Capital Position and Capital Ratios
The Basel framework allows qualifying banks to determine capital levels consistent with the way they measure, manage, and mitigate risks. It specifies methodologies for the measurement of credit, market, and operational risks. The Bank uses the advanced approaches for the majority of its portfolios. Effective the third quarter of 2016, OSFI approved the Bank to calculate the majority of the retail portfolio credit RWA in the U.S. Retail segment using the Advanced Internal Ratings Based (AIRB) approach. The remaining assets in the U.S. Retail segment continue to use the standardized approach for credit risk. For accounting purposes, IFRS is followed for consolidation of subsidiaries and joint ventures. For regulatory capital purposes, insurance subsidiaries are deconsolidated and reported as a deduction from capital. Insurance subsidiaries are subject to their own capital adequacy reporting, such as OSFI’s Minimum Continuing Capital Surplus Requirements and Minimum Capital Test. Currently, for regulatory capital purposes, all the entities of the Bank are either consolidated or deducted from capital and there are no entities from which surplus capital is recognized.
Some of the Bank’s subsidiaries are individually regulated by either OSFI or other regulators. Many of these entities have minimum capital requirements which they must maintain and which may limit the Bank’s ability to extract capital or funds for other uses. As at October 31, 2016, the Bank’s CET1, Tier 1, and Total Capital ratios were 10.4%, 12.2%, and 15.2%, respectively. Compared with the Bank’s CET1 Capital ratio of 9.9% at October 31, 2015, the CET1 Capital ratio, as at October 31, 2016, increased due to growth in retained earnings, partially offset by a combination of common shares repurchased, actuarial losses on employee benefit plans primarily due to a decline in long term interest rates, and RWA growth in the Canadian and U.S. Retail segments.
As at October 31, 2016, the Bank’s leverage ratio was 4.0%. Compared with the Bank’s leverage ratio of 3.7% at October 31, 2015, the leverage ratio, as at October 31, 2016, increased mainly from capital generation and preferred share issuances, partially offset by business growth in all segments.
Common Equity Tier 1 Capital
CET1 Capital was $42.3 billion as at October 31, 2016. Strong earnings growth contributed the majority of CET1 Capital growth in the year. Capital management funding activities during the year included the common share issuance of $521 million under the dividend reinvestment plan and from stock option exercises.
Tier 1 and Tier 2 Capital
Tier 1 Capital was $49 billion as at October 31, 2016, consisting of CET1 Capital and Additional Tier 1 Capital of $42 billion and $7 billion, respectively. Tier 1 Capital management activities during the year consisted of the issuance of $700 million non-cumulative Rate Reset Preferred Shares, Series 12 and $1 billion non-cumulative Rate Reset Preferred Shares, Series 14, both of which included NVCC Provisions to ensure loss absorbency at the point of non-viability.
Tier 2 Capital was $12 billion as at October 31, 2016. Tier 2 Capital management activities during the year consisted of the issuance of $1.25 billion 4.859% subordinated debentures due March 4, 2031, and US$1.5 billion 3.625% subordinated debentures due September 15, 2031, both of which included NVCC Provisions to ensure loss absorbency at the point of non-viability, and the redemption of $1 billion 3.367% subordinated debentures due November 2, 2020. On October 27, 2016, the Bank announced its intention to redeem $2.25 billion 4.779% subordinated debentures due December 14, 2105 on December 14, 2016.
INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS The Bank’s Internal Capital Adequacy Assessment Process (ICAAP) is an integrated enterprise-wide process that encompasses the governance, management, and control of risk and capital functions within the Bank. It provides a framework for relating risks to capital requirements through the Bank’s capital modeling and stress testing practices which help inform the Bank’s overall CAR.
The ICAAP is led by Risk Management and is supported by numerous functional areas who together help assess the Bank’s internal capital adequacy. This assessment ultimately represents the capacity to bear risk in congruence with the Bank’s risk profile and RAS. Risk Management alongside Enterprise Capital Management 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, 2016, the quarterly dividend was $0.55 per share, consistent with the Bank’s current target payout range of 40% to 50% of adjusted earnings. Cash dividends declared and paid during the year totalled $2.16 per share (2015 – $2.00). For cash dividends payable on the Bank’s preferred shares, refer to Note 21 of the 2016 Consolidated Financial Statements. As at October 31, 2016, 1,857 million common shares were outstanding (2015 – 1,855 million). The Bank’s ability to pay dividends is subject to the requirements of the Bank Act (Canada) (the “Bank Act”) and OSFI. Refer to Note 21 of the 2016 Consolidated Financial Statements for further information on dividend restrictions.
NORMAL COURSE ISSUER BID
On December 9, 2015, the Bank announced that the Toronto Stock Exchange and OSFI approved the Bank’s normal course issuer bid (NCIB) to repurchase for cancellation up to 9.5 million of the Bank’s common shares. During the year ended October 31, 2016, the Bank completed its share repurchase under the NCIB and repurchased 9.5 million common shares at an average price of $51.23 per share for a total amount of $487 million.
RISK-WEIGHTED ASSETS
Based on Basel III, RWA are calculated for each of credit risk, market risk, and operational risk. Details of the Bank’s RWA are included in the following table.
T ABLE 41
COMMON EQUITY TIER 1 CAPITAL RISK-WEIGHTED ASSETS1
(millions of Canadian dollars)
Credit risk2 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 Trading book
Operational risk3 Regulatory floor
Total 1
2
$ 29,563 $ 28,726 18,965 43,288
12,586 60,976
169,559 150,497 5,139 9,087
4,071
16,161 789
11,412 13,074 866
292,551 282,208 8,515
6,347 39,230
12,211 48,001 5,336
40,032 340,296 328,587
12,655 41,118 –
$ 405,844 $ 382,360
Each capital ratio has its own RWA measure due to the OSFI-prescribed scalar for inclusion of the CVA. The scalar for inclusion of CVA for CET1, Tier 1 and Total Capital RWA are 64%, 71%, and 77%, respectively.
Effective the third quarter of 2016, the majority of U.S. Retail’s retail portfolio credit risk RWA are calculated using the AIRB approach. Prior to the third quarter of 2016, RWA were calculated using the Standardized Approach.
3
Effective the third quarter of 2016, operational risk RWA is calculated using a combination of the Advanced Measurement Approach (AMA) and the Standardized Approach (TSA). Prior to the third quarter of 2016, RWA were calculated using TSA.
As at
October 31 October 31 2016
2015
60 TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS
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