statements. As disclosed in Note 7 and Note 8 to
the consolidated financial statements, TD recognized $9,384 million in
allowances for credit losses on its consolidated balance sheet using an
expected credit loss model (ECL). The ECL is an unbiased and probability-
weighted estimate of credit losses expected to occur in the future, which
is based on the probability of default (PD), loss given default (LGD) and
exposure at default (EAD) or the expected cash shortfall relating to the
underlying financial asset. The ECL is determined by evaluating a range of
possible outcomes incorporating the time value of money and reasonable
and supportable information about past events, current conditions, and
future economic forecasts. ECL allowances are measured at amounts
equal to either (i) 12-month ECL; or (ii) lifetime ECL for those financial
instruments that have experienced a significant increase in credit risk (SICR)
since initial recognition or when there is objective evidence of impairment.
Auditing the allowance for credit losses was complex and required
the application of significant judgment and involvement of specialists
because of the sophistication of the models, the forward-looking nature
of the key assumptions, and the inherent interrelationship of the critical
variables used in measuring the ECL. Key areas of judgment include
evaluating: (i) the models and methodologies used for measuring both
the 12-month and lifetime expected credit losses; (ii) the assumptions
used in the ECL scenarios including forward-looking information (FLI) and
assigning probability weighting; (iii) the determination of SICR; and (iv)
the assessment of the qualitative component applied to the modelled ECL
based on management’s expert credit judgment. Management has applied
a significant level of judgment in the areas noted above in determining
the impact of COVID-19 on the allowance for credit losses. Specifically,
management has applied judgment in assessing the impact of COVID-19
on borrower credit scores, industry and geographic specific COVID-19
impacts, payment support initiatives introduced by TD and governments,
and the persistence of the economic shutdown.
How our audit addressed the key audit matter
We obtained an understanding, evaluated the design, and tested the
operating effectiveness of management’s controls over the allowance
for credit losses. The controls we tested included, amongst others, the
development and validation of models and selection of appropriate inputs
including economic forecasting and determination of non-retail borrower
risk ratings, the integrity of the data used including the associated controls
over relevant information technology (IT) systems, and the governance and
oversight over the modelled results and the use of expert credit judgment.
To test the allowance for credit losses, our audit procedures included,
amongst others, involving our credit risk specialists to assess whether the
methodology and assumptions, including management’s SICR triggers,
used in significant models that estimate the ECL across various portfolios
are consistent with the requirements of IFRS and industry standards. With
the assistance of our economic specialists, we evaluated the process used
by management to develop FLI and determine the ECL scenario probability
weights. For a sample of FLI variables, we compared management’s FLI to
independently derived forecasts and publicly available information. On a
sample basis, we recalculated the ECL to test the mathematical accuracy
of management’s models. We tested the completeness and accuracy of
data used in measuring the ECL and evaluated management’s non-retail
borrower risk ratings against TD’s risk rating policy. With the assistance of
our credit risk specialists, we also evaluated management’s methodology and
governance over the application of expert credit judgment by evaluating
that the amounts recorded were reflective of underlying credit quality and
macroeconomic trends, including the impact of COVID-19. We also assessed
the adequacy of disclosures related to the allowance for credit losses.
Fair value measurement of derivatives
Key audit matter
TD describes its significant accounting judgments, estimates, and
assumptions in relation to the fair value measurement of derivatives in
Note 3 of the consolidated financial statements. As disclosed in Note 5
of the consolidated financial statements, TD has derivative assets of
$54,242 million and derivative liabilities of $53,203 million recorded at
fair value. Of these derivatives, certain trades are complex and illiquid
and require valuation techniques that may include complex models and
non-observable inputs, requiring management’s estimation and judgment.
Auditing the valuation of certain derivatives required the application of
significant auditor judgment and involvement of valuation specialists
in assessing the complex models and non-observable inputs used,
including any significant valuation adjustments applied. Certain valuation
inputs used to determine fair value that may be non-observable include
volatilities, correlations, and credit spreads. The valuation of certain
derivatives is sensitive to these inputs as they are forward-looking and
could be affected by future economic and market conditions.
127
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS How our audit addressed the key audit matter
We obtained an understanding, evaluated the design, and tested the
operating effectiveness of management’s controls, including those related
to technology, over the valuation of TD’s derivative portfolio. The controls
we tested included, amongst others, the controls over the suitability
and mechanical accuracy of models used in the valuation of derivatives,
controls over management’s independent assessment of fair values,
including the integrity of data used in the valuation such as the significant
inputs noted above, controls over relevant IT systems, and the review of
significant valuation adjustments applied.
To test the valuation of these derivatives, our audit procedures included,
amongst others, an evaluation of the methodologies and significant
inputs used by TD. With the assistance of our valuation specialists, we
performed an independent valuation for a sample of derivatives to assess
the modelling assumptions and significant inputs used to estimate the
fair value, which involved independently obtaining significant inputs
from external sources. For a sample of valuation adjustments, we utilized
the assistance of our valuation specialists to evaluate the methodology
applied against industry practice and performed a recalculation of these
adjustments. We also assessed the adequacy of the disclosures related to
the fair value measurement of derivatives.
Valuation of provision for unpaid claims
Key audit matter
TD describes its significant accounting judgments, estimates, and
assumptions in relation to the valuation of provisions for unpaid claims in
Note 3 of the consolidated financial statements. As disclosed in Note 22
to the consolidated financial statements, TD has recognized $7,590 million
in insurance-related liabilities on its consolidated balance sheet. The
insurance-related liabilities include a provision for unpaid claims, which is
determined in accordance with accepted actuarial practices.
Auditing the provision for unpaid claims involves the application of
models, methodologies and assumptions that require significant judgment.
The main assumption underlying the claims liability estimates is the
amount and timing related to incurred insured events including those not
yet reported by the claimants. It also considers variables such as discount
rate, margin for adverse deviation, past loss experience, current claim
trends and the impact changes in the prevailing social, economic and legal
environment may have on claims.
How our audit addressed the key audit matter
We evaluated the objectivity, independence and expertise of the
actuarial valuator appointed by management. Also, we obtained
an understanding, evaluated the design, and tested the operating
effectiveness of management’s controls over the valuation of the
provision for unpaid claims. The controls we tested included, amongst
others, the controls related to TD’s claims and actuarial processes
including over the completeness and accuracy of data flow through the
claims administration systems, and the overall review of the provision
for unpaid claims by management.
To test the valuation for unpaid claims, our audit procedures included,
amongst others, involving our actuarial specialists to independently
calculate significant components of the provision for unpaid claims. This
included assessing the accuracy of TD’s data by agreeing to source systems
on a sample basis and benchmarking the assumptions against industry
trends. We involved our actuarial specialists in assessing TD’s actuary’s
methodologies and significant assumptions, including the rationale for the
judgments applied against accepted actuarial practice. We performed data
integrity testing of incurred claims, paid claims, and earned premiums used
in the estimation of the provision for unpaid claims. We also assessed the
adequacy of the disclosures related to the claims liabilities.
Measurement of provision for uncertain tax positions
Key audit matter
TD describes its significant accounting judgments, estimates, and
assumptions in relation to income taxes in Note 3 of the consolidated
financial statements. As a financial institution operating in multiple
jurisdictions, TD is subject to complex and constantly evolving tax
legislation. Uncertainty in a tax position may arise as tax laws are subject
to interpretation. TD uses significant judgment in i) determining whether
128
it is probable that TD will have to make a payment to tax authorities upon
their examination of certain uncertain tax positions and ii) measuring the
amount of the liability, where probable.
Auditing the recognition and measurement of TD’s provision for uncertain
tax positions involves the application of judgment and is based on
interpretation of tax legislation and jurisprudence.
How our audit addressed the key audit matter
We obtained an understanding, evaluated the design, and tested the
operating effectiveness of management’s controls over the recognition and
measurement of TD’s provision for uncertain tax positions. This includes
controls over the assessment of the technical merits of tax positions and
management’s process to measure the provision for uncertain tax positions.
With the assistance of our tax professionals our audit procedures included,
amongst others, assessing the technical merits and the amount recorded
for uncertain tax positions. This included using our knowledge of, and
experience with, the application of tax laws by the relevant income tax
authorities to evaluate TD’s interpretations and assessment of tax
laws with respect to uncertain tax positions. We assessed the implications
of correspondence received by TD from the relevant tax authorities and
evaluated income tax opinions or other third-party advice obtained. We also
assessed the adequacy of the disclosures related to uncertain tax positions.
Other Information
Management is responsible for the other information. The other
information comprises:
• Management’s Discussion and Analysis; and
• The information, other than the consolidated financial statements and
our auditor’s report thereon, in the 2020 Annual Report.
Our opinion on the consolidated financial statements does not cover
the other information and we do not express any form of assurance
conclusion thereon.
In connection with our audit of the consolidated financial statements,
our responsibility is to read the other information, and in doing so,
consider whether the other information is materially inconsistent with the
consolidated financial statements or our knowledge obtained in the audit
or otherwise appears to be materially misstated.
We obtained Management’s Discussion and Analysis and the 2020 Annual
Report prior to the date of this auditor’s report. If, based on the work we
have performed, we conclude that there is a material misstatement of
this other information, we are required to report that fact in this auditor’s
report. We have nothing to report in this regard.
Responsibilities of Management and Those Charged with
Governance for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of
the consolidated financial statements in accordance with IFRS, 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.
In preparing the consolidated financial statements, management is
responsible for assessing TD’s ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using
the going concern basis of accounting unless management either intends
to liquidate TD or to cease operations, or has no realistic alternative but
to do so.
Those charged with governance are responsible for overseeing
TD’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Consolidated
Financial Statements
Our objectives are to obtain reasonable assurance about whether the
consolidated financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s
report that includes our opinion. Reasonable assurance is a high level of
assurance, but is not a guarantee that an audit conducted in accordance
with Canadian generally accepted auditing standards will always detect a
material misstatement when it exists. Misstatements can arise from fraud
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions
of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted
auditing standards, we exercise professional judgment and maintain
professional skepticism throughout the audit. We also:
•
Identify and assess the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error, design
and perform audit procedures responsive to those risks, and obtain
audit evidence that is sufficient and appropriate to provide a basis for
our opinion. The risk of not detecting a material misstatement resulting
from fraud is higher than for one resulting from error, as fraud may
involve collusion, forgery, intentional omissions, misrepresentations,
or the override of internal control.
• Obtain an understanding of internal control relevant to the audit
in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on
the effectiveness of TD’s internal control.
• Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made
by management.
• Conclude on the appropriateness of management’s use of the
going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on TD’s ability to continue
as a going concern. If we conclude that a material uncertainty exists,
we are required to draw attention in our auditor’s report to the
related disclosures in the consolidated financial statements or, if such
disclosures are inadequate, to modify our opinion. Our conclusions
are based on the audit evidence obtained up to the date of our
auditor’s report. However, future events or conditions may cause
TD to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the
• Obtain sufficient appropriate audit evidence regarding the financial
information of the entities or business activities within TD to express an
opinion on the consolidated financial statements. We are responsible
for the direction, supervision and performance of the group audit. We
remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among
other matters, the planned scope and timing of the audit and significant
audit findings, including any significant deficiencies in internal control that
we identify during our audit.
We also provide those charged with governance with a statement that we
have complied with relevant ethical requirements regarding independence,
and to communicate with them all relationships and other matters that
may reasonably be thought to bear on our independence, and where
applicable, related safeguards.
From the matters communicated with those charged with governance, we
determine those matters that were of most significance in the audit of the
consolidated financial statements of the current period and are therefore
the key audit matters. We describe these matters in our auditors report
unless law or regulation precludes public disclosure about the matter or
when, in extremely rare circumstances, we determine that a matter should
not be communicated in our report because the adverse consequences of
doing so would reasonably be expected to outweigh the public interest
benefits of such communication.
The engagement partner on the audit resulting in this independent
auditor’s report is Carrie Marchitto.
Chartered Professional Accountants
Licensed Public Accountants
consolidated financial statements, including the disclosures, and
whether the consolidated financial statements represent the underlying
transactions and events in a manner that achieves fair presentation.
Toronto, Canada
December 2, 2020
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 Balance Sheet of The
Toronto-Dominion Bank (TD) as of October 31, 2020 and 2019, the related
Consolidated Statement of Income, Comprehensive Income, Changes
in Equity, and Cash Flows for each of the years in the three-year period
ended October 31, 2020, and the related notes (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, 2020 and 2019, and the results of its operations and its
consolidated cash flows for each of the years in the three-year period
ended October 31, 2020, in conformity with International Financial
Reporting Standards (IFRS) as issued by the International Accounting
Standards Board.
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, 2020, based
on the criteria established in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) and our report dated December 2, 2020,
expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of TD’s
management. Our responsibility is to express an opinion on TD’s
consolidated financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and are required to be
independent with respect to TD in accordance with U.S. federal securities
laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts
and disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that
our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from
the current period audit of the consolidated financial statements that were
communicated or required to be communicated to the audit committee
and that: (1) relate to accounts or disclosures that are material to the
consolidated financial statements, and (2) involved our especially
129
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS challenging, subjective, or complex judgments. The communication
of critical audit matters does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are not,
by communicating the critical audit matters below, providing separate
opinions on the critical audit matters or on the accounts or disclosures to
which they relate.
Allowance for credit losses
Description of the Matter
TD describes its significant accounting judgments, estimates, and
assumptions in relation to the allowance for credit losses in Note 3 of the
consolidated financial statements. As disclosed in Note 7 and Note 8 to
the consolidated financial statements, TD recognized $9,384 million in
allowances for credit losses on its consolidated balance sheet using an
expected credit loss model (ECL). The ECL is an unbiased and probability-
weighted estimate of credit losses expected to occur in the future, which
is based on the probability of default (PD), loss given default (LGD) and
exposure at default (EAD) or the expected cash shortfall relating to the
underlying financial asset. The ECL is determined by evaluating a range of
possible outcomes incorporating the time value of money and reasonable
and supportable information about past events, current conditions, and
future economic forecasts. ECL allowances are measured at amounts
equal to either (i) 12-month ECL; or (ii) lifetime ECL for those financial
instruments that have experienced a significant increase in credit risk (SICR)
since initial recognition or when there is objective evidence of impairment.
Auditing the allowance for credit losses was complex and required
the application of significant judgment and involvement of specialists
because of the sophistication of the models, the forward-looking nature
of the key assumptions, and the inherent interrelationship of the critical
variables used in measuring the ECL. Key areas of judgment include
evaluating: (i) the models and methodologies used for measuring both
the 12-month and lifetime expected credit losses; (ii) the assumptions
used in the ECL scenarios including forward-looking information (FLI) and
assigning probability weighting; (iii) the determination of SICR; and (iv)
the assessment of the qualitative component applied to the modelled ECL
based on management’s expert credit judgment. Management has applied
a significant level of judgment in the areas noted above in determining
the impact of COVID-19 on the allowance for credit losses. Specifically,
management has applied judgment in assessing the impact of COVID-19
on borrower credit scores, industry and geographic specific COVID-19
impacts, payment support initiatives introduced by TD and governments,
and the persistence of the economic shutdown.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design, and tested the
operating effectiveness of management’s controls over the allowance
for credit losses. The controls we tested included, amongst others, the
development and validation of models and selection of appropriate inputs
including economic forecasting and determination of non-retail borrower
risk ratings, the integrity of the data used including the associated controls
over relevant information technology (IT) systems, and the governance and
oversight over the modelled results and the use of expert credit judgment.
To test the allowance for credit losses, our audit procedures included,
amongst others, involving our credit risk specialists to assess whether the
methodology and assumptions, including management’s SICR triggers,
used in significant models that estimate the ECL across various portfolios
are consistent with the requirements of IFRS and industry standards. With
the assistance of our economic specialists, we evaluated the process used
by management to develop FLI and determine the ECL scenario probability
weights. For a sample of FLI variables, we compared management’s FLI to
independently derived forecasts and publicly available information. On a
sample basis, we recalculated the ECL to test the mathematical accuracy
of management’s models. We tested the completeness and accuracy of
data used in measuring the ECL and evaluated management’s non-retail
borrower risk ratings against TD’s risk rating policy. With the assistance of
our credit risk specialists, we also evaluated management’s methodology
and governance over the application of expert credit judgment by
evaluating that the amounts recorded were reflective of underlying credit
quality and macroeconomic trends, including the impact of COVID-19.
We also assessed the adequacy of disclosures related to the allowance
for credit losses.
130
Fair value measurement of derivatives
Description of the Matter
TD describes its significant accounting judgments, estimates, and
assumptions in relation to the fair value measurement of derivatives in
Note 3 of the consolidated financial statements. As disclosed in Note 5
of the consolidated financial statements, TD has derivative assets of
$54,242 million and derivative liabilities of $53,203 million recorded at
fair value. Of these derivatives, certain trades are complex and illiquid and
require valuation techniques that may include complex models and non-
observable inputs, requiring management’s estimation and judgment.
Auditing the valuation of certain derivatives required the application of
significant auditor judgment and involvement of valuation specialists
in assessing the complex models and non-observable inputs used,
including any significant valuation adjustments applied. Certain valuation
inputs used to determine fair value that may be non-observable include
volatilities, correlations, and credit spreads. The valuation of certain
derivatives is sensitive to these inputs as they are forward-looking and
could be affected by future economic and market conditions.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design, and tested the
operating effectiveness of management’s controls, including those related
to technology, over the valuation of TD’s derivative portfolio. The controls
we tested included, amongst others, the controls over the suitability
and mechanical accuracy of models used in the valuation of derivatives,
controls over management’s independent assessment of fair values,
including the integrity of data used in the valuation such as the significant
inputs noted above, controls over relevant IT systems, and the review of
significant valuation adjustments applied.
To test the valuation of these derivatives, our audit procedures included,
amongst others, an evaluation of the methodologies and significant
inputs used by TD. With the assistance of our valuation specialists, we
performed an independent valuation for a sample of derivatives to assess
the modelling assumptions and significant inputs used to estimate the
fair value, which involved independently obtaining significant inputs
from external sources. For a sample of valuation adjustments, we utilized
the assistance of our valuation specialists to evaluate the methodology
applied against industry practice and performed a recalculation of these
adjustments. We also assessed the adequacy of the disclosures related to
the fair value measurement of derivatives.
Valuation of provision for unpaid claims
Description of the Matter
TD describes its significant accounting judgments, estimates, and
assumptions in relation to the valuation of provisions for unpaid claims in
Note 3 of the consolidated financial statements. As disclosed in Note 22
to the consolidated financial statements, TD has recognized $7,590 million
in insurance-related liabilities on its consolidated balance sheet. The
insurance-related liabilities include a provision for unpaid claims, which is
determined in accordance with accepted actuarial practices.
Auditing the provision for unpaid claims involves the application of
models, methodologies and assumptions that require significant judgment.
The main assumption underlying the claims liability estimates is the
amount and timing related to incurred insured events including those not
yet reported by the claimants. It also considers variables such as discount
rate, margin for adverse deviation, past loss experience, current claim
trends and the impact changes in the prevailing social, economic and legal
environment may have on claims.
How We Addressed the Matter in Our Audit
We evaluated the objectivity, independence and expertise of the
actuarial valuator appointed by management. Also, we obtained
an understanding, evaluated the design, and tested the operating
effectiveness of management’s controls over the valuation of the
provision for unpaid claims. The controls we tested included, amongst
others, the controls related to TD’s claims and actuarial processes including
over the completeness and accuracy of data flow through the claims
administration systems, and the overall review of the provision for unpaid
claims by management.
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS To test the valuation for unpaid claims, our audit procedures included,
amongst others, involving our actuarial specialists to independently
calculate significant components of the provision for unpaid claims. This
included assessing the accuracy of TD’s data by agreeing to source systems
on a sample basis and benchmarking the assumptions against industry
trends. We involved our actuarial specialists in assessing TD’s actuary’s
methodologies and significant assumptions, including the rationale for the
judgments applied against accepted actuarial practice. We performed data
integrity testing of incurred claims, paid claims, and earned premiums used
in the estimation of the provision for unpaid claims. We also assessed the
adequacy of the disclosures related to the claims liabilities.
Measurement of provision for uncertain tax positions
Description of the Matter
TD describes its significant accounting judgments, estimates, and
assumptions in relation to income taxes in Note 3 of the consolidated
financial statements. As a financial institution operating in multiple
jurisdictions, TD is subject to complex and constantly evolving tax
legislation. Uncertainty in a tax position may arise as tax laws are subject
to interpretation. TD uses significant judgment in i) determining whether
it is probable that TD will have to make a payment to tax authorities
upon their examination of certain uncertain tax positions and ii) measuring
the amount of the liability, where probable.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design, and tested the
operating effectiveness of management’s controls over the recognition and
measurement of TD’s provision for uncertain tax positions. This includes
controls over the assessment of the technical merits of tax positions and
management’s process to measure the provision for uncertain tax positions.
With the assistance of our tax professionals our audit procedures
included, amongst others, assessing the technical merits and the amount
recorded for uncertain tax positions. This included using our knowledge of,
and experience with, the application of tax laws by the relevant income
tax authorities to evaluate TD’s interpretations and assessment of tax laws
with respect to uncertain tax positions. We assessed the implications of
correspondence received by TD from the relevant tax authorities and
evaluated income tax opinions or other third-party advice obtained. We also
assessed the adequacy of the disclosures related to uncertain tax positions.
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.
Auditing the recognition and measurement of TD’s provision for uncertain
tax positions involves the application of judgment and is based on
interpretation of tax legislation and jurisprudence.
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
December 2, 2020
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, 2020, based on criteria established
in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework)
(the COSO criteria). In our opinion, TD maintained, in all material respects,
effective internal control over financial reporting as of October 31, 2020,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States) (PCAOB), the
Consolidated Balance Sheet of TD as at October 31, 2020 and 2019, 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, 2020, and the related notes, and our report dated
December 2, 2020, 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 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.
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
December 2, 2020
131
TD BANK GROUP ANNUAL REPORT 2020 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 (Notes 5, 7)
Derivatives (Notes 5, 11)
Financial assets designated at fair value through profit or loss (Notes 5, 7)
Financial assets at fair value through other comprehensive income (Notes 5, 7, 8)
Debt securities at amortized cost, net of allowance for credit losses (Notes 5, 7)
Securities purchased under reverse repurchase agreements (Note 5)
Loans (Notes 5, 8)
Residential mortgages
Consumer instalment and other personal
Credit card
Business and government
Allowance for loan losses (Note 8)
Loans, net of allowance for loan losses
Other
Customers’ liability under acceptances
Investment in Schwab and 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)
Financial liabilities designated at fair value through profit or loss (Notes 5, 17)
Deposits (Notes 5, 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 (Notes 5, 9)
Amounts payable to brokers, dealers, and clients
Insurance-related liabilities (Note 22)
Other liabilities (Note 18)
Subordinated notes and debentures (Notes 5, 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)
Total equity
Total liabilities and equity
The accompanying Notes are an integral part of these Consolidated
Financial Statements.
132
October 31
2020
October 31
2019
$
6,445 $
164,149
170,594
148,318
8,548
54,242
4,739
103,285
319,132
227,679
169,162
252,219
185,460
32,334
255,799
725,812
(8,289)
717,523
14,941
12,174
17,148
2,125
10,136
2,444
33,951
18,856
111,775
4,863
25,583
30,446
146,000
6,503
48,894
4,040
111,104
316,541
130,497
165,935
235,640
180,334
36,564
236,517
689,055
(4,447)
684,608
13,494
9,316
16,976
2,503
5,513
1,799
20,575
17,087
87,263
$ 1,715,865 $ 1,415,290
$
19,177 $
53,203
13,718
59,665
145,763
625,200
28,969
481,164
1,135,333
14,941
34,999
188,876
15,768
35,143
7,590
30,476
327,793
11,477
26,885
50,051
13,058
105,131
195,125
503,430
16,751
366,796
886,977
13,494
29,656
125,856
14,086
23,746
6,920
21,004
234,762
10,725
1,620,366
1,327,589
22,487
5,650
(37)
(4)
121
53,845
13,437
95,499
21,713
5,800
(41)
(6)
157
49,497
10,581
87,701
$ 1,715,865 $ 1,415,290
Bharat B. Masrani
Group President and
Chief Executive Officer
Alan N. MacGibbon
Chair, Audit Committee
TD BANK GROUP ANNUAL REPORT 2020 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 (Note 4)
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) (Note 12)
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 and sub-advisory 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
For the years ended October 31
2020
2019
2018
$ 28,151
$ 31,925
$ 27,790
5,432
1,714
350
35,647
7,163
363
426
2,084
10,036
25,611
5,341
1,400
40
1,404
14
55
2,593
2,154
4,565
469
18,035
43,646
7,242
2,886
11,891
1,990
1,287
817
740
(16)
362
1,144
3,389
21,604
11,914
1,152
1,133
11,895
267
7,843
1,548
683
41,999
13,675
524
395
3,474
18,068
23,931
4,872
1,289
78
1,047
121
8
2,885
2,465
4,282
87
17,134
41,065
3,029
2,787
11,244
1,835
1,165
800
769
175
336
1,322
4,374
22,020
13,229
2,735
1,192
11,686
252
6,685
1,234
713
36,422
10,489
586
337
2,771
14,183
22,239
4,714
1,210
111
1,052
48
(170)
2,716
2,376
4,045
551
16,653
38,892
2,480
2,444
10,377
1,765
1,073
815
803
73
359
1,194
3,736
20,195
13,773
3,182
743
11,334
214
Net income available to common shareholders and non-controlling interests in subsidiaries
$ 11,628
$ 11,434
$ 11,120
Attributable to:
Common shareholders
Non-controlling interests in subsidiaries
Earnings per share (Canadian dollars) (Note 26)
Basic
Diluted
Dividends per common share (Canadian dollars)
$ 11,628
$ 11,416
–
18
$ 11,048
72
$
6.43
6.43
3.11
$
6.26
6.25
2.89
$
6.02
6.01
2.61
1 Includes $32,524 million, for the year ended October 31, 2020 (October 31, 2019 –
$34,828 million; October 31, 2018 – $30,639 million), 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.
133
TD BANK GROUP ANNUAL REPORT 2020 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
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 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 (Note 12)
Net gains (losses) on hedges of investments in foreign operations
Reclassification to earnings of net losses (gains) on hedges of investments in foreign operations (Note 12)
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
Gains (losses) from changes in fair value due to credit risk on financial liabilities designated at fair value
through profit or loss
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.
Income Tax Provisions (Recoveries) in the Consolidated Statement of Comprehensive Income
(millions of Canadian dollars)
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 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
Unrealized gains (losses) on investments in foreign operations
Less: Reclassification to earnings of net losses (gains) on investment in foreign operations (Note 12)
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 (Note 12)
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
Gains (losses) from changes in fair value due to credit risk on financial liabilities designated at fair value
through profit or loss
Total income taxes
The accompanying Notes are an integral part of these Consolidated
Financial Statements.
For the years ended October 31
2020
2019
2018
$ 11,895
$ 11,686
$ 11,334
312
(94)
2
220
855
(1,531)
(291)
1,531
564
3,565
(1,230)
2,335
(390)
(212)
(51)
(653)
2,466
110
(31)
(1)
78
(165)
–
132
–
(33)
3,459
519
3,978
(921)
(95)
14
(1,002)
3,021
(261)
(22)
(1)
(284)
1,323
–
(288)
–
1,035
(1,624)
(455)
(2,079)
622
38
–
660
(668)
$ 14,361
$ 14,707
$ 10,666
$ 14,094
$ 14,437
267
–
252
18
$ 10,380
214
72
For the years ended October 31
2020
2019
2018
$
78
$
21
$
(139)
1
1
–
–
(102)
(545)
947
121
(140)
(78)
(18)
(1)
–
–
–
48
–
1,235
(157)
(324)
(35)
4
13
–
–
–
(104)
–
(473)
283
243
20
–
$ 1,111
$ 1,107
$
(749)
134
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
Consolidated Statement of Changes in Equity
(millions of Canadian dollars)
Common shares (Note 21)
Balance at beginning of year
Proceeds from shares issued on exercise of stock options
Shares issued as a result of dividend reinvestment plan
Shares issued in connection with acquisitions (Notes 13)
Purchase of shares for cancellation and other
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 16, Leases (IFRS 16) (Note 4)
Impact on adoption of IFRS 15, Revenue from Contracts with Customers (IFRS 15)
Impact on adoption of IFRS 9, Financial Instruments (IFRS 9)
Net income attributable to shareholders
Common dividends
Preferred dividends
Share issue expenses and other
Net premium on repurchase of common shares, redemption of preferred shares, and other
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
Gain (losses) from changes in fair value due to credit risk on financial liabilities designated at fair value through profit or loss:
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
Balance at beginning of year
Net income attributable to non-controlling interests in subsidiaries
Redemption of non-controlling interests in subsidiaries
Other
Balance at end of year
Total equity
For the years ended October 31
2020
2019
2018
$ 21,713
$ 21,221
79
838
–
(143)
22,487
5,800
–
(150)
5,650
(41)
(8,752)
8,756
(37)
(6)
(122)
124
(4)
157
(31)
–
(5)
121
49,497
(553)
n/a
n/a
11,895
(5,614)
(267)
–
(710)
(390)
(13)
53,845
323
n/a
218
2
543
(40)
n/a
(225)
13
(252)
14
(51)
(37)
8,793
564
9,357
1,491
2,335
3,826
13,437
95,499
–
–
–
–
–
124
357
366
(355)
21,713
5,000
800
–
5,800
(144)
(9,782)
9,885
(41)
(7)
(151)
152
(6)
193
(22)
(8)
(6)
157
46,145
n/a1
(41)
n/a
11,668
(5,262)
(252)
(9)
(1,880)
(921)
49
49,497
245
n/a
79
(1)
323
55
n/a
(46)
(49)
(40)
–
14
14
8,826
(33)
8,793
(2,487)
3,978
1,491
10,581
87,701
993
18
(1,000)
(11)
–
$ 95,499
$ 87,701
$ 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
n/a
n/a
53
11,262
(4,786)
(214)
(10)
(1,273)
622
2
46,145
510
19
(283)
(1)
245
113
(96)
40
(2)
55
–
–
–
7,791
1,035
8,826
(408)
(2,079)
(2,487)
6,639
79,047
983
72
–
(62)
993
$ 80,040
135
1 Not applicable.
The accompanying Notes are an integral part of these Consolidated
Financial Statements.
TD BANK GROUP ANNUAL REPORT 2020 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)
Net gain on sale of the investment in TD Ameritrade (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 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 and liabilities 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
Repayment of lease liabilities1
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 debt securities at amortized cost (Note 7)
Purchases
Proceeds from maturities
Proceeds from sales
Net purchases of land, buildings, equipment, and other depreciable assets
Net cash acquired from (paid for) divestitures and acquisitions (Note 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
2020
2019
2018
$ 13,047
$ 14,421
$ 14,516
7,242
1,324
817
(40)
(1,133)
(1,491)
(1,065)
(108)
63,020
(3,227)
5,343
(2,318)
(39,641)
240,648
(2,196)
(2,045)
(46,165)
2,342
280
(1,979)
(869)
231,786
3,000
(2,530)
68
–
(847)
(156)
–
8,849
(8,874)
(5,043)
–
(596)
(6,129)
3,029
605
800
(78)
(1,192)
–
(33)
(26)
32,467
(38,556)
(9,822)
(18,103)
(41,693)
(52,281)
9,883
(2,397)
104,693
(157)
(771)
1,726
(2,244)
271
1,749
24
105
791
(2,235)
–
(1,000)
10,015
(9,933)
(5,157)
(11)
n/a
(5,652)
2,480
576
815
(111)
(743)
–
385
(104)
4,798
7,050
3,996
(24,065)
(45,620)
53,379
(3,745)
5,257
(460)
(1,532)
(780)
(1,435)
(8,964)
5,693
1,750
(2,468)
128
740
(1,501)
(500)
–
8,454
(8,424)
(4,634)
(72)
n/a
(6,527)
(138,566)
5,137
20,465
(50,569)
49,684
11,005
(146,703)
51,400
1,391
(1,757)
–
(224,115)
40
(24,898)
37,835
10,158
(51,202)
28,392
1,418
(794)
(540)
5,506
3
(20,269)
30,101
2,731
(51,663)
20,101
670
(587)
–
1,549
49
1,582
4,863
$ 6,445
128
4,735
$ 4,863
764
3,971
$ 4,735
$ 2,285
10,287
34,076
1,675
$ 3,589
17,958
40,315
1,584
$ 3,535
13,888
34,789
1,202
1 Prior to the adoption of IFRS 16, payments on finance lease liabilities were included in
“Net cash from (used in) operating activities”.
