TD Bank 2001 Annual Report Download - page 27

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HOW WE PERFORMED IN 2001
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATING PERFORMANCE
Business and government loans
We also establish industry and group limits for credit exposure
to businesses and governments. We use a systematic approach
to set and communicate risk guidelines for each industry in our
loan portfolio. These guidelines are based on a risk assessment
of the industry. We have identified 26 major industry groups and
divided them into 110 segments. We assign a risk rating to each
industry segment on a scale of one to six.
Our analysis focuses on key risks inherent in a given industry,
such as its cycles, exposure to technological change, political
influence, regulatory change or barriers to entry. If we believe
that several industry segments are affected by common risk
factors, we assign a single exposure guideline to them. Group
Risk Management conducts ongoing reviews of industry risk
ratings and segmentation.
We assign each business or government borrower a risk rating
using our 21-category rating system. We set limits on credit
exposure to related business or government accounts based on
these ratings. In addition, we use a Risk Adjusted Return on
Capital model to assess the return on credit relationships in
relation to the structure and maturity of the loans and internal
ratings of the borrowers. We review the rating and return on
capital for each borrower every year.
For accounts where exposures include derivatives that are
traded over the counter, we use master netting agreements or
collateral wherever possible to reduce our exposure.
Financial institutions
Our financial institutions portfolio is divided into eight major
groups. Individual companies in each group have similar
attributes and common risk factors. We have developed specific
exposure guidelines for 21 segments within these groups. Group
Risk Management conducts ongoing reviews of the segment and
exposure guidelines for each group.
We assign each group a risk rating using our six-category
rating system. These ratings are based on the strength of each
firm’s parent institution. We assign each group a credit rating
based on each firm’s net worth, the quality of its assets, the
consistency and level of its profits, as well as the ratings of the
major credit rating agencies. We may use additional criteria for
certain types of financial institutions.
Personal credit
We use credit-scoring models to grant credit and manage
accounts. These tools allow us to make consistent and objective
decisions and manage accounts based on statistically proven
methods. This helps to ensure that our consumer portfolios
perform at acceptable levels of return and within prescribed
risk tolerances.
We have centralized the granting of personal credit and use
automated scoring processes wherever possible to make sure
that credit underwriting is objective and controlled.
Classified risk
Classified risk refers to loans and other credit exposures that
pose a higher credit risk than normal, based on our standards.
A loan is classified as impaired when, in management’s
opinion, we can no longer be reasonably assured that we will be
able to collect the full amount of the principal and interest when
it is due.
We establish specific provisions for impaired loans when a
loss is likely or when the estimated value of the loan is less
than its recorded value, based on discounting expected future
cash flows.
Provisions for our personal credit portfolios are based on
delinquency and type of security.
See Supplementary information page 38, table 12
See Notes to consolidated financial statements page 46, note 1, (g) & (h)
See Notes to consolidated financial statements page 50, note 3
General allowances
We have established general allowances for credit losses based
on the credit risk of items that have not yet been specifically
identified. We increased our general allowance for loan losses to
$1,141 million at October 31, 2001 from $836 million at the
end of fiscal 2000. We also had a reserve for certain derivative
financial instruments of $34 million such that general
allowances totalled $1,175 million at October 31, 2001. This
represented .92% of risk-weighted assets of which $1,112
million qualifies as Tier 2 capital, equal to .875% of risk
weighted assets under guidelines issued by the Office of the
Superintendent of Financial Institutions Canada.
Provision for credit losses
The provision for credit losses is the amount added to the
allowance for credit losses to bring it to a level that management
considers adequate to absorb all probable credit-related losses
in the loan portfolio.
The deterioration in the North American economic
environment in 2001 resulted in an increase in our provision
for credit losses, excluding the $300 million special addition to
the general allowance, from $480 million in 2000 to $620 mil-
lion in 2001. This level of specific provision represents .48%
of net average loans and customer’s liability under acceptances
compared to .39% in the prior year. During the year, TD
increased the general allowance for credit losses by $300 mil-
lion. The increase was based on an assessment of business and
economic conditions, historical and expected loss experience,
loan portfolio composition and other relevant indicators.
See Supplementary information page 39, table 14
Net impaired loans
The level of net impaired loans is a key measure of credit risk.
It is the gross amount of impaired loans less total allowances for
credit losses.
For the fifth year in a row, allowances continued to exceed
impaired loans, resulting in excess allowances of $(53) million
in 2001 compared to the 2000 level of $(159) million.
See Supplementary information page 38, table 12