Wednesday, August 16, 2006

Moody's Changes Outlook on TD Bank to Positive from Stable

Investment Executive, 16 August 2006

Moody’s Investors Service has changed the rating outlook on Toronto-Dominion Bank, and its subsidiaries, to positive from stable.

At the same time, it affirmed the bank’s ratings. TD is rated “Aa3” for deposits and “B” for bank financial strength.

In a related action, Moody’s changed the outlook to positive from stable on TD Banknorth, Inc.’s deposit and debt ratings, reflecting TD’s implicit support for creditors. TD owns approximately 56% of TD Banknorth.

The change in TD’s outlook reflects its enhanced credit fundamentals, improved governance and oversight of TD Banknorth and TD Ameritrade Holdings Corp., and strengthened enterprise risk management disciplines.

“TD’s performance on key credit ratios exceeds that of similarly-rated U.S. and Canadian banks,” said Peter Routledge, VP at Moody’s. For example, the bank’s pre-tax, pre-provision profitability as a percent of risk-weighted and securitized assets was 3.5% in the first quarter of 2006, versus a 2.9% peer median for banks with financial strength ratings of B.

Meanwhile, TD’s nonperforming assets to tangible common equity and reserves ratio was 2.9% in the first quarter, versus peer median of 6.1%. In explaining this performance, Routledge noted that “following a rather difficult stress period in 2002, TD shifted its business mix away from a market with poor risk-return characteristics — U.S. corporate lending — and towards markets with strong risk-return characteristics — Canadian personal, commercial, and wholesale banking. This shift in strategy ultimately led to TD’s improved credit fundamentals.”

In 2005 and 2006, TD acquired a majority ownership position in BNK and a minority ownership stake in AMTD. These acquisitions marked a significant step up in TD’s U.S. aspirations. Moody’s had earlier expressed concern over the risk of unintended, adverse consequences in governing these companies, noting that the interests of strong minority shareholders could ultimately diverge from TD’s. Routledge said “we believe the part-ownership approach has allowed TD to identify those areas where it can add most value to the U.S. operations, while at the same time supporting the development of strong management and governance connections. Our concern about limited or weak oversight has diminished as a result.”

Moody’s also noted that TD is a leading Canadian bank in the field of enterprise risk management. The rating agency regards TD’s governance framework as strong with well-defined delegations from the board on down throughout the bank. Moreover, the risk management function is very influential in decision-making. As a result, TD has improved its loan granularity significantly over the past three years and maintained strong interest-rate risk management disciplines.

As part of its positive outlook, Moody’s expects TD to maintain its profitability and asset quality ratios at levels superior to banks with B financial strength ratings.