The accompanying Notes are an integral part of these Consolidated
Financial Statements.
136
TD BANK GROUP ANNUAL REPORT 2020 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’s Consolidated Financial Statements have been prepared using
uniform accounting policies for like transactions and events in similar
circumstances. All intercompany transactions, balances, and unrealized
gains and losses on transactions are eliminated on consolidation.
Subsidiaries
Subsidiaries are corporations or other legal entities controlled by
the Bank, generally through directly holding more than half of the voting
power of the entity. Control of subsidiaries is determined based on the
power exercisable through ownership of voting rights and is generally
aligned with the risks and/or returns (collectively referred to as “variable
returns”) absorbed from subsidiaries through those voting rights. As a
result, the Bank controls and consolidates subsidiaries when it holds the
majority of the voting rights of the subsidiary, unless there is evidence that
another investor has control over the subsidiary. The existence and effect
of potential voting rights that are currently exercisable or convertible are
considered in assessing whether the Bank controls an entity. Subsidiaries
are consolidated from the date the Bank obtains control and continue to
be consolidated until the date when control ceases to exist.
The Bank may consolidate certain subsidiaries where it owns 50% or less
of the voting rights. Most of those subsidiaries are structured entities as
described in the following section.
Structured Entities
Structured entities 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
These Consolidated Financial Statements were prepared using the
accounting policies as described in Notes 2 and 4. Certain comparative
amounts have been revised 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
December 2, 2020.
Certain disclosures are included in the shaded sections of the
“Managing Risk” section of the accompanying 2020 Management’s
Discussion and Analysis (MD&A), as permitted by IFRS, and form an
integral part of the Consolidated Financial Statements.
are consolidated when the substance of the relationship between the Bank
and the structured entity indicates that the entity is controlled by the Bank.
When assessing whether the Bank has to consolidate a structured entity,
the Bank evaluates three primary criteria in order to conclude whether,
in substance:
• The Bank has the power to direct the activities of the structured
entity that have the most significant impact on the entity’s risks
and/or returns;
• The Bank is exposed to significant variable returns arising from the
entity; and
• The Bank has the ability to use its power to affect the risks and/or
returns to which it is exposed.
Consolidation conclusions are reassessed at the end of each financial
reporting period. The Bank’s policy is to consider the impact on
consolidation of all significant changes in circumstances, focusing on
the following:
• Substantive changes in ownership, such as the purchase or disposal
of more than an insignificant additional interest in an entity;
• Changes in contractual or governance arrangements of an entity;
• Additional activities undertaken, such as providing a liquidity facility
beyond the original terms or entering into a transaction not originally
contemplated; or
• Changes in the financing structure of an entity.
Investments in Associates and Joint Ventures
Entities over which the Bank has significant influence are associates and
entities over which the Bank has joint control are joint ventures. Significant
influence is the power to participate in the financial and operating policy
decisions of an investee, but is not control or joint control over these
entities. Significant influence is presumed to exist where the Bank holds
between 20% and 50% of the voting rights of an entity. Significant
influence may also exist where the Bank holds less than 20% of the
voting rights and has influence over financial and operating policy-making
processes, through board representation and significant commercial
arrangements. Associates and joint ventures are accounted for using the
equity method of accounting. Investments in associates and joint
137
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS 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. The carrying amount of the investments also
includes the Bank’s share of the investee’s other comprehensive income
or loss, which is reported in the relevant section of the Consolidated
Statement of Comprehensive 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 within total equity,
separate from the equity of the Bank’s shareholders’ equity. 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 at an amount that reflects the consideration
the Bank expects to be entitled to in exchange for transferring services
to a customer, excluding amounts collected on behalf of third parties.
The Bank recognizes revenue when it transfers control of a good or a
service to a customer at a point in time or over time. The determination of
when performance obligations are satisfied requires the use of judgment.
Refer to Note 3 for further details.
The Bank identifies contracts with customers subject to IFRS 15,
which create enforceable rights and obligations. The Bank determines
the performance obligations based on distinct services promised to the
customers in the contracts. The Bank’s contracts generally have a term
of one year or less, consist of a single performance obligation, and the
performance obligations generally reflect services.
For each contract, the Bank determines the transaction price, which
includes estimating variable consideration and assessing whether the price
is constrained. Variable consideration is included in the transaction price
to the extent that it is highly probable that a significant reversal of the
amount will not occur when the uncertainty associated with the amount
of variable consideration is subsequently resolved. As such, the estimate
of the variable consideration is constrained until the end of the invoicing
period. The uncertainty is generally resolved at the end of the reporting
period and as such, no significant judgment is required when recognizing
variable consideration in revenues.
The Bank’s receipt of payment from customers generally occurs
subsequent to the satisfaction of performance obligations or a short time
thereafter. As such, the Bank has not recognized any material contract
assets (unbilled receivables) or contract liabilities (deferred revenues)
and there is no significant financing component associated with the
consideration due to the Bank.
When another party is involved in the transfer of services to a customer,
an assessment is made to evaluate whether the Bank is the principal
such that revenues are reported on a gross basis or the agent such that
revenues are reported on a net basis. The Bank is the principal when it
controls the services in the contract promised to the customer before
they are transferred. Control is demonstrated by the Bank being primarily
responsible for fulfilling the transfer of the services to the customer, having
discretion in establishing pricing of the services, or both.
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 the 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 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
The Bank applies IFRS 9, Financial Instruments (IFRS 9), which 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, Financial Instruments:
Recognition and Measurement (IAS 39). The Bank has made the decision
to continue applying the IAS 39 hedge accounting requirements
and complies with the revised annual hedge accounting disclosures as
required by the related amendments to IFRS 7, Financial Instruments:
Disclosures (IFRS 7).
Various interest rates and other indices that are deemed to be
“benchmarks” (including Interbank Offered Rate (IBOR) benchmarks) have
been, and continue to be, the subject of international regulatory guidance
and proposals for reform. 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
London Interbank Offered Rate (LIBOR) post December 31, 2021, efforts
to transition away from IBORs to alternative reference rates (ARRs) have
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TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS 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.
Moreover, the replacement of the IBORs or other benchmark rates could
result in market dislocation and have other adverse consequences for
market participants.
The Bank has adopted Interest Rate Benchmark Reform, Amendments
to IFRS 9, IAS 39 and IFRS 7 (Interest Rate Benchmark Reform Phase 1),
including the applicable amendments to IFRS 7 relating to hedge
accounting in the fourth quarter of 2019. Under these amendments, it is
assumed that the hedged interest rate benchmark is not altered and thus
hedge accounting continues through to the date of replacement of the
existing interest rate benchmark with its ARR. The Bank is not required to
discontinue hedge accounting if the actual results of the hedge do not
meet the effectiveness requirements as a result of interest rate benchmark
reform. Refer to Note 11 for disclosures related to the Bank’s hedges
impacted by interest rate benchmark reform.
Refer to Note 4 for details of Interest Rate Benchmark Reform –
Phase 2, Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16
(Interest Rate Benchmark Reform Phase 2), issued on August 27, 2020
and not yet adopted by the Bank.
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 recognizes financial assets on a settlement date basis, except for
derivatives and securities, which are recognized 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 the
determination of the Bank’s business models and whether contractual
cashflows represent 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.
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.
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 other comprehensive
income, 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 other comprehensive income 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
The held-for-sale business model includes financial assets held within
a trading portfolio, which 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 (loss). 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 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.
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.
139
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS 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, 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 other comprehensive
income 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 trading and non-trading equity
investments measured at FVTPL are included in trading income (loss) and
income (loss) from non-trading financial instruments at FVTPL, respectively.
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 certain obligations related to securities
sold under repurchase agreements.
Trading portfolio liabilities 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 (loss). Transaction costs are expensed as incurred.
Interest is recognized on an accrual basis and included in interest expense.
Financial Liabilities Designated at Fair Value through
Profit or Loss
Certain financial liabilities may be designated at FVTPL at initial
recognition. 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) the financial
liabilities or a group of financial assets and financial liabilities are 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.
Financial 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 income (loss) from financial
instruments designated at FVTPL, except for the amount of change in
fair value attributable to changes in the Bank’s own credit risk, which is
presented in other comprehensive income. Amounts recognized in other
comprehensive income are not subsequently reclassified to net income
upon derecognition of the financial liability; instead, they are transferred
directly to retained earnings.
Changes in fair value attributable to changes in the Bank’s own credit
risk are measured as the difference between: (i) the period-over-period
change in the present value of the expected cash flows using an all-in
discount curve reflecting both the interest rate benchmark curve and
the Bank’s own credit risk; and (ii) the period-over-period change in the
present value of the same expected cash flows using a discount curve
based solely on the interest rate benchmark curve.
Certain deposits are designated at FVTPL. For loan commitments and
financial guarantee contracts that are designated at FVTPL, the full change
in fair value of the liability is recognized in income (loss) from financial
instruments designated at FVTPL.
Interest is recognized on an accrual basis in interest expense.
Other Financial Liabilities
Deposits
Deposits, other than deposits included in a trading portfolio and deposits
designated at FVTPL, 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
credit-impaired. ECLs are the difference between all the 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 EIR. 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
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. Refer to the shaded areas of the “Managing Risk”
section of the 2020 MD&A for further details on the Bank’s 21-point BRR
scale to risk levels.
140
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS 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 credit-impaired and migrate to Stage 3 when the definition
of default is met 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 assessing 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
ECLs. 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.
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 ECLs 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 calculation of
probability-weighted 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, and 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
calculation of probability-weighted 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 Performing Loans
Acquired performing 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 performing loans, resulting
in the carrying amount being lower than fair value. 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 performing loans
with revolving terms.
Acquired Credit-Impaired Loans
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.
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
141
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS 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 EIR 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.
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.
Guarantees 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 contract 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.
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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 portfolios. The realized
and unrealized gains or losses on trading derivatives are recognized 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, are recognized 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).
Interest Rate Benchmark Reform
A hedging relationship is affected by interest rate benchmark reform
if it gives rise to uncertainties about (a) the interest rate benchmark
(contractually or non-contractually specified) designated as a hedged risk;
and/or (b) the timing or the amount of interest rate benchmark-based cash
flows of the hedged item or of the hedging instrument.
For such hedging relationships, the following temporary exceptions apply
during the period of uncertainty:
• when assessing whether a forecast transaction is highly probable
or expected to occur, it is assumed that the interest rate benchmark
on which the hedged cash flows (contractually or non-contractually
specified) are based is not altered as a result of interest rate
benchmark reform;
• when assessing whether a hedge is expected to be highly effective,
it is assumed that the interest rate benchmark on which the hedged
cash flows and/or the hedged risk (contractually or non-contractually
specified) are based, or the interest rate benchmark on which the cash
flows of the hedging instrument are based, is not altered as a result of
interest rate benchmark reform;
• a hedge is not required to be discontinued if the actual results of the
hedge are outside of a range of 80–125 percent as a result of interest
rate benchmark reform;
• for a hedge of a non-contractually specified benchmark portion of
interest rate risk, the requirement that the risk component is separately
identifiable need only be met at the inception of the hedging relationship.
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS 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 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 (AOCI)
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 AOCI at that time remains in AOCI 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 AOCI is immediately reclassified to
Net interest income or Non-interest income, as applicable, on the
Consolidated Statement of Income.
Net Investment Hedges
Hedges of net investments in foreign operations are accounted for similar
to cash flow hedges. The change in fair value on the hedging instrument
relating to the effective portion is recognized in other comprehensive
income. The change in fair value of the hedging instrument relating to
the ineffective portion is recognized immediately in non-interest income.
Gains and losses in AOCI 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 financial liabilities or other host contracts.
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 measured at fair value with changes in fair value
recognized in income, such as held-for-trading or designated at FVTPL.
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 in fair value recognized
in Non-interest income on the Consolidated Statement of Income.
TRANSLATION AND PRESENTATION OF FOREIGN CURRENCIES
The Bank’s Consolidated Financial Statements are presented in Canadian
dollars. 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 operations are those with a functional currency other
than Canadian dollars. For the purpose of translation into the Bank’s
presentation currency, all assets and liabilities are first measured in
the functional currency of the foreign operation and subsequently,
translated at exchange rates prevailing at the balance sheet date. Income
and expenses are translated at average exchange rates for the period.
Unrealized translation gains and losses relating to these foreign operations,
net of gains or losses arising from net investment hedges and applicable
income taxes, are included in other comprehensive income. Translation
gains and losses in AOCI are recognized on the Consolidated Statement
of Income upon the disposal or partial disposal of the foreign operation.
The investment balance of foreign entities accounted for by the equity
method, including TD Ameritrade and The Charles Schwab Corporation,
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 a measurement exception, as described in
Note 5 under Portfolio Exception. The value determined from application
of the portfolio exception must be allocated to the individual financial
instruments within the group to arrive at the fair value of an individual
financial instrument. Balance sheet offsetting presentation requirements,
as described above under the Offsetting of Financial Instruments section of
this Note, are then applied, if applicable. 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.
Valuation adjustments reflect the Bank’s assessment of factors that
market participants would use in pricing the asset or liability. The Bank
recognizes various types of valuation adjustments including, but not
limited to, adjustments for bid-offer spreads, adjustments for the
unobservability of inputs used in pricing models, and adjustments for
assumptions about risk, such as the creditworthiness of either counterparty
and market implied funding costs for uncollateralized derivatives.
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 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
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TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS price and the value determined by the valuation technique at initial
recognition is recognized 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.
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 AOCI. 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 securities 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 Obligations 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.
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TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS 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. If the composition of a CGU or group of CGUs to which
goodwill has been allocated changes as a result of the sale of a business,
restructuring or other changes, the goodwill is reallocated to the units
affected using a relative value approach, unless the Bank can demonstrate
that some other method better reflects the goodwill associated with the
units affected.
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. If the CGU is not impaired, the
useful life of the intangible asset is assessed with any changes applied on
a prospective basis. 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 or losses on disposal are included in Non-interest income on the
Consolidated Statement of Income.
The Bank adopted IFRS 16, Leases (IFRS 16), on November 1, 2019.
Refer to Note 4 for further details.
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 changes in useful life or
impairment on a quarterly basis. Where an impairment indicator exists
and the depreciable asset does not generate separate cash flows on
a stand-alone basis, impairment is assessed based on the recoverable
amount of the CGU to which the depreciable asset belongs. If the CGU is
not impaired, the useful life of the depreciable asset is assessed with any
changes applied on a prospective basis. Any 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 or 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 or disposal groups. Non-current assets or
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. Write-downs on premises related non-current assets
and write-downs on equipment on initial classification as held-for-sale
are included in the line items Occupancy, including depreciation and
Equipment, including depreciation, respectively; both of which are
included in Non-interest expenses on the Consolidated Statement of
Income. Subsequently, a non-current asset or disposal group that is
held-for-sale 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
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TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS 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 on the
Consolidated Balance Sheet. 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 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 the Consolidated
Statement of 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 in the Provision for (recovery of) income taxes 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 in
provision for (recovery of) income taxes in the period in which management
determines they are no longer required or as determined by statute.
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TD BANK GROUP ANNUAL REPORT 2020 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.
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 more than infrequent.
Solely Payments of Principal and Interest Test
In assessing whether contractual cash flows represent 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 assesses 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. Significant
increase in credit risk since initial recognition has occurred when one
of the criteria is met.
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. Significant increase in credit
risk since initial recognition has occurred when one of the criteria is met.
Refer to the Impact of COVID-19 section of this Note for considerations as
a result of COVID-19.
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
forward-looking 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 forward-looking 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 ECLs, 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 macroeconomic 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 ECLs.
Macroeconomic variables are statistically derived relative to the base
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 the Impact of COVID-19 section of this Note for
considerations as a result of COVID-19 and Note 8 for further details
on the macroeconomic variables and ECL sensitivity.
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TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS Expert Credit Judgment
ECLs are recognized on initial recognition of the financial assets. Allowance
for credit losses represents management’s best estimate of the 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. Refer
to the Impact of COVID-19 section of this Note for considerations as a
result of COVID-19.
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.
Impact of COVID-19
As a result of COVID-19, there is a higher degree of uncertainty in
determining reasonable and supportable forward-looking information
used in assessing significant increase in credit risk and measuring ECLs.
The Bank introduced relief programs in the second quarter that allow
borrowers to temporarily defer payments of principal and/or interest on
their loans and is supporting various government-assistance programs
which reduce the Bank’s exposure to expected losses. Under these retail
and non-retail programs and notwithstanding any other changes in
credit risk, opting into a payment deferral program does not in and of
itself trigger a significant increase in credit risk since initial recognition
(which would result in stage migration) and does not result in additional
days past due. Macroeconomic variables for the upside scenario are
statistically derived relative to the base forecast based on historical
distributions for each variable. For the downside scenario, since the
second quarter of 2020, macroeconomic variables were based on
plausible scenario analysis of COVID-19 impacts, given the lack of
comparable historical data for a shock of this nature. Refer to Note 8
for additional details on the macroeconomic variables used in the
forward-looking macroeconomic forecasts.
The current environment is subject to rapid change and to the extent
that certain effects of COVID-19 are not fully incorporated into the model
calculations, increased temporary quantitative and qualitative adjustments
have been applied. This includes borrower credit scores, industry and
geography specific COVID-19 impacts, payment support initiatives
introduced by the Bank and governments, and the persistence of the
economic shutdown, the effects of which are not yet fully reflected in the
quantitative models. The Bank has performed certain additional qualitative
portfolio and loan level assessments of significant increase in credit risk.
LEASES
The Bank applies judgment in determining the appropriate lease term on
a lease-by-lease basis. All facts and circumstances that create an economic
incentive to exercise a renewal option or not to exercise a termination
option including investments in major leaseholds, branch performance and
past business practice are considered. The periods covered by renewal or
termination options are only included in the lease term if it is reasonably
certain that the Bank will exercise the options; management considers
“reasonably certain” to be a high threshold. Changes in the economic
environment or changes in the industry may impact the Bank’s assessment
of lease term, and any changes in the Bank’s estimate of lease terms may
have a material impact on the Bank’s Consolidated Balance Sheet and
Consolidated Statement of Income.
In determining the carrying amount of right-of-use (ROU) assets and
lease liabilities, the Bank is required to estimate the incremental borrowing
rate specific to each leased asset or portfolio of leased assets if the interest
rate implicit in the lease is not readily determinable. The Bank determines
the incremental borrowing rate of each leased asset or portfolio of leased
assets by incorporating the Bank’s creditworthiness, the security, term,
and value of the ROU asset, and the economic environment in which the
leased asset operates. The incremental borrowing rates are subject to
change mainly due to changes in the macroeconomic environment.
148
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 instruments, 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 valuation adjustments to model
fair values to account for system limitations or measurement uncertainty,
such as 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, IBOR reform 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 OF FINANCIAL INSTRUMENTS
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 assets 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 AOCI. 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, ECLs, 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 CGUs is determined from internally
developed valuation models that consider various factors and assumptions
such as forecasted earnings, growth rates, discount rates, and terminal
values reflecting terminal growth rates or terminal price-earnings 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
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS the assumptions and estimates used are reasonable and supportable.
Where possible, assumptions 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.
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.
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
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
into account 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.
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TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS REVENUE FROM CONTRACTS WITH CUSTOMERS
The Bank applies judgment to determine the timing of satisfaction of
performance obligations which affects the timing of revenue recognition,
by evaluating the pattern in which the Bank transfers control of services
promised to the customer. A performance obligation is satisfied over time
when the customer simultaneously receives and consumes the benefits
as the Bank performs the service. For performance obligations satisfied
over time, revenue is generally recognized using the time-elapsed method
which is based on time elapsed in proportion to the period over which the
service is provided, for example, personal deposit account bundle fees.
The time-elapsed method is a faithful depiction of the transfer of control
for these services as control is transferred evenly to the customer when
the Bank provides a stand-ready service or effort is expended evenly
by the Bank to provide a service over the contract period. In contracts
where the Bank has a right to consideration from a customer in an
amount that corresponds directly with the value to the customer of
the Bank’s performance completed to date, the Bank recognizes revenue
in the amount to which it has a right to invoice.
The Bank satisfies a performance obligation at a point in time if
the customer obtains control of the promised services at that date.
Determining when control is transferred requires the use of judgment. For
transaction-based services, the Bank determines that control is transferred
to the customer at a point in time when the customer obtains substantially
all of the benefits from the service rendered and the Bank has a present
right to payment, which generally coincides with the moment the
transaction is executed.
The Bank exercises judgment in determining whether costs incurred
in connection with acquiring new revenue contracts would meet the
requirement to be capitalized as incremental costs to obtain or fulfil a
contract with customers.
N O T E 4 | CURRENT AND FUTURE CHANGES IN ACCOUNTING POLICIES
CURRENT CHANGES IN ACCOUNTING POLICY
The following new standards were adopted by the Bank on
November 1, 2019.
Leases
In January 2016, the IASB issued IFRS 16, Leases, which replaced IAS 17,
Leases (IAS 17) and became effective for annual periods beginning on or
after January 1, 2019, which was November 1, 2019 for the Bank.
IFRS 16 introduces a single lessee accounting model for all leases
by eliminating the distinction between operating and financing leases.
IFRS 16 requires lessees to recognize ROU assets and lease liabilities for
arrangements that meet the definition of a lease on the commencement
date. The ROU asset is initially measured as the lease liability, subject to
certain adjustments, if any, and is subsequently measured at such cost less
accumulated depreciation and any related accumulated impairment. The
lease liability is initially measured at the present value of the future lease
payments over the remaining lease term and is discounted using the Bank’s
incremental borrowing rate. The lease term includes renewal and
termination options that the Bank is reasonably certain to exercise, and
the lease liability is remeasured when there are adjustments to future lease
payments, changes in the Bank’s assumptions or strategies relating to the
exercise of purchase, extension, or termination options, or updates to the
incremental borrowing rate. ROU assets are recorded in Land, buildings,
equipment, and other depreciable assets and lease liabilities are included
in Other liabilities on the Consolidated Balance Sheet. The Consolidated
Statement of Income recognizes interest expense on lease liabilities, which
is calculated on an EIR basis. Secondly, depreciation expense is recognized
on the ROU assets and is calculated on a straight-line basis in non-interest
expense. ROU assets are depreciated over the shorter of the useful life
of the underlying asset and the lease term. Any changes in useful life are
applied on a prospective basis. Previously, under IAS 17, net rental expense
on operating leases was recorded in non-interest expense. The net impact
of these changes shifts the timing and geography of expense recognition.
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,
with their payments being recognized in Non-interest expense on a
straight-line basis within the Bank’s Consolidated Statement of Income.
Lessor accounting remains substantially unchanged.
Upon transition to IFRS 16, the Bank adopted the new standard using
the modified retrospective approach and recognized the cumulative
effect of the transitional impact in opening retained earnings on
November 1, 2019 with no restatement of comparative periods. The Bank
has applied certain permitted practical expedients and elections including:
using hindsight to determine the lease term where lease contracts contain
options to extend or terminate; measuring the ROU asset retrospectively
for certain leases; not reassessing contracts identified as leases under
the previous accounting standards; not applying IFRS 16 to leases of
intangible assets; and applying onerous lease provisions recognized as at
October 31, 2019 as an alternative to performing an impairment review
on the ROU assets as at November 1, 2019.
150
The main impact of IFRS 16 was on the Bank’s real estate leases,
which were previously classified as operating leases. The Bank also
leases certain equipment and other assets. On November 1, 2019,
the Bank recognized $4.46 billion of ROU assets, $5.66 billion of lease
liabilities, and other balance sheet adjustments and reclassifications of
$0.65 billion. The decrease in retained earnings was $0.55 billion after
tax. The impact to Common Equity Tier 1 (CET1) capital was a decrease
of 24 basis points (bps). The following table sets forth the adjustments
to the Bank’s operating lease commitments disclosed under IAS 17 as
at October 31, 2019, which were used to derive the lease liabilities
recognized by the Bank as at November 1, 2019:
(millions of Canadian dollars)
Operating lease commitments disclosed as at October 31, 2019
Commitments for leases that have not commenced at
Amount1
$ 7,621
November 1, 2019, and commitments for non-lease payments2
(2,577)
Effect of recognition exemption for short-term and low
value leases
Effect of extension and termination options reasonably certain
to be exercised and other
Effect of discounting using the incremental borrowing rate3
Lease liabilities recognized as at November 1, 2019
(29)
4,732
(4,083)
$ 5,664
1 Certain amounts have been reclassified to conform with the presentation adopted
in the current period.
2 Non-lease payments include taxes and estimated operating expenses.
3 The weighted average incremental borrowing rate was 2.8%.
Uncertainty over Income Tax Treatments
In June 2017, the IASB issued IFRIC (IFRS Interpretations Committee)
Interpretation 23, Uncertainty over Income Tax Treatments, which clarifies
application of recognition and measurement requirements in IAS 12,
Income Taxes, when there is uncertainty over income tax treatments.
The Bank adopted this interpretation on November 1, 2019 and it did not
have a significant impact on the Bank.
FUTURE CHANGES IN ACCOUNTING POLICIES
The following standards and framework 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 and framework on the Consolidated
Financial Statements.
IBOR Reform and its Effects on Financial Reporting
The IASB finalized its standard setting relating to the effects of IBOR
reform and on August 27, 2020, the IASB issued Interest Rate Benchmark
Reform – Phase 2, Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and
IFRS 16, for which the Bank is currently assessing the impact of adoption.
The Bank adopted the IASB’s first phase of interest rate benchmark reform
standard setting, Interest Rate Benchmark Reform, Amendments to IFRS 9,
IAS 39, and IFRS 7, effective October 31, 2019.
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
Interest Rate Benchmark Reform Phase 2 addresses issues affecting
financial reporting when changes are made to contractual cash flows
of financial instruments or hedging relationships as a result of IBOR
reform. The amendments are effective for annual periods beginning on
or after January 1, 2021, with early adoption permitted. The changes
relate to the modification of financial assets, financial liabilities and
lessee lease liabilities, as well as providing specific hedge accounting
relief and disclosure requirements. The amendments permit modification
to financial assets, financial liabilities and lessee lease liabilities required
as a direct consequence of IBOR reform made on an economically
equivalent basis to be accounted for by updating the EIR prospectively.
If the modification does not meet the practical expedient requirements,
existing IFRS requirements are applied. Reliefs are also provided for an
entity’s hedge accounting relationships in circumstances where changes
to hedged items and hedging instruments arise as a result of IBOR reform.
The amendments enable entities to amend the formal designation
and documentation of a hedging relationship to reflect these changes
without discontinuing the hedging relationship or designating a new
hedging relationship. Permitted changes include redefining the hedged
risk to reference an ARR (contractually or non-contractually specified),
amending the description of the hedged item and hedging instrument
to reflect the ARR, and amending the description of how the entity will
assess hedge effectiveness. Additional reliefs are also provided for specific
hedge accounting requirements if certain conditions are met. Hedging
relationships within the scope of Interest Rate Benchmark Reform Phase 2
are the same as those within the scope of Interest Rate Benchmark Reform
Phase 1. Interest Rate Benchmark Reform Phase 2 also amended IFRS 7,
introducing expanded qualitative and quantitative disclosures about the
risks arising from IBOR reform, how an entity is managing those risks, its
progress in completing the transition to ARRs, and how it is managing
the transition.
Insurance Contracts
The IASB issued IFRS 17, Insurance Contracts (IFRS 17), amended in
June 2020, which replaces the guidance in IFRS 4, Insurance Contracts
and establishes principles for recognition, measurement, presentation,
and disclosure of insurance contracts. The standard is effective for annual
reporting periods beginning on or after January 1, 2023, which will be
November 1, 2023 for the Bank. OSFI’s related Advisory precludes
early adoption.
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. The
adoption of the Revised Conceptual Framework is not expected to have
a significant impact on the Bank.
Business Combinations
In October 2018, the IASB issued a narrow-scope amendment to IFRS 3,
Business Combinations (IFRS 3). The amendments provide additional
guidance on the definition of a business which determines whether an
acquisition is of a business or a group of assets. An acquirer recognizes
goodwill only when acquiring a business, not when acquiring a group of
assets. The amendment to IFRS 3 are effective for annual reporting periods
beginning on or after January 1, 2020, which will be November 1, 2020
for the Bank. These amendments will be applied prospectively and are not
expected to 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 FVTPL, financial assets and liabilities designated at FVTPL,
financial assets at FVOCI, 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.
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 market
prices, the applicable indices, and metrics such as the coupon, maturity,
and weighted-average maturity of the pool. Market inputs used in the
valuation model include, but are not limited to, indexed yield curves and
trading spreads.
The fair value of other OECD government guaranteed debt is based
on broker quotes and third-party vendor prices, or where these quotes
or prices are not readily available, other valuation techniques, such as
discounted cash flow models, may be used. Market inputs used in other
valuation techniques or broker quotes and third-party vendor prices
include government bond yield curves and trade execution data.
The fair value of residential mortgage-backed securities (MBS) is based
on broker quotes, third-party vendor prices, or other valuation techniques,
such as the use of option-adjusted spread 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.
151
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS 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-ask spread, fair value is determined based on quoted market
prices for similar securities or through valuation techniques, including
discounted cash flow analysis, 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 their 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 FVTPL, which includes trading loans
and non-trading loans at FVTPL, 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 FVOCI 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 valuation adjustment (CVA) 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 fulfil its
obligations under the transaction. In determining CVA, the Bank takes
into account master netting agreements and collateral, and considers the
creditworthiness of the counterparty and of the Bank itself, using market
observed or proxy credit spreads, 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
funding spread and the expected average exposure by counterparty.
The Bank will continue to monitor industry practice on valuation
adjustments and may refine the methodology as market practices evolve.
Deposits
The estimated fair value of term deposits is determined by discounting the
contractual cash flows using interest rates currently offered for deposits
with similar terms.
For deposits with no defined maturities, the Bank considers fair value
to equal carrying value, which is equivalent to the amount payable on the
balance sheet date.
For trading deposits and deposits designated at FVTPL, which is
included in financial liabilities designated at FVTPL, 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 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.
152
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS 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.
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 to a particular risk, or
risks; 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. Refer
to Note 2 for further details on the use of the portfolio exception to
establish fair value.
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 debt securities,
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.
Financial Assets and Liabilities not carried at Fair Value1
(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
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
1 This table excludes financial assets and liabilities where the carrying amount is
a reasonable approximation of fair value.
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
October 31, 2020
October 31, 2019
Carrying value
Fair value
Carrying value
Fair value
As at
$
174,592 $
53,087
175,500 $ 78,275 $ 78,374
52,370
52,222
53,373
227,679
717,523
228,873
727,197
130,497
684,608
130,744
688,154
$ 945,202 $ 956,070 $ 815,105
$ 818,898
$ 1,135,333 $ 1,137,624 $ 886,977 $ 892,597
14,258
11,323
$ 1,162,578 $ 1,166,141 $ 911,788 $ 918,178
14,086
10,725
15,768
11,477
16,143
12,374
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.
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 recognized 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, 2020 and October 31, 2019.
