GROUP FINANCIAL CONDITION
Credit Portfolio Quality AT A GLANCE OVERVIEW
• Loans and acceptances net of allowance for loan losses were $601 billion, an increase of $40 billion compared with last year.
• Impaired loans net of counterparty-specific and individually insignificant allowances were $2,785 million, an increase of $125 million compared with last year.
• Provision for credit losses was $2,330 million, compared with $1,683 million last year.
• Total allowance for loan losses increased by $439 million to $3,873 million.
LOAN PORTFOLIO
Overall in 2016, the Bank’s credit quality remained stable despite uncertain economic conditions. During 2016, the Bank increased its credit portfolio by $40 billion, or 7%, from the prior year, largely due to volume growth in the Canadian and U.S. Retail segments and the impact of foreign exchange.
While the majority of the credit risk exposure is related to loans and acceptances, the Bank also engaged in activities that have off-balance sheet credit risk. These include credit instruments and derivative financial instruments, as explained in Note 32 of the 2016 Consolidated Financial Statements.
CONCENTRATION OF CREDIT RISK
The Bank’s loan portfolio continued to be dominated by Canadian and U.S. residential mortgages, consumer instalment and other personal loans, and credit cards, representing 65% of total loans net of counterparty-specific and individually insignificant allowances, down from 67% in 2015. During the year, these portfolios increased by $16 billion, or 4%, and totalled $393 billion at year end. Residential mortgages represented 36% of the portfolio in 2016, down from 38% in 2015. Consumer instalment and other personal loans, and credit cards were 29% of total loans net of counterparty-specific and individually insignificant allowances in 2016, consistent with 2015. The Bank’s business and government credit exposure was 35% of total loans net of counterparty-specific and individually insignificant allowances, up from 33% in 2015. The largest business and government sector concentrations in Canada were the real estate and financial sectors, which comprised 4.8% and 1.7%, respectively. Real estate was the leading U.S. sector of concentration and represented 4.7% of net loans, up from 4.3% in 2015.
Geographically, the credit portfolio remained concentrated in Canada. In 2016, the percentage of loans held in Canada was 66%, down from 68% in 2015. The largest Canadian exposure was in Ontario, which represented 39% of total loans net of counterparty- specific and individually insignificant allowance for loan losses for 2016, down from 40% in 2015.
The balance of the credit portfolio was predominantly in the U.S., which represented 33% of the portfolio, up from 31% in 2015 primarily due to the impact of foreign exchange and volume growth in business and government and consumer indirect auto loans. Exposures to debt securities classified as loans, ACI loans, and other geographic regions were relatively small. The largest U.S. exposures by state were in New England, New Jersey, and New York which represented 6%, 6%, and 5% of total loans net of counterparty-specific and individually insignificant allowances, respectively, compared with 7%, 6% and 5%, respectively, in the prior year.
Oil and Gas Exposure
From the beginning of fiscal 2015, West Texas Intermediate crude oil prices fell from approximately US$80 per barrel to US$47 as at October 31, 2016. Within the Commercial and Wholesale portfolios, TD had $3.7 billion of drawn exposure to oil and gas producers and services as at October 31, 2016, representing less than 1% of the Bank’s total gross loans and acceptances outstanding. Of the $3.7 billion drawn exposure, $1.2 billion is to investment grade borrowers and $2.5 billion to non-investment grade borrowers based on the Bank’s internal rating system. The portfolio of oil and gas exposure is broadly diversified and consistent with TD’s North American strategy. For certain producers, a borrowing base re-determination is performed on a semi-annual basis, the results of which are used to determine exposure levels and credit terms. Within the retail credit portfolios, TD had $62.8 billion of consumer and small business outstanding exposure in Alberta, Saskatchewan, and Newfoundland and Labrador as at October 31, 2016, the regions most impacted by lower oil prices. Excluding real estate secured lending, consumer and small business banking drawn exposure represents 2% of the Bank’s total gross loans and acceptances outstanding. The Bank regularly conducts stress testing on its credit portfolios in light of current market conditions. The Bank’s portfolios continue to perform within expectations given the current level and near term outlook for commodity prices in this sector.
42 TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
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