TD Bank 2009 Annual Report Download - page 59

TD BANK FINANCIAL GROUP ANNUAL REPORT 2009 MANAGEMENT’S DISCUSSION AND ANALYSIS 55
General Allowance
A general allowance is established to recognize losses that manage-
ment estimates to have occurred in the portfolio at the balance sheet
date for loans not yet specifically identified as impaired. The level of
general allowance reflects exposures across all portfolios and categories.
The general allowance is reviewed on a quarterly basis using credit
risk models. The allowance level is calculated using the probability of
default, the loss given default and the exposure at default. The proba-
bility of default (PD) is the likelihood that a borrower will not be able
to meet its scheduled repayments. The loss given default (LGD) is the
amount of the loss when a default occurs. Exposure at default (EAD) is
the loss when default occurs expressed as a percentage of the exposure.
For the non-retail portfolio and for debt securities classified as loans,
allowances are computed at the borrower level. The LGD is based on
the security of the facility; EAD is a function of the current usage, the
borrower’s risk rating, and the committed amount of the facility. For
the retail portfolio, the general allowance is calculated on a portfolio
level and is based on statistical estimates of loss using historical loss
and recovery data models and forecast balances. Models are validated
against historical experience and are updated at least annually. The
general allowance methodology is approved annually by the Risk
Committee of the Board of Directors.
At October 31, 2009 the general allowance for loan losses was
$1,810 million, up from $1,184 million at October 31, 2008. Excluding
debt securities classified as loans, the general allowance for loan losses
was $1,533 million. The 2009 general allowance for loan losses does
not include the general allowance for off-balance sheet instruments
which effective April 30, 2009 were recorded as other liabilities. These
totalled $271 million as at October 31, 2009. Prior period general
allowance balances which included the allowance for off-balance
sheet instruments have not been restated.
PROVISION FOR CREDIT LOSSES
The provision for credit losses is the amount charged to the specific
and general allowances for credit losses during the year to bring the
total allowance to a level that management considers adequate to
absorb all credit-related losses in the Bank’s loan portfolio. New provi-
sions in the year are reduced by any recoveries.
The Bank recorded total provision for credit losses of $2,480 million
in 2009, compared with a total provision of $1,063 million in 2008.
This amount comprised $1,614 million of specific provisions and
$866 million of general provisions. The addition of debt securities
classified as loans to the credit portfolio in 2009 represented a
$250 million increase in total provision for credit losses, or 10% of
total 2009 provision for credit losses. Total provision for credit losses
as a percentage of net average loans and acceptances increased to
0.97% from 0.5% in 2008, including provisions related to debt
securities classified as loans.
In Canada, residential and personal loans required specific provisions
of $887 million, an increase of $268 million, or 43%, over 2008.
Consumer instalment and other personal loans represented the most
significant portion of this increase. Business and government loans
required specific provisions of $177 million, an increase of $110 million,
or 164%, over 2008. Business and government specific provisions
were distributed across industry sectors. Increased provision for credit
losses in 2009 were due to higher loan volumes and increased credit
card losses in the personal and residential portfolio combined with the
broader effects of the recession across the portfolio.
In the U.S., residential and personal loans required specific provisions
of $215 million, an increase of $132 million, or 159%, over 2008.
Consumer instalment and other personal loans represented the most
significant portion of this increase. Business and government loans
required specific provisions of $288 million, an increase of $123 million,
or 75%, over 2008. Similar to impaired loans, business and govern-
ment specific provisions were highly concentrated in the real estate
sector. Increased provisions for credit losses in 2009 were due to
continued weakness in the real estate sector and the broader effects
of the recession across the portfolio.
Geographically, 66% of specific provisions were attributed to Canada
and 31% to the U.S. The balance of 2.7% resulted from debt securities
classified as loans and 0.2% from provisions attributed to other inter-
national. Canadian specific provisions were concentrated in Ontario,
which represented 51% of total specific provisions, down from 56%
in 2008. U.S. specific provisions were concentrated in New Jersey and
New York, representing 6.8% and 5.6% of total specific provisions,
down from 6.9% and 6.1% respectively in 2008.
Table 29 provides a summary of provisions charged to the Consoli-
dated
Statement of Income.
PROVISION FOR CREDIT LOSSES
TABLE 29
(millions of Canadian dollars) 2009 2008 2007
Net new specifics (net of reversals)1$ 1,723 $ 1,058 $ 778
Recoveries (109) (124) (135)
Total specific provision 1,614 934 643
Change in general allowance
VFC 90 65 47
U.S. Personal and Commercial Banking 521 63 15
Canadian Personal and Commercial Banking
(excluding VFC) and Wholesale Banking 255 – (60)
Other –1–
Total general provision 866 129 2
Total provision for credit losses $ 2,480 $ 1,063 $ 645
1Includes net new specific PCL of $44 million and general PCL of $206 million
related to debt securities classified as loans.