TD Bank 2006 Annual Report Download - page 60

TD BANK FINANCIAL GROUP ANNUAL REPORT 2006 Management’s Discussion and Analysis
56
GROUP FINANCIAL CONDITION
Financial Instruments
As a financial institution, the Bank’s assets and liabilities are sub-
stantially comprised of financial instruments. Financial assets of the
Bank include, but are not limited to, cash resources, investment and
trading securities, loans and derivatives while financial liabilities
include deposits, obligations related to securities sold short, obliga-
tions related to securities sold under repurchase agreements,
derivative 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 earning a profit. Trading financial
instruments include trading securities and trading derivatives. Non-
trading financial instruments include the Bank’s lending portfolio,
investment securities, hedging derivatives and financial liabilities.
Trading financial instruments are measured at fair value in the
Bank’s Consolidated Financial Statements while non-trading finan-
cial instruments are carried at cost. This reflects how the Bank
manages its businesses internally. For details on how fair values of
financial instruments are determined, refer to the Critical
Accounting Estimates section on page 67.
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
management 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 57 to 66.
RISK FACTORS AND MANAGEMENT
Risk Factors That May Affect
Future Results
In addition to the risks described in the Managing Risk section,
there are numerous other risk factors, many beyond our control,
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 expectations 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 11 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’searnings 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 inter-
est rates, inflation, fluctuations in the debt and capital markets,
exchange rates, the strength of the economy, threats of terrorism and
the level of business conducted in a specific region. For example, in an
economic downturn 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 jurisdictions
in which the Bank does business may have an adverse impact on the
Bank’sfinancial position as a result of foreign currency translation
adjustments and on the Bank’s future earnings. For example, the
rising value of the Canadian dollar may negatively affect our invest-
ments and earnings in the U.S., including the Bank’s investment in
TD Banknorth Inc. and TD Ameritrade Holding 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.
Achange 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 interpre-
tation or implementation, could affect the Bank by limiting the
products or services it can provide and increasing the ability of com-
petitors to compete with its products and services. Also, the Bank’s
failure to comply with applicable laws and regulations could result in
sanctions and financial penalties that could adversely impact its
earnings and damage the Bank’s reputation. 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
Indeciding whether to extend credit or enter into other transactions
with customers and counterparties, the Bank may rely on information
furnished by them, including financial statements and other financial
information. The Bank may also rely on the representations of cus-
tomers 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.
Accounting Policies and Methods Used by the Bank
The accounting policies and methods the Bank utilizes determine
how the Bank reports its financial condition and results of opera-
tions, and they may require management to make estimates or rely
on assumptions about matters that are inherently uncertain. Such
estimates and assumptions may require revisions, and changes
to them may materially adversely affect the Bank’s results of
operations and financial condition.
BANK SPECIFIC FACTORS
New Products and Services to Maintain or Increase Market
Share
The Bank’s ability to maintain or increase its market share depends, in
part, on its ability to adapt products and services to evolving industry