TD Bank 2003 Annual Report Download - page 83

TD BANK FINANCIAL GROUP ANNUAL REPORT 2003 • Financial Results 81
Concentration of credit exists where a number of borrowers or
counterparties are engaged in similar activities, are located in the
same geographic area or have comparable economic characteris-
tics. Their ability to meet contractual obligations may be similarly
affected by changing economic, political or other conditions.
On-balance sheet assets
The percentage of total loans outstanding by geographic location
of borrowers was as follows at September 30.
2003 2002
Canada190% 83%
United States 712
Other countries 35
1The largest concentration in Canada is Ontario at 55% (2002 – 53%).
No single industry segment accounted for more than 5% of the
total loans and customers’ liability under acceptances.
(c) The Bank and its subsidiaries are involved in various legal
actions in the ordinary course of business, many of which are
loan-related. In management’s opinion, the ultimate disposition
of these actions, individually or in the aggregate, will not have
a material adverse effect on the financial condition of the Bank.
(d) In the ordinary course of business, securities and other
assets are pledged against liabilities. As at October 31, 2003
securities and other assets with a carrying value of $20 billion
(2002 – $23 billion) were pledged in respect of securities
sold short or under repurchase agreements. In addition, as at
October 31, 2003, assets with a carrying value of $3 billion (2002
– $2 billion) were deposited for the purposes of participation in
clearing and payment systems and depositories or to have access
to the facilities of central banks in foreign jurisdictions, or as
security for contract settlements with derivative exchanges or
other derivative counterparties.
(e) In the ordinary course of business, the Bank agrees to lend
unpaid customer securities, or its own securities, to borrowers on
a fully collateralized basis. Securities lent at October 31, 2003
amounted to $4 billion (2002 – $4 billion).
(f) As of February 1, 2003, the Bank prospectively adopted the
new accounting guideline on disclosure of guarantees. A guaran-
tee is defined to be a contract that contingently requires the
Bank to make payments to a third party based on (i) changes
in an underlying interest rate, foreign exchange rate, equity or
commodity instrument, index or other variable, that is related
to an asset, a liability or an equity security of the counterparty,
(ii) failure of another party to perform under an obligating
agreement, or (iii) failure of another third party to pay its
indebtedness when due.
Significant guarantees that the Bank has provided to third
parties include the following:
Financial and performance standby letters of credit
Financial and performance standby letters of credit represent
irrevocable assurances that the Bank will make payments in the
event that a customer cannot meet its obligations to third parties
and they carry the same credit risk, recourse and collateral securi-
ty requirements as loans extended to customers. Generally, the
terms of these letters of credit do not exceed four years.
Assets sold with recourse
In connection with certain asset sales, the Bank typically makes
representations about the underlying assets in which the Bank
may have an obligation to repurchase the assets or indemnify the
purchaser against any loss. The term of these guarantees does
not exceed four years.
Credit enhancements
The Bank guarantees payments to counterparties in the event
that third party credit enhancements supporting asset pools are
insufficient. The term of these credit facilities ranges from ten to
seventeen years.
Written options
Written options are agreements under which the Bank grants
the buyer the future right, but not the obligation, to sell/buy at
or by a specified date, a specific amount of a financial instrument
at a price agreed when the option is arranged and which can be
physically or cash settled.
Written options can be used by the counterparty to hedge for-
eign exchange, equity, credit, commodity and interest rate risks.
The Bank does not track, for accounting purposes, whether its
clients enter into these derivative contracts for trading or hedging
purposes and has not determined if the guaranteed party has the
asset or liability related to the underlying. Accordingly, the Bank
cannot ascertain which contracts are ”guarantees” under the
definition contained in the accounting guideline. The Bank
employs a risk framework to define risk tolerances and establish-
es limits designed to ensure that losses do not exceed acceptable,
predefined limits. Due to the nature of these contracts, the Bank
cannot make a reasonable estimate of the potential maximum
amount payable to the counterparties. The total notional princi-
pal amount of the written options as at October 31, 2003 is
$114 billion.
Indemnification agreements
In the normal course of operations, the Bank provides indemnifi-
cation agreements to various counterparties in transactions such
as service agreements, leasing transactions, and agreements
relating to acquisitions and dispositions. We also indemnify direc-
tors and officers, to the extent permitted by law, against certain
claims that may be made against them as a result of their services
to the Bank. Under these agreements, the Bank is required to
compensate counterparties for costs incurred as a result of
various contingencies such as changes in laws and regulations
and litigation claims. The nature of the indemnification agree-
ments prevents the Bank from making a reasonable estimate of
the maximum potential amount that the Bank would be required
to pay such counterparties.
The table below summarizes at October 31, 2003, the maxi-
mum potential amount of future payments that could be made
under the guarantee agreements without consideration of
possible recoveries under recourse provisions or from collateral
held or pledged.
(millions of dollars)
Financial and performance standby letters of credit $6,275
Assets sold with recourse 1,887
Credit enhancements 130
$8,292
NOTE 20 Concentration of credit risk