153
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS Fair Value Hierarchy for Assets and Liabilities Measured at Fair Value on a Recurring Basis
(millions of Canadian dollars)
October 31, 2020
As at
October 31, 2019
Level 1
Level 2
Level 3
Total1
Level 1
Level 2
Level 3
Total1
$
351 $ 21,141
$
395 $ 10,521
$
–
–
$ 21,492 $
8,468
FINANCIAL ASSETS AND COMMODITIES
Trading loans, securities, and other2
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 loss
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
Securities2
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
Securities purchased under reverse
repurchase agreements
FINANCIAL LIABILITIES
Trading deposits
Derivatives
Interest rate contracts
Foreign exchange contracts
Credit contracts
Equity contracts
Commodity contracts
Securitization liabilities at fair value
Financial liabilities designated at fair value
through profit or loss
Obligations related to securities sold short2
Obligations related to securities sold under
repurchase agreements
1 Fair value is the same as carrying value.
154
–
–
–
–
–
–
43,803
37
–
12,976
–
57,167
232
–
232
22
13
–
5
383
423
–
–
–
–
–
–
–
–
–
–
8,468
22,809
4,563
1,690
5,613
13,352
39
–
12,959
484
14
91,132
4,027
3,715
7,742
17,937
29,605
19
3,855
2,022
53,438
4,739
4,739
14,126
16,502
33,034
10,756
3,865
10,006
–
9,875
819
186
–
1,005
15
–
2,502
100,681
–
–
14
14
–
–
355
383
–
–
1,039
16
–
–
2
1
–
–
–
–
–
19
571
3
574
–
2
–
370
9
381
–
–
–
–
–
–
–
–
–
20
1,553
26
–
1,599
22,825
4,563
1,690
5,615
13,353
43,842
37
12,959
13,460
14
148,318
4,830
3,718
8,548
17,959
29,620
19
4,230
2,414
54,242
4,739
4,739
14,126
16,502
33,034
10,756
3,865
10,006
–
9,895
2,387
212
2,502
103,285
–
–
–
–
–
–
56,058
57
–
13,761
–
70,271
229
–
229
22
24
–
1
266
313
–
–
–
–
–
–
–
–
–
–
89
198
–
287
–
–
19
21
–
–
266
306
–
–
878
8,510
19,133
4,132
1,746
5,129
13,547
61
–
12,482
437
19
75,717
3,985
1,791
5,776
14,794
30,623
16
1,298
1,246
47,977
4,040
4,040
9,663
12,927
40,737
14,407
5,437
15,888
247
7,810
2
–
2,124
109,242
14,404
29,374
420
2,877
1,040
48,115
13,058
105,110
28,778
–
8
–
–
–
3
1
–
–
–
–
–
12
493
5
498
–
3
–
589
12
604
–
–
–
–
–
–
–
–
–
24
1,507
44
–
1,575
$ 10,916
8,518
19,133
4,132
1,746
5,132
13,548
56,119
57
12,482
14,198
19
146,000
4,707
1,796
6,503
14,816
30,650
16
1,888
1,524
48,894
4,040
4,040
9,663
12,927
40,737
14,407
5,437
15,888
247
7,834
1,598
242
2,124
111,104
83
4
–
1,514
29
1,630
–
14,506
29,399
420
4,391
1,335
50,051
13,058
21
–
–
105,131
29,656
2,973
7,395
–
7,395
14,528
4,649
19,177
4,843
–
4,843
22,793
4,092
26,885
19,022
27,300
327
3,360
1,611
51,620
13,718
59,641
33,960
19,132
27,314
327
4,437
1,993
53,203
13,718
59,665
34,999
96
–
–
1,077
27
1,200
–
24
–
–
–
3,675
3,675
–
2,973
2 Balances reflect the reduction of securities owned (long positions) by the amount of
identical securities sold but not yet purchased (short positions).
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
The Bank’s policy is to record transfers of assets and liabilities between
the different levels of the fair value hierarchy using the fair values as at
the end of each reporting period. Assets are transferred between Level 1
and Level 2 depending on if there is sufficient frequency and volume in an
active market.
There were no significant transfers between Level 1 and Level 2 during the
years ended October 31, 2020 and October 31, 2019.
Movements of Level 3 instruments
Significant transfers into and out of Level 3 occur mainly due to the
following reasons:
• Transfers from Level 3 to Level 2 occur when techniques used for
valuing the instrument incorporate significant observable market inputs
or broker-dealer quotes which were previously not observable.
• Transfers from Level 2 to Level 3 occur when an instrument’s fair value,
which was previously determined using valuation techniques with
significant observable market inputs, is now determined using valuation
techniques with significant unobservable 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 following tables reconcile changes in fair value of all assets and
liabilities measured at fair value using significant Level 3 unobservable
inputs for the years ended October 31, 2020 and October 31, 2019.
Reconciliation of Changes in Fair Value for Level 3 Assets and Liabilities
(millions of Canadian dollars)
Fair
value as at
November 1
2019
Total realized and
unrealized gains (losses)
Movements
Included
in income1
Included
in OCI2,3
Purchases/
Issuances
Sales/
Settlements4
Into
Level 3
Transfers
Out of
Level 3
Fair
value as at
October 31
2020
Change in
unrealized
gains
(losses) on
instruments
still held5
FINANCIAL ASSETS
Trading loans, securities, and other
Government and government-related
securities
Canadian government debt
Provinces
$
8
$
–
$
U.S. federal, state, municipal governments
and agencies debt
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
–
3
1
12
493
5
498
–
–
24
1,507
44
(1)
–
–
(1)
12
–
12
–
–
–
–
–
$
–
–
–
–
–
–
–
–
–
–
(4)
(4)
(19)
–
–
–
29
29
118
–
118
–
–
–
48
2
$
(8)
$
–
$ –
$
–
(1)
(40)
(49)
(52)
(2)
(54)
–
–
–
2
(1)
17
2
16
35
–
–
–
–
–
–
–
–
–
–
16
2
1
19
571
3
574
–
–
20
1,553
26
$
–
–
–
–
–
(2)
–
(2)
–
–
(4)
(4)
(20)
–
(2)
(5)
(7)
–
–
–
–
–
–
–
–
$ 1,575
$
–
$ (27)
$
50 $
1
$
$ –
$ 1,599
$ (28)
FINANCIAL LIABILITIES
Trading deposits6
Derivatives7
Interest rate contracts
Foreign exchange contracts
Equity contracts
Commodity contracts
Financial liabilities designated at fair
value through profit or loss
Obligations related to securities
sold short
$ (4,092)
$ 214
$
(83)
(1)
(925)
(17)
(1,026)
(21)
–
(43)
2
172
(42)
89
112
–
–
–
–
–
–
–
–
–
$ (3,334)
$ 2,558
$
(3)
$ 8 $ (4,649)
$ 328
–
–
(101)
–
(101)
(202)
–
30
–
146
41
217
87
–
–
1
(1)
–
–
–
(6)
–
–
2
–
2
–
6
(96)
2
(707)
(18)
(819)
(24)
–
(17)
1
172
(16)
140
112
–
1 Gains/losses on financial assets and liabilities are recognized within Non-interest
5 Changes in unrealized gains/losses on financial assets at FVOCI are recognized
income on the Consolidated Statement of Income.
in AOCI.
2 Other comprehensive income.
3 Includes realized gains/losses transferred to retained earnings on disposal of equities
designated at FVOCI. Refer to Note 7 for further details.
4 Includes foreign exchange.
6 Issuances and repurchases of trading deposits are reported on a gross basis.
7 As at October 31, 2020, consists of derivative assets of $0.4 billion (November 1, 2019 –
$0.6 billion) and derivative liabilities of $1.2 billion (November 1, 2019 – $1.6 billion),
which have been netted in this table for presentation purposes only.
155
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
Reconciliation of Changes in Fair Value for Level 3 Assets and Liabilities
(millions of Canadian dollars)
Fair
value as at
November 1
2018
Total realized and
unrealized gains (losses)
Movements
Included
in income1
Included
in OCI2,3
Purchases/
Issuances
Sales/
Settlements4
Into
Level 3
Transfers
Out of
Level 3
Fair
value as at
October 31
2019
Change in
unrealized
gains
(losses) on
instruments
still held5
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
FINANCIAL LIABILITIES
Trading deposits6
Derivatives7
Interest rate contracts
Foreign exchange contracts
Equity contracts
Commodity contracts
Financial liabilities designated at fair
value through profit or loss
Obligations related to securities
sold short
$
3
$
1
16
20
408
19
427
200
562
24
1,492
135
–
–
1
1
97
4
101
24
–
–
–
–
$
$
–
–
–
–
–
–
–
–
–
–
(3)
(16)
–
1
2
3
317
5
322
–
–
–
31
1
$
(50)
$ 55
$
–
$
8
$
(2)
(24)
(76)
(329)
(23)
(352)
(224)
–
–
(13)
(75)
4
20
79
–
–
–
–
–
–
–
–
(1)
(14)
(15)
–
–
–
–
(562)
–
–
(1)
3
1
12
493
5
498
–
–
24
1,507
44
–
–
–
–
20
1
21
–
–
–
(4)
(23)
$ 2,413
$ 24
$ (19)
$
32
$ (312)
$ –
$ (563)
$ 1,575
$
(27)
$ (3,024)
$ (380)
$
–
$ (2,030)
$ 1,342
$ –
$
–
$ (4,092)
$ (243)
(63)
1
(624)
27
(659)
(22)
–
(472)
(33)
(527)
(14)
104
–
–
–
–
–
–
–
–
–
–
–
(127)
–
(127)
(187)
1
6
–
298
(11)
293
76
–
(4)
(5)
–
–
(9)
–
–
–
3
–
–
3
–
(1)
(83)
(1)
(925)
(17)
(1,026)
(21)
–
(32)
(1)
(460)
(20)
(513)
65
–
1 Gains/losses on financial assets and liabilities are recognized within Non-interest
income on the Consolidated Statement of Income.
2 Other comprehensive income.
3 Includes realized gains/losses transferred to retained earnings on disposal of equities
designated at FVOCI. Refer to Note 7 for further details.
4 Includes foreign exchange.
5 Changes in unrealized gains/losses on financial assets at FVOCI are recognized in AOCI.
6 Issuances and repurchases of trading deposits are reported on a gross basis.
7 As at October 31, 2019, consists of derivative assets of $0.6 billion (November 1, 2018 –
$0.5 billion) and derivative liabilities of $1.6 billion (November 1, 2018 – $1.2 billion),
which have been netted in this table for presentation purposes only.
156
TD BANK GROUP ANNUAL REPORT 2020 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.
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 the 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.
Net Asset Value
The fair value of certain private funds is based on the net asset value
determined by the fund managers based on valuation methodologies,
as there are no observable prices for these instruments.
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.
157
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS Valuation Techniques and Inputs Used in the Fair Value Measurement of Level 3 Assets and Liabilities
Valuation
technique
Significant
unobservable
inputs (Level 3)
Lower
range
Upper
range
Lower
range
Upper
range
October 31, 2020
October 31, 2019
Government and
government-related
securities
Market comparable
Bond price equivalent
Other debt securities
Market comparable
Bond price equivalent
Equity securities1
Market comparable
Discounted cash flow
EBITDA multiple
Market comparable
New issue price
Discount rate
Earnings multiple
Price equivalent
Non-trading financial
assets at fair value
through profit or loss
Derivatives
Interest rate contracts
Market comparable
Discounted cash flow
EBITDA multiple
Price-based
New issue price
Discount rates
Earnings multiple
Net Asset Value2
Swaption model Currency-specific volatility
Discounted cash flow Inflation rate swap curve
Funding ratio
Option model
Foreign exchange
contracts
Option model Currency-specific volatility
Equity contracts
Option model
Market comparable
Commodity contracts
Option model
Price correlation
Quanto correlation
Dividend yield
Equity volatility
New issue price
Quanto correlation
Swaption correlation
Option model
Price correlation
Quanto correlation
Dividend yield
Equity volatility
Swaption model Currency-specific volatility
Trading deposits
Financial liabilities
designated at fair
value through profit
or loss
19
–
100
9
n/a
23
100
20
1.5
n/a
n/a
1
60
4
(16)
10
–
8
100
(66)
73
(16)
(35)
–
7
21
116
111
100
9
n/a
23
100
20
16.0
n/a
n/a
2
75
18
95
68
10
117
100
(46)
85
98
68
11
284
462
101
–
100
9
3.5
79
100
8
1.1
n/a
27
1
60
4
(19)
10
–
7
100
(66)
44
(19)
(43)
–
7
25
158
113
100
9
3.5
80
100
20
6.7
n/a
325
2
75
12
97
68
8
124
100
(46)
56
97
68
16
96
325
As at
Unit
points
points
%
%
times
%
%
%
times
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
Option model
Funding ratio
1
70
2
70
1 As at October 31, 2020, common shares exclude the fair value of Federal Reserve
2 Net asset value information for private funds has not been disclosed due to the wide
stock and Federal Home Loan Bank stock of $1.5 billion (October 31, 2019 –
$1.5 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.
range in prices for these instruments.
158
TD BANK GROUP ANNUAL REPORT 2020 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 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 non-trading securities at FVTPL
and equity securities at FVOCI, 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
Financial assets at fair value through other comprehensive income
Other debt securities
Corporate and other debt
Equity securities
Common shares
Preferred shares
FINANCIAL LIABILITIES
Trading deposits
Derivatives
Interest rate contracts
Equity contracts
Financial liabilities designated at fair value through profit or loss
October 31, 2020
October 31, 2019
Impact to net assets
Impact to net assets
Decrease in
fair value
Increase in
fair value
Decrease in
fair value
Increase in
fair value
As at
$ 57
–
$ 27
–
$ 49
1
$ 23
1
57
18
–
6
7
13
33
12
71
83
1
27
27
–
3
4
7
72
10
52
62
3
50
14
2
6
10
18
23
20
41
61
2
24
17
2
3
4
9
32
14
35
49
2
Total
$ 205
$ 198
$ 168
$ 133
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 using observable inputs 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 with
significant non-observable inputs is not recognized in income until the
significant non-observable inputs 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 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
2020
$ 15
87
(66)
$ 36
2019
$ 14
38
(37)
$ 15
159
TD BANK GROUP ANNUAL REPORT 2020 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.
Fair Value Hierarchy for Assets and Liabilities not carried at Fair Value1
(millions of Canadian dollars)
In addition, certain debt securities have been designated at FVTPL
as they are economically hedged with derivatives and the designation
eliminates or significantly reduces an accounting mismatch. The derivatives
are carried at fair value, with changes 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 financial assets and liabilities not carried at fair value
as at October 31, 2020 and October 31, 2019, but for which fair value
is disclosed.
October 31, 2020
As at
October 31, 2019
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
Total loans, net of allowance for loan losses
$ 919 $ 174,571 $
10 $ 175,500
$ 169 $ 78,195 $
53,373
–
52,368
10 $ 78,374
52,370
2
–
53,371
919
–
227,942
236,287
2
12
490,910
228,873
727,197
169
–
130,563
221,405
12
466,749
130,744
688,154
Total assets with fair value disclosures
$ 919 $ 464,229 $ 490,922 $ 956,070
$ 169 $ 351,968 $ 466,761 $ 818,898
LIABILITIES
Deposits
Securitization liabilities at amortized cost
Subordinated notes and debentures
Total liabilities with fair value disclosures
$
$
–
–
–
–
$ 1,137,624 $
16,143
12,374
– $ 1,137,624
–
–
16,143
12,374
$
$ 1,166,141 $
– $ 1,166,141
$
–
–
–
–
$ 892,597 $
14,258
11,323
– $ 892,597
14,258
–
11,323
–
$ 918,178 $
– $ 918,178
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 transactions, 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 Note 16 in accounts receivable and other items, and in
Note 18 in accounts payable, accrued expenses, and other items.
160
TD BANK GROUP ANNUAL REPORT 2020 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 on
Offsetting Financial Assets and Financial Liabilities
(millions of Canadian dollars)
the Consolidated 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 line on the Consolidated Balance Sheet, after giving
effect to transactions with the same counterparties that have been offset
on the Consolidated Balance Sheet. Related amounts and collateral
received that are not offset on the Consolidated Balance Sheet, but are
otherwise subject to the same enforceable netting agreements and
similar arrangements, are then presented to arrive at a net amount.
As at
October 31, 2020
Amounts subject to an enforceable
master netting arrangement
or similar agreement
that are not offset in the
Consolidated Balance Sheet1,2
Financial Assets
Derivatives
Securities purchased under reverse
repurchase agreements
Total
Financial Liabilities
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
Collateral
Net Amount
$ 55,732
$ 1,490
$ 54,242
$ 34,970
$ 8,914
$ 10,358
198,273
254,005
29,111
30,601
169,162
223,404
38,335
73,305
34,970
38,335
129,682
138,596
16,998
149,882
1,145
11,503
1,235
659
Derivatives
Obligations related to securities sold under
repurchase agreements
54,693
1,490
53,203
217,987
29,111
188,876
Total
$ 272,680
$ 30,601
$ 242,079
$ 73,305
$ 166,880
$ 1,894
Financial Assets
Derivatives
Securities purchased under reverse
repurchase agreements
Total
Financial Liabilities
Derivatives
Obligations related to securities sold under
repurchase agreements
$ 55,973
$ 7,079
$ 48,894
$ 32,664
$ 8,840
$ 7,390
180,054
236,027
14,119
21,198
165,935
214,829
14,430
47,094
141,903
150,743
9,602
16,992
October 31, 2019
57,130
7,079
50,051
32,664
17,387
139,975
14,119
125,856
14,430
110,995
Total
$ 197,105
$ 21,198
$ 175,907
$ 47,094
$ 128,382
$
1 Excess collateral as a result of overcollateralization has not been reflected in the table.
2 Includes amounts where the contractual set-off rights are subject to uncertainty
under the laws of the relevant jurisdiction.
–
431
431
161
TD BANK GROUP ANNUAL REPORT 2020 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 Schedule1
(millions of Canadian dollars)
As at
October 31
2020
October 31
2019
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
Non-trading financial assets at fair value
through profit or loss
Government and government-related
securities
Canadian government debt
Federal
U.S. federal, state, municipal governments,
and agencies debt
Other debt securities
Canadian issuers
Asset-backed securities
Other issuers
Equity securities
Common shares
Preferred shares
Within
1 year
Over 1
years to
3 years
Over 3
years to
5 years
Over 5
years to
10 years
Over 10
years
With no
specific
maturity
Total
Total
Remaining terms to maturities2
$ 16,124 $ 1,774 $
1,621
4,615
1,085
299
–
23,744
816
3,753
4,569
–
–
–
–
984
5,466
915
575
16
9,730
1,500
4,817
6,317
–
–
–
3
431
904
5,235
554
653
80
7,857
1,284
2,965
4,249
–
–
–
6
$ 2,335 $
828 $
917
781
1,460
–
67
4,042
6,728
549
–
–
5,560
12,147
1,310
1,572
2,882
–
–
–
5
705
246
951
–
–
–
–
– $ 21,492 $ 10,916
8,518
–
8,468
–
–
–
–
–
–
–
–
43,842
37
43,879
–
22,825
4,563
1,527
163
59,038
5,615
13,353
18,968
43,842
37
43,879
14
19,133
4,132
1,603
143
44,445
5,132
13,548
18,680
56,119
57
56,176
19
$ 28,313 $ 16,050 $ 12,112
$ 8,447 $ 13,098 $ 43,879 $ 121,899 $ 119,320
$
– $
– $
–
$
– $
– $
– $
– $
32
–
–
–
112
–
112
–
–
–
–
–
47
1,997
–
2,044
–
–
–
–
–
281
527
–
808
–
–
–
–
–
–
598
–
598
–
–
–
388
388
–
58
–
58
–
–
–
–
–
324
–
170
494
293
35
328
388
388
652
3,292
170
4,114
293
35
328
287
319
587
3,362
132
4,081
277
30
307
Total non-trading financial assets at fair
value through profit or loss
$
112 $ 2,044 $
808
$ 598 $
446 $
822 $
4,830 $
4,707
1 Certain comparative amounts have been added to conform with the presentation
2 Represents contractual maturities. Actual maturities may differ due to prepayment
adopted in the current period.
privileges in the applicable contract.
162
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS Securities Maturity Schedule1 (continued)
(millions of Canadian dollars)
Financial assets 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
Within
1 year
Over 1
years to
3 years
Over 3
years to
5 years
Over 5
years to
10 years
Over 10
years
With no
specific
maturity
Total
Total
Remaining terms to maturities
2
As at
October 31
2020
October 31
2019
$ 1,129 $
– $
– $
325
–
146
1,600
309
65
374
70
11
137
218
757
252
1,009
50
–
101
151
635
173
808
– $
1
–
–
1
457
–
457
– $
99
–
–
99
22
–
22
– $ 1,129 $
–
545
–
–
–
–
–
–
11
384
2,069
2,180
490
2,670
164
388
67
794
1,413
1,888
739
2,627
Total financial assets designated at fair
value through profit or loss
$ 1,974 $
1,227 $
959 $
458 $
121 $
– $ 4,739 $ 4,040
Securities at fair value through other
comprehensive income
Government and government-related
securities
Canadian government debt
Federal
Provinces
$ 2,144 $ 2,922 $ 6,120 $ 2,434 $
1,368
2,308
4,430
7,920
506 $
476
– $ 14,126 $ 9,663
12,927
–
16,502
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
10,516
3,988
1,166
19,182
11,497
6,025
2,699
25,451
2,467
539
–
13,556
3,031
204
–
13,589
5,523
–
–
6,505
954
1,978
1,906
1,649
3,519
–
2,174
3,128
–
–
–
–
3,570
5,548
–
–
–
–
2,519
4,425
–
–
–
–
1,612
3,261
–
–
–
–
20
3,539
–
–
–
–
–
–
–
–
–
–
–
2,387
212
2,599
33,034
10,756
3,865
78,283
40,737
14,407
5,437
83,171
10,006
15,888
–
9,895
19,901
2,387
212
2,599
247
7,834
23,969
1,598
242
1,840
Total securities at fair value through other
comprehensive income
$ 22,310 $ 30,999 $ 17,981 $ 16,850 $ 10,044 $ 2,599 $ 100,783 $ 108,980
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
Other debt securities
Asset-backed securities
Non-agency collateralized mortgage obligation
portfolio
Canadian issuers
Other issuers
$ 11,046 $ 1,201 $ 3,036 $
293
2,075
77
643 $ 2,055 $
2,784
398
– $ 17,981 $ 4,771
2,271
–
5,627
36,788
8,105
56,016
9
–
203
1,059
1,271
7,987
16,438
25,919
5,856
–
49
3,788
9,693
12,045
11,077
28,233
8,811
–
54
1,746
10,611
23,086
1,520
28,033
33,939
–
36,392
2,102
10,419
80
573
1,415
4,170
16,912
8
2
27,341
–
–
–
–
–
–
–
–
–
113,845
37,140
174,593
43,214
28,019
78,275
27,197
28,763
16,992
887
8,010
53,086
16,236
99
7,124
52,222
227,679
130,497
Total debt securities at amortized cost, net
of allowance for credit losses
57,287
35,612
38,844
32,203
63,733
Total securities
$ 109,996 $ 85,932 $ 70,704 $ 58,556 $ 87,442 $ 47,300 $ 459,930 $ 367,544
1 Certain comparative amounts have been added to conform with the presentation
2 Represents contractual maturities. Actual maturities may differ due to prepayment
adopted in the current period.
privileges in the applicable contract.
163
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS Unrealized Securities Gains (Losses)
The following table summarizes the unrealized gains and losses
as at October 31, 2020 and October 31, 2019.
Unrealized Securities Gains (Losses) for Securities at Fair Value Through Other Comprehensive Income
(millions of Canadian dollars)
October 31, 2020
As at
October 31, 2019
Cost/
amortized
cost1
Gross
unrealized
gains
Gross
unrealized
(losses)
Fair
value
Cost/
amortized
cost1
Gross
unrealized
gains
Gross
unrealized
(losses)
Fair
value
Government and government-
related securities
Canadian government debt
Federal
Provinces
$ 13,967
16,342
$ 160
181
$
(1)
(21)
$ 14,126
16,502
$
9,603
12,890
$ 62
77
$
(2)
(40)
$
9,663
12,927
U.S. federal, state, municipal
governments, and agencies debt
32,875
Other OECD government
guaranteed debt
Mortgage-backed securities
Other debt securities
Asset-backed securities
Non-agency collateralized
mortgage obligation portfolio
Corporate and other debt
Total debt securities
Equity securities
Common shares
Preferred shares
Total securities at fair value
through other comprehensive
income
10,720
3,855
77,759
10,051
–
9,853
19,904
97,663
2,641
303
2,944
192
39
11
583
26
–
79
105
688
26
–
26
(33)
(3)
(1)
(59)
(71)
–
(37)
(108)
(167)
(280)
(91)
(371)
33,034
40,703
10,756
3,865
78,283
14,394
5,407
82,997
10,006
15,890
–
9,895
19,901
98,184
2,387
212
2,599
247
7,832
23,969
106,966
1,594
302
1,896
86
21
31
277
29
–
27
56
333
31
4
35
(52)
(8)
(1)
(103)
(31)
–
(25)
(56)
(159)
(27)
(64)
(91)
40,737
14,407
5,437
83,171
15,888
247
7,834
23,969
107,140
1,598
242
1,840
$ 100,607
$ 714
$ (538)
$ 100,783
$ 108,862
$ 368
$ (250)
$ 108,980
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. 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, 2020
October 31, 2019
October 31, 2020
October 31, 2019
Fair value
Dividend income recognized
$ 2,387
212
$ 2,599
$ 1,598
242
$ 1,840
$ 93
14
$ 107
$ 64
15
$ 79
The Bank disposed of certain equity securities in line with the Bank’s
investment strategy with a fair value of $40 million during the year ended
October 31, 2020 (October 31, 2019 – $323 million). The Bank realized
a cumulative gain (loss) of $(18) million during the year ended
October 31, 2020 (October 31, 2019 – $68 million) on disposal of
these equity securities and recognized dividend income of nil during
the year ended October 31, 2020 (October 31, 2019 – $3 million).
Securities Net Realized Gains (Losses)
(millions of Canadian dollars)
For the year ended
Debt securities at amortized cost
Debt securities at fair value through other
comprehensive income
Total
October 31
October 31
2020
$ 13
27
$ 40
2019
$ 49
29
$ 78
164
TD BANK GROUP ANNUAL REPORT 2020 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, as detailed in the shaded area of the
“Managing Risk” section of the 2020 MD&A. This system is used to
assess all non-retail exposures, including debt securities.
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)
October 31, 2020
As at
October 31, 2019
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 3
Total
Debt securities
Investment grade
Non-Investment grade
Watch and classified
Default
Total debt securities
Allowance for credit losses on debt
securities at amortized cost
$ 322,842
$
2,762
n/a
n/a
325,604
2
–
244
17
n/a
261
–
$ n/a $ 322,842 $ 235,475
3,006
17
–
2,109
n/a
n/a
325,865
237,584
2
1
n/a
n/a
–
–
–
–
$ –
54
–
n/a
54
–
$ n/a $ 235,475
2,163
–
–
n/a
n/a
–
–
–
237,638
1
Debt securities, net of allowance
$ 325,602
$ 261
$
$ 325,863 $ 237,583
$ 54
$
– $ 237,637
As at October 31, 2020, the allowance for credit losses on debt securities
was $7 million (October 31, 2019 – $4 million), comprising $2 million
(October 31, 2019 – $1 million) for debt securities at amortized cost
(DSAC) and $5 million (October 31, 2019 – $3 million) for debt securities
at FVOCI. For the year ended October 31, 2020, the Bank reported a
provision for credit losses of $1 million (October 31, 2019 – $1 million)
on DSAC. For the year ended October 31, 2020, the Bank reported a
provision for credit losses of $2 million (October 31, 2019 – recovery of
credit losses of $2 million) on debt securities at FVOCI.
The difference between probability-weighted ECLs and base
ECLs on debt securities at FVOCI and at amortized cost as at both
October 31, 2020 and October 31, 2019, 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 judgment. Refer to the shaded areas of the
“Managing Risk” section of the 2020 MD&A for further details, including
the mapping of PD ranges to risk levels for retail exposures as well as
the Bank’s 21-point BRR scale to risk levels and external ratings for
non-retail exposures.
The following tables provide the gross carrying amounts of loans,
acceptances, 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.
165
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
Loans and Acceptances by Risk Ratings
(millions of Canadian dollars)
Residential mortgages1,2,3
Low Risk
Normal Risk
Medium Risk
High Risk
Default
Total
Allowance for loan losses
Loans, net of allowance
Consumer instalment and other personal4
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 government1,2,3,5,6,7
Investment grade or Low/Normal Risk
Non-Investment grade or Medium Risk
Watch and classified or High Risk
Default
Total
Allowance for loan and acceptances losses
Loans and acceptances, net of allowance
Total loans and acceptances5,8
Total Allowance for loan losses8
Total loans and acceptances, net
of allowance5,8
October 31, 2020
As at
October 31, 2019
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 3
Total
$ 169,710
56,663
–
–
n/a
226,373
32
226,341
77,178
59,349
28,094
3,700
n/a
168,321
567
167,754
3,916
7,027
10,431
3,493
n/a
24,867
624
24,243
120,106
126,509
890
n/a
247,505
1,321
246,184
667,066
2,544
$ 3,125
9,938
7,690
4,120
n/a
24,873
205
24,668
1,199
1,360
3,631
9,940
n/a
16,130
1,265
14,865
49
129
804
6,180
n/a
7,162
1,726
5,436
250
11,818
12,567
n/a
24,635
1,706
22,929
72,800
4,902
$ n/a $ 172,835 $ 181,748
66,601
7,690
4,563
530
43,988
5,817
964
n/a
n/a
n/a
443
530
973
65
908
n/a
n/a
n/a
638
371
252,219
232,517
302
28
251,917
232,489
78,377
60,709
31,725
14,278
371
92,601
46,878
27,576
6,971
n/a
1,009
185,460
174,026
187
822
n/a
n/a
n/a
206
99
305
204
101
n/a
n/a
120
982
1,102
388
714
3,389
844
2,019
690
183,441
173,336
3,965
7,156
11,235
9,879
99
32,334
2,554
29,780
120,356
138,327
13,577
982
273,242
3,415
269,827
743,255
8,290
7,188
10,807
11,218
4,798
n/a
34,011
732
33,279
111,763
128,263
951
n/a
240,977
672
240,305
681,531
2,122
$
77
$
248
433
1,454
n/a
2,212
26
2,186
953
973
879
2,435
n/a
5,240
384
4,856
48
82
275
1,670
n/a
2,075
521
1,554
81
5,540
4,649
n/a
10,270
648
9,622
19,797
1,579
n/a $ 181,825
44,236
n/a
6,250
n/a
2,784
366
545
545
911
56
855
n/a
n/a
n/a
618
450
235,640
110
235,530
93,554
47,851
28,455
10,024
450
1,068
180,334
175
893
n/a
n/a
n/a
355
123
478
322
156
n/a
n/a
158
730
888
193
695
3,345
746
1,249
179,085
7,236
10,889
11,493
6,823
123
36,564
1,575
34,989
111,844
133,803
5,758
730
252,135
1,513
250,622
704,673
4,447
$ 664,522
$ 67,898
$ 2,545 $ 734,965 $ 679,409
$ 18,218
$ 2,599 $ 700,226
1 As at October 31, 2020, impaired loans with a balance of $111 million
(October 31, 2019 – $127 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.
2 As at October 31, 2020, excludes trading loans and non-trading loans at FVTPL
with a fair value of $13 billion (October 31, 2019 – $12 billion) and $4 billion
(October 31, 2019 – $2 billion), respectively.
5 As at October 31, 2020, includes loans that are measured at FVOCI of $3 billion
(October 31, 2019 – $2 billion) and customers’ liability under acceptances of
$15 billion (October 31, 2019 – $13 billion).
6 As at October 31, 2020, includes loans guaranteed by government agencies of
$27 billion (October 31, 2019 – $26 billion), which are primarily classified in
Non-Investment grade or a lower risk rating based on the borrowers’ credit risk.
7 Certain comparative amounts have been reclassified to conform with the
3 As at October 31, 2020, includes insured mortgages of $86 billion
presentation adopted in the current year.
(October 31, 2019 – $88 billion).
4 As at October 31, 2020, includes Canadian government-insured real estate personal
loans of $12 billion (October 31, 2019 – $13 billion).
8 As at October 31, 2020, Stage 3 includes ACI loans of $232 million
(October 31, 2019 – $313 million) and a related allowance for loan losses of
$10 million (October 31, 2019 – $12 million), which have been included in the
“Default” risk rating category as they were impaired at acquisition.
