TD Bank 2007 Annual Report Download - page 58

TD BANK FINANCIAL GROUP ANNUAL REPORT 2007 Management’s Discussion and Analysis54
TABLE 31 CAPITAL STRUCTURE AND RATIOS
(millions of Canadian dollars, except percentage amounts) 2007 2006 2005
Tier 1 capital
Retained earnings $ 15,954 $ 13,725 $ 10,650
Unrealized foreign currency translation losses on investments in subsidiaries, net of hedging activities (2,073)(918)(696)
Common shares 6,577 6,334 5,872
Additional adjustment for dealer holding TD Bank shares –(78)(29)
Qualifying preferred shares 974 1,319 895
Contributed surplus 119 66 40
Qualifying non-controlling interests in subsidiaries 22 2,395 1,632
Innovative instruments 1,740 1,250 1,250
Less: goodwill and intangibles in excess of 5% limit (7,668)(7,014)(6,508)
Total Tier 1 capital 15,645 17,079 13,106
Tier 2 capital
Subordinated notes and debentures 9,449 6,900 5,138
General allowance for credit losses included in capital 1,092 1,145 1,137
Less: amortization of non-qualifying subordinated notes and debentures and other (163)(182)(39)
Accumulated net after tax unrealized gain on available-for-sale securities in other comprehensive income 354 – –
Total Tier 2 capital 10,732 7,863 6,236
Investment in regulated insurance subsidiaries (1,440)(1,262)(1,043)
Substantial investments in unconsolidated subsidiaries (5,088)(5,065)(1,072)
First loss protection (55)(53)(44)
(6,583)(6,380)(2,159)
Total regulatory capital $ 19,794 $ 18,562 $ 17,183
Regulatory capital ratios
Tier 1 capital 10.3%12.0%10.1%
Total capital 13.0 13.1 13.2
Assets to capital multiple119.7 19.9 19.9
Tangible common equity $ 11,315 $ 12,938 $ 9,567
Tangible common equity as a percentage of risk-weighted assets 7.4%9.1%7.4%
1 Total assets plus off-balance sheet credit instruments, such as letters of
credit and guarantees, less investments in associated corporations and
goodwill and net intangibles divided by total regulatory capital.
THE BANK’S GOALS ARE TO:
• Provide sufficient capital to maintain the confidence of
investors and depositors, while providing the Bank’s common
shareholders with a satisfactory return.
• Be an appropriately capitalized institution, as measured
internally, defined by regulatory authorities and compared
with the Bank’s peers.
• Achieve the lowest overall cost of capital consistent with
preserving the appropriate mix of capital elements to meet
target capitalization levels.
• Maintain strong ratings with rating agencies.
CAPITAL SOURCES
The Bank’s capital is primarily derived from common sharehold-
ers and retained earnings. Other sources of capital include the
Bank’s preferred shareholders, holders of hybrid capital instru-
ments and holders of the Bank’s subordinated debt.
CAPITAL MANAGEMENT
Group Finance manages capital for the Bank and is responsible
for acquiring, maintaining and retiring capital. The Board of
Directors oversees capital policy and management.
ECONOMIC CAPITAL
The Bank’s internal measure of required capital is called eco-
nomic capital or invested capital. Economic capital comprises
risk-based capital required to fund losses that could occur under
extremely adverse economic or operational conditions, and
investment capital that has been used to fund acquisitions or
investments in fixed assets.
The Bank uses internal models to determine how much risk-
based capital is required for credit, market, trading, banking
book interest rate, operational, business and other identified
risks. Risk-based capital differs from regulatory capital because
it applies to deposit products, as well as asset products, and it
applies to operational and insurance risks, as well as credit and
market risks. Regulatory capital is set by regulations established
by the Superintendent of Financial Institutions Canada (OSFI).
Within the Bank’s measurement framework, our objective
is to hold risk-based capital to cover unexpected losses to a
high level of confidence and ratings standards. Since losses
flow through to the Consolidated Statement of Income,
the Bank ensures it has sufficient common equity to absorb
worst-case losses.
The Bank makes business decisions based on the return
on economic capital, while also ensuring that, in aggregate,
regulatory and rating agency requirements and capital available
are kept in balance.
REGULATORY CAPITAL
Tier 1 Capital
Tier 1 capital was $15.6 billion at October 31, 2007, down
from $17.1 billion last year. The decrease was largely due to
the privatization of TD Banknorth as a result of the exclusion
of non-controlling interests and foreign currency transaction
GROUP FINANCIAL CONDITION
Capital Position