TD Bank 2003 Annual Report Download - page 44

TD BANK FINANCIAL GROUP ANNUAL REPORT 2003 • Management’s Discussion and Analysis42
Regulatory capital structure and ratios at year end
(millions of dollars) 2003 2002 2001
Tier 1 capital
Retained earnings $ 8,518 $ 8,292 $ 9,203
Foreign currency translation adjustments (130) 418 450
Common shares 3,179 2,846 2,259
Qualifying preferred shares 1,535 1,328 1,492
Contributed surplus 9––
Non-controlling interest in subsidiaries 1,250 1,119 1,272
Less: goodwill and intangibles in excess of 5% limit (3,035) (4,213) (4,041)
Total Tier 1 capital 11,326 9,790 10,635
Tier 2 capital
Subordinated notes and debentures 5,887 4,343 4,892
Qualifying preferred shares and non-controlling interest in subsidiaries –157 –
General allowance for credit losses included in capital 947 1,056 1,112
Less: amortization of subordinated notes and debentures (241) (357) (545)
Total Tier 2 capital 6,593 5,199 5,459
Investment in unconsolidated subsidiaries/substantial investments 919 870 697
First loss protection 145 159 288
Total regulatory capital $16,855 $13,960 $15,109
Capital ratios
To risk-weighted assets
Tier 1 capital 10.5% 8.1% 8.4%
Total regulatory capital 15.6 11.6 11.9
Assets to capital multiple115.2 18.9 18.3
Managing Capital
Our goals
We want to provide enough capital to maintain the
confidence of investors and depositors, while providing our
common shareholders with a satisfactory return.
Our goals are to:
•Be an appropriately capitalized institution, as defined by
regulatory authorities and compared with our peers.
•Maintain strong ratings.
•Make sure that we have enough capital and the right type
of capital on hand or readily available at a reasonable cost.
•Achieve the lowest overall cost of capital consistent with
preserving the appropriate mix of capital elements.
•Provide a satisfactory return to our common shareholders.
Where capital comes from
Most of our capital comes from common shareholders.
Other sources of capital come from our preferred
shareholders and holders of our subordinated debt.
Who manages our capital
Finance manages capital for the Bank. They’re responsible
for acquiring, maintaining and retiring capital. The Board
of Directors oversees capital management.
Economic capital
The Bank uses in-house models to determine how much
capital is required to cover unexpected loss from market,
credit and operational risks. We refer to this measure as
economic capital and note that it differs from current
regulatory capital because it applies to deposit products as
well as asset products, and it applies to operational as well as
credit and market risk. Regulatory capital is set by regulations
established by the Superintendent of Financial Institutions
Canada (refer to next section).
Within the Bank’s measurement framework, economic
capital covers unexpected loss. Expected loss is considered a
cost of doing business and is included in product pricing.
Economic capital is sufficient to absorb worst case loss
at levels consistent with a AA ratings standard. Unlike rating
agency and regulatory capital measures, economic capital
refers solely to common equity capital. Since losses flow
through the Consolidated Statement of Operations, the
Bank ensures it has sufficient common equity to absorb worst
case loss.
The Bank makes business decisions based on 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
Retained earnings, when adjusted for foreign currency
translation, declined by $322 million during the year. Foreign
exchange adjustments unfavourably affected retained
earnings by $548 million. However, our capital ratios were
favourably affected by foreign currency translation adjustments
to our assets. We raised $333 million of common stock
including $286 million from the dividend reinvestment plan.
In addition, we redeemed US$225 million and $150 million of
our preferred shares and we issued $550 million of preferred
shares during the year.
1Total 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.