166
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
Loans and Acceptances by Risk Ratings – Off-Balance Sheet Credit Instruments1
(millions of Canadian dollars)
October 31, 2020
As at
October 31, 2019
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 3
Total
Retail Exposures2
Low Risk
Normal Risk
Medium Risk
High Risk
Default
Non-Retail Exposures3
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,
$ 200,226
$
724
$ n/a $ 200,950 $ 227,757
78,448
35,187
2,004
n/a
194,182
76,280
18
n/a
586,345
1,124
1,444
3,025
n/a
–
6,553
4,416
n/a
17,286
381
672
n/a
n/a
–
–
n/a
n/a
–
144
144
34
79,572
36,631
5,029
–
194,182
82,833
4,434
144
603,775
67,245
13,204
1,869
n/a
179,650
64,553
2
n/a
554,280
$ 732
570
277
854
n/a
$ n/a
n/a
n/a
–
–
$ 228,489
67,815
13,481
2,723
–
–
3,397
2,126
n/a
7,956
n/a
n/a
–
108
108
15
179,650
67,950
2,128
108
562,344
585
1,087
293
277
net of allowance
$ 585,964
$ 16,614
$ 110 $ 602,688 $ 553,987
$ 7,679
$ 93 $ 561,759
1 Exclude mortgage commitments.
2 As at October 31, 2020, includes $321 billion (October 31, 2019 – $311 billion) of
personal lines of credit and credit card lines, which are unconditionally cancellable at
the Bank’s discretion at any time.
The following table presents information related to the Bank’s impaired
loans as at October 31, 2020 and October 31, 2019.
3 As at October 31, 2020, includes $43 billion (October 31, 2019 – $41 billion) of the
undrawn component of uncommitted credit and liquidity facilities.
Impaired Loans1
(millions of Canadian dollars)
Residential mortgages
Consumer instalment and other personal
Credit card
Business and government
Unpaid
principal
balance2
$ 885
1,068
305
1,134
Carrying
value
$ 825
988
305
1,039
October 31, 2020
Related
allowance
for credit
losses
Average
gross
impaired
loans
$ 67
186
204
377
$ 781
1,067
446
1,137
Unpaid
principal
balance2
$ 788
1,159
478
870
Carrying
value
$ 724
1,037
478
793
As at
October 31, 2019
Related
allowance
for credit
losses
$ 53
173
322
186
Average
gross
impaired
loans
$ 698
1,160
465
906
Total
$ 3,392
$ 3,157
$ 834
$ 3,431
$ 3,295
$ 3,032
$ 734
$ 3,229
1 Balances exclude ACI loans.
2 Represents contractual amount of principal owed.
167
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
The changes to the Bank’s allowance for loan losses, as at and for the
years ended October 31, 2020 and October 31, 2019, are shown in the
following table.
Allowance for Loan Losses
(millions of Canadian dollars)
Residential Mortgages
Balance at beginning of period
Provision for credit losses
Transfer to Stage 12
Transfer to Stage 2
Transfer to Stage 3
Net remeasurement due to transfers3
New originations or purchases4
Net repayments5
Derecognition of financial assets (excluding disposals and write-offs)6
Changes to risk, parameters, and models7
Disposals
Write-offs
Recoveries
Foreign exchange and other adjustments
Balance at end of period
Consumer Instalment and Other Personal
Balance, including off-balance sheet instruments,
at beginning of period
Provision for credit losses
Transfer to Stage 12
Transfer to Stage 2
Transfer to Stage 3
Net remeasurement due to transfers3
New originations or purchases4
Net repayments5
Derecognition of financial assets
(excluding disposals and write-offs)6
Changes to risk, parameters, and models7
Disposals
Write-offs
Recoveries
Foreign exchange and other adjustments
Balance, including off-balance sheet instruments, at end of period
Less: Allowance for off-balance sheet instruments8
Stage 1
Stage 2
Stage 31
For the years ended October 31
2020
Total
Stage 1
Stage 2
Stage 31
2019
Total
$ 28 $
26 $
56 $ 110
$ 24
$ 34 $
52 $ 110
66
(33)
–
(20)
15
–
(4)
(21)
–
–
1
–
(65)
46
(14)
29
n/a
(1)
(11)
196
–
–
(1)
–
(1)
(13)
14
–
n/a
–
(22)
53
–
(26)
1
3
–
–
–
9
15
(1)
(37)
228
–
(26)
1
3
35
(5)
(2)
(16)
14
–
(4)
(18)
–
–
–
–
(33)
13
(8)
6
n/a
(1)
(5)
20
–
–
–
–
(2)
(8)
10
–
n/a
–
(17)
49
–
(31)
1
2
–
–
–
(10)
14
(1)
(26)
51
–
(31)
1
2
$ 32 $ 205 $
65 $ 302
$ 28
$ 26 $
56 $ 110
$ 717 $ 417 $ 175 $ 1,309
$ 599
$ 392 $ 180 $ 1,171
490
(438)
(11)
(216)
327
(92)
(95)
(83)
–
–
–
(4)
595
28
(473)
504
(147)
473
n/a
(62)
(73)
698
–
–
–
(7)
1,330
65
(17)
(66)
158
11
n/a
(11)
(31)
952
–
(1,261)
278
(1)
187
–
–
–
–
268
327
(165)
(199)
1,567
–
(1,261)
278
(12)
2,112
93
352
(121)
(15)
(149)
326
(88)
(81)
(105)
–
–
–
(1)
717
27
(333)
164
(164)
160
n/a
(30)
(71)
298
–
–
–
1
417
33
(19)
(43)
179
11
n/a
(12)
(49)
893
–
(1,220)
254
1
175
–
–
–
–
22
326
(130)
(201)
1,086
–
(1,220)
254
1
1,309
60
Balance at end of period
$ 567 $ 1,265 $ 187 $ 2,019
$ 690
$ 384 $ 175 $ 1,249
1 Includes allowance for loan losses related to ACI loans.
2 Transfers represent stage transfer movements prior to ECL remeasurement.
3 Represents the mechanical remeasurement between twelve-month (i.e., Stage 1)
and lifetime ECLs (i.e., Stage 2 or 3) due to stage transfers necessitated by credit risk
migration, as described in the “Significant Increase in Credit Risk” section of Note 2,
Summary of Significant Accounting Policies and Note 3, Significant Accounting
Judgments, Estimates and Assumptions, holding all other factors impacting the
change in ECLs constant.
6 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.
7 Represents the changes in the allowance related to current period changes in risk
(e.g. PD) caused by changes to macroeconomic factors, level of risk, parameters, and/
or models, subsequent to stage migration. Refer to the “Measurement of Expected
Credit Losses”, “Forward Looking Information” and “Expert Credit Judgment”
sections of Note 2, Summary of Significant Accounting Policies and Note 3, Significant
Accounting Judgments, Estimates and Assumptions for further details.
4 Represents the increase in the allowance resulting from loans that were newly
8 The allowance for loan losses for off-balance sheet instruments is recorded in Other
originated, purchased, or renewed.
liabilities on the Consolidated Balance Sheet.
5 Represents the changes in the allowance related to cash flow changes associated
with new draws or repayments on loans outstanding.
168
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
Allowance for Loan Losses (continued)
(millions of Canadian dollars)
Credit Card2
Balance, including off-balance sheet instruments,
at beginning of period
Provision for credit losses
Transfer to Stage 13
Transfer to Stage 2
Transfer to Stage 3
Net remeasurement due to transfers3
New originations or purchases3
Net repayments3
Derecognition of financial assets (excluding disposals and write-offs)3
Changes to risk, parameters, and models3
Disposals
Write-offs
Recoveries
Foreign exchange and other adjustments
Balance, including off-balance sheet instruments, at end of period
Less: Allowance for off-balance sheet instruments4
Stage 1
Stage 2
Stage 31
For the years ended October 31
2020
Total
Stage 1
Stage 2
Stage 31
2019
Total
$ 934 $ 673 $ 322 $ 1,929 $ 819 $ 580 $ 341 $ 1,740
–
–
–
115
144
73
1,000
(598)
(19)
(356)
174
(35)
(970)
673
(638)
830
n/a
(7)
(623)
288
(563)
314
n/a
3
705
(224)
(30)
(240)
144
92
–
–
–
496
174
(7)
(30)
(75)
657
22
n/a
35
(82)
(64)
593
41
n/a
(22)
(145)
(152)
–
–
–
(4)
799
175
(174)
1,814
–
–
–
(20)
2,181
455
(378)
1,063
–
(1,720)
306
2
204
–
(697)
2,725
–
(1,720)
306
(22)
3,184
630
(96)
(236)
–
–
–
–
934
202
(107)
781
–
–
–
–
673
152
(439)
1,356
–
(1,699)
297
–
322
–
(642)
1,901
–
(1,699)
297
–
1,929
354
Balance at end of period
$ 624 $ 1,726 $ 204 $ 2,554 $ 732 $ 521 $ 322 $ 1,575
Business and Government5
Balance, including off-balance sheet instruments,
at beginning of period
Provision for credit losses
Transfer to Stage 13
Transfer to Stage 2
Transfer to Stage 3
Net remeasurement due to transfers3
New originations or purchases3
Net repayments3
Derecognition of financial assets (excluding disposals and write-offs)3
Changes to risk, parameters, and models3
Disposals
Write-offs
Recoveries
Foreign exchange and other adjustments
Balance, including off-balance sheet instruments, at end of period
Less: Allowance for off-balance sheet instruments4
Balance at end of period
$ 736 $ 740 $ 208 $ 1,684 $ 736 $ 688 $ 133 $ 1,557
255
(459)
(14)
(94)
871
(52)
(459)
727
–
–
–
(12)
1,499
178
1,321
(248)
482
(131)
256
n/a
(68)
(503)
1,334
–
–
–
(4)
1,858
152
1,706
(7)
(23)
145
(4)
n/a
(54)
(242)
827
(22)
(430)
52
(28)
422
34
388
–
–
–
158
871
(174)
(1,204)
2,888
(22)
(430)
52
(44)
3,779
364
3,415
214
(127)
(18)
(89)
451
(9)
(340)
(83)
–
–
–
1
736
64
672
(210)
138
(136)
115
n/a
(35)
(382)
564
(3)
–
–
1
740
92
648
(4)
(11)
154
2
n/a
(42)
(85)
241
–
(228)
57
(9)
208
15
193
–
–
–
28
451
(86)
(807)
722
(3)
(228)
57
(7)
1,684
171
1,513
Total Allowance for Loan Losses at end of period
$ 2,544 $ 4,902 $ 844 $ 8,290 $ 2,122 $ 1,579 $ 746 $ 4,447
1 Includes allowance for loan losses related to ACI loans.
2 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.
3 For explanations regarding this line item, refer to the “Allowance for Loan Losses”
table on the previous page in this Note.
4 The allowance for loan losses for off-balance sheet instruments is recorded in Other
liabilities on the Consolidated Balance Sheet.
5 Includes the allowance for loan losses related to customers’ liability under
acceptances.
The allowance for credit losses on all remaining financial assets is
not significant.
FORWARD-LOOKING INFORMATION
Relevant macroeconomic factors are incorporated in risk parameters as
appropriate. Additional risk factors that are industry or segment specific
are also incorporated, where relevant. The key macroeconomic variables
used in determining ECLs include regional unemployment rates for all retail
exposures and regional housing price indices for residential mortgages
and home equity lines of credit. For business and government loans, the
key macroeconomic variables include GDP, unemployment rates, interest
rates, and credit spreads. Refer to Note 3 for a discussion of how forward-
looking information is considered in determining whether there has been a
significant increase in credit risk and in measuring 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 macroeconomic 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 ECLs. Macroeconomic variables for the upside scenario are
statistically derived relative to the base forecast based on historical
distribution of each variable. For the downside scenario, since the second
quarter of 2020, macroeconomic variables were based on plausible
scenario analysis of COVID-19 impacts, given the lack of comparable
historical data for a shock of this nature.
169
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS Macroeconomic Variables
Select macroeconomic variables are projected over the forecast period.
The following table represents the average values of the macroeconomic
variables over the next four calendar quarters and the remaining 4-year
forecast period for the base, upside, and downside forecasts used in
determining the Bank’s ECLs as at October 31, 2020. 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 economic outlook is particularly uncertain at present
given the wide range of potential outcomes related to the pandemic and
government decisions. Following the onset of the COVID-19 pandemic
in North America in March 2020, the economy went through a sudden
and severe downturn in the first half of the calendar year followed by
a rapid rebound in the third calendar quarter. The base forecast reflects
an ongoing economic recovery at a significantly slower pace due to
persistent restrictions imposed on economic activity to mitigate health
risks. This prevents real GDP and unemployment rates from returning to
pre-pandemic levels for several more quarters. The downside scenario
incorporates an acceleration in infections that prompts more extensive
government-imposed lockdowns, resulting in a severely deteriorated
economic environment relative to the base forecast.
Macroeconomic Variables
Unemployment rate
Canada
United States
Real GDP
Canada
United States
Home prices
Canada (average existing price)3
United States (CoreLogic HPI)4
Central bank policy interest rate
Canada
United States
U.S. 10-year treasury yield
U.S. 10-year BBB spread (%-pts)
Exchange rate (U.S. dollar/
Calendar Quarters1
Q4
2020
Q1
2021
Q2
2021
Q3
2021
Average
Q4 2020-
Q3 20212
Remaining
4-year
period2
Average
Q4 2020-
Q3 20212
Remaining
4-year
period2
Average
Q4 2020-
Q3 20212
Remaining
4-year
period2
Base Forecasts
Upside Forecasts
Downside Forecasts
9.3%
8.3
2.1
2.8
0.1
1.0
0.25
0.25
0.75
1.90
8.8%
7.9
2.6
2.9
(19.3)
0.5
0.25
0.25
0.88
1.88
8.0%
7.7
7.5%
7.2
8.4%
7.8
6.1%
4.8
7.8%
7.1
5.7%
4.1
10.2%
9.4
6.2%
5.1
2.9
2.7
(9.4)
–
0.25
0.25
1.03
1.85
4.0
4.3
0.7
0.5
0.25
0.25
1.18
1.83
2.4
1.8
6.0
2.9
0.25
0.25
0.96
1.87
2.2
2.4
1.1
2.9
0.50
0.50
1.82
1.80
3.2
2.3
7.4
3.4
0.25
0.25
1.39
1.77
2.8
3.0
3.1
4.1
0.64
0.72
2.78
1.53
(0.7)
(1.5)
(3.5)
(2.4)
0.25
0.25
0.69
2.14
2.9
3.1
3.5
4.1
0.39
0.39
1.71
1.81
Canadian dollar)
$ 0.77 $ 0.78 $ 0.78 $ 0.78
$ 0.78
$ 0.77
$ 0.78
$ 0.81
$ 0.76
$ 0.77
1 Quarterly figures for real GDP and home prices are presented as the quarter on
quarter change, seasonally adjusted annualized rate.
2 The numbers represent average values for the quoted periods, and average of year-
3 The average home price is the average transacted sale price of homes sold via the
Multiple Listing Service; data is collected by the Canadian Real Estate Association.
4 The CoreLogic home price index (HPI) is a repeat-sales index which tracks increases
on-year growth for real GDP and home prices.
and decreases in the same home’s sales price over time.
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, upside, and downside forecasts used in determining
the Bank’s ECLs as at October 31, 2019.
Macroeconomic Variables
As at
October 31, 2019
Base Forecasts
Remaining
4-year
period1
Next 12
months1
Upside
Remaining
4-year
period1
Next 12
months1
Downside
Remaining
4-year
period1
Next 12
months1
5.8%
3.8
1.6
1.9
7.1
3.6
5.8%
4.1
1.8
1.8
2.7
3.6
5.7%
3.6
1.8
2.0
8.9
4.4
5.2%
3.5
2.2
2.1
5.9
5.0
6.8%
4.9
0.6
0.7
2.7
2.4
8.0%
6.1
0.3
0.2
(3.5)
1.7
1.31
1.75
1.76
1.80
$ 0.76
1.53
2.20
2.50
1.80
$ 0.77
1.75
2.00
2.25
1.73
$ 0.78
2.16
2.86
3.44
1.59
$ 0.83
0.75
1.06
1.32
1.96
$ 0.74
0.63
1.00
1.79
2.19
$ 0.69
4 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.
Unemployment rate
Canada
United States
Real gross domestic product (GDP)2
Canada
United States
Home prices2
Canada (average home price)3
United States (CoreLogic HPI)4
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)
1 The numbers represent average values for the quoted periods.
2 The numbers represent annual % change.
3 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).
170
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
SENSITIVITY OF EXPECTED CREDIT LOSSES
The ECLs are sensitive to the inputs used in internally developed
models, the macroeconomic variables in the forward-looking forecasts
and respective probability weightings in determining the probability-
weighted ECLs, and other factors considered when applying expert credit
judgment. Changes in these inputs, assumptions, models, and judgments
would affect the assessment of significant increase in credit risk and
the measurement of ECLs. Refer to Note 3 for further details and for
significant judgments applied as a result of COVID-19.
The following table presents the base ECL scenario compared to the
probability-weighted ECLs, with the latter derived from three ECL scenarios
for performing loans and off-balance sheet instruments. The difference
reflects the impact of deriving multiple scenarios around the base ECLs
and resultant change in ECLs due to non-linearity and sensitivity to using
macroeconomic forecasts.
Change from Base to Probability-Weighted ECLs
(millions of Canadian dollars,
except as noted)
Probability-weighted ECLs
Base ECLs
Difference – in amount
Difference – in percentage
October 31, 2020
$ 8,500
8,157
$ 343
4.0%
As at
October 31, 2019
$ 4,271
4,104
$ 167
3.9%
The ECLs for performing loans and off-balance sheet instruments consist
of an aggregate amount of Stage 1 and Stage 2 probability-weighted ECLs
which are twelve-month ECLs and lifetime ECLs, respectively. Transfers
from Stage 1 to Stage 2 ECLs result from a significant increase in credit
risk since initial recognition of the loan. The following table shows the
estimated impact of staging on ECLs by presenting all performing loans
and off-balance sheet instruments calculated using twelve-month ECLs
compared to the current aggregate probability-weighted ECLs, holding all
risk profiles constant.
Incremental Lifetime ECLs Impact
(millions of Canadian dollars)
Aggregate Stage 1 and 2 probability-
weighted ECLs
All performing loans and off-balance
sheet instruments using
12-month ECLs
Incremental lifetime ECLs impact
October 31, 2020
October 31, 2019
As at
$ 8,500
$ 4,271
6,482
$ 2,018
3,672
$ 599
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
$77 million as at October 31, 2020 (October 31, 2019 – $121 million), and
were recorded in Other assets on the Consolidated Balance Sheet.
LOANS PAST DUE BUT NOT IMPAIRED
A loan is classified as past due when a borrower has failed to make
a payment by the contractual due date. The following table
summarizes loans that are contractually past due but not impaired
as at October 31, 2020 and October 31, 2019.
Loans Past Due but not Impaired1,2,3
(millions of Canadian dollars)
Residential mortgages
Consumer instalment and other personal
Credit card
Business and government
October 31, 2020
1-30
days
$ 1,325
5,623
956
2,521
31-60
days
$ 221
590
218
723
61-89
days
$ 64
200
149
329
Total
1-30
days
31-60
days
$ 1,610
6,413
1,323
3,573
$ 1,709
6,038
1,401
1,096
$ 404
845
351
858
As at
October 31, 2019
61-89
days
$ 111
266
229
60
Total
$ 2,224
7,149
1,981
2,014
Total
$ 10,425
$ 1,752
$ 742
$ 12,919
$ 10,244
$ 2,458
$ 666
$ 13,368
1 Includes loans that are measured at FVOCI.
2 Balances exclude ACI loans.
3 Loans deferred under a Bank-led COVID-19 relief program were not considered
past due. Where such loans were already past due, they were not aged further
during the deferral period. Aging for deferred loans commences subsequent to
the deferral period.
MODIFIED FINANCIAL ASSETS
To provide financial relief to customers affected by the economic
consequences of COVID-19, the Bank offered certain relief programs,
including payment deferral options for residential mortgages, home equity
loans, personal loans, auto loans, and commercial and small business
loans. Including the modifications under the COVID-19 relief programs,
the amortized cost of financial assets with lifetime allowance that were
modified during the year ended October 31, 2020, was $7.7 billion
(October 31, 2019 – $407 million) before modification, with insignificant
modification gain or loss. The gross carrying amount of modified financial
assets for which the loss allowance changed from lifetime to twelve-
month ECLs during the year ended October 31, 2020 was $609 million
(October 31, 2019 – $243 million).
COLLATERAL
As at October 31, 2020, the collateral held against total gross impaired
loans represents 86% (October 31, 2019 – 77%) 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.
171
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
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.
The following table summarizes the securitized asset types that did
not qualify for derecognition, along with their associated securitization
liabilities as at October 31, 2020 and October 31, 2019.
Financial Assets Not Qualifying for Derecognition Treatment as Part of the Bank’s Securitization Programs
(millions of Canadian dollars)
Nature of transaction
Securitization of residential mortgage loans
Other financial assets transferred related to securitization1
Total
Associated liabilities2
October 31, 2020
October 31, 2019
Fair
value
Carrying
amount
Fair
value
Carrying
amount
As at
$ 25,622
4,101
$ 25,271
4,084
$ 23,705
3,525
29,723
29,355
27,230
$ 23,689
3,524
27,213
$ 29,861
$ 29,486
$ 27,316
$ 27,144
1 Includes asset-backed securities, asset-backed commercial paper (ABCP), cash,
2 Includes securitization liabilities carried at amortized cost of $16 billion as at
repurchase agreements, and Government of Canada securities used to fulfil funding
requirements of the Bank’s securitization structures after the initial securitization of
mortgage loans.
October 31, 2020 (October 31, 2019 – $14 billion), and securitization liabilities
carried at fair value of $14 billion as at October 31, 2020 (October 31, 2019 –
$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, 2020 and
October 31, 2019.
Other Financial Assets Not Qualifying for Derecognition1
(millions of Canadian dollars)
Carrying amount of assets
Nature of transaction
Repurchase agreements2,3
Securities lending agreements
Total
As at
October 31
2020
October 31
2019
$ 28,549
38,934
67,483
$ 16,537
39,128
55,665
Carrying amount of associated liabilities3
$ 27,855
$ 16,975
1 Certain comparative amounts have been restated to conform with the presentation
adopted in the current year.
2 Includes $2.4 billion, as at October 31, 2020, of assets related to repurchase
agreements or swaps that are collateralized by physical precious metals
(October 31, 2019 – $1.3 billion).
3 Associated liabilities are all related to repurchase agreements.
172
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
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, 2020, the fair value of retained interests was $14 million
(October 31, 2019 – $19 million). There are no ECLs 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, 2020, the trading income recognized on
the retained interest was nil (October 31, 2019 – $1 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, 2020, the carrying value of these servicing
rights was $61 million (October 31, 2019 – $52 million) and the fair value
was $56 million (October 31, 2019 – $51 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, 2020 was $78 million
(October 31, 2019 – $14 million).
Canada Emergency Business Account Program
Under the Canada Emergency Business Account (CEBA) Program, with
funding provided by Her Majesty in Right of Canada (the “Government of
Canada”) and Export Development Canada (EDC) as the Government of
Canada’s agent, the Bank provides loans to its eligible business banking
customers. Under the CEBA Program, eligible businesses receive a $40,000
interest-free loan until December 31, 2022. If $30,000 is repaid on or
before December 31, 2022, the remaining amount of the loan is eligible
for complete forgiveness. If the loan is not repaid by December 31, 2022,
it will be extended for an additional 3-year term bearing an interest rate
of 5% per annum. The funding provided to the Bank by the Government
of Canada in respect of the CEBA Program represents an obligation to
pass-through collections on the CEBA loans and is otherwise non-recourse
to the Bank. Accordingly, the Bank is required to remit all collections of
principal and interest on the CEBA loans to the Government of Canada
but is not required to repay amounts that its customers fail to pay or that
have been forgiven. The Bank receives an administration fee to recover the
costs to administer the program for the Government of Canada. The Bank
continues to work with the Government of Canada and EDC as further
amendments to the CEBA Program are contemplated. Loans issued under
the program are not recognized on the Bank’s Consolidated Balance Sheet,
as the Bank transfers substantially all risks and rewards in respect of the
loans to the Government of Canada. As of October 31, 2020, the Bank
had provided approximately 184,000 customers with CEBA loans and had
funded approximately $7.3 billion in loans under the program.
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 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
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 entity. If an entity experiences difficulty issuing ABCP due to
illiquidity in the commercial market, the entity may draw on the loan
facility, and use the proceeds to pay maturing ABCP. The ABCP issued by
each multi-seller conduit is in the conduit’s own name with recourse to the
financial assets owned by the multi-seller conduit, and is non-recourse to
the Bank except through our participation in liquidity facilities. 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 financial assets are purchased
from more than one seller and commingled into a single portfolio of
assets. Each transaction is structured with transaction-specific first loss
protection provided by the third-party seller. This enhancement can take
various forms, including but not limited to overcollateralization, excess
spread, subordinated classes of financial assets, guarantees or letters of
credit. 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.
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.
Where the Bank has power over multi-seller conduits, but is not exposed
to significant variable returns it does not consolidate such entities. Where
the Bank is exposed to variable returns of a multi-seller conduit from
173
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS provision of liquidity facilities, together with power over the entity
as well as the ability to use its power to influence significant variable
returns, the Bank consolidates the conduit.
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 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.
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 IV (Trust IV) and
(2) TD Covered Bond (Legislative) Guarantor Limited Partnership (the
“Covered Bond Entity”). The Bank had previously issued TD Capital Trust III
Securities – Series 2008 (TD CaTS III) through TD Capital Trust III (Trust III),
which were included in Non-controlling interests in subsidiaries on the
Consolidated Balance Sheet. The TD CaTS III were fully redeemed on
December 31, 2018 at a price of $1 billion plus the unpaid distribution
payable on the redemption date. On June 30, 2019, Trust IV redeemed
all of the outstanding $550 million TD Capital Trust IV Notes – Series 1.
Refer to Note 20 for additional details.
Trust IV issued innovative capital securities which 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. Trust IV holds
assets which are only exposed to the Bank’s own credit risk. The Bank
is considered to have decision-making power over the key economic
activities of Trust IV; however, the Bank does not consolidate the trust
because it does not absorb significant variable returns of the trust as it
is ultimately exposed only to its own credit risk. 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.
174
Third-party Sponsored Securitization Programs
The Bank participates in the securitization program of government-
sponsored structured entities, including the CMHC, a Crown corporation
of the Government of Canada, and similar U.S. government-sponsored
entities. The CMHC guarantees CMB issued through the CHT.
The Bank is exposed to the variable returns in the CHT, through its
retention of seller swaps resulting from its participation in the CHT
program. The Bank does not have power over the CHT as its key economic
activities are controlled by the Government of Canada. The Bank’s
exposure to the CHT is included in the balance of residential mortgage
loans as noted in Note 9, and is not disclosed in the table accompanying
this Note.
The Bank participates in the securitization programs sponsored by
U.S. government agencies. The Bank is not exposed to significant
variable returns from these agencies and does not have power over
the key economic activities of the agencies, which are controlled by
the U.S. government.
Investment Holdings and Derivatives
The Bank may hold interests in third-party structured entities, predominantly
in the form of direct investments in securities or partnership interests
issued by those structured entities, or through derivatives transacted
with counterparties which are structured entities. Investments in,
and derivatives with, structured entities are recognized on the Bank’s
Consolidated Balance Sheet. The Bank does not typically consolidate
third-party structured entities where its involvement is limited to
investment holdings and/or derivatives as the Bank would not generally
have power over the key economic decisions of these entities.
Financing Transactions
In the normal course of business, the Bank may enter into financing
transactions with third-party structured entities including commercial
loans, reverse repurchase agreements, prime brokerage margin lending,
and similar collateralized lending transactions. While such transactions
expose the Bank to the structured entities’ counterparty credit risk, this
exposure is mitigated by the collateral related to these transactions.
The Bank typically has neither power nor significant variable returns
due to financing transactions with structured entities and would
not generally consolidate such entities. Financing transactions with
third-party sponsored structured entities are included on the Bank’s
Consolidated Financial Statements and have not been included in the
table accompanying this Note.
Arm’s-length Servicing Relationships
In addition to the involvement outlined above, the Bank may also provide
services to structured entities on an arm’s-length basis, for example as
sub-advisor to an investment fund or asset servicer. Similarly, the Bank’s
asset management services provided to institutional investors may include
transactions with structured entities. As a consequence of providing
these services, the Bank may be exposed to variable returns from these
structured entities, for example, through the receipt of fees or short-term
exposure to the structured entity’s securities. Any such exposure is typically
mitigated by collateral or some other contractual arrangement with the
structured entity or its sponsor. The Bank generally has neither power nor
significant variable returns from the provision of arm’s-length services to
a structured entity and, consequently does not consolidate such entities.
Fees and other exposures through servicing relationships are included on
the Bank’s Consolidated Financial Statements and have not been included
in the table accompanying this Note.
INVOLVEMENT WITH CONSOLIDATED STRUCTURED ENTITIES
Securitizations
The Bank securitizes consumer instalment, and other personal loans
through securitization entities, predominantly single-seller conduits. These
conduits are consolidated by the Bank based on the factors described
above. Aside from the exposure resulting from its involvement as seller
and sponsor of consolidated securitization conduits described above,
including the liquidity facilities provided, the Bank has no contractual or
non-contractual arrangements to provide financial support to consolidated
securitization conduits. The Bank’s interests in securitization conduits
generally rank senior to interests held by other parties, in accordance
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS 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.
Carrying Amount and Maximum Exposure to Unconsolidated Structured Entities
(millions of Canadian dollars)
Securitizations
Investment
funds and
trusts
Other
Total
Securitizations
Investment
funds and
trusts
October 31, 2020
As at
October 31, 2019
Other
Total
FINANCIAL ASSETS
Trading loans, securities, and other
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
other comprehensive income
Debt securities at amortized cost,
net of allowance for credit losses
Loans
Other
Total assets
FINANCIAL LIABILITIES
Derivatives1
Obligations related to securities
sold short
Total liabilities
Off-balance sheet exposure2
Maximum exposure to loss from
involvement with unconsolidated
structured entities
Size of sponsored unconsolidated
structured entities3
$
8,764 $
845
$
– $
9,609 $
8,450 $ 1,096
$
– $
9,546
3,680
–
–
513
368
23
30,278
2,395
104,914
2,134
8
149,778
–
3,337
3,337
16,431
28
5
–
4,177
150
335
485
68
6
–
7
–
–
3,098
3,179
–
–
–
4,261
374
23
3,649
–
–
488
64
4
32,680
34,451
1,550
104,942
2,139
3,106
157,134
150
3,672
3,822
22,825
85,456
1,314
6
–
5
–
133,326
3,207
–
3,164
3,164
17,233
395
503
898
–
6
–
9
–
–
3,027
3,042
–
–
–
4,137
70
4
36,010
85,456
1,319
3,033
139,575
395
3,667
4,062
22,689
5,105
1,289
4,234
1,222
$ 162,872 $ 8,797
$ 4,468 $ 176,137 $ 147,395 $ 6,543
$ 4,264 $ 158,202
$ 10,862 $ 37,286
$ 1,200 $ 49,348 $ 10,068 $ 37,638
$ 1,200 $ 48,906
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
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.
value of liquidity facilities, guarantees, or other off-balance sheet commitments
without considering the effect of collateral or other credit enhancements.
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 earned non-interest income of $2.1 billion
(October 31, 2019 − $2.0 billion) from its involvement with these asset
management entities for the year ended October 31, 2020, of which
$1.8 billion (October 31, 2019 − $1.8 billion) was received directly from
these entities. The total AUM in these entities as at October 31, 2020 was
$241.4 billion (October 31, 2019 − $233.9 billion). Any assets transferred
by the Bank during the period are co-mingled with assets obtained from
third parties in the market. Except as previously disclosed, the Bank has no
contractual or non-contractual arrangements to provide financial support
to unconsolidated structured entities.
175
TD BANK GROUP ANNUAL REPORT 2020 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
structural market risk 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;
• CVA 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. This includes interest rate swaps that are
transacted and settled through a clearing house which acts as a central
counterparty. 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.
Forward rate agreements are OTC contracts that effectively fix a future
interest rate for a period of time. A typical forward rate agreement
provides that at a pre-determined future date, a cash settlement will be
made between the counterparties based upon the difference between
a contracted rate and a market rate to be determined in the future,
calculated on a specified notional amount. No exchange of principal
amount takes place.
