TD Bank 2003 Annual Report Download - page 45

TD BANK FINANCIAL GROUP ANNUAL REPORT 2003 • Management’s Discussion and Analysis 43
In fiscal 2003, goodwill and net intangibles (above 5%
of gross Tier 1 capital), which are deducted from capital for
regulatory purposes, decreased by $1,178 million as the
result of the recognition of goodwill impairment of $624
million and the amortization of intangibles of $491 million,
net of tax. The decrease was also favourably affected by
foreign currency translation adjustments, but partially offset
by the $126 million of new intangibles arising from the
acquisition of Laurentian Bank branches.
Tier 2 capital
Actions taken to manage our capital during the year included
maturing US$75 million and $100 million of debentures
and issuing $1.9 billion of replacement subordinated medium
term notes. The increases in Tier 2 capital, combined with
higher Tier 1 capital and lower assets, have resulted in an
improvement to the Bank’s reported assets to capital multiple.
See Notes 10 to 12 to the Bank’s Consolidated Financial
Statements for more details.
Dividends
The Bank’s dividend policy is approved by the Board of
Directors. During the year, the Bank increased its quarterly
dividend to 32 cents per share, which is consistent with its
target payout range of 35-45%. The Bank’s ability to pay
dividends is subject to the Bank Act and the regulations of
the Superintendent of Financial Institutions Canada. Note 12
of the Bank’s Consolidated Financial Statements provides
further details.
Ratings
In December 2002, Standard & Poor’s (S&P) announced that
it had downgraded the senior debt rating of the Bank from
AA- to A+. S&P cited concerns about weaker profitability and
capital levels combined with deteriorating credit quality. In
February 2003, Moody’s Investors Service changed its rating
outlook on the Bank’s Aa3 rated senior debt from negative to
stable. The confirmation of our rating by Moody’s, combined
with a lower risk profile in businesses which are ratings
sensitive, have significantly mitigated the impact of the
ratings change on earnings during the year.
Capital ratios
About capital ratios
Capital ratios are measures of financial strength and
flexibility.
The Office of the Superintendent of Financial Institutions
Canada (OSFI) defines two primary ratios to measure capital
adequacy, the Tier 1 capital ratio and the total capital ratio.
OSFI sets target levels for Canadian banks:
•The Tier 1 capital ratio is defined as Tier 1 capital
divided by risk-weighted assets. OSFI has established
a target Tier 1 capital requirement of 7%.
•The total capital ratio is defined as total regulatory
capital divided by risk-weighted assets. OSFI has
established a target total capital requirement of 10%.
Our Tier 1 and total capital ratios were 10.5% and 15.6%,
respectively, on October 31, 2003 compared with 8.1% and
11.6% on October 31, 2002. The principal factors for the
year-over-year increases were the stronger earnings in 2003
combined with successful management of growth in our risk-
weighted assets primarily from reduction in our non-core
loan portfolio. As a result we have exceeded our medium
term target for Tier 1 of 9–9.5%.
OSFI measures the capital adequacy of Canadian banks
according to its instructions for determining risk-adjusted
capital, risk-weighted assets and off-balance sheet exposures.
This approach is based on the Bank for International
Settlements’ (BIS) agreed framework for achieving a more
consistent way to measure the capital adequacy and
standards of banks engaged in international business.
Risk-weighted assets
Risk-weighted assets are determined by applying OSFI
prescribed risk-weights to balance sheet assets and off-balance
sheet financial instruments according to credit risk of the
counterparty. Risk-weighted assets also include an amount for
the market risk exposure associated with our trading portfolio.
Our total risk-weighted assets decreased by $12 billion or
10% in 2003. Total risk-weighted assets decreased as a result
of our ongoing management of risk-weighted assets across
all of our businesses, together with translation of our foreign
currency assets based on the stronger Canadian currency.
We review balance sheet and off-balance sheet exposures
when assessing risk.
See Managing risk page 33 and Off-balance sheet arrangements page 15
Proposed accounting changes
Proposed Variable Interest Entity (VIE) accounting rules may
require the Bank to consolidate additional assets onto its
balance sheet. The rule change is currently scheduled for
implementation in fiscal 2005. See Note 26 of the Bank’s
Consolidated Financial Statements for more details.
Accounting changes to the Canadian Institute of
Chartered Accountants’Handbook Section 3860, Financial
Instruments – Disclosure and Presentation, if implemented as
currently drafted, may have the effect of classifying both
the Bank’s preferred shares and innovative Tier 1 capital as
liabilities. Such an accounting recategorization could result in
the disallowance of the Bank’s preferred shares and innovative
instruments for regulatory capital purposes. In the absence
of grandfathering of the existing capital instruments by the
Superintendent of Financial Institutions Canada, the Bank's
capital ratios could be significantly affected.