TD Bank 2007 Annual Report Download - page 63

TD BANK FINANCIAL GROUP ANNUAL REPORT 2007 Management’s Discussion and Analysis 59
As a financial institution, the Bank’s assets and liabilities are
substantially composed of financial instruments. Financial assets
of the Bank include, but are not limited to, cash resources,
securities, loans and derivatives, while financial liabilities include
deposits, obligations related to securities sold short, obligations
related to securities sold under repurchase agreements, deriva-
tive instruments and subordinated debt.
The Bank uses financial instruments for both trading and
non-trading activities. The Bank typically engages in trading
activities by the purchase and sale of securities to provide
liquidity and meet the needs of clients and, less frequently, by
taking proprietary trading positions with the objective of earn-
ing a profit. Trading financial instruments include trading securi-
ties and trading derivatives. Non-trading financial instruments
include the majority of the Bank’s lending portfolio, non-trading
In addition to the risks described in the Managing Risk section,
there are numerous other risk factors, many beyond our con-
trol, that could cause our results to differ significantly from our
plans, objectives and estimates. Some of these factors are
described below. All forward-looking statements, by their very
nature, including those in this MD&A, are subject to inherent
risks and uncertainties, general and specific, which may cause
the Bank’s actual results to differ materially from the expecta-
tions expressed in the forward-looking statements. Some of
these factors are discussed below and others are noted on the
Caution Regarding Forward-Looking Statements on page 13 of
this MD&A.
INDUSTRY FACTORS
General Business and Economic Conditions in the Regions
in Which We Conduct Business
The Bank operates in Canada, the U.S. and other countries.
As a result, the Bank’s earnings are significantly affected by the
general business and economic conditions in the geographic
regions in which it operates. These conditions include short-
term and long-term interest rates, inflation, fluctuations in the
debt and capital markets, exchange rates, the strength of the
economy, threats of terrorism and the level of business con-
ducted in a specific region. For example, in an economic down-
turn characterized by higher unemployment and lower family
income, corporate earnings, business investment and consumer
spending, the demand for our loan and other products would
be adversely affected and the provision for credit losses would
likely increase, resulting in lower earnings. Similarly, a natural
disaster could result in a potential increase in claims which
could adversely affect our results.
Currency Rates
Currency rate movements in Canada, the U.S. and other juris-
dictions in which the Bank does business may have an adverse
impact on the Bank’s financial position as a result of foreign
currency translation adjustments and on the Bank’s future earn-
ings. For example, the rising value of the Canadian dollar may
negatively affect our investments and earnings in the U.S.,
including the Bank’s investment in TD Ameritrade Holding
GROUP FINANCIAL CONDITION
Financial Instruments
RISK FACTORS AND MANAGEMENT
Risk Factors That May Affect
Future Results
securities, hedging derivatives and financial liabilities. Effective
November 1, 2006, the Bank adopted new accounting stan-
dards for financial instruments on a prospective basis. Under
these new standards financial instruments classified as trading,
those designated as trading under the fair value option, those
classified as available for sale and all derivatives are measured
at fair value in the Bank’s Consolidated Financial Statements.
Financial instruments classified as held to maturity, loans and
receivables and other liabilities are carried at amortized cost
using the effective interest method. For details on how fair
values of financial instruments are determined, refer to the
Critical Accounting Estimates section on page 70. The use of
financial instruments allows the Bank to earn profits in interest
and fee income. Financial instruments also create a variety of
risks which the Bank manages with its extensive risk manage-
ment policies and procedures. The key risks include interest
rate, credit, liquidity, equities and foreign exchange risks. For
a more detailed description on how the Bank manages its risk,
refer to the Managing Risk section on pages 60 to 70.
Corporation. The rising Canadian dollar may also adversely
affect the earnings of the Bank’s small business, commercial
and corporate clients in Canada.
Monetary Policy
The Bank’s earnings are affected by the monetary policies of the
Bank of Canada and the Federal Reserve System in the U.S. and
other financial market developments. Changes in the supply of
money and the general level of interest rates can impact the
Bank’s profitability. A change in the level of interest rates affects
the interest spread between the Bank’s deposits and loans and
as a result impacts the Bank’s net interest income. Changes in
monetary policy and in the financial markets are beyond the
Bank’s control and difficult to predict or anticipate.
Level of Competition
The Bank’s performance is impacted by the level of competition
in the markets in which it operates. The Bank currently operates
in a highly competitive industry. Customer retention can be
influenced by many factors, such as the pricing of products or
services, changes in customer service levels and changes in
products or services offered.
Changes in Laws and Regulations, and Legal Proceedings
Changes to laws and regulations, including changes in their
interpretation or implementation, could affect the Bank by lim-
iting the products or services it can provide and increasing the
ability of competitors to compete with its products and services.
Also, the Bank’s failure to comply with applicable laws and reg-
ulations could result in sanctions and financial penalties that
could adversely impact its earnings and damage the Bank’s rep-
utation. Judicial or regulatory judgments and legal proceedings
against the Bank may also adversely affect its results.
Accuracy and Completeness of Information on Customers
and Counterparties
In deciding whether to extend credit or enter into other trans-
actions with customers and counterparties, the Bank may rely
on information furnished by them, including financial state-
ments and other financial information. The Bank may also rely
on the representations of customers and counterparties as to
the accuracy and completeness of that information. The Bank’s
financial condition and earnings could be negatively impacted
to the extent it relies on financial statements that do not comply
with GAAP, that are materially misleading, or that do not fairly
present, in all material respects, the financial condition and
results of operations of the customers and counterparties.