Interest rate options are contracts in which one party (the purchaser
of an option) acquires from another party (the writer of an option), in
exchange for a premium, the right, but not the obligation, either to buy or
sell, on a specified future date or series of future dates or within a specified
time, a specified financial instrument at a contracted price. The underlying
financial instrument will have a market price which varies in response to
changes in interest rates. In managing the Bank’s interest rate exposure,
the Bank acts as both a writer and purchaser of these options. Options
are transacted both OTC and through exchanges. Interest rate futures are
standardized contracts transacted on an exchange. They are based upon
an agreement to buy or sell a specified quantity of a financial instrument
on a specified future date, at a contracted price. These contracts differ
from forward rate agreements in that they are in standard amounts with
standard settlement dates and are transacted on an exchange.
176
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. 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, as well as managing counterparty credit risk
on derivatives. 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), which include contracts
transacted through clearing houses, and total return swaps (referred to as
swap contracts). In option contracts, an option purchaser acquires credit
protection on a reference asset or group of assets from an option writer
in exchange for a premium. The option purchaser may pay the agreed
premium at inception or over a period of time. The credit protection
compensates the option purchaser for deterioration in value of the
reference asset or group of assets upon the occurrence of certain credit
events such as bankruptcy, or changes in specified credit 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,
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS 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/or 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
Forward rate agreements
Swaps
Options written
Options purchased
Total interest rate contracts
Foreign exchange contracts
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, 2020
Fair value as at
balance sheet date
October 31, 2019
Fair value as at
balance sheet date
Positive
Negative
Positive
Negative
$
38
$
71
$
24
$
12,290
–
1,322
13,650
818
10,858
15,106
–
256
27,038
3
7
10
3,649
2,414
6,063
46,761
2
4,299
–
9
4,310
608
8
1,964
2,580
9
9
582
582
7,481
15,068
1,321
–
16,460
1,361
9,649
14,431
286
–
25,727
165
9
174
3,328
1,993
5,321
47,682
1
2,671
2
–
2,674
187
1
1,399
1,587
153
153
1,107
1,107
5,521
11,244
–
1,168
12,436
713
12,734
14,721
–
289
28,457
–
16
16
748
1,524
2,272
43,181
–
2,365
–
15
2,380
660
2
1,531
2,193
–
–
1,140
1,140
5,713
149
11,952
1,099
–
13,200
1,540
12,613
12,913
302
–
27,368
241
–
241
2,942
1,335
4,277
45,086
2
1,303
1
–
1,306
90
22
1,919
2,031
179
179
1,449
1,449
4,965
$ 54,242
$ 53,203
$ 48,894
$ 50,051
177
TD BANK GROUP ANNUAL REPORT 2020 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, 2020 and
October 31, 2019.
Fair Value of Non-Trading Derivatives1
(millions of Canadian dollars)
Derivative Assets
Derivatives in qualifying
hedging relationships
Fair
value
Cash
flow
Net
investment
Derivatives
not in
qualifying
hedging
relationships
Derivatives in qualifying
hedging relationships
Total
Fair
value
Cash
flow
Net
investment
As at
October 31, 2020
Derivative Liabilities
Derivatives
not in
qualifying
hedging
relationships
Total
$ –
–
–
–
$ –
$ 1,709 $ 2,674
1,587
153
1,107
41
153
965
$ 2,868 $ 5,521
October 31, 2019
$ –
58
–
–
$ 58
$ 566 $ 1,306
2,031
179
1,449
63
179
1,449
$ 2,257 $ 4,965
Derivatives held or issued for
non-trading purposes
Interest rate contracts
Foreign exchange contracts
Credit derivative contracts
Other contracts
$ 1,624 $ 1,061
–
–
–
2,503
–
200
Fair value – non-trading
$ 1,624 $ 3,764
Derivatives held or issued for
non-trading purposes
Interest rate contracts
Foreign exchange contracts
Credit derivative contracts
Other contracts
$ 882 $ 804
–
–
–
2,175
–
531
$ –
–
–
–
$ –
$ –
2
–
–
$ 1,625 $ 4,310
77
9
382
2,580
9
582
81
$ 884 $
–
–
–
1,546
–
142
$ 2,093 $ 7,481
$ 884 $ 1,769
$ 694 $ 2,380
16
–
609
2,193
–
1,140
$ 786 $
–
–
–
(46)
1,910
–
–
Fair value – non-trading
$ 882 $ 3,510
$ 2
$ 1,319 $ 5,713
$ 786 $ 1,864
1 Certain derivative assets qualify to be offset with certain derivative liabilities on
the Consolidated Balance Sheet. Refer to Note 6 for further details.
178
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
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)
Assets
Interest rate risk
Debt securities at amortized cost
Financial assets at fair value through
comprehensive income
Loans
Total assets
Liabilities
Interest rate risk
Deposits
Securitization liabilities at
amortized cost
Subordinated notes and debentures
Total liabilities
Total
Assets
Interest rate risk
Debt securities at amortized cost
Financial assets at fair value through
other comprehensive income
Loans
Total assets
Liabilities
Interest rate risk
Deposits
Securitization liabilities at
amortized cost
Subordinated notes and debentures
Total liabilities
Total
Total
For the years ended or as at October 31
Change in
value of
hedged
items for
ineffectiveness
measurement
Change in
fair value
of hedging
instruments for
ineffectiveness
measurement
Hedge
ineffectiveness
Carrying
amounts for
hedged items
2020
Accumulated
amount of fair
value hedge
adjustments
on hedged
items1
Accumulated
amount of fair
value hedge
adjustments on
de-designated
hedged item
$ 1,377
$ (1,384)
$
(7)
$ 59,095
$ 2,572
$ 215
1,413
1,834
4,624
(3,962)
(201)
(246)
(4,409)
(1,414)
(1,838)
(4,636)
3,922
202
246
4,370
$
215
$
(266)
(1)
(4)
(12)
66,000
36,019
161,114
(40)
142,464
1
–
(39)
$ (51)
3,519
2,658
148,641
1,812
2,059
6,443
4,703
230
111
5,044
52
37
304
72
–
(13)
59
2019
$ 2,144
$ (2,160)
$ (16)
$ 46,888
$ 1,502
$
–
3,286
1,440
6,870
(4,566)
(149)
(189)
(4,904)
(3,299)
(1,458)
(6,917)
4,584
151
190
4,925
(13)
(18)
(47)
18
2
1
21
78,688
59,270
184,846
125,602
5,481
5,071
136,154
580
741
2,823
2,214
82
(28)
2,268
$ 1,966
$ (1,992)
$ (26)
$
(802)
$
804
$
2
(119)
(6)
(125)
(11)
–
(135)
(146)
2018
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.
179
TD BANK GROUP ANNUAL REPORT 2020 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)
Cash flow hedges2
Interest rate risk3
Foreign exchange risk4,5,6
Equity price risk
Total cash flow hedges
Net investment hedges
Cash flow hedges2
Interest rate risk3
Foreign exchange risk4,5,6
Equity price risk
Total cash flow hedges
Net investment hedges
Total cash flow hedges2
Net investment hedges
For the years ended October 31
2020
Change in
value of
hedged
items for
ineffectiveness
measurement
Change in
fair value
of hedging
instruments for
ineffectiveness
measurement
Hedge
ineffectiveness
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
$ (3,884)
(1,129)
364
$ (4,649)
$ 3,891
1,122
(364)
$ 4,649
$
394
$
(394)
$ 7
(7)
–
$ –
$ –
$ 4,222
$
609
650
(364)
1,043
(294)
$ 3,613
(393)
(70)
$ 4,508
$ 1,358
$ 3,150
$
(394)
$ (2,077)
$ 1,683
$ (5,087)
251
(122)
$ (4,958)
$ 5,089
(250)
122
$ 4,961
$ 2
1
–
$ 3
$ 5,041
(466)
122
$ 4,697
$
(180)
$
180
$ –
$
180
$ 2,070
392
$
$ (2,072)
(392)
$
$ (2)
$ –
$ (2,100)
(392)
$
2019
$ 5,259
106
5
$ 5,370
(218)
(572)
117
(673)
–
$
180
738
–
2018
$ (2,838)
(392)
$
$
$
$
$
$
1 Effects on other comprehensive income are presented on a pre-tax basis.
2 During the years ended October 31, 2020, October 31, 2019, and October 31, 2018,
there were no instances where forecasted hedged transactions failed to occur.
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).
3 Hedged items include forecasted interest cash flows on loans, deposits, and
6 Hedged items include principal and interest cash flows on foreign denominated
securitization liabilities.
securities, loans, deposits, other liabilities, and subordinated notes and debentures.
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.
Reconciliation of Accumulated Other Comprehensive Income (Loss)1
(millions of Canadian dollars)
For the years ended October 31
Accumulated other
comprehensive
income (loss)
at beginning
of year
Net changes
in other
comprehensive at
income (loss)
Accumulated
other
comprehensive
income (loss) at
end of year
Accumulated
other
comprehensive
income (loss) on
designated hedges
2020
Accumulated
other
comprehensive
income (loss) on
de-designated
hedges
$ 1,603
353
25
$ 1,981
$ 3,613
(393)
(70)
$ 3,150
$ 5,216
$ 1,881
(40)
(45)
(40)
(45)
$ 5,131
$ 1,796
$ 3,335
–
–
$ 3,335
$ (5,509)
$ 1,683
$ (3,826)
$ (3,826)
$
–
$ (3,656)
247
20
$ (3,389)
$ 5,259
106
5
$ 5,370
$ 1,603
353
25
$ 1,981
$ 1,226
353
25
$ 1,604
$ (5,689)
$
180
$ (5,509)
$ (5,509)
2019
377
–
–
377
–
$
$
$
Cash flow hedges
Interest rate risk
Foreign exchange risk
Equity price risk
Total cash flow hedges
Net investment hedges
Foreign translation risk
Cash flow hedges
Interest rate risk
Foreign exchange risk
Equity price risk
Total cash flow hedges
Net investment hedges
Foreign translation risk
1 Presented on a pre-tax basis and excludes the Bank’s equity in the AOCI
of an investment in TD Ameritrade.
180
TD BANK GROUP ANNUAL REPORT 2020 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 are they 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)
As at
October 31
2020
October 31
2019
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
Over-the-Counter1
Clearing
house2
Non clearing
house
Exchange-
traded
Total
Non-trading3
Total
Total
Trading
$
$
–
1,468,217
8,659,568
–
–
10,127,785
–
–
–
–
–
–
–
8,444
1,336
9,780
–
66
66
–
9,035
350,193
89,499
82,712
531,439
–
116,537
2,035,231
896,278
17,863
17,894
3,083,803
102
207
309
76,337
46,370
122,707
$
546,112 $
–
–
275,160
366,412
546,112 $
1,477,252
9,009,761
364,659
449,124
–
1,497
1,338,113
1,649
3,914
$
546,112 $
1,478,749
10,347,874
366,308
453,038
884,565
1,846,927
11,412,846
246,268
314,793
1,187,684
11,846,908
1,345,173
13,192,081
14,705,399
–
–
–
–
40
26
66
–
–
–
71,960
56,835
128,795
–
116,537
2,035,231
896,278
17,903
17,920
3,083,869
8,546
1,543
10,089
148,297
103,271
251,568
–
31,717
1,263
97,182
–
–
130,162
4,196
1
4,197
27,767
–
27,767
–
148,254
2,036,494
993,460
17,903
17,920
3,214,031
12,742
1,544
14,286
176,064
103,271
279,335
16
190,465
1,749,551
858,701
27,654
27,295
2,853,682
12,670
1,112
13,782
188,371
96,687
285,058
$ 10,137,631 $ 3,738,258 $ 1,316,545 $ 15,192,434 $ 1,507,299 $ 16,699,733 $ 17,857,921
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 reduce 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 As at October 31, 2020, includes $1,150 billion of OTC derivatives that are transacted
with clearing houses (October 31, 2019 – $1,454 billion) and $357 billion of OTC
derivatives that are transacted with non-clearing houses (October 31, 2019 –
$352 billion). There were no exchange-traded derivatives both as at October 31, 2020
and October 31, 2019.
181
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
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
Interest rate contracts
Foreign exchange contracts
Credit derivative contracts
Other contracts
Total notional non-trading
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.
The following table discloses the notional principal amount of over-
the-counter derivatives and exchange-traded derivatives based on their
contractual terms to maturity.
As at
October 31, 2020
Derivatives in qualifying hedging relationships
Fair
value
Cash
flow1
Net
Investment1
Derivatives not in
qualifying
hedging
relationships
Total
$ 313,461
–
–
–
$ 193,897
121,263
–
1,630
$
–
44
–
–
$ 837,815 $ 1,345,173
130,162
4,197
27,767
8,855
4,197
26,137
$ 313,461
$ 316,790
$
44
$ 877,004 $ 1,507,299
$ 337,374
–
–
–
$ 234,134
117,532
–
2,079
$
–
1,292
–
–
$ 1,077,788 $ 1,649,296
123,349
3,199
29,454
4,525
3,199
27,375
$ 337,374
$ 353,745
$ 1,292
$ 1,112,887 $ 1,805,298
October 31, 2019
Within
1 year
Over 1 year
to 5 years
Over 5
years
Total
Total
October 31
2020
As at
October 31
2019
$
422,942
$
1,431,511
3,184,527
293,678
383,966
5,716,624
–
137,409
1,993,627
253,709
15,796
15,671
2,416,212
1,869
410
2,279
132,950
87,727
220,677
123,170
46,454
5,020,569
63,196
59,949
5,313,338
$
–
784
2,142,778
9,434
9,123
2,162,119
–
10,761
36,992
543,801
1,830
1,964
595,348
4,526
901
5,427
43,103
15,333
58,436
–
84
5,875
195,950
277
285
202,471
6,347
233
6,580
11
211
222
$
546,112
$
1,478,749
10,347,874
366,308
453,038
13,192,081
–
148,254
2,036,494
993,460
17,903
17,920
3,214,031
12,742
1,544
14,286
176,064
103,271
279,335
884,565
1,846,927
11,412,846
246,268
314,793
14,705,399
16
190,465
1,749,551
858,701
27,654
27,295
2,853,682
12,670
1,112
13,782
188,371
96,687
285,058
$ 8,355,792
$ 5,972,549
$ 2,371,392
$ 16,699,733
$ 17,857,921
Derivatives by Remaining Term-to-Maturity
(millions of Canadian dollars)
Notional Principal
Interest rate contracts
Futures
Forward rate agreements
Swaps
Options written
Options purchased
Total interest rate contracts
Foreign exchange contracts
Futures
Forward contracts
Swaps
Cross-currency interest rate swaps
Options written
Options purchased
Total foreign exchange contracts
Credit 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
182
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
The following table discloses the notional amount and average price
of derivative instruments designated in qualifying hedge accounting
relationships.
Hedging Instruments by Remaining 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
As at
October 31
2020
October 31
2019
Within
1 year
Over
1 year to
5 years
Over
5 years
Total
Total
$ 35,776
$ 76,270
$ 48,976
$ 161,022
$ 201,878
1.29
37,905
0.93
73,681
680
1.32
4,240
1.56
44
27,547
1.30
2,327
1.46
2,071
1.72
9,691
46,600
1,657
1.54
140,448
1.58
216,718
775
1.33
12,471
1.65
–
24,498
1.32
16,691
1.51
3,020
1.70
10,365
67,820
1.53
50,404
0.89
99,380
200
1.34
316
1.73
–
2,634
1.33
2,898
1.50
284
1.71
552
6,884
228,757
248,779
389,779
450,657
1,655
1,063
17,027
17,009
44
1,292
54,679
49,455
21,916
23,474
5,375
5,033
20,608
121,304
21,468
118,794
–
–
1,657
2,092
$ 121,938
$ 284,538
$ 106,264
$ 512,740
$ 571,543
1 Foreign currency denominated deposit liabilities are also used to hedge foreign
exchange risk. As at October 31, 2020, the carrying value of these non-derivative
hedging instruments was $27.9 billion (October 31, 2019 – $23.9 billion) designated
under net investment hedges.
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.
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 $117.6 billion as at October 31, 2020 (October 31, 2019 –
$120.9 billion).
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.
Interest Rate Benchmark Reform
The Bank’s hedging relationships have significant exposure to
US LIBOR, EURIBOR and GBP LIBOR benchmark rates. Under IBOR
reform, these benchmark rates may be subject to discontinuance,
changes in methodology, or become illiquid when the adoption of
ARRs as established benchmark rates increase. As a result of these
developments, significant judgment is required in determining whether
certain hedging relationships that hedge the variability of cash flows
and interest rate or foreign exchange risk due to changes in IBORs
continue to qualify for hedge accounting.
Impacted hedging relationships will continue to be monitored for each
significant benchmark rate subject to potential ARR transition. As the new
ARRs are likely to differ from the prior benchmark rates, new or revised
hedging strategies may be required to better align derivative hedging
instruments with hedged items. However, given the market uncertainty,
the assessment of the impact on the Bank’s hedging strategies and its
mitigation plans is ongoing.
The following table discloses the notional amount of derivative
instruments designated in qualifying hedge accounting relationships,
disaggregated by significant interest rate benchmark, that have yet to
transition to an alternative benchmark rate for contracts maturing after
December 31, 2021. EURIBOR underwent a methodology change in 2019
and will continue as a benchmark rate in the foreseeable future and is
excluded from this table. As at October 31, 2020, the notional amount
of derivative instruments indexed to EURIBOR in designated hedge
accounting relationships is $46 billion (October 31, 2019 – $48 billion).
As at October 31, 2020, none of the Bank’s derivative instruments in
designated hedge accounting relationships have transitioned to an ARR.
183
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
Derivative Instruments Designated in Qualifying
Hedge Accounting Relationships1,2
(millions of Canadian dollars)
Notional
Interest rate risk
Interest rate swaps
US LIBOR
GBP LIBOR
Foreign exchange risk
Interest rate swaps
US LIBOR
GBP LIBOR
Cross-currency swaps3
US LIBOR
GBP LIBOR
Total
As at
October 31, 2020
October 31, 2019
Hedging derivatives maturing
after December 31, 2021
$ 210,352
–
$ 173,763
–
17,024
1,726
34,359
2,589
9,586
1,706
21,539
2,559
$ 266,050
$ 209,153
1 US LIBOR transitioning to Secured Overnight Financing Rate (SOFR). GBP LIBOR
transitioning to Sterling Overnight Interbank Average Rate (SONIA).
2 Excludes hedging derivatives which reference rates in multi-rate jurisdictions,
including CDOR. Derivative instruments indexed to 6-month and 12-month CDOR
tenors will be discontinued on May 17, 2021 while other tenors of CDOR will
continue as a benchmark rate. As at October 31, 2020, the Bank does not have any
derivative instruments indexed to 6-month or 12-month CDOR in designated hedge
accounting relationships.
3 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.
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.
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.
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 current replacement cost and credit equivalent
amount shown in the following table are based on the standardized
approach for counterparty credit risk. According to this approach, the
current replacement cost accounts for the fair value of the positions,
posted and received collateral, and master netting agreement clauses.
The credit equivalent amount is the sum of the current replacement
cost and the potential future exposure, which is calculated by applying
factors determined by OSFI to the notional principal amount of
the derivatives. The risk-weighted amount is determined by applying
the adequate risk weights to the credit equivalent amount.
Credit Exposure of Derivatives1
(millions of Canadian dollars)
Interest rate contracts
Forward rate agreements
Swaps
Options written
Options purchased
Total interest rate contracts
Foreign exchange contracts
Forward contracts
Swaps
Cross-currency interest rate swaps
Options written
Options purchased
Total foreign exchange contracts
Other contracts
Credit derivatives
Equity contracts
Commodity contracts
October 31, 2020
As at
October 31, 2019
Current
replacement
cost
Credit
equivalent
amount
Risk-
weighted
amount
Current
replacement
cost
Credit
equivalent
amount
Risk-
weighted
amount
$
20
$
325
4,347
33
5
4,405
465
1,999
2,087
29
8
4,588
3
689
714
10,607
129
75
11,136
2,364
15,638
10,422
135
104
28,663
508
8,513
3,610
$ 229
2,641
36
23
2,929
353
1,370
1,500
44
28
3,295
123
1,376
975
$
31
$
536
3,210
64
69
3,374
434
1,961
1,812
29
19
4,255
6
151
383
9,635
224
235
10,630
2,555
14,286
10,288
193
170
27,492
634
5,706
3,083
$ 449
1,809
60
42
2,360
375
1,635
1,183
45
38
3,276
149
667
627
Total other contracts
Total derivatives
Qualifying Central Counterparty (QCCP) Contracts
Total
1,406
10,399
3,274
$ 13,673
12,631
52,430
14,150
$ 66,580
2,474
8,698
410
$ 9,108
540
8,169
3,085
$ 11,254
9,423
47,545
12,967
$ 60,512
1,443
7,079
349
$ 7,428
1 Certain comparative amounts have been reclassified to conform with the
presentation adopted in the current year.
184
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
Current Replacement Cost of Derivatives
(millions of Canadian dollars, except as noted)
By sector
Financial
Government
Other
Canada1
United States1
Other international1
As at
Total
October 31
2020
October 31
2019
October 31
2020
October 31
2019
October 31
2020
October 31
2019
October 31
2020
October 31
2019
$ 2,562
2,156
2,092
$ 2,416
1,836
1,279
$
123
26
2,397
$
80
43
1,531
$
309
116
618
$ 245 $ 2,994
221
518
2,298
5,107
$ 2,741
2,100
3,328
Total current replacement cost
$ 6,810
$ 5,531
$ 2,546
$ 1,654
$ 1,043
$ 984
$ 10,399
$ 8,169
By location of risk
Canada
United States
Other international
United Kingdom
Europe – other
Other
Total Other international
Total current replacement cost
1 Based on geographic location of unit responsible for recording revenue.
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, 2020, the aggregate net liability
position of those contracts would require: (1) the posting of collateral
or other acceptable remedy totalling $120 million (October 31, 2019 –
$102 million) in the event of a one-notch or two-notch downgrade
in the Bank’s senior debt rating; and (2) funding totalling nil
(October 31, 2019 – $0.5 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.
N O T E 1 2 | INVESTMENT IN ASSOCIATES AND JOINT VENTURES
INVESTMENT IN THE CHARLES SCHWAB CORPORATION
On October 6, 2020, The Charles Schwab Corporation (“Schwab”)
completed its acquisition of TD Ameritrade Holding Corporation
(“TD Ameritrade”), of which the Bank was a major shareholder (the
“Schwab transaction”). Under the terms of the Schwab transaction,
all TD Ameritrade shareholders, including the Bank, exchanged each
TD Ameritrade share they owned for 1.0837 common shares of Schwab.
Upon closing, the Bank exchanged its approximately 43% ownership
in TD Ameritrade for an approximately 13.5% stake in Schwab, consisting
of 9.9% voting common shares and the remainder in non-voting
common shares, convertible into voting common shares upon transfer to
a third party. The Bank recognized a net gain on sale of its investment in
TD Ameritrade of $1.4 billion ($2.3 billion after-tax) in the fourth quarter
of 2020, which was recorded in Other income (loss) on the Consolidated
Statement of Income. The gain was primarily related to the revaluation
on sale of the Bank’s investment in TD Ameritrade, after elimination of
the unrealized portion relating to the Bank’s ownership in Schwab, and
the release of a deferred tax liability related to the Bank’s investment in
TD Ameritrade, and after transaction costs. The Bank also released the
cumulative foreign currency translation gains (losses) from AOCI related
to the Bank’s foreign investment in TD Ameritrade on the sale of its
investment, with an offsetting AOCI release of the designated hedging
items and related taxes against this foreign investment. The transaction
had an approximately neutral impact on CET1 at closing.
October 31
2020
October 31
2019
$ 3,752
$ 2,768
4,078
2,936
October 31
2020
% mix
October 31
2019
% mix
36.1%
39.2
33.9%
36.0
371
1,414
784
2,569
501
1,211
753
2,465
3.6
13.6
7.5
24.7
6.1
14.8
9.2
30.1
$ 10,399
$ 8,169
100.0%
100.0%
Certain of the Bank’s derivative contracts are governed by master
derivative agreements having credit support provisions that permit
the Bank’s counterparties to call for collateral depending on the net
mark-to-market exposure position of all derivative contracts governed
by that master derivative agreement. Some of these agreements may
permit the Bank’s counterparties to require, upon the downgrade
of the credit rating of the Bank, to post additional collateral. As at
October 31, 2020, the fair value of all derivative instruments with
credit risk related contingent features in a net liability position
was $11 billion (October 31, 2019 – $11 billion). The Bank has posted
$14 billion (October 31, 2019 – $14 billion) of collateral for this exposure
in the normal course of business. As at October 31, 2020, the impact of a
one-notch downgrade in the Bank’s credit rating would require the Bank
to post an additional $202 million (October 31, 2019 – $147 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 $249 million (October 31, 2019 – $192 million) of collateral to
that posted in the normal course of business.
The Bank and Schwab are party to a stockholder agreement (the
“Stockholder Agreement”) under which the Bank has the right to
designate two members of Schwab’s Board of Directors and has
representation on two Board Committees, subject to the Bank meeting
certain conditions. As of October 31, 2020, the Bank’s designated
directors were the Bank’s Group President and Chief Executive Officer
and the Bank’s Chair of the Board. Under the Stockholder Agreement,
the Bank is not permitted to own more than 9.9% voting common shares
of Schwab, and the Bank is subject to customary standstill and lockup
restrictions, including, subject to certain exceptions, transfer restrictions. In
addition, the insured deposit account agreement between the Bank and
Schwab (the “Schwab IDA Agreement”) became effective upon closing
and has an initial expiration date of July 1, 2031. Refer to Note 28 for
further details on the Schwab IDA Agreement.
Through a combination of the Bank’s ownership, board representation
and the Schwab IDA Agreement, the Bank has significant influence over
Schwab and the ability to participate in the financial and operating policy-
making decisions of Schwab. As such, the Bank accounts for its investment
in Schwab using the equity method. The Bank’s share of Schwab’s earnings
available to common shareholders is reported with a one-month lag, and
the Bank will begin recording its share of Schwab’s earnings on this basis
in the first quarter of fiscal 2021.
185
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
As at October 31, 2020, the Bank’s reported investment in Schwab was
13.51% of the outstanding voting and non-voting common shares of
Schwab with a fair value of $14 billion (US$10 billion) based on the closing
price of US$41.11 on the New York Stock Exchange.
INVESTMENT IN TD AMERITRADE HOLDING CORPORATION
Prior to completion of the Schwab transaction on October 6, 2020,
the Bank had significant influence over TD Ameritrade and accounted
for its investment in TD Ameritrade using the equity method. The Bank’s
share of TD Ameritrade’s earnings, excluding dividends, was reported with
a one-month lag. The Bank’s reported investment in TD Ameritrade was
43.19% of the outstanding shares of TD Ameritrade on October 31, 2019
with a fair value of $12 billion (US$9 billion) based on the closing price of
US$38.38 on the New York Stock Exchange.
During the year ended October 31, 2020, TD Ameritrade repurchased
2.0 million shares (for the year ended October 31, 2019 – 21.5 million
shares). Pursuant to the stockholders agreement in relation to the Bank’s
equity investment in TD Ameritrade, if stock repurchases by TD Ameritrade
caused the Bank’s ownership percentage of TD Ameritrade to exceed
45%, the Bank was 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 caused the Bank’s ownership percentage
of TD Ameritrade to exceed 45%, the Bank had no absolute obligation to
reduce its ownership percentage to 45%. In addition, stock repurchases
by TD Ameritrade could not result in the Bank’s ownership percentage of
TD Ameritrade exceeding 47%.
Pursuant to the stockholders agreement in relation to the Bank’s equity
investment in TD Ameritrade, the Bank had the right to designate five of
twelve members of TD Ameritrade’s Board of Directors. Immediately prior
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)
1 The Bank’s share of TD Ameritrade’s earnings 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.
INVESTMENT IN IMMATERIAL ASSOCIATES
OR JOINT VENTURES
Except for Schwab and TD Ameritrade as disclosed above, no associate or
joint venture was individually material to the Bank as of October 31, 2020,
or October 31, 2019. The carrying amount of the Bank’s investment in
individually immaterial associates and joint ventures during the period was
$3.4 billion (October 31, 2019 – $3.2 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.
186
to completion of the Schwab transaction, the Bank’s designated directors
were the Bank’s Group President and Chief Executive Officer and four
independent directors of TD or TD’s U.S. subsidiaries.
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)
As at
September 30
2020
September 30
2019
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
$ 2,070
36,938
36,223
$ 3,212
27,156
27,303
$ 75,231
$ 57,671
$ 4,307
50,382
7,174
61,863
13,368
$ 4,357
35,650
6,205
46,212
11,459
Total liabilities and stockholders’ equity
$ 75,231
$ 57,671
1 Customers’ securities are reported on a settlement date basis whereas the Bank
reports customers’ securities on a trade date basis.
2 As at October 31, 2019, 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 was comprised of goodwill, other intangibles, and the cumulative
translation adjustment.
For the years ended September 30
2020
2019
2018
$ 1,873
6,202
$ 2,036
5,947
8,075
7,983
$ 1,635
5,365
7,000
1,905
2,388
4,293
143
3,639
910
1,756
2,245
4,001
94
3,888
957
1,992
2,434
4,426
142
2,432
535
$ 2,729
$ 2,931
$ 1,897
$ 5.04
5.02
$ 5.27
5.26
$ 3.34
3.32
2 The Bank’s share of TD Ameritrade’s earnings for the year ended October 31, 2018
included 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.
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.
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
N O T E 1 3 | SIGNIFICANT ACQUISITIONS AND DISPOSALS
Agreement for Air Canada Credit Card Loyalty Program
On January 10, 2019, the Bank’s long-term loyalty program agreement
(the “Loyalty Agreement”) with Air Canada became effective in
conjunction with Air Canada completing its acquisition of Aimia Canada
Inc., which operates the Aeroplan loyalty business (the “Transaction”).
Under the terms of the Loyalty Agreement, the Bank became the primary
credit card issuer for Air Canada’s new loyalty program when it launched
in November 2020 through to 2030. TD Aeroplan cardholders became
members of Air Canada’s new loyalty program and their miles were
transitioned when Air Canada’s new loyalty program launched in 2020.
In connection with the Transaction, the Bank paid $622 million plus
applicable sales tax to Air Canada, of which $547 million ($446 million
after sales and income taxes) was recognized in Non-interest expenses –
Other on the Consolidated Statement of Income, and $75 million
was recognized as an intangible asset which will be amortized over the
Loyalty Agreement term. In addition, the Bank prepaid $308 million
plus applicable sales tax for the future purchase of loyalty points over
a ten-year period.
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 $821 million,
of which $479 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 were held
in escrow for two years post-acquisition up to November 1, 2020, subject
to their continued employment, and were recorded as a compensation
expense over the two-year escrow period.
The acquisition was accounted for as a business combination
under the purchase method. As at November 1, 2018, the acquisition
contributed $165 million of assets and $46 million of liabilities. The excess
of accounting consideration over the fair value of the identifiable net
assets was allocated to customer relationship intangibles of $140 million,
deferred tax liability of $37 million, and goodwill of $432 million. Goodwill
is not deductible for tax purposes. The results of the acquisition have
been consolidated from the acquisition date and reported in the Canadian
Retail segment. For the year ended October 31, 2020, the contribution of
Greystone to the Bank’s revenue and net income was not significant.
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, discount rates, and terminal
values reflecting terminal growth rates or terminal price-earnings 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, assumptions 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 $20.6 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.
The Bank assessed whether market conditions and uncertainty
about the macroeconomic impacts of COVID-19, including on gross
domestic product (GDP) growth, unemployment rates and interest rates,
have resulted in an impairment of its goodwill and intangible assets.
Having considered these indicators, the Bank concluded that there is no
impairment in the carrying amount of its goodwill and intangible assets as
of October 31, 2020.
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 Value
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. Beyond the Bank’s
internal forecast, cash flows were assumed to grow at a steady terminal
growth rate. Terminal growth rates were based on the expected long-term
growth of gross domestic product and inflation and ranged from 2.0%
to 4.0% (2019 – 2.0% to 4.0%). The pre-tax terminal multiples for the
period after the Bank’s internal forecast were consistent with observable
multiples of comparable financial institutions and ranged from 9 times to
14 times (2019 – 9 times to 13 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.
