TD Bank 2006 Annual Report Download - page 56

TD BANK FINANCIAL GROUP ANNUAL REPORT 2006 Management’s Discussion and Analysis
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$328 million from the dividend reinvestment plan and
$70 million related to the acquisition of VFC. The Bank also
repurchased four million common shares at a cost of $264 mil-
lion in 2006 through a normal course issuer bid. The Bank
issued $425 million of First Preferred Shares, Series O, and
redeemed all 16,065 First Preferred Shares, Series I during the
year. See Notes 12 and 13 to the Bank’s Consolidated Financial
Statements for more details.
Tier 2 Capital
The Bank redeemed two subordinated debentures during the
year, the first for $150 million and the second for $800 million.
The Bank also issued three new subordinated debentures: one
Tier 2A qualifying note for $800 million, and two Tier 2B issues
for $1billion and $500 million, respectively. See Note 11 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 twice
and as at October 31, 2006, the quarterly dividend was $.48 per
share, consistent with the Bank’s current target payout range of
35-45% of adjusted earnings. Cash dividends declared and paid
during 2006 totalled $1.78 per share (2005 – $1.58; 2004 –
$1.36). As at October 31, 2006, 717.4 million common shares
were outstanding (2005 – 711.8 million; 2004 – 655.9 million).
The Bank’s ability to pay dividends is subject to the Bank Act and
the regulations of the OSFI. Note 13 to the Bank’s Consolidated
Financial Statements provides further details.
RATINGS
In October,2006 Dominion Bond Rating Service (DBRS) upgraded
the Bank’s long-term senior debt rating to AA. Both Standard &
Poor’s (S&P) and Moody’s Investors Service (Moody’s) modified
their outlooks for the Bank’srating to positive from stable during
the year. As at October, 2006, the Bank’s long-term ratings were:
Fitch (AA-), Moody’s (Aa3), DBRS (AA) and S&P (A+).
CAPITAL RATIOS
Capital ratios are measures of financial strength and flexibility.
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 as follows:
•The Tier 1 capital ratio is defined as Tier 1 capital divided
by risk-weighted assets (RWA). OSFI has established a target
Tier 1 capital requirement of 7%.
•The total capital ratio is defined as total regulatory capital
divided by RWA. OSFI has established a target total capital
requirement of 10%.
The Bank’s Tier 1 and total capital ratios were 12.0% and
13.1%, respectively, on October 31, 2006, compared with
10.1% and 13.2% on October 31, 2005. The year-over-year
change was influenced by several factors, including growth in
capital as described above, and increases in RWA (most notably
from TD Banknorth’s acquisition of Hudson). The Bank’s invest-
ment in TD Ameritrade is deducted from total capital, which has
amaterial impact on the total capital ratio. The Bank exceeded
its medium-term target for Tier 1 capital of 8–8.5%.
OSFI measures the capital adequacy of Canadian banks
according to its instructions for determining risk-adjusted capital,
RWA 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 ade-
quacy and standards of banks engaged in international business.
RISK-WEIGHTED ASSETS
Risk-weighted assets (RWA) 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. RWA also include an amount for the market risk
exposure associated with the Bank’s trading portfolio. The Bank’s
total RWA increased by $11.9 billion, or 9.2%, in 2006 from
the prior year.
(millions of Canadian dollars) 2006 2005 2004
Risk- Risk- Risk-
weighted weighted weighted
Balance balance Balance balance Balance balance
Balance sheet assets
Cash resources and other $10,782 $ 1,905 $13,418 $ 2,435 $ 9,038 $ 1,582
Securities 124,458 4,792 108,096 4,955 98,280 4,155
Securities purchased under
reverse repurchase agreements 30,961 1,562 26,375 559 21,888 589
Loans (net) 160,608 91,436 152,243 82,713 123,924 61,251
Customers’ liability under acceptances 8,676 8,676 5,989 5,896 5,507 5,414
Other assets 57,429 8,881 59,089 7,695 52,390 6,208
Total balance sheet assets $392,914 $117,252 $365,210 $104,253 $311,027 $79,199
Off-balance sheet assets
Credit instruments 14,818 13,419 9,031
Derivative financial instruments 6,647 7,201 6,268
Total off-balance sheet assets 21,465 20,620 15,299
Total risk-weighted asset equivalent
–credit risk 138,717 124,873 94,498
–market risk 3,162 5,109 5,808
Total risk-weighted assets $ 141,879 $129,982 $100,306
RISK-WEIGHTED ASSETS
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