For the commercial and wholesale portfolios, allowances are estimated using borrower specific information. The LGD is based on the security and structure of the facility; EAD is a function of the current usage, the borrower’s risk rating, and the committed amount of the facility. For the consumer lending and small business banking portfolios, the collectively assessed allowance for incurred but not identified credit losses is calculated on a pooled portfolio level with each pool comprising exposures with similar credit risk characteristics segmented, for example by product type and PD estimate. Recovery data models are used in the determination of the LGD for each pool. EAD is a function of the current usage and historical exposure experience at default.
As at October 31, 2016, the collectively assessed allowance for incurred but not identified credit losses was $3,381 million, up from $2,873 million as at October 31, 2015. Excluding debt securities classified as loans, the collectively assessed allowance for incurred but not identified credit losses increased by $509 million, or 18% from the prior year, primarily due to changes in risk, volume growth, and the impact of foreign exchange. The Bank periodically reviews the methodology for calculating the allowance for incurred but not identified credit losses. As part of this review, certain revisions may be made to reflect updates in statistically derived loss estimates for the Bank’s recent loss experience of its credit portfolios, which may cause the Bank to provide or release amounts from the allowance for incurred but not identified losses. During the year ended October 31, 2016, certain refinements were made to the methodology, the cumulative effect of which was not material. Allowance for credit losses are further described in Note 8 of the 2016 Consolidated Financial Statements.
PROVISION FOR CREDIT LOSSES
The PCL is the amount charged to income to bring the total allowance for credit losses, including both counterparty-specific and collectively assessed allowances, to a level that management considers adequate to absorb incurred credit-related losses in the Bank’s loan portfolio. Provisions in the year are reduced by any recoveries in the year.
T ABLE 31 PROVISION FOR CREDIT LOSSES1 (millions of Canadian dollars)
Provision for credit losses – counterparty-specific and individually insignificant Provision for credit losses – counterparty-specific Provision for credit losses – individually insignificant Recoveries
Total provision for credit losses for counterparty-specific and individually insignificant
Provision for credit losses – incurred but not identified Canadian Retail and Wholesale Banking2 U.S. Retail Corporate3
Total provision for credit losses – incurred but not identified Provision for credit losses
1
Certain comparative amounts have been recast to conform with revised presentation for the U.S. strategic cards portfolio adopted in fiscal 2016. For further details, refer to the “Business Focus” section of this document.
2
The incurred but not identified PCL is included in the Corporate segment results for management reporting.
3 The retailer program partners’ share of the U.S. strategic cards portfolio. 2016
$ 139 2,334 (602)
1,871
165 210 84
459 $ 2,330 $ 2015 76
2,062 (601)
1,537
44 76 26
146 $ 1,683 2014
$ 168 1,849 (533)
1,484
8 8
57 73
$ 1,557
The Bank recorded a total PCL of $2,330 million in 2016, compared with a total PCL of $1,683 million in 2015. This amount comprised $1,871 million of counterparty-specific and individually insignificant provisions and $459 million in collectively assessed incurred but not identified provisions. The total PCL as a percentage of net average loans and acceptances increased to 0.40% from 0.32%. In Canada, residential mortgages, consumer instalment and other personal loans, and credit cards, required counterparty-specific and individually insignificant provisions of $945 million, an increase of $117 million, or 14%, compared to 2015 primarily due to increases in provisions for the indirect auto portfolio. Business and government loans required counterparty-specific and individually insignificant provisions of $103 million, an increase of $41 million, or 66%, compared to 2015 primarily in the professional and other services and pipeline, oil and gas sectors.
In the U.S., residential mortgages, consumer instalment and other personal loans, and credit cards, required counterparty-specific and individually insignificant provisions of $807 million, an increase of $177 million, or 28%, compared to 2015, primarily due to increases in provisions for the credit card portfolio. Business and government loans required counterparty-specific and individually insignificant provisions of $39 million, a decrease of $41 million, compared to 2015 primarily due to higher recoveries across various industries offset by higher provisions in the pipeline, oil and gas sector.
Geographically, 56% of counterparty-specific and individually insignificant provisions were attributed to Canada and 45% to the U.S. Canadian counterparty-specific and individually insignificant provisions were concentrated in Ontario, which represented 21% of total counterparty-specific and individually insignificant provisions, down from 27% in 2015. U.S. counterparty-specific and individually insignificant provisions were concentrated in New England, New York, and New Jersey, representing 6%, 5% and 4%, respectively, of total counterparty-specific and individually insignificant provisions, down from 9%, 5% and 6% respectively, in the prior year. The following table provides a summary of provisions charged to the Consolidated Statement of Income.
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
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