187
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS Goodwill by Segment
(millions of Canadian dollars)
Carrying amount of goodwill as at November 1, 2018
Additions
Foreign currency translation adjustments and other
Carrying amount of goodwill as at October 31, 2019
Foreign currency translation adjustments and other
Carrying amount of goodwill as at October 31, 20202
Pre-tax discount rates
2019
2020
1 Goodwill predominantly relates to U.S. personal and commercial banking.
2 Accumulated impairment as at October 31, 2020 and October 31, 2019 was nil.
OTHER INTANGIBLES
The following table presents details of other intangibles as at
October 31, 2020 and October 31, 2019.
Canadian
Retail
$ 2,403
432
1
U.S.
Retail1
Wholesale
Banking
$ 13,973
–
7
$ 160
–
–
Total
$ 16,536
432
8
$ 2,836
$ 13,980
$ 160
$ 16,976
10
162
–
172
$ 2,846
$ 14,142
$ 160
$ 17,148
9.7–11.0%
9.7–11.0
9.6–11.8%
9.2–11.8
12.7%
12.7
Other Intangibles
(millions of Canadian dollars)
Cost
As at November 1, 2018
Additions
Disposals
Fully amortized intangibles
Foreign currency translation adjustments and other
As at October 31, 2019
Additions
Disposals
Fully amortized intangibles
Foreign currency translation adjustments and other
Core deposit
intangibles
Credit card
related
intangibles
Internally
generated
software
Other
software
Other
intangibles
$ 2,575
–
–
–
1
$ 759
83
–
–
–
$ 2,760
541
(40)
(322)
(12)
$ 2,576
$ 842
$ 2,927
–
–
–
30
–
–
–
2
327
(55)
(391)
26
$ 300
63
–
(79)
11
$ 295
44
(25)
(37)
1
Total
$ 6,980
850
(40)
(401)
(6)
$ 586
163
–
–
(6)
$ 743
$ 7,383
41
–
–
6
412
(80)
(428)
65
As at October 31, 2020
$ 2,606
$ 844
$ 2,834
$ 278
$ 790
$ 7,352
Amortization and impairment
As at November 1, 2018
Disposals
Impairment losses
Amortization charge for the year
Fully amortized intangibles
Foreign currency translation adjustments and other
$ 2,404
–
–
76
–
1
$ 542
–
–
86
–
–
$ 1,031
(14)
4
474
(322)
(6)
As at October 31, 2019
$ 2,481
$ 628
$ 1,167
Disposals
Impairment losses
Amortization charge for the year
Fully amortized intangibles
Foreign currency translation adjustments and other
–
–
54
–
28
–
–
60
–
2
(32)
4
528
(391)
(1)
$ 184
–
–
82
(79)
4
$ 191
(25)
–
73
(37)
2
$ 360
–
1
58
–
(6)
$ 4,521
(14)
5
776
(401)
(7)
$ 413
$ 4,880
–
13
66
–
3
(57)
17
781
(428)
34
As at October 31, 2020
Net Book Value:
As at October 31, 2019
As at October 31, 2020
$ 2,563
$ 690
$ 1,275
$ 204
$ 495
$ 5,227
$
95
43
$ 214
154
$ 1,760
1,559
$ 104
74
$ 330
295
$ 2,503
2,125
188
TD BANK GROUP ANNUAL REPORT 2020 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, 2019 and
October 31, 2020.
Land, Buildings, Equipment, and Other Depreciable Assets
(millions of Canadian dollars)
Cost
As at November 1, 2018
Additions
Acquisitions through business combinations
Disposals
Fully depreciated assets
Foreign currency translation adjustments and other
As at October 31, 2019
Impact on adoption of IFRS 161
As at November 1, 2019
Additions
Disposals
Fully depreciated assets
Foreign currency translation adjustments and other2
Land
Buildings
Computer
equipment
Furniture,
fixtures,
and other
depreciable
assets
Leasehold
improvements
$ 971
30
–
(2)
–
(12)
$ 3,378
194
–
(29)
(45)
(10)
$ 829
259
–
(119)
(156)
–
$ 1,315
147
1
(35)
(63)
(14)
$ 1,993
227
2
(48)
(53)
18
987
–
987
1
(1)
–
(19)
3,488
(71)
3,417
217
(16)
(28)
(105)
813
(188)
625
233
(76)
17
4
1,351
–
1,351
149
(74)
(20)
(10)
2,139
–
2,139
315
(71)
(69)
6
Total
$ 8,486
857
3
(233)
(317)
(18)
8,778
(259)
8,519
915
(238)
(100)
(124)
As at October 31, 2020
$ 968
$ 3,485
$ 803
$ 1,396
$ 2,320
$ 8,972
Accumulated depreciation and impairment losses
As at November 1, 2018
Depreciation charge for the year
Disposals
Fully depreciated assets
Foreign currency translation adjustments and other
As at October 31, 2019
Impact on adoption of IFRS 161
As at November 1, 2019
Depreciation charge for the year
Disposals
Impairment losses
Fully depreciated assets
Foreign currency translation adjustments and other2
$
–
–
–
–
–
$ 1,173
120
(19)
(45)
(11)
$ 449
168
(85)
(156)
1
$ 605
138
(31)
(63)
(1)
$ 935
179
(38)
(53)
(1)
–
–
–
–
–
–
–
–
1,218
185
1,403
155
(27)
53
(28)
(122)
377
(129)
248
172
(48)
3
17
(18)
648
–
648
156
(62)
–
(20)
(3)
1,022
–
1,022
194
(43)
–
(69)
24
$ 3,162
605
(173)
(317)
(12)
3,265
56
3,321
677
(180)
56
(100)
(119)
As at October 31, 2020
$
–
$ 1,434
$ 374
$ 719
$ 1,128
$ 3,655
Net Book Value Excluding Right of Use Assets:
As at October 31, 2019
As at October 31, 2020
1 Refer to Note 4 for further details.
2 Includes adjustments to reclassify premises related non-current assets
held-for-sale to other assets.
$ 987
968
$ 2,270
2,051
$ 436
429
$ 703
677
$ 1,117
1,192
$ 5,513
5,317
The following table presents details of the Bank’s ROU assets as recorded
in accordance with IFRS 16. Refer to Note 18: Other Liabilities, and
Note 27: Provisions, Contingent Liabilities, Commitments, Guarantees,
Pledged Assets and Collateral for the related lease liabilities details.
Right of Use Assets Net Book Value
(millions of Canadian dollars)
As at October 31, 2019
Impact on adoption of IFRS 161
As at November 1, 2019
Additions
Depreciation
Reassessments, modifications, and variable lease payment adjustments
Terminations and impairment
Foreign currency translation adjustments and other
As at October 31, 2020
1 Refer to Note 4 for further details.
Land
Buildings
Computer
equipment
Total
$
n/a
$
n/a
$ n/a
$
n/a
1,027
1,027
2
(98)
14
(2)
13
3,377
3,377
733
(476)
186
(18)
19
59
59
–
(17)
–
–
–
4,463
4,463
735
(591)
200
(20)
32
$ 956
$ 3,821
$ 42
$ 4,819
189
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
Total Land, Buildings, Equipment, and Other Depreciable Assets Net Book Value
(millions of Canadian dollars)
Land
Buildings
Computer
equipment
Furniture,
fixtures,
and other
depreciable
assets
Leasehold
improvements
As at October 31, 2019
As at October 31, 2020
$ 987
1,924
$ 2,270
5,872
$ 436
471
$ 703
677
$ 1,117
1,192
Total
$ 5,513
10,136
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
As at
October 31
2020
October 31
2019
$ 10,799
2,336
2,294
9
2,268
1,150
$ 9,069
2,479
2,468
13
1,761
1,297
$ 18,856
$ 17,087
N O T E 1 7 | DEPOSITS
Demand deposits are those for which the Bank does not have the right
to require notice prior to withdrawal. These deposits are in general
chequing accounts.
Notice deposits are those for which the Bank can legally require notice
prior to withdrawal. These deposits are in general savings accounts.
Term deposits are those payable on a fixed date of maturity 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, 2020 was $287 billion (October 31, 2019 – $309 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.
Certain deposits have been designated at FVTPL on the Consolidated
Balance Sheet to reduce an accounting mismatch from related economic
hedges. These deposits are accounted for at fair value with the change in
fair value recognized on the Consolidated Statement of Income, except for
the amount of change in fair value attributable to changes in the Bank’s
own credit risk, which is recognized on the Consolidated Statement of
Comprehensive Income.
For deposits designated at FVTPL, the estimated amount that the Bank
would be contractually required to pay at maturity, which is based
on notional amounts, was $155 million less than its fair value as at
October 31, 2020 (October 31, 2019 – $328 million).
190
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
Deposits
(millions of Canadian dollars)
Personal
Banks2
Business and government3
Trading2
Designated at fair value through
profit or loss2,4
Total
Non-interest-bearing
included above
In domestic offices
In foreign offices
Interest-bearing deposits
included above
In domestic offices
In foreign offices
U.S. federal funds deposited2
Total3,5
By Type
By Country
October 31
2020
October 31
2019
As at
Demand
Notice
Term1
Canada United States
International
Total
Total
$ 20,237
13,974
115,436
–
$ 545,695
126
197,845
–
$ 59,268
14,869
167,883
19,177
$ 274,953
19,735
326,460
11,842
$ 350,244
4,692
151,431
2,657
$
3 $ 625,200 $ 503,430
16,751
366,796
26,885
28,969
481,164
19,177
4,542
3,273
4,678
–
–
59,626
27,555
26,080
5,991
59,626
105,100
$ 149,647
$ 743,666
$ 320,823
$ 660,545
$ 535,104
$ 18,487 $ 1,214,136 $ 1,018,962
1 Includes $27.58 billion (October 31, 2019 – $17 billion) of senior debt which is
subject to the bank recapitalization “bail-in” regime. This regime provides certain
statutory powers to the Canada Deposit Insurance Corporation, including the ability
to convert specified eligible shares and liabilities into common shares in the event
that the Bank becomes non-viable.
2 Includes deposits and advances with the Federal Home Loan Bank.
3 As at October 31, 2020, includes $40.5 billion relating to covered bondholders
(October 31, 2019 – $39.9 billion) and $1.2 billion (October 31, 2019 – $1.2 billion)
due to TD Capital Trust IV.
Term Deposits by Remaining Term-to-Maturity
(millions of Canadian dollars)
$
55,920 $
76,099
43,887
53,381
604,625
472,913
4,579
530,608
391,076
10
$ 1,214,136 $ 1,018,962
4 Financial liabilities designated at FVTPL consist of deposits designated at FVTPL and
$39 million (October 31, 2019 – $31 million) of loan commitments and financial
guarantees designated at FVTPL.
5 As at October 31, 2020, includes deposits of $708 billion (October 31, 2019 –
$580 billion) denominated in U.S. dollars and $44 billion (October 31, 2019 –
$52 billion) denominated in other foreign currencies.
As at
October 31
2020
October 31
2019
Within 1 year
Over 1 year
to 2 years
Over 2 years
to 3 years
Over 3 years
to 4 years
Over 4 years
to 5 years
Over
5 years
Total
Total
$ 10,096
$ 5,065
$ 1,712
$ 1,145
$
$ 41,213
14,859
97,278
10,993
–
14,382
3,510
3
25,761
1,349
–
18,166
1,254
2
8,911
851
–
37
5
3,385
1,220
$ 59,268
14,869
167,883
19,177
$ 58,006
8,397
145,258
26,885
–
59,626
105,100
59,626
–
–
–
$ 223,969
$ 27,988
$ 32,178
$ 21,132
$ 10,909
$ 4,647
$ 320,823
$ 343,646
Personal
Banks
Business and government
Trading
Designated at fair value through
profit or loss
Total
Term Deposits due within a Year
(millions of Canadian dollars)
Personal
Banks
Business and government
Trading
Designated at fair value through profit or loss
Total
As at
October 31
2020
October 31
2019
Within 3
months
$ 15,235
14,462
50,090
4,232
25,919
Over 3
months to 6
months
Over 6
months to 12
months
$
9,139
313
24,700
2,065
12,563
$ 16,839
84
22,488
4,696
21,144
Total
Total
$ 41,213
14,859
97,278
10,993
59,626
$ 38,941
8,387
57,346
18,819
104,744
$ 109,938
$ 48,780
$ 65,251
$ 223,969
$ 228,237
191
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
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
Lease liabilities2
Liabilities related to structured entities
Provisions
Total
1 Certain comparative amounts have been recast to conform with the presentation
adopted in the current year.
2 Refer to Note 27 for lease liability maturity and lease payment details.
N O T E 1 9 | SUBORDINATED NOTES AND DEBENTURES
As at
October 31
2020
October 31
2019
$ 6,571
1,142
2,900
2,440
275
284
3,302
6,095
5,898
1,569
$ 5,163
1,393
3,245
1,042
169
193
2,781
66
5,857
1,095
$ 30,476
$ 21,004
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
May 26, 2025
June 24, 20251
September 30, 20251
September 14, 20281
July 25, 20291
April 22, 20301
March 4, 20311
September 15, 20311
January 26, 20321
Total
Interest
rate (%)
Reset
spread (%)
9.150
2.6922
2.9822
3.5892
3.2242
3.1052
4.8592
3.6256
3.0602
n/a
1.2102
1.8302
1.0602
1.2502
2.1602
3.4902
2.2056
1.3302
Earliest par
redemption
date
–
June 24, 20203
September 30, 20204
September 14, 2023
July 25, 2024
April 22, 20255
March 4, 2026
September 15, 2026
January 26, 2027
As at
October 31
2020
October 31
2019
$
200
–
–
1,743
1,561
2,974
1,279
1,881
1,839
$
198
1,496
996
1,738
1,509
–
1,206
1,842
1,740
$ 11,477
$ 10,725
1 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 is no declared and unpaid interest on the respective subordinated notes, would
be 525 million for the 3.589% subordinated debentures due September 14, 2028,
450 million for the 3.224% subordinated debentures due July 25, 2029, 900 million
for the 3.105% subordinated debentures due April 22, 2030, 375 million for the
4.859% subordinated debentures due March 4, 2031, 450 million for the 3.625%
subordinated debentures due September 15, 2031 (assuming a Canadian to
U.S. dollar exchange rate of 1.00), and 525 million for the 3.060% subordinated
debentures due January 26, 2032.
2 Interest rate is for the period to but excluding the earliest par redemption date, and
thereafter, it will be reset at a rate of three-month Bankers’ Acceptance rate (as such
term is defined in the applicable offering document) plus the reset spread noted.
3 On June 24, 2020, the Bank redeemed all of its outstanding $1.5 billion 2.692% NVCC
subordinated debentures due June 24, 2025, at a redemption price of 100% of the
principal amount plus accrued and unpaid interest to, but excluding, the redemption date.
4 On September 30, 2020, the Bank redeemed all of its outstanding $1 billion 2.982%
NVCC subordinated debentures due September 30, 2025, at a redemption price of
100% of the principal amount plus accrued and unpaid interest to, but excluding,
the redemption date.
5 On April 22, 2020, the Bank issued $3 billion of NVCC medium-term notes
constituting subordinated indebtedness of the Bank (the “Notes”). The Notes bear
interest at a fixed rate of 3.105% per annum (paid semi-annually) until April 22,
2025, and at the three-month Bankers’ Acceptance rate (as such term is defined
in the applicable offering document) plus 2.16% thereafter (paid quarterly) until
maturity on April 22, 2030. With the prior approval of OSFI, the Bank may, at its
option, redeem the Notes on or after April 22, 2025, in whole or in part, at par plus
accrued and unpaid interest. Not more than 60 nor less than 30 days’ notice
is required to be given to the Notes’ holders for such redemptions.
6 Interest rate is for the period to but excluding the earliest par redemption date,
and thereafter, it will be reset at a rate of 5-year Mid-Swap Rate plus the reset
spread noted.
192
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
The total change in subordinated notes and debentures for the year
ended October 31, 2020 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
2020
October 31
2019
$
–
–
–
200
11,277
$ 11,477
$
–
–
–
–
10,725
$ 10,725
N O T E 2 0 | CAPITAL TRUST SECURITIES
The Bank issued innovative capital securities through two structured
entities: Trust III and Trust IV.
TD CAPITAL TRUST III SECURITIES – SERIES 2008
On September 17, 2008, Trust III, a closed-end trust, issued TD CaTS III.
The proceeds from the issuance were invested in trust assets purchased
from the Bank. On December 31, 2018, Trust III redeemed all of the
outstanding TD CaTS III at a price of $1 billion plus the unpaid distribution
payable on the redemption date. TD CaTS III were reported on the
Consolidated Balance Sheet as Non-controlling interests in subsidiaries.
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. On June 30, 2019, Trust IV redeemed all of
the outstanding TD CaTS IV – 1. Each 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.
Capital Trust Securities
(millions of Canadian dollars, except as noted)
TD CaTS IV Notes issued by Trust IV
TD Capital Trust IV Notes – Series 2
TD Capital Trust IV Notes – Series 3
Thousands
of units
Distribution/Interest
payment dates
Annual
yield
Redemption date
At the option of
the issuer
October 31
2020
October 31
2019
As at
450
750
1,200
June 30, Dec. 31
June 30, Dec. 31
10.000%1
6.631%3
June 30, 20142
Dec. 31, 20142
450
750
450
750
$ 1,200
$ 1,200
1 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%.
2 On or after the redemption date, Trust IV may, with regulatory approval, redeem
the TD CaTS IV – 2 or TD CaTS IV – 3, respectively, in whole or in part, without the
consent of the holders. On February 27, 2020, the Bank announced that, subject
to regulatory approval, it expects to exercise a regulatory event redemption right
in its fiscal 2022 year in respect of the TD CaTS IV – 2 outstanding at that time,
meaning that this redemption right could occur as early as November 1, 2021.
The Bank’s expectations regarding this redemption are based on a number of factors
and assumptions, including the Bank’s current and expected future capital position
and market conditions, which are subject to change and may result in a change in
the Bank’s expectations regarding the redemption.
3 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%.
193
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
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. All preferred
shares 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.
The following table summarizes the changes to the shares issued and
outstanding and treasury shares held as at and for the years ended
October 31, 2020 and October 31, 2019.
Common and Preferred Shares Issued and Outstanding and Treasury Shares Held
(millions of shares and millions of Canadian dollars)
October 31, 2020
October 31, 2019
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
Shares issued in connection with acquisitions1
Purchase of shares for cancellation and other
Balance as at end of year – common shares
Preferred Shares – Class A2
Series 1
Series 3
Series 5
Series 7
Series 9
Series 113
Series 12
Series 14
Series 16
Series 18
Series 20
Series 22
Series 24
Balance as at end of year – preferred shares
Treasury shares – common4
Balance as at beginning of year
Purchase of shares
Sale of shares
Balance as at end of year – treasury shares – common
Treasury shares – preferred4
Balance as at beginning of year
Purchase of shares
Sale of shares
Balance as at end of year – treasury shares – preferred
1 On November 1, 2018, the Bank issued 4.7 million shares for $342 million that
formed part of the consideration paid for Greystone, as well as 0.3 million shares
issued for $24 million as share-based compensation to replace share-based payment
awards of Greystone. Refer to Note 13 for a discussion on the acquisition of Greystone.
2 All series of preferred shares – Class A include NVCC Provisions and 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 for Series 1, 100 million for Series 3, 100 million
Number
of shares
1,812.5
1.5
14.1
–
(12.0)
Amount
$ 21,713
79
838
–
(143)
Number
of shares
1,830.4
2.3
4.8
5.0
(30.0)
Amount
$ 21,221
124
357
366
(355)
1,816.1
$ 22,487
1,812.5
$ 21,713
20.0
20.0
20.0
14.0
8.0
–
28.0
40.0
14.0
14.0
16.0
14.0
18.0
226.0
$
500
500
500
350
200
–
700
1,000
350
350
400
350
450
$ 5,650
20.0
20.0
20.0
14.0
8.0
6.0
28.0
40.0
14.0
14.0
16.0
14.0
18.0
232.0
$
500
500
500
350
200
150
700
1,000
350
350
400
350
450
$ 5,800
0.6
$
135.6
(135.7)
(41)
(8,752)
8,756
2.1
$
132.3
(133.8)
(144)
(9,782)
9,885
0.5
$
(37)
0.6
$
(41)
0.3
6.0
(6.2)
$
(6)
(122)
124
0.3
7.0
(7.0)
$
(7)
(151)
152
0.1
$
(4)
0.3
$
(6)
for Series 5, 70 million for Series 7, 40 million for Series 9, 140 million for Series 12,
200 million for Series 14, 70 million for Series 16, 70 million for Series 18, 80 million
for Series 20, 70 million for Series 22, and 90 million for Series 24.
3 On October 31, 2020, the Bank redeemed all of its 6 million outstanding Non-
Cumulative Fixed Rate Class A First Preferred Shares NVCC, Series 11 (“Series 11
Shares”), at a redemption price of $26.00 per Series 11 Share, for a total redemption
cost of approximately $156 million.
4 When the Bank purchases its own shares as part of its trading business, they are
classified as treasury shares and the cost of these shares is recorded as a reduction
in equity.
194
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS Preferred Shares Terms and Conditions
NVCC Rate Reset Preferred Shares2
Series 1
Series 3
Series 53
Series 74
Series 95
Series 12
Series 14
Series 16
Series 18
Series 20
Series 22
Series 24
Issue date
Annual
yield (%)1
Reset
spread (%)1
Next redemption/
conversion date1
Convertible
into1
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
January 28, 2019
June 4, 2019
3.662
3.681
3.876
3.201
3.242
5.5
4.85
4.50
4.70
4.75
5.20
5.10
2.24
2.27
2.25
2.79
2.87
4.66
4.12
3.01
2.70
2.59
3.27
3.56
October 31, 2024
July 31, 2024
January 31, 2025
July 31, 2025
October 31, 2025
April 30, 2021
October 31, 2021
October 31, 2022
April 30, 2023
October 31, 2023
April 30, 2024
July 31, 2024
Series 2
Series 4
Series 6
Series 8
Series 10
Series 13
Series 15
Series 17
Series 19
Series 21
Series 23
Series 25
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 5 years
thereafter to equal the then 5-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 the redemption date noted and every
5 years thereafter, at $25 per share. Convertible on the conversion date noted and
every 5 years thereafter if not redeemed. If converted, the holders have the option
to convert back to the original Series of preferred shares every 5 years.
3 On January 16, 2020, the Bank announced that none of its 20 million Non-
Cumulative 5-Year Rate Reset Preferred Shares NVCC, Series 5 (the “Series 5 Shares”)
would be converted on January 31, 2020, into Non-Cumulative Floating Rate
Preferred Shares NVCC, Series 6. On January 2, 2020, the Bank announced the
dividend rate for the Series 5 Shares for the 5-year period from and including
January 31, 2020, to but excluding January 31, 2025, would be 3.876%.
4 On July 16, 2020, the Bank announced that none of its 14 million Non-Cumulative
5-Year Rate Reset Preferred Shares NVCC, Series 7 (the “Series 7 Shares”) would
be converted on July 31, 2020, into Non-Cumulative Floating Rate Preferred Shares
NVCC, Series 8. On July 2, 2020, the Bank announced the dividend rate for the
Series 7 Shares for the 5-year period from and including July 31, 2020, to but
excluding July 31, 2025, would be 3.201%.
5 On October 16, 2020, the Bank announced that none of its 8 million Non-Cumulative
5-Year Rate Reset Preferred Shares NVCC, Series 9 (the “Series 9 Shares”) would be
converted on October 31, 2020, into Non-Cumulative Floating Rate Preferred Shares
NVCC, Series 10. On October 1, 2020, the Bank announced the dividend rate for the
Series 9 Shares for the 5-year period from and including October 31, 2020, to but
excluding October 31, 2025, would be 3.242%.
NORMAL COURSE ISSUER BID
On December 19, 2019, the Bank announced that the Toronto
Stock Exchange (TSX) and OSFI had approved the Bank’s previously
announced normal course issuer bid (NCIB) to repurchase for cancellation
up to 30 million of its common shares. The NCIB commenced on
December 24, 2019. During the year ended October 31, 2020, the Bank
repurchased 12 million common shares under its NCIB at an average price
of $70.55 per share for a total amount of $847 million. During the year
ended October 31, 2019, the Bank repurchased an aggregate of 30 million
common shares under its then current NCIB and a prior NCIB, at an
average price of $74.48 per share, for a total amount of $2.2 billion.
On March 13, 2020, OSFI issued a news release announcing a series of
measures to support the resilience of financial institutions in response
to challenges posed by COVID-19 and current market conditions. One
such measure was a decrease in the Domestic Stability Buffer (DSB) by
1.25% of risk-weighted assets (RWA). In the news release, OSFI stated its
expectation that banks will use the additional lending capacity to support
Canadian households and businesses and set the expectation for all
federally regulated financial institutions that dividend increases and share
buybacks should be halted for the time being.
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 ended October 31, 2020, 4.1 million common shares were
issued from the Bank’s treasury with no discount and 10.0 million common
shares were issued from the Bank’s treasury with a 2% discount under
the dividend reinvestment plan. During the year ended October 31, 2019,
4.8 million common shares were issued from the Bank’s treasury with no
discount under the dividend reinvestment plan.
DIVIDEND RESTRICTIONS
The Bank is prohibited by the Bank Act from declaring dividends on
its preferred or common shares if there are reasonable grounds for
believing that the Bank is, or the payment would cause the Bank to be, in
contravention of the capital adequacy and liquidity regulations of the Bank
Act or directions of OSFI. The Bank does not anticipate that this condition
will restrict it from paying dividends in the normal course of business.
The Bank is also restricted from paying dividends in the event that Trust IV
fails to pay interest in full to holders of its trust securities, 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.
As noted above under “Normal Course Issuer Bid”, on March 13, 2020,
OSFI issued a news release announcing a series of measures to support
the resilience of financial institutions in response to challenges posed by
COVID-19 and current market conditions. In that news release, among
other things, OSFI set the expectation for all federally regulated financial
institutions that dividend increases should be halted for the time being.
195
TD BANK GROUP ANNUAL REPORT 2020 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 2020 were
$92 million (2019 –$123 million; 2018 – $130 million).
For the years ended October 31
2020
2019
2018
$ 4,845
643
$ 4,632
915
$ 4,398
915
4,202
363
4,565
3,380
494
3,717
565
4,282
2,987
200
3,483
562
4,045
2,676
232
$ 2,886
$ 2,787
$ 2,444
RECONCILIATION OF CHANGES IN INSURANCE LIABILITIES
Insurance-related liabilities are comprised of provision for unpaid claims
(section (a) below), unearned premiums (section (b) below) and other
insurance 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)
October 31, 2020
October 31, 2019
Reinsurance/
Other
recoverable
Gross
Net
Gross
Reinsurance/
Other
recoverable
Net
Balance as at beginning of year
$ 4,840
$ 141
$ 4,699
$ 4,812
$ 160
$ 4,652
Claims costs for current accident year
Prior accident years claims development (favourable) unfavourable
Increase (decrease) due to changes in assumptions:
Discount rate
Provision for adverse deviation
Claims and related expenses
Claims paid during the year for:
Current accident year
Prior accident years
Increase (decrease) in reinsurance/other recoverables
2,948
(354)
123
25
2,742
(1,346)
(1,084)
(2,430)
(10)
302
(5)
–
4
301
(179)
(7)
(186)
(10)
2,646
(349)
123
21
2,441
(1,167)
(1,077)
(2,244)
–
2,727
(410)
95
(7)
2,405
(1,239)
(1,147)
(2,386)
9
–
(2)
1
(1)
(2)
–
(26)
(26)
9
2,727
(408)
94
(6)
2,407
(1,239)
(1,121)
(2,360)
–
Balance as at end of year
$ 5,142
$ 246
$ 4,896
$ 4,840
$ 141
$ 4,699
(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)
October 31, 2020
October 31, 2019
Gross
Reinsurance
Net
Gross
Reinsurance
Net
Balance as at beginning of year
$ 1,869
$
17
$ 1,852
$ 1,674
$
19
$ 1,655
Written premiums
Earned premiums
Balance as at end of year
3,879
(3,625)
127
(120)
3,752
(3,505)
3,528
(3,333)
105
(107)
3,423
(3,226)
$ 2,123
$
24
$ 2,099
$ 1,869
$
17
$ 1,852
196
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
(c) Other Movements in Insurance Liabilities
Other insurance liabilities were $325 million as at October 31, 2020
(October 31, 2019 – $211 million). The increase of $114 million (2019 –
decrease of $1 million) is mainly due to business growth, interest rate
movements and changes in life and health insurance actuarial assumptions
impacting actuarial liabilities.
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
2011
and prior
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
Accident Year
end of accident year
$ 4,230 $ 1,830 $ 2,245 $ 2,465 $ 2,409 $ 2,438 $ 2,425 $ 2,631 $ 2,727 $ 2,646
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
4,483
4,794
4,726
4,758
4,663
4,577
4,556
4,493
4,466
1,930
1,922
1,885
1,860
1,818
1,793
1,761
1,754
–
2,227
2,191
2,158
2,097
2,047
2,004
1,982
–
–
2,334
2,280
2,225
2,147
2,084
2,044
–
–
–
2,367
2,310
2,234
2,162
2,115
–
–
–
–
2,421
2,334
2,264
2,200
–
–
–
–
–
2,307
2,258
2,201
–
–
–
–
–
–
2,615
2,573
–
–
–
–
–
–
–
2,684
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4,466
1,754
1,982
2,044
2,115
2,200
2,201
2,573
2,684
2,646
(4,337)
(1,695)
(1,911)
(1,914)
(1,878)
(1,831)
(1,688)
(1,866)
(1,716)
(1,167)
129
59
71
130
237
369
513
707
968
1,479 $ 4,662
(195)
429
$ 4,896
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)
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
October 31, 2020
October 31, 2019
Impact on net
income (loss)
before
income taxes
Impact on
equity
Impact on net
income (loss)
before
income taxes
Impact on
equity
As at
$ 130
(140)
$ 96
(103)
$ 122
(131)
$ 89
(96)
(47)
47
(35)
35
$ (52)
52
(225)
225
$ (39)
39
(166)
166
(45)
45
$ (52)
52
(220)
220
(33)
33
$ (38)
38
(161)
161
197
TD BANK GROUP ANNUAL REPORT 2020 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
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.
historical company data.
• Expense assumptions are based on an annually updated expense
study that is used to determine expected expenses for future years.
• Asset reinvestment rates are based on projected earned rates, and
liabilities are calculated using the Canadian Asset Liability Method (CALM).
A sensitivity analysis for possible movements in the life and health
insurance business assumptions was performed and the impact is not
significant to the Bank’s Consolidated Financial Statements.
CONCENTRATION OF INSURANCE RISK
Concentration risk is the risk resulting from large exposures to similar risks
that are positively correlated.
Risk associated with automobile, residential and other products may
vary in relation to the geographical area of the risk insured. Exposure to
concentrations of insurance risk, by type of risk, is mitigated by ceding
these risks through reinsurance contracts, as well as careful selection
and implementation of underwriting strategies, which is in turn largely
As at October 31, 2020, for the property and casualty insurance
business, 66.3% of net written premiums were derived from automobile
policies (October 31, 2019 – 66.0%) followed by residential with
33.3% (October 31, 2019 – 33.5%). The distribution by provinces show
that business is mostly concentrated in Ontario with 52.3% of net
written premiums (October 31, 2019 – 53.9%). The Western provinces
represented 31.7% (October 31, 2019 – 31.2%), followed by the Atlantic
provinces with 9.4% (October 31, 2019 – 8.8%), and Québec at 6.6%
(October 31, 2019 – 6.1%).
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, 14 million common shares have been reserved for future issuance
(October 31, 2019 – 16 million; October 31, 2018 – 18 million). The
outstanding options expire on various dates to December 12, 2029.
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, 2020,
October 31, 2019, and October 31, 2018.
Stock Option Activity
(millions of shares and Canadian dollars)
Number outstanding, beginning of year
Granted
Exercised
Forfeited/expired
Number outstanding, end of year
Exercisable, end of year
2020
Number
of shares
Weighted-
average
exercise price
Number
of shares
2019
Weighted-
average
exercise price
2018
Weighted-
average
exercise price
Number
of shares
12.8
2.1
(1.5)
(0.3)
13.1
$ 57.35
72.84
43.60
65.99
$ 61.27
13.1
2.2
(2.3)
(0.2)
12.8
$ 53.12
69.39
44.07
66.59
$ 57.35
14.3
1.9
(3.0)
(0.1)
13.1
$ 48.17
72.64
41.21
60.46
$ 53.12
5.4
$ 48.50
4.7
$ 44.77
4.7
$ 40.61
The weighted-average share price for the options exercised in 2020
was $70.21 (2019 – $74.15; 2018 – $74.99).
The following table summarizes information relating to stock options
outstanding and exercisable as at October 31, 2020.
Options outstanding
Options exercisable
Number
of shares
outstanding
Weighted-
average
remaining
contractual
life (years)
Weighted-
average
exercise price
Number
of shares
exercisable
Weighted-
average
exercise price
0.5
1.8
3.1
3.9
3.8
1.0
2.5
4.6
7.1
8.1
36.63
44.27
52.87
67.66
72.75
0.5
1.8
3.1
–
–
36.63
44.27
52.87
–
–
Range of Exercise Prices
(millions of shares and Canadian dollars)
$36.63 – $36.64
$40.54 – $47.59
$52.46 – $53.15
$65.75 – $69.39
$72.64 – $72.84
198
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS For the year ended October 31, 2020, the Bank recognized compensation
expense for stock option awards of $11.2 million (October 31, 2019 –
$11.1 million; October 31, 2018 – $11.5 million). For the year ended
October 31, 2020, 2.1 million (October 31, 2019 – 2.2 million;
October 31, 2018 – 1.9 million) options were granted by the Bank at
a weighted-average fair value of $5.55 per option (2019 – $5.64 per
option; 2018 – $6.28 per option).
The following table summarizes the assumptions used for estimating
the fair value of options for the years ended October 31, 2020,
October 31, 2019, and October 31, 2018.
Assumptions Used for Estimating the Fair Value of Options
(in Canadian dollars, except
as noted)
Risk-free interest rate
Expected option life
Expected volatility1
Expected dividend yield
Exercise price/share price
2020
1.59%
2019
2.03%
2018
1.71%
6.3 years
6.3 years
6.3 years
12.90%
3.50%
$ 72.84
12.64%
3.48%
$ 69.39
13.91%
3.50%
$ 72.64
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 typically 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, 2020 was
22 million (2019 – 22 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. 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, 2020, 6.8 million deferred share
units were outstanding (October 31, 2019 – 6.6 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, 2020,
the Bank recognized compensation expense, net of the effects of hedges,
for these plans of $500 million (2019 – $546 million; 2018 – $509 million).
The compensation expense recognized before the effects of hedges was
$206 million (2019 – $662 million; 2018 – $607 million). The carrying
amount of the liability relating to these plans, based on the closing share
price, was $1.5 billion at October 31, 2020 (October 31, 2019 – $2.0 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, 2020, the Bank’s contributions totalled
$82 million (2019 – $74 million; 2018 – $72 million) and were expensed
as salaries and employee benefits. As at October 31, 2020, an aggregate
of 22 million common shares were held under the Employee Ownership
Plan (October 31, 2019 – 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.
N O T E 2 4 | EMPLOYEE BENEFITS
PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
The Bank’s principal defined benefit pension plans, consisting of The
Pension Fund Society of The Toronto-Dominion Bank (the “Society”)
and the defined benefit portion of the TD Pension Plan (Canada) (the
“TDPP DB’), are for Canadian Bank employees. The Society was closed
to new members on January 30, 2009, and the TDPP DB commenced on
March 1, 2009. Effective December 31, 2018, the TDPP DB was closed
to new employees hired after that date. All new permanent employees
hired in Canada on or after January 1, 2019 are eligible to join the
defined contribution portion of the TDPP (the “TDPP DC”) after one year
of service. Benefits under the principal defined benefit 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. Benefits under the TDPP DC are funded
from the balance of the accumulated contributions of the member and
the Bank plus the member’s investment earnings.
Funding for the Bank’s principal defined benefit 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 defined benefit pension plans
during 2020 were $463 million (2019 – $352 million). The 2020 and 2019
contributions were made in accordance with the actuarial valuation reports
for funding purposes as at October 31, 2019 and October 31, 2018,
respectively. Valuations for funding purposes are being prepared as of
October 31, 2020. Annual expense for the TDPP DC is equal to the Bank’s
contributions to the plan.
The Bank also provides certain post-retirement benefits, which are
generally unfunded. Post-retirement defined benefit plans, where offered,
generally include health care and dental benefits or an annual discount
amount to be used to reduce the cost of coverage. 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 post-retirement
defined benefit plan was closed to new employees hired on or after
that date.
199
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
INVESTMENT STRATEGY AND ASSET ALLOCATION
The principal defined benefit plans are expected to each 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 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 the target risk profiles for the plans.
The investment policies for the principal defined benefit 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.
The asset allocations by asset category for the principal defined benefit
pension plans are as follows:
Plan Asset Allocation1
(millions of Canadian dollars,
except as noted)
As at October 31, 2020
Debt
Equity
Alternative investments3
Other4
Total
As at October 31, 2019
Debt
Equity
Alternative investments3
Other4
Total
As at October 31, 2018
Debt
Equity
Alternative investments3
Other4
Total
Target
range
30-70%
24-55
6-35
n/a
40-70%
24-42
6-35
n/a
40-70%
24-42
6-35
n/a
Society2
Fair value
Quoted
Unquoted
$
–
685
–
–
$ 3,670
1,402
899
(685)
% of
total
55%
31
14
n/a
100%
$ 685
$ 5,286
55%
32
13
n/a
$
–
1,002
–
–
$ 3,374
976
760
(276)
Target
range
25-50%
30-70
5-35
n/a
25-50%
30-70
5-35
n/a
% of
total
40%
47
13
n/a
100%
34%
54
12
n/a
TDPP2
Fair value
Quoted
Unquoted
$
–
344
–
–
$ 940
756
301
(72)
$ 344
$ 1,925
$
–
368
–
–
100%
$ 1,002
$ 4,834
100%
$ 368
55%
34
11
n/a
$
–
897
–
–
$ 2,885
869
551
(107)
25-50%
30-65
3-25
n/a
34%
58
8
n/a
$
–
283
–
–
100%
$ 897
$ 4,198
100%
$ 283
$ 634
639
229
111
$ 1,613
$ 497
583
122
63
$ 1,265
1 Certain comparative amounts have been reclassified to conform with the
3 The principal defined benefit pension plans’ alternative investments are primarily
presentation adopted in the current year.
private equity, infrastructure, and real estate funds.
2 The principal defined benefit pension plans invest in investment vehicles which
4 Consists mainly of amounts due to and due from brokers for securities traded but
may hold shares or debt issued by the Bank.
not yet settled, PEA assets, and interest and dividends receivable.
Public debt instruments of the Bank’s principal defined benefit pension
plans must meet or exceed a credit rating of BBB- at the time of purchase.
The equity portfolios of the principal defined benefit pension plans
are broadly diversified primarily across medium to large capitalization
quality companies with no individual holding exceeding 10% of the equity
portfolio. Foreign equities are included to further diversify the portfolio.
Derivatives can be utilized in the principal defined benefit pension plans
provided they are not used to create financial leverage, unless the financial
leverage is for risk management purposes. They are permitted to invest
in alternative investments, such as private equity, infrastructure equity,
and real estate.
RISK MANAGEMENT PRACTICES
The Bank’s principal defined benefit 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.
The principal defined benefit pension plans’ investments include
financial instruments which are exposed to various risks. These risks
include market risk (including foreign currency, interest rate, inflation,
price, credit spread risks), credit risk, and liquidity risk. Key material risks
faced by defined benefit 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, and from longevity risk
(that is, lower mortality rates).
Asset-liability matching strategies focus on obtaining an appropriate
balance between earning an adequate return and having changes in
liability values hedged by changes in asset values.
The principal defined benefit pension plans manage these financial risks
in accordance with the Pension Benefits Standards Act, 1985, applicable
regulations, as well as the plans’ written investment policies. Specific risk
management practices monitored for the principal defined benefit pension
plans include performance, credit exposure, and asset mix.
OTHER PENSION AND POST-RETIREMENT BENEFIT PLANS
CT Pension Plan
As a result of the acquisition of CT Financial Services Inc. (CT), the Bank
sponsors a defined benefit pension plan, which is closed to new members,
but for which active members continue to accrue benefits. Funding for the
plan is provided by contributions from the Bank and members of the plan.
TD Bank, N.A. Retirement Plans
TD Bank, N.A. and its subsidiaries maintain a defined contribution 401(k)
plan covering all employees. Annual expense is equal to the Bank’s
contributions to the plan.
TD Bank, N.A. also has frozen defined benefit pension and post-
retirement benefit 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 groups
of employees from legacy organizations.
Supplemental Employee Pension Plans
Supplemental employee pension plans for eligible employees are not
funded by the Bank.
Government Pension Plans
The Bank also makes contributions to government pension plans, including
the Canada Pension Plan, Quebec Pension Plan and U.S. Federal Insurance
Contribution Act.
200
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
The following table presents the financial position of the Bank’s principal
defined benefit pension and post-retirement benefit plans and the Bank’s
significant other defined benefit pension and post-retirement benefit
plans. Other employee defined benefit plans operated by the Bank
and certain of its subsidiaries are not considered material for
disclosure purposes.
Employee Defined Benefit Plans’ Obligations, Assets and Funded Status
(millions of Canadian dollars, except as noted)
Principal pension plans
Principal
post-retirement
benefit plan1
Other pension
and post-retirement
benefit plans2
2020
2019
2018
2020
2019
2018
2020
2019
2018
$ 8,558 $ 6,539 $ 7,082
$ 620
$ 535 $ 558 $ 2,948 $ 2,569 $ 2,750
Change in projected benefit obligation
Projected benefit obligation 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
–
467
236
617
–
56
107
(373)
–
–
–
326
240
1,565
–
83
107
(303)
–
1
8,558
6
407
217
(969)
–
22
104
(330)
–
–
6,539
Projected benefit obligation as at October 31
9,668
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
7,817
6,643
6,536
–
221
15
107
463
(373)
–
(10)
–
253
773
107
352
(303)
–
(8)
10
209
(231)
104
355
(330)
–
(10)
Plan assets at fair value as at October 31
8,240
7,817
6,643
–
17
17
(101)
(44)
9
–
(12)
–
–
506
–
–
–
–
–
12
(12)
–
–
–
–
14
20
92
(26)
–
–
(15)
–
–
–
15
18
(42)
–
2
–
(16)
–
–
–
9
80
128
(80)
9
–
(144)
20
(3)
–
9
106
430
2
6
–
(143)
(1)
(30)
–
10
96
(190)
(8)
14
–
(137)
31
3
620
535
2,967
2,948
2,569
–
–
–
–
–
15
(15)
–
–
–
–
–
–
–
–
16
(16)
–
–
–
1,959
1,733
1,855
–
52
96
–
72
(144)
18
(7)
–
73
205
–
96
(143)
(1)
(4)
–
66
(109)
–
37
(137)
27
(6)
2,046
1,959
1,733
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
(1,428)
–
(1,428)
(741)
–
(741)
104
–
104
(506)
–
(506)
(620)
–
(620)
(535)
–
(535)
(921)
(14)
(935)
(989)
(13)
(1,002)
(836)
(13)
(849)
467
326
407
15
–
10
(13)
1
10
8
–
10
17
17
–
–
14
20
–
–
15
18
–
–
9
28
(3)
5
9
33
(30)
6
10
30
3
4
47
Total expense
$ 492 $ 324 $ 425
$ 34
$ 34 $
33 $
39 $
18 $
Actuarial assumptions used to determine the annual
expense (percentage)
Weighted-average discount rate for projected
benefit obligation
Weighted-average rate of compensation increase
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
3.08%
2.57
4.10%
2.54
3.60%
2.54
3.07%
3.00
4.10%
3.00
3.60%
3.00
3.12%
1.00
4.37%
1.03
3.74%
1.16
2.85%
2.53
3.08%
2.57
4.10%
2.54
2.76%
3.00
3.07%
3.00
4.10%
3.00
2.74%
1.03
3.12%
1.00
4.37%
1.03
1 The rate of increase for health care costs for the next year used to measure the
credits can be earned after that date. Certain TD Auto Finance defined benefit
expected cost of benefits covered for the principal post-retirement defined benefit
plan is 3.26%. The rate is assumed to decrease gradually to 1.06% by the year 2040
and remain at that level thereafter (2019 – 4.18% grading to 2.42% by the year
2040 and remain at that level thereafter).
2 Includes CT defined benefit pension plan, TD Banknorth defined benefit pension
plan, TD Auto Finance defined benefit pension and post-retirement benefit plans,
and supplemental employee defined benefit pension plans. The TD Banknorth
defined benefit pension plan was frozen as of December 31, 2008, and no service
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 in fiscal 2018.
4 Includes a gain of $33 million related to the TD Auto Finance post-retirement benefit
plan that was amended during fiscal 2019.
201
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS During the year ended October 31, 2021, the Bank expects to contribute
$550 million to its principal defined benefit pension plans, $18 million to
its principal post-retirement defined benefit plan, and $42 million to its
other defined benefit pension and post-retirement benefit plans.
Future contribution amounts may change upon the Bank’s review of its
contribution levels during the year.
The following table summarizes expenses for the Bank’s defined
contribution plans.
Defined Contribution Plan Expenses
(millions of Canadian dollars)
Defined contribution pension plans1
Government pension plans2
Total
For the years ended
October 31
2020
October 31
2019
October 31
2018
$ 169
347
$ 516
$ 150
324
$ 474
$ 136
293
$ 429
1 Includes defined contribution portion of the TD Pension Plan (Canada) and TD Bank,
2 Includes Canada Pension Plan, Quebec Pension Plan, and U.S. Federal Insurance
N.A. defined contribution 401(k) plan.
Contributions Act.
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 45 at measurement date
Female aged 45 at measurement date
Principal
pension plans
Principal
post-retirement
benefit plan
Other pension
and post-retirement
benefit plans
As at October 31
2020
2019
2018
2020
2019
2018
2020
2019
2018
23.4
24.2
24.4
25.1
23.4
24.1
24.3
25.1
23.3
24.1
24.3
25.0
23.4
24.2
24.4
25.1
23.4
24.1
24.3
25.1
23.3
24.1
24.3
25.0
21.5
23.1
22.2
23.9
22.1
23.7
22.7
24.5
22.1
23.7
22.7
24.5
The weighted-average duration of the defined benefit obligation for
the Bank’s principal defined benefit pension plans, principal post-
retirement defined benefit plan, and other defined benefit pension
and post-retirement benefit plans at the end of the reporting period
are 16 years (2019 – 16 years, 2018 – 15 years), 15 years (2019 –
18 years, 2018 – 17 years), and 13 years (2019 – 13 years, 2018 –
12 years), respectively.
The following table provides the sensitivity of the projected benefit
obligation for the Bank’s principal defined benefit pension plans, the
principal post-retirement defined benefit plan, and the Bank’s significant
other defined benefit pension and post-retirement benefit 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 Defined Benefit Plan 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.
202
As at
October 31, 2020
Obligation Increase (Decrease)
Principal
post-
retirement
benefit plan
Other
pension
and post-
retirement
benefit plans
Principal
pension plans
$ 1,718
(1,314)
$ 81
(65)
$ 391
(322)
(345)
333
(203)
200
n/a
n/a
n/a
n/a
(16)
16
(13)
15
–1
–1
(99)
99
n/a
n/a
TD BANK GROUP ANNUAL REPORT 2020 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 defined benefit pension plans
Other defined benefit pension and post-retirement benefit plans
Other employee benefit plans1
Total other assets
Other liabilities
Principal defined benefit pension plans
Principal post-retirement defined benefit plan
Other defined benefit pension and post-retirement benefit plans
Other employee benefit plans1
Total other liabilities
Net amount recognized
1 Consists of other pension and other post-retirement 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 defined benefit pension plans
Principal post-retirement defined benefit plan
Other defined benefit pension and post-retirement benefit 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 pension and other post-retirement benefit plans operated by the Bank
and its subsidiaries that are not considered material for disclosure purposes.
October 31
2020
October 31
2019
October 31
2018
As at
$
$
$
–
3
6
9
–
6
7
13
1,428
506
938
430
3,302
741
620
1,008
412
2,781
104
3
6
113
–
535
852
360
1,747
$ (3,293)
$ (2,768)
$ (1,634)
For the years ended
October 31
2020
October 31
2019
October 31
2018
$ (658)
136
36
(44)
$ (530)
$
(873)
(66)
(231)
(75)
$ (1,245)
$ 720
40
60
45
$ 865
203
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
N O T E 2 5 | INCOME TAXES
The provision for (recovery of) income taxes is comprised of the following:
Provision for (Recovery of) Income Taxes
(millions of Canadian dollars)
Provision for income taxes – Consolidated Statement of Income
Current income taxes
Provision for (recovery of) income taxes for the current period
Adjustments in respect of prior years and other
Total current income taxes
Deferred income taxes
Provision for (recovery of) deferred income taxes related to the origination
and reversal of temporary differences
Effect of changes in tax rates
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
For the years ended October 31
2020
2019
2018
$ 2,287
$ 2,675
(70)
2,217
(1,075)
(1)
11
(1,065)
1,152
406
705
1,111
(30)
(194)
(224)
2,039
1,170
818
605
2,593
(143)
(96)
(315)
(554)
93
2,768
54
10
(97)
(33)
$ 2,873
(76)
2,797
76
302
7
385
2,735
3,182
37
1,070
1,107
(7)
(6)
(13)
(48)
(701)
(749)
(3)
(2)
(5)
3,829
2,428
1,256
891
651
2,798
127
87
817
1,031
1,491
1,055
200
2,746
(244)
(160)
86
(318)
Total provision for (recovery of) income taxes
$ 2,039
$ 3,829
$ 2,428
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 other comprehensive income 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.
The Bank’s statutory and effective tax rate is outlined in the following table.
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 operations1
Other – net
Provision for income taxes and effective income tax rate
2020
2019
$ 3,141
26.4%
$ 3,502
26.5%
$ 3,648
(120)
(1,927)
58
$ 1,152
(1.0)
(16.2)
0.5
(104)
(728)
65
(0.8)
(5.5)
0.5
(142)
(343)
19
9.7%
$ 2,735
20.7%
$ 3,182
23.1%
2018
26.5%
(1.0)
(2.5)
0.1
1 Reflects the impact of the sale of the Bank’s investment in TD Ameritrade, including
the non-taxable revaluation gain, the release of non-taxable cumulative currency
translation gains from AOCI, and the release of a deferred tax liability.
The Canada Revenue Agency (CRA), Revenu Québec Agency (RQA)
and Alberta Tax and Revenue Administration (ATRA) are denying certain
dividend deductions claimed by the Bank. During the year ended
October 31, 2020, the CRA reassessed the Bank for $239 million of
additional income tax and interest in respect of its 2015 taxation year, the
RQA reassessed the Bank for $20 million of additional income tax and
interest for the years 2011 to 2014, and the ATRA reassessed the Bank
for $18 million of additional income tax and interest in respect of its 2014
taxation year. To date, the CRA has reassessed the Bank for $1,032 million
of income tax and interest for the years 2011 to 2015, the RQA has
204
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
reassessed the Bank for $26 million for the years 2011 to 2014, and
the ATRA has reassessed the Bank for $33 million for the years 2011 to
2014. In total, the Bank has been reassessed for $1,091 million of income
tax and interest. The Bank expects the CRA, RQA, and ATRA to reassess
open years on the same basis. The Bank is of the view that its tax filing
positions were appropriate and intends to challenge all reassessments.
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
Trading loans
Employee benefits
Pensions
Losses available for carry forward
Tax credits
Land, buildings, equipment, and other depreciable assets
Intangibles
Other
Total deferred tax assets
Deferred tax liabilities
Securities
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.
As at
October 31
2020
October 31
2019
$ 1,705
43
834
516
96
133
111
87
236
3,761
1,404
–
73
–
124
1,601
2,160
2,444
284
$ 965
50
844
344
95
228
–
–
88
2,614
527
242
91
40
108
1,008
1,606
1,799
193
$ 2,160
$ 1,606
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 $669 million as at October 31, 2020 (October 31, 2019 –
$461 million), of which $5 million (October 31, 2019 – $3 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, 2020. The total amount of these temporary differences was
$81 billion as at October 31, 2020 (October 31, 2019 – $71 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)
Deferred income tax
expense (recovery)
Allowance for credit losses
Trading loans
Employee benefits
Pensions
Losses available for carry forward
Tax credits
Land, buildings, equipment,
and other depreciable assets
Intangibles
Other deferred tax assets
Securities
Deferred (income) expense
Goodwill
Total deferred income tax
expense (recovery)
Consolidated
statement of
income
Other
comprehensive
income
Business
combinations
and other
$
(740)
7
(23)
(1)
(1)
95
(159)
(127)
(148)
34
(18)
16
$
–
–
33
(171)
–
–
–
–
–
843
–
–
$
–
–
–
–
–
–
(194)
–
–
–
–
–
2020
Total
$ (740)
7
10
(172)
(1)
95
(353)
(127)
(148)
877
(18)
16
Consolidated
statement of
income
Other
comprehensive
income
Business
combinations
and other
$ (120)
4
(87)
19
(1)
98
19
(123)
7
56
79
16
$
–
–
(18)
(303)
–
–
–
–
–
1,391
–
–
$ –
–
–
–
–
–
–
–
(4)
–
–
(2)
$
2019
Total
(120)
4
(105)
(284)
(1)
98
19
(123)
3
1,447
79
14
$ (1,065)
$ 705
$ (194)
$ (554)
$
(33)
$ 1,070
$ (6)
$ 1,031
205
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
N O T E 2 6 | EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income attributable
to common shareholders by the weighted-average number of common
shares outstanding for the period.
Diluted earnings per share is calculated using the same method as
basic earnings per share except that certain adjustments are made to net
income attributable to common shareholders and the weighted-average
number of shares outstanding for the effects of all dilutive potential
common shares that are assumed to be issued by the Bank.
The following table presents the Bank’s basic and diluted earnings per
share for the years ended October 31, 2020, October 31, 2019, and
October 31, 2018.
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
For the years ended October 31
2020
2019
2018
$ 11,628
1,807.3
$ 11,416
1,824.2
$ 11,048
1,835.4
$
6.43
$
6.26
$
6.02
$ 11,628
11,628
$ 11,416
11,416
1,807.3
1,824.2
$ 11,048
11,048
1,835.4
1.5
3.1
4.1
1,808.8
1,827.3
1,839.5
$
6.43
$
6.25
$
6.01
1 For the year ended October 31, 2020, the computation of diluted earnings per
share excluded average options outstanding of 7.5 million with a weighted-average
exercise price of $70.04, as the option price was greater than the average market
price of the Bank’s common shares. For the years ended October 31, 2019 and
October 31, 2018, no outstanding options were excluded from the computation
of diluted earnings per share.
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 October 31, 2019
Impact on adoption of IFRS 162
Balance as at November 1, 2019
Additions
Amounts used
Release of unused amounts
Foreign currency translation adjustments and other
Balance as at October 31, 2020, before allowance for credit losses
for off-balance sheet instruments
Add: Allowance for credit losses for off-balance sheet instruments3
Balance as at October 31, 2020
Restructuring
$ 241
(75)
166
–
(70)
(16)
10
Litigation
and Other1
$ 269
–
269
332
(194)
(33)
18
Total
$ 510
(75)
435
332
(264)
(49)
28
$ 90
$ 392
$ 482
1,087
$ 1,569
1 Includes onerous contracts for non-lease payments including taxes and estimated
2 Upon adoption of IFRS 16, provisions for onerous lease contracts were adjusted
operating expenses which are included in Occupancy, including depreciation on the
Consolidated Statement of Income.
against the ROU assets. Refer to Notes 4 and 15 for further details.
3 Refer to Note 8 for further details.
LEGAL AND REGULATORY MATTERS
LITIGATION
In the ordinary course of business, the Bank and its subsidiaries are
involved in various legal and regulatory actions including but not limited
to civil claims and lawsuits, regulatory examinations, investigations,
audits and requests for information by various governmental regulatory
agencies and law enforcement authorities in various jurisdictions. The Bank
establishes 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, 2020, the Bank’s RPL is from
zero to approximately $951 million (October 31, 2019 – from zero to
approximately $606 million). The Bank’s provisions and RPL represent
the Bank’s best estimates based upon currently available information
for actions for which estimates can be made, but there are a number of
factors that could cause the Bank’s provisions and/or RPL to be significantly
206
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
different from its actual or RPL. 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.
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.
On February 28, 2019, the Bank, along with the other bank defendants,
filed a motion for judgment on the pleadings in OSIC’s case seeking
dismissal of three claims (aiding and abetting fraud, aiding and abetting
conversion, and aiding and abetting breach of fiduciary duty). The motion
was fully briefed as of April 4, 2019. On September 10, 2019, OSIC filed
a motion for leave to amend its intervenor complaints against the Bank
and the other bank defendants to insert additional factual allegations. The
motion was fully briefed as of October 15, 2019. On June 15, 2020, the
Northern District of Texas (N.D. Tex.) court granted OSIC’s motion for leave
to amend its intervenor complaints against the Bank and the other bank
defendants, and OSIC’s Second Amended Intervenor Complaint against
the Bank and certain other bank defendants was filed on that same date.
On July 10, 2020, the N.D. Tex. court so-ordered the parties’ agreed
motion extending the Bank’s time to respond to the Second Amended
Intervenor Complaint until July 31, 2020. On July 31, 2020, the Bank filed
its answer to the Second Amended Intervenor Complaint. On July 7, 2020,
the Bank, along with the other defendants, requested to withdraw the
motion for judgment on the pleadings, and the court issued an order
finding the motion moot on August 14, 2020.
On May 3, 2019, two groups of plaintiffs comprising more than
950 investors in certificates of deposit issued by SIBL, and those who
purchased one or more of such investors’ claims, filed motions to
intervene in OSIC’s case against the Bank and the other bank defendants.
On September 18, 2019, the Court denied the motions to intervene. On
October 14, 2019, one group of plaintiffs (comprising 147 investors) filed
a notice of appeal to the Fifth Circuit, and briefing was complete on the
appeal as of April 8, 2020. On October 7, 2020, the Fifth Circuit heard
oral argument on the appeal. Discovery against the bank defendants is
ongoing, and the Court has set a ready-for-trial date of May 6, 2021.
On November 1, 2019, a second group of plaintiffs (comprising
1,286 investors) filed a petition in Texas state court against the Bank and
other bank defendants alleging claims similar to those alleged in the
Rotstain v. Trustmark National Bank, et al. action. On November 26, 2019,
the U.S. Receiver for the Stanford Receivership Estate filed a motion to
enjoin the Texas state court action in the United States District Court for
the N.D. Tex. On January 15, 2020, the Court granted the U.S. Receiver’s
motion to enjoin the Texas state court action. On February 26, 2020,
another defendant bank removed the Texas state court action to the
United States District Court for the Southern District of Texas (S.D. Tex.).
On April 13, 2020, the removing bank defendant and plaintiffs requested
that the S.D. Tex. court stay the action for an initial period of 120 days.
On April 20, 2020, the S.D. Tex. court stayed all case deadlines until
August 14, 2020. On July 14, 2020, the removing bank defendant and
plaintiffs requested that the S.D. Tex. court extend the stay of the action
for an additional period of 90 days. On July 19, 2020, the S.D. Tex. court
extended the stay until November 14, 2020. On October 30, 2020, the
removing bank defendant and plaintiffs requested that the S.D. Tex. court
extend the stay of the action for an additional period of 60 days.
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. On
June 9, 2020, the court held a case conference, confirming the trial date
scheduled for January 11, 2021.
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 were 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 amended class action complaint 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 (Dorsey) challenging an overdraft practice
that was already the subject of the consolidated amended class action
complaint. The Dorsey action was consolidated into MDL 2613, and
dismissed by the Court. The Dorsey plaintiff appealed the dismissal to the
United States Court of Appeals for the Fourth Circuit.
207
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS On December 5, 2017, TD Bank, N.A. was named as a defendant in
a thirteenth class action complaint (Lawrence) challenging the Bank’s
overdraft practices. The Lawrence action, which was also transferred
to MDL 2613, concerns the Bank’s treatment of certain transactions as
“recurring” for overdraft purposes. The Bank moved to dismiss the claims.
On February 22, 2018, the Court issued an order certifying a class as
to certain claims in the consolidated amended class action complaint and
denying certification as to others. The Fourth Circuit denied the Bank’s
23(f) petition seeking permission to appeal certain portions of the district
court’s order.
On February 1, 2019, the parties filed a Joint Notice of Settlement of
all claims consolidated in MDL 2613 on a class-wide basis. In response to
the Notice of Settlement, on February 4, 2019, the Court issued an order
suspending all deadlines. On June 26, 2019, the Court issued an order
preliminarily approving settlement of all claims consolidated in MDL 2613
on a class-wide basis and directing notice to settlement class members.
On January 9, 2020, the Court issued an order granting final approval of
the settlement, certifying the six settlement classes for settlement purposes
only, and overruling a class member objection. On January 24, 2020, the
Court entered a final judgment dismissing with prejudice any and all cases
and claims consolidated in MDL 2613.
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 previously set for October 2020 has been
lifted and no new date has been set at this time. 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. On July 25, 2019, the
Quebec Court of Appeal granted the plaintiff’s appeal, thereby reinstating
the extended class period for the Quebec proceeding.
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 claims in connection with various fees,
interest rate calculations, and credit decisions. The cases are in various
stages of maturity.
U.S. Consumer Financial Protection Bureau (the “Bureau”) – On
August 20, 2020, TD Bank, N.A, (TDBNA) entered into a Consent Order
(the “Consent Order”) with the Bureau with respect to certain of TDBNA’s
enrollment practices for its optional overdraft product called Debit Card
Advance and certain of its reporting practices in relation to specialty
208
consumer reporting agencies. The Consent Order resolves the Bureau’s
investigation into TDBNA. TDBNA did not admit to any wrongdoing and
disagrees with the Bureau’s conclusions but has cooperated fully and
agreed to engage in certain remedial activities to resolve the matter.
COMMITMENTS
Credit-related Arrangements
In the normal course of business, the Bank enters into various commitments
and contingent liability contracts. The primary purpose of these contracts
is to make funds available for the financing needs of customers. The Bank’s
policy for requiring collateral security with respect to these contracts and
the types of collateral security held is generally the same as for loans made
by the Bank.
Financial and performance standby letters of credit represent irrevocable
assurances that the Bank will make payments in the event that a customer
cannot meet its obligations to third parties and they carry the same credit
risk, recourse, and collateral security requirements as loans extended to
customers. 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.
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
2020
October 31
2019
$ 30,849
$ 26,887
107
107
66,902
166,142
56,676
150,170
$ 264,000
$ 233,840
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, 2020, the Bank is committed to
fund $290 million (October 31, 2019 – $374 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 commitments for IFRS 16 lease
liabilities on an undiscounted basis are $30 million for 2021, $69 million
for 2022, $88 million for 2023, $111 million for 2024, $302 million
for 2025, $5,944 million for 2026, and thereafter. Total lease payments
(including $19 million paid for short-term and low-value asset leases)
for the year ended October 31, 2020 were $754 million.
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.
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
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)
Sources of pledged assets and collateral
Bank assets
Cash and due from banks
Interest-bearing deposits with banks
Loans
Securities
Other assets
Third-party assets2
Collateral received and available for sale
or repledging
Less: Collateral not repledged
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
As at
October 31
2020
October 31
2019
$
1,894
3,639
112,190
102,999
642
$
820
4,918
87,415
85,574
850
221,364
179,577
319,817
(93,647)
226,170
447,534
274,775
(62,893)
211,882
391,459
12,002
11,468
171,825
101,826
32,770
32,513
41,434
8,976
1,148
45,040
120,572
105,255
28,402
32,024
41,937
8,338
1,167
42,296
Total
$ 447,534
$ 391,459
1 Certain comparative amounts have been restated to conform with the presentation
adopted in the current year.
2 Includes collateral received from reverse repurchase agreements, securities borrowing,
margin loans, and other client activity.
3 Includes $56.2 billion of on-balance sheet assets that the Bank has pledged
and that the counterparty can subsequently repledge as at October 31, 2020
(October 31, 2019 – $45.9 billion).
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, 2020, $449 million (October 31, 2019 – $121 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:
ASSETS SOLD WITH RECOURSE
In connection with its securitization activities, the Bank typically makes
customary representations and warranties about the underlying assets
which may result in an obligation to repurchase the assets. These
representations and warranties attest that the Bank, as the seller, has
executed the sale of assets in good faith, and in compliance with relevant
laws and contractual requirements. In the event that they do not meet
these criteria, the loans may be required to be repurchased by the Bank.
GUARANTEES
In addition to financial and performance standby letters of credit, the
following types of transactions represent the principal guarantees that
the Bank has entered into.
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.
Compensation
(millions of Canadian dollars)
For the years ended October 31
Short-term employee benefits
Post-employment benefits
Share-based payments
Total
2020
$ 27
1
30
$ 58
2019
$ 33
2
35
$ 70
2018
$ 34
3
37
$ 74
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, SCHWAB,
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, Schwab, TD Ameritrade, and Symcor
Inc. (Symcor) also qualify as related party transactions. There were no
significant transactions between the Bank, Schwab, TD Ameritrade, and
Symcor during the year ended October 31, 2020, other than as described
in the following sections and in Note 12.
209
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
i) TRANSACTIONS WITH SCHWAB AND TD AMERITRADE
A description of significant transactions between the Bank and its affiliates
with Schwab and TD Ameritrade is set forth below.
Insured Deposit Account Agreement
In connection with the Schwab transaction, the Bank and Schwab entered
into the Schwab IDA Agreement which became effective on completion
of the Schwab transaction on October 6, 2020 and has an initial expiration
date of July 1, 2031. Pursuant to the Schwab IDA Agreement, the Bank
makes FDIC-insured (up to specified limits) money market deposit accounts
available to clients of Schwab. Schwab provides recordkeeping and
support services with respect to the Schwab IDA Agreement. The servicing
fee under the Schwab IDA Agreement is set at 15 bps per annum on
the aggregate average daily balance in the sweep accounts. Starting on
July 1, 2021, deposits under the Schwab IDA Agreement, which were
$195 billion (US$146 billion) as at October 31, 2020, can be reduced
at Schwab’s option by up to US$10 billion a year (subject to certain
adjustments based on the change in the balance of the sweep deposits
between closing and July 1, 2021), with a floor of US$50 billion. The Bank
paid fees of $136 million to Schwab for the period from October 6, 2020
to October 31, 2020 related to sweep deposit accounts. The amount
paid by the Bank is based on the average insured deposit balance of
$194 billion for the period from October 6, 2020 to October 31, 2020 and
yields based on agreed upon market benchmarks, less the actual interest
paid to clients of Schwab.
Prior to the Schwab IDA Agreement becoming effective on completion
of the Schwab transaction, the Bank was party to an insured deposit
account agreement with TD Ameritrade (the “TD Ameritrade IDA
Agreement”). Pursuant to the TD Ameritrade IDA Agreement, the Bank
made FDIC-insured (up to specified limits) money market deposit accounts
available to clients of TD Ameritrade as either designated sweep vehicles
or as non-sweep deposit accounts. TD Ameritrade provided marketing
and support services with respect to the TD Ameritrade IDA Agreement.
The Bank earned a servicing fee of 25 bps per annum on the aggregate
average daily balance in the sweep accounts (subject to adjustment
based on a specified formula). The Bank paid fees of $1.9 billion during
the year ended October 31, 2020 prior to completion of the Schwab
transaction (October 31, 2019 – $2.2 billion; October 31, 2018 –
$1.9 billion) to TD Ameritrade related to sweep deposit accounts. The
amount paid by the Bank was based on the average insured deposit
balance of $176 billion for the year ended October 31, 2020 prior to
completion of the Schwab transaction (October 31, 2019 – $140 billion;
October 31, 2018 – $140 billion) and yields based on agreed upon market
benchmarks, less the actual interest paid to clients of TD Ameritrade.
As at October 31, 2020, amounts receivable from Schwab under the
Schwab IDA Agreement were $75 million (amounts receivable from
TD Ameritrade under the TD Ameritrade IDA Agreement as at
October 31, 2019 – $41 million). As at October 31, 2020, amounts
payable to Schwab under the Schwab IDA Agreement were $344 million
(amounts payable to TD Ameritrade under the TD Ameritrade IDA
Agreement as at October 31, 2019 – $168 million).
The Bank and other financial institutions provided Schwab and its
subsidiaries with unsecured revolving loan facilities. The total commitment
provided by the Bank was $305 million, which was undrawn as at
October 31, 2020 (unsecured revolving loan facilities to TD Ameritrade
as at October 31, 2019 – $291 million undrawn).
ii) 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, 2020, the Bank paid $78 million (October 31, 2019 –
$81 million; October 31, 2018 – $86 million) for these services. As at
October 31, 2020, the amount payable to Symcor was $12 million
(October 31, 2019 – $12 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, 2020, and October 31, 2019.
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 (Schwab
as of October 6, 2020); 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 Schwab
and 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
210
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS 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 following table summarizes the segment results for the years ended
October 31, 2020, October 31, 2019, and October 31, 2018.
Results by Business Segment1
(millions of Canadian dollars)
Net interest income (loss)
Non-interest income (loss)
Total revenue
Provision for (recovery of) credit losses
Insurance claims and related expenses
Non-interest expenses
Income (loss) before 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
For the years ended October 31
Canadian
Retail
U.S.
Retail
Wholesale
Banking2
$ 12,061
12,272
$
8,834
2,438
$
1,990
2,968
24,333
2,746
2,886
10,441
8,260
2,234
–
11,272
2,925
–
6,579
1,768
(167)
1,091
4,958
508
–
2,518
1,932
514
–
Corporate2
$
2,726 $
357
3,083
1,063
–
2,066
(46)
(1,429)
42
2020
Total
25,611
18,035
43,646
7,242
2,886
21,604
11,914
1,152
1,133
Net income (loss)
$
6,026
$
3,026
$
1,418
$
1,425 $
11,895
Total assets as at October 31, 2020
$ 472,370
$ 566,629
$ 512,886
$ 163,980 $ 1,715,865
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 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
$ 12,349
11,877
$
8,951
2,840
24,226
1,306
2,787
10,735
9,398
2,535
–
11,791
1,082
–
6,411
4,298
471
1,154
$
911
$
1,720 $
2,320
3,231
44
–
2,393
794
186
–
97
1,817
597
–
2,481
(1,261)
(457)
38
2019
23,931
17,134
41,065
3,029
2,787
22,020
13,229
2,735
1,192
Net income (loss)
$
6,863
$
4,981
$
608
$
(766)
$
11,686
Total assets as at October 31, 2019
$ 452,163
$ 436,086
$ 458,420
$ 68,621 $ 1,415,290
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 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
$ 11,576
11,137
$
8,176
2,768
$
1,150
2,367
22,713
998
2,444
9,473
9,798
2,615
–
10,944
917
–
6,100
3,927
432
693
3,517
3
–
2,125
1,389
335
–
$
1,337 $
381
1,718
562
–
2,497
(1,341)
(200)
50
2018
22,239
16,653
38,892
2,480
2,444
20,195
13,773
3,182
743
Net income (loss)
$
7,183
$
4,188
$
1,054
$
(1,091)
$
11,334
Total assets as at October 31, 2018
$ 433,960
$ 417,292
$ 425,909
$ 57,742 $ 1,334,903
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.
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 The Bank’s share of TD Ameritrade’s earnings is reported with a one-month lag. The
same convention is being followed for Schwab, and the Bank will begin recording its
share of Schwab’s earnings on this basis in the first quarter of fiscal 2021. Refer to
Note 12 for further details.
211
TD BANK GROUP ANNUAL REPORT 2020 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
2020
2020
Total revenue
Income before
income taxes
$ 24,198
15,076
4,372
$ 43,646
$ 23,599
15,557
1,909
$ 41,065
$ 23,332
13,751
1,809
$ 38,892
$ 6,420
1,941
3,553
$ 11,914
$ 7,237
4,827
1,165
$ 13,229
$ 8,886
3,768
1,119
$ 13,773
Net income
Total assets
$ 5,070
2,015
4,810
$ 916,798
679,369
119,698
$ 11,895
$ 1,715,865
2019
2019
$ 5,208
4,180
2,298
$ 769,314
524,397
121,579
$ 11,686
$ 1,415,290
2018
2018
$ 6,523
2,993
1,818
$ 713,677
514,263
106,963
$ 11,334
$ 1,334,903
N O T E 3 0 | INTEREST INCOME AND EXPENSE
The following table presents interest income and interest expense by basis
of accounting measurement. Refer to Note 2 for the type of instruments
measured at amortized cost and FVOCI.
Interest Income and Expense
(millions of Canadian dollars)
Measured at amortized cost1
Measured at FVOCI
Not measured at amortized cost or FVOCI2
Total
October 31, 2020
Interest
income
$ 30,981
1,543
32,524
3,123
Interest
expense
$ 6,547
–
6,547
3,489
For the years ended
October 31, 2019
Interest
income
Interest
expense
$ 31,663
3,165
$ 11,294
–
34,828
7,171
11,294
6,774
$ 35,647
$ 10,036
$ 41,999
$ 18,068
1 Includes interest expense on lease liabilities for the year ended October 31, 2020
2 Includes interest income, interest expense, and dividend income for financial
of $153 million, upon adoption of IFRS 16 on November 1, 2019.
instruments that are measured or designated at FVTPL and equities designated
at FVOCI.
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.
212
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
Concentration of Credit Risk1
(millions of Canadian dollars, except as noted)
Canada
United States
United Kingdom
Europe – other
Other international
Total
Loans and customers’ liability
under acceptances2,3
Credit Instruments4,5
As at
Derivative financial
instruments6,7
October 31
2020
October 31
2019
October 31
2020
October 31
2019
October 31
2020
October 31
2019
66%
33
–
–
1
66%
33
–
–
1
37%
59
1
2
1
38%
58
1
2
1
24%
27
22
18
9
25%
31
17
20
7
100%
100%
100%
100%
100%
100%
$ 734,958
$ 700,226
$ 264,000
$ 233,840
$ 51,225
$ 46,829
1 Certain comparative numbers have been reclassified to conform with the
presentation adopted in the current year.
2 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, 2020 was real estate 10% (October 31, 2019 – 10%).
3 Includes loans that are measured at FVOCI.
4 As at October 31, 2020, the Bank had commitments and contingent liability
contracts in the amount of $264 billion (October 31, 2019 – $234 billion). Included
are commitments to extend credit totalling $233 billion (October 31, 2019 –
$207 billion), of which the credit risk is dispersed as detailed in the table above.
5 Of the commitments to extend credit, industry segments which equalled or
exceeded 5% of the total concentration were as follows as at October 31, 2020:
financial institutions 21% (October 31, 2019 – 22%); pipelines, oil and gas 10%
(October 31, 2019 – 9%); automotive 9% (October 31, 2019 – 9%); power and
utilities 8% (October 31, 2019 – 8%); sundry manufacturing and wholesale 7%
(October 31, 2019 – 7%); professional and other services 6% (October 31, 2019 –
6%); telecommunications, cable, and media 6% (October 31, 2019 – 6%); non-
residential real estate development 5% (October 31, 2019 – 6%).
6 As at October 31, 2020, the current replacement cost of derivative financial
instruments, excluding the impact of master netting agreements and collateral,
amounted to $51 billion (October 31, 2019 – $47 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.
7 The largest concentration by counterparty type was with financial institutions
(including non-banking financial institutions), which accounted for 64% of the total
as at October 31, 2020 (October 31, 2019 – 69%). The second largest concentration
was with governments, which accounted for 24% of the total as at October 31, 2020
(October 31, 2019 – 22%). No other industry segment exceeded 5% of the total.
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
Debt securities at amortized cost
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
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, 2020 October 31, 2019
As at
$
6,445
$
164,149
2,069
2,668
59,037
18,968
14
388
4,114
78,283
19,901
174,593
53,086
169,162
54,242
251,915
183,440
29,778
252,390
12,959
3,718
2,502
14,941
33,951
7,326
4,863
25,583
1,413
2,627
44,445
18,680
19
319
4,081
83,171
23,969
78,275
52,222
165,935
48,894
235,530
179,085
34,989
235,004
12,482
1,796
2,124
13,494
20,575
5,913
1,600,039
264,000
1,295,488
233,840
320,823
311,138
$ 2,184,862
$ 1,840,466
1 Excludes equity securities.
2 The carrying amount of the derivative assets represents the maximum credit
risk exposure related to derivative contracts.
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.
213
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
For accounting purposes, IFRS is followed for consolidation of
subsidiaries and joint ventures. For regulatory capital purposes, all
subsidiaries of the Bank are consolidated except for insurance subsidiaries
which are deconsolidated and follow prescribed treatment per OSFI’s
CAR guidelines. Insurance subsidiaries are subject to their own capital
adequacy reporting, such as OSFI’s Life Insurance Capital Adequacy Test.
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, 2020, the Bank complied with the
OSFI Basel III guidelines 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 domestic systemically important
banks (D-SIBs) includes a 1% common equity capital surcharge bringing
the targets to 8%, 9.5%, and 11.5%, respectively. On June 25, 2018,
OSFI provided greater transparency related to previously undisclosed
Pillar 2 CET1 capital buffers through the introduction of the public DSB
which is held by D-SIBs against Pillar 2 risks. The current buffer is set at
1% of total RWA and must be met with CET1 Capital, effectively raising
the CET1 minimum to 9%. In addition, on November 22, 2019, the Bank
was designated a global systemically important bank (G-SIB). The OSFI
target includes the greater of the D-SIB or G-SIB surcharge, both of which
are currently 1%.
The following table summarizes the Bank’s regulatory capital position as
at October 31, 2020 and October 31, 2019.
Regulatory Capital Position1
(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 ratios
Capital and leverage ratios
Common Equity Tier 1 Capital ratio
Tier 1 Capital ratio
Total Capital ratio
Leverage ratio
October 31, 2020
October 31, 2019
As at
$ 62,616
69,091
80,021
$ 55,042
61,683
74,122
478,909
455,977
13.1%
14.4
16.7
4.5
12.1%
13.5
16.3
4.0
1 Includes capital adjustments provided by OSFI in response to the COVID-19 pandemic
in the year ended October 31, 2020. Refer to “Capital Position” section of the MD&A
for additional detail.
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,
trading 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, including
stress test analysis, 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 loss 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.
Basel III Capital Framework
Capital requirements of the Basel Committee on Banking Supervision are
commonly referred to as Basel III. Under Basel III, Total Capital consists
of three components, namely Common Equity Tier 1, Additional Tier 1,
and Tier 2 Capital. Risk sensitive regulatory capital ratios are calculated by
dividing CET1, Tier 1, and Total Capital by 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 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, trading market,
and operational risks. The Bank uses the advanced internal ratings-based
approach to credit risk for all material portfolios. In the third quarter of
2020, OSFI approved the Bank to calculate the non-retail portfolio credit
RWA in U.S. Retail segment using the AIRB Approach.
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 credit, market, liquidity, and insurance risks are an
integral part of the 2020 Consolidated Financial Statements.
214
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
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
Address of Head
or Principal Office2
Montreal, Québec
Montreal, Québec
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Description
Holding Company
Insurance Company
Insurance Company
Insurance Company
Insurance Company
Insurance Company
TD Wealth Holdings Canada Limited
TD Asset Management Inc.
GMI Servicing Inc.
TD Waterhouse Private Investment Counsel Inc.
Toronto, Ontario
Toronto, Ontario
Regina, Saskatchewan
Toronto, Ontario
Holding Company
Dealing in Securities
Mortgage Servicing Entity
Investment Counselling and Portfolio Management
TD Auto Finance (Canada) 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 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.
TD Waterhouse Canada Inc.
International
TD Bank N.V.
Toronto, Ontario
Automotive Finance Entity
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
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
Toronto, Ontario
Toronto, Ontario
Mutual Fund Dealer
Insurance Company
Toronto, Ontario
Vancouver, British Columbia
Toronto, Ontario
Deposit-Taking Entity
Deposit-Taking Entity
Trust, Loans, and Deposit-Taking Entity
Toronto, Ontario
Toronto, Ontario
Hamilton, Bermuda
St. James, Barbados
Toronto, Ontario
Investment Dealer and Broker
Holding Company
Holding Company
Reinsurance Company
Investment Dealer
Amsterdam, The Netherlands
Dutch Bank
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
Dublin, Ireland
Dublin, Ireland
Tokyo, Japan
Sydney, Australia
London, England
London, England
London, England
London, England
Holding Company
Securities Dealer
Securities Dealer
Securities Dealer
Holding Company
UK Bank
Holding Company
Securities Dealer
Toronto Dominion (South East Asia) Limited
Singapore, Singapore
Financial Institution
As at October 31, 2020
Carrying value of shares
owned by the Bank3
$ 1,725
1,164
2,791
73,421
30
91
10,384
2,086
27,212
3,104
486
886
13
100
1,165
1,067
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 fulfil,
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, 2020, the net assets of subsidiaries subject to regulatory
or CAR was $95.0 billion (October 31, 2019 – $86.3 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.
215
TD BANK GROUP ANNUAL REPORT 2020 FINANCIAL RESULTS
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
Trading deposits
Derivatives
Financial liabilities designated at fair
value through profit or loss
Deposits
Other
Subordinated notes and debentures
Total liabilities
EQUITY
Shareholders’ Equity
Common shares
Preferred shares
Treasury shares
Contributed surplus
Retained earnings
Accumulated other comprehensive
income (loss)
Non-controlling interests in subsidiaries
(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 (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:
Ten-year Statistical Review – IFRS
Condensed Consolidated Balance Sheet
(millions of Canadian dollars)
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
$ 170,594
256,342
$
30,446
261,144
$
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
8,548
54,242
227,679
n/a
6,503
48,894
130,497
n/a
4,015
56,996
107,171
n/a
n/a
56,195
n/a
71,363
n/a
72,242
n/a
84,395
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
–
169,162
717,523
111,775
$ 1,715,865
165,935
684,608
87,263
$ 1,415,290
127,379
646,393
95,379
$ 1,334,903
134,429
612,591
94,900
$ 1,278,995
86,052
585,656
79,890
$ 1,176,967
97,364
544,341
84,826
$ 1,104,373
82,556
478,909
70,793
$ 960,511
64,283
444,922
53,214
$ 862,021
69,198
408,848
47,680
$ 811,053
56,981
377,187
46,259
$ 735,493
$
19,177
53,203
$
26,885
50,051
$ 114,704
48,270
$
79,940
51,214
$
79,786
65,425
$
74,759
57,218
$ 59,334
51,209
$ 50,967
49,471
$ 38,774
64,997
$ 29,613
61,715
59,665
1,135,333
341,511
11,477
105,131
886,977
247,820
10,725
16
851,439
231,694
8,740
8
832,824
230,291
9,528
190
773,660
172,801
10,891
1,415
695,576
199,740
8,637
3,250
600,716
181,986
7,785
12
541,605
160,601
7,982
17
487,754
160,088
11,318
32
449,428
139,158
11,543
1,620,366
1,327,589
1,254,863
1,203,805
1,102,753
1,037,345
904,280
810,638
762,948
691,489
22,487
5,650
(41)
121
53,845
13,437
95,499
–
21,713
5,800
(47)
157
49,497
10,581
87,701
–
21,221
5,000
(151)
193
46,145
6,639
79,047
993
80,040
20,931
4,750
(183)
214
40,489
8,006
74,207
983
75,190
20,711
4,400
(36)
203
35,452
11,834
72,564
1,650
74,214
20,294
2,700
(52)
214
32,053
10,209
65,418
1,610
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
3,159
3,645
3,326
54,682
49,875
46,628
42,521
1,549
1,508
1,477
1,483
67,028
56,231
51,383
48,105
44,004
Total equity
95,499
87,701
Total liabilities and equity
$ 1,715,865
$ 1,415,290
$ 1,334,903
$ 1,278,995
$ 1,176,967
$ 1,104,373
$ 960,511
$ 862,021
$ 811,053
$ 735,493
Condensed Consolidated Statement of Income – Reported
$
$
2020
25,611
18,035
43,646
7,242
2,886
21,604
11,914
1,152
1,133
11,895
267
2019
23,931
17,134
41,065
3,029
2,787
22,020
13,229
2,735
1,192
11,686
252
$
2018
22,239
16,653
38,892
2,480
2,444
20,195
13,773
3,182
743
11,334
214
$
$
2017
20,847
15,355
36,202
2,216
2,246
19,419
12,321
2,253
449
10,517
193
2016
19,923
14,392
34,315
2,330
2,462
18,877
10,646
2,143
433
8,936
141
2015
18,724
12,702
31,426
1,683
2,500
18,073
9,170
1,523
377
8,024
99
2014
2013
2012
2011
$ 17,584
12,377
$ 16,074
11,185
$ 15,026
10,520
$ 13,661
10,179
29,961
1,557
2,833
16,496
27,259
1,631
3,056
15,069
25,546
1,795
2,424
14,016
23,840
1,490
2,178
13,047
9,075
1,512
320
7,883
143
7,503
1,135
272
6,640
185
7,311
1,085
234
6,460
196
7,125
1,326
246
6,045
180
$
11,628
$
11,434
$
11,120
$
10,324
$
8,795
$
7,925
$
7,740
$
6,455
$
6,264
$
5,865
Common shareholders
Non-controlling interests in subsidiaries
$
11,628
–
$
11,416
18
$
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)
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
Shareholders’ Equity
Common shares
Preferred shares
Treasury shares
Contributed surplus
Retained earnings
Accumulated other comprehensive
income (loss)
Total
Non-controlling interests in subsidiaries
$
$
$
22,487
5,650
(41)
121
53,845
13,437
95,499
–
21,713
5,800
(47)
157
49,497
10,581
87,701
–
$
$
21,221
5,000
(151)
193
46,145
6,639
79,047
993
20,931
4,750
(183)
214
40,489
8,006
74,207
983
20,711
4,400
(36)
203
35,452
11,834
72,564
1,650
$
20,294
2,700
(52)
214
32,053
$ 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
10,209
65,418
1,610
4,936
3,159
3,645
3,326
54,682
49,875
46,628
42,521
1,549
1,508
1,477
1,483
Total equity
$
95,499
$
87,701
$
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).
216
TD BANK GROUP ANNUAL REPORT 2020 TEN-YEAR STATISTICAL REVIEW Ten-year Statistical Review
Other Statistics – IFRS Reported
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
Per common share
Basic earnings
Diluted earnings
Dividends
Book value
Closing market price
Closing market price to
book value
Closing market price
appreciation
Total shareholder return
(1-year)1
Performance ratios
Return on common equity
Return on Common
Equity Tier 1 Capital
risk-weighted assets2,3,4
Efficiency ratio
Net interest margin
Common dividend
payout ratio
Dividend yield5
Price-earnings ratio6
$
6.43
6.43
3.11
49.49
58.78
1.19
$
6.26 $
6.25
2.89
45.20
75.21
6.02
6.01
2.61
40.50
73.03
$
5.51 $
5.50
2.35
37.76
73.34
4.68 $
4.67
2.16
36.71
60.86
4.22
4.21
2.00
33.81
53.68
$
4.15 $ 3.46 $ 3.40 $ 3.25
3.21
4.14
1.31
1.84
21.72
28.45
37.62
55.47
3.38
1.45
23.60
40.62
3.44
1.62
25.33
47.82
1.66
1.80
1.94
1.66
1.59
1.95
1.89
1.72
1.73
(21.8)%
3.0%
(0.4)%
20.5%
13.4%
(3.2)%
16.0%
17.7%
8.0%
2.4%
(17.9)
7.1
3.1
24.8
17.9
0.4
20.1
22.3
11.9
5.7
13.6%
14.5%
15.7%
14.9%
13.3%
13.4%
15.4%
14.2%
15.0%
16.2%
2.41
49.5
1.80
48.3
4.8
9.2
2.55
53.6
1.96
46.1
3.9
12.0
2.56
51.9
1.95
43.3
3.5
12.2
2.46
53.6
1.96
42.6
3.6
13.3
2.21
55.0
2.01
46.1
3.9
13.0
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
Net impaired loans as
a % of net loans and
acceptances7,8
Net impaired loans as a % of
common equity7,8
Provision for credit losses as
a % of net average loans
and acceptances7,8
Capital ratios
Common Equity Tier 1
Capital ratio3,4,9
Tier 1 Capital ratio2,3,4
Total Capital ratio2,3,4
Other
Common equity to
total assets
Number of common shares
outstanding (millions)
0.32%
0.33%
0.37%
0.38%
0.46%
0.48%
0.46%
0.50%
0.52%
0.56%
2.59
2.81
3.33
3.45
4.09
4.24
4.28
4.83
4.86
5.27
1.00
0.45
0.39
0.37
0.41
0.34
0.34
0.38
0.43
0.39
13.1%
14.4
16.7
12.1%
13.5
16.3
12.0%
13.7
16.2
10.7%
12.3
14.9
10.4%
12.2
15.2
9.9%
11.3
14.0
9.4%
9.0%
n/a%
n/a%
10.9
13.4
11.0
14.2
12.6
15.7
13.0
16.0
5.2
5.8
5.5
5.4
5.8
5.7
5.5
5.4
5.3
5.3
1,815.6
1,811.9
1,828.3
1,839.6
1,857.2
1,855.1
1,844.6
1,835.0
1,832.3
1,802.0
24 Market capitalization
(millions of Canadian
dollars)
Average number of full-time
equivalent staff10
Number of retail outlets11
Number of retail
brokerage offices
Number of automated
banking machines
25
26
27
28
$ 106,719
$ 136,274 $ 133,519
$ 134,915 $ 113,028 $ 99,584
$ 102,322 $ 87,748 $ 74,417 $ 67,782
89,598
2,358
89,031
2,380
84,383
2,411
83,160
2,446
81,233
2,476
81,483
2,514
81,137
2,534
78,748
2,547
78,397
2,535
75,631
2,483
87
113
109
109
111
108
111
110
112
108
6,233
6,302
5,587
5,322
5,263
5,171
4,833
4,734
4,739
4,650
1 Total shareholder return is calculated based on share price movement and dividends
5 Dividend yield is calculated as the dividend per common share for the year divided
reinvested over a trailing one-year period.
by the daily average closing stock price during the year.
2 Effective fiscal 2013, amounts are calculated in accordance with the Basel III
6 The price-earnings ratio is computed using diluted net income per common share
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 has been 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,
for fiscal 2018, were 80%, 83%, and 86%, respectively, and effective fiscal 2019,
the corresponding scalars are all 100%. 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.
over the trailing 4 quarters.
7 Includes customers’ liability under acceptances.
8 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.
9 Effective fiscal 2013, the Bank implemented the Basel III regulatory framework. As
a result, the Bank began reporting the measures, CET1 and CET1 Capital ratio, in
accordance with the “all-in” methodology. Accordingly, amounts for years prior to
fiscal 2013 are not applicable (n/a).
10 In fiscal 2014, the Bank conformed to a standardized definition of full-time
equivalent staff across all segments. The definition includes, among other things,
hours for overtime and contractors as part of its calculations. Comparatives for years
prior to fiscal 2014 have not been restated.
4 Includes capital adjustments provided by the Office of the Superintendent of Financial
11 Includes retail bank outlets, private client centre branches, and estate and
Institutions Canada in response to COVID-19 pandemic in the second quarter of
2020. Refer to the “Capital Position” section of the MD&A for additional detail.
trust branches.
217
TD BANK GROUP ANNUAL REPORT 2020 TEN-YEAR STATISTICAL REVIEW 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: Represent expected credit losses (ECLs)
on financial assets, including any off-balance sheet exposures, at the
balance sheet date. Allowance for credit losses consists of Stage 3
allowance for impaired financial assets and Stage 2 and Stage 1 allowance
for performing financial assets and off-balance sheet instruments. The
allowance is increased by the provision for credit losses, and decreased
by write-offs net of recoveries and disposals.
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.
Collateralized Mortgage Obligation (CMO): They are collateralized
debt obligations consisting of mortgage-backed securities that are
separated and issued as different classes of mortgage pass-through
securities with different terms, interest rates, and risks. CMOs by private
issuers are collectively referred to as non-agency CMOs.
Common Equity Tier 1 (CET1) Capital: This is a primary Basel III capital
measure comprised mainly of common equity, retained earnings and
qualifying non-controlling interest in subsidiaries. Regulatory deductions
made to arrive at the CET1 Capital include goodwill and intangibles,
unconsolidated investments in banking, financial, and insurance entities,
deferred tax assets, defined benefit pension fund assets, and shortfalls
in allowances.
218
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 a capital charge
that measures credit risk due to default of derivative counterparties.
This charge requires banks to capitalize for the potential changes in
counterparty credit spread for the derivative portfolios.
Dividend Yield: Dividend per common share for the year divided by the
daily average closing stock price during the year.
Effective Interest Rate (EIR): The rate that discounts expected future
cash flows for the expected life of the financial instrument to its carrying
value. The calculation takes into account the contractual interest rate,
along with any fees or incremental costs that are directly attributable to
the instrument and all other premiums or discounts.
Effective Interest Rate Method (EIRM): A technique for calculating
the actual interest rate in a period based on the amount of a financial
instrument’s book value at the beginning of the accounting period.
Under EIRM, the effective interest rate, which is a key component of
the calculation, discounts the expected future cash inflows and outflows
expected over the life of a financial instrument.
Efficiency Ratio: 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.
Enhanced Disclosure Task Force (EDTF): Established by the Financial
Stability Board in May 2012, comprising of banks, analysts, investors, and
auditors, with the goal of enhancing the risk disclosures of banks and
other financial institutions.
Expected Credit Losses (ECLs): ECLs are the probability-weighted
present value of expected cash shortfalls over the remaining expected
life of the financial instrument and considers 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.
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).
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.
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.
TD BANK GROUP ANNUAL REPORT 2020 GLOSSARY GLOSSARY (continued)
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.
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.
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.
219
TD BANK GROUP ANNUAL REPORT 2020 GLOSSARY Board Committees
COMMITTEE
MEMBERS1
KEY RESPONSIBILITIES1
Corporate Governance
Committee
Brian M. Levitt
(Chair)
Amy W. Brinkley
Karen E. Maidment
Alan N. MacGibbon
Responsibility for corporate governance of the Bank:
•
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, performance and reporting on corporate responsibility for environmental and
social matters;
• Provide oversight of enterprise-wide conduct risk and act as the conduct review committee for the Bank
and certain of its Canadian subsidiaries that are federally-regulated financial institutions; and
• Oversee the evaluation of the Board and Committees.
Human Resources
Committee
Karen E. Maidment
(Chair)
Amy W. Brinkley
David E. Kepler
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
capital management and compensation, as set out in the Committee’s charter;
• Set corporate goals and objectives for the Chief Executive Officer (CEO) and regularly measure the CEO’s
performance against these goals and objectives;
• Recommend compensation for the CEO to the Board for approval, and review and approve 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 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 the strategy, design and management of the Bank’s employee pension, retirement savings, and
benefit plans.
Risk Committee
Audit Committee
Amy W. Brinkley
(Chair)
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 for approval by the Board and oversee
the Bank’s major risks as set out in the ERF;
• Review the Bank’s risk profile and performance against Risk Appetite; and
• Provide a forum for “big-picture” analysis of an enterprise view of risk, including considering trends, and
current and emerging risks.
Alan N. MacGibbon2
(Chair)
Brian C. Ferguson2
Jean-René Halde
Irene R. Miller2
Claude Mongeau2
S. Jane Rowe2
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,
and global chief anti-money laundering 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
2020 Annual Information Form.
1 As at October 31, 2020
2 Designated Audit Committee Financial Expert
220
TD BANK GROUP ANNUAL REPORT 2020 BOARD COMMITTEES 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 2020
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 (or 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 (or 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 Chair of the
Board, by writing to:
Chair 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 Chair received from shareholders and
expressing an interest to communicate directly
with the independent directors via the Chair
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 (TTY): 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 1, 2021
9:30 a.m. (Eastern)
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:
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La Banque Toronto-Dominion
P.O. Box 1, Toronto-Dominion Centre
Toronto (Ontario) M5K 1A2
TD BANK GROUP ANNUAL REPORT 2020 SHAREHOLDER AND INVESTOR INFORMATION221Design: q30 design inc., Printing: TC Transcontinental Printing ® The TD logo and other trade-marks are the property of
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