TD Bank 2009 Annual Report Download - page 69

TD BANK FINANCIAL GROUP ANNUAL REPORT 2009 MANAGEMENT’S DISCUSSION AND ANALYSIS 65
GROUP FINANCIAL CONDITION
Financial Instruments
As a financial institution, the Bank’s assets and liabilities are substan-
tially composed of financial instruments. Financial assets of the Bank
include, but are not limited to, cash resources, securities, loans and
derivatives, while financial liabilities include deposits, obligations related
to securities sold short, obligations 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 majority of the Bank’s lending portfolio,
non-trading securities, hedging derivatives and financial liabilities. In
accordance with accounting standards related to financial instruments
classified as trading, those designated as trading under the fair value
option, those classified as available-for-sale and all derivatives are
measured at fair value in the Bank’s Consolidated Financial Statements,
with the exception of those available-for-sale securities recorded at
cost. Financial instruments classified as held-to-maturity, loans and
receivables, and other liabilities are carried at amortized cost using
the effective interest method. For details on how fair values of financial
instruments are determined, refer to the “Critical Accounting Estimates”
– Fair Value of Financial Instruments section of this MD&A. 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 of
this MD&A.
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 of which are 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, including those in this MD&A, are,
by their very nature, 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 in the “Caution Regarding Forward-Looking Statements”
section 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’s earnings 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 interest rates,
inflation, fluctuations in the debt and capital markets, government
spending, 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 unemploy-
ment 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 cause business disruptions and/or result in a potential increase in
insurance and liability claims, all of which could adversely affect our
results. Also, the financial markets are generally characterized by exten-
sive
interconnections among financial institutions. As such, defaults
by other financial institutions in Canada, the U.S. or other countries
could adversely affect the Bank.
Currency Rates
Currency rate movements in Canada, the U.S., and other jurisdictions
in which the Bank does business impact the Bank’s financial position (a s
a result of foreign currency translation adjustments) and on the Bank’s
future earnings. For example, if the value of the Canadian dollar rises
against the U.S. dollar, the Bank’s investments and earnings in the
U.S., may be negatively affected, and vice versa. Changes in the value
of the Canadian dollar relative to the U.S. dollar may also affect the
earnings of the Bank’s small business, commercial, and corporate clients
in Canada.
Monetary and Economic Policies
The Bank’s earnings are affected by the economic and monetary policies
of the Bank of Canada, the Federal Reserve System in the U.S., the
U.S. Treasury, the U.S. Federal Insurance Deposit Corporation, and
various other regulatory agencies internationally. The adoption of new
economic or monetary policies by such agencies, changes to existing
policies or changes in the supply of money and the general level of
interest rates can impact the Bank’s profitability. Unintended conse-
quences of new policies or changes to existing ones can also include
the reduction of competition, the increase of uncertainty in markets
and, in jurisdictions outside Canada, the favouring of certain domestic
institutions. A change 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, and their impact on the Bank, are beyond the Bank’s
control and can be difficult to predict or anticipate.
Level of Competition
The Bank currently operates in a highly competitive industry and its
performance is impacted by the level of competition. Customer reten-
tion and attraction of new customers can be influenced by many factors,
such as the quality and pricing of products or services. Deterioration
in these factors or a loss of market share could adversely affect the
Bank’s earnings. In addition, other types of financial institutions, such as
insurance companies, as well as non-financial institutions are increas-
ingly offering products and services traditionally offered by banks. This
type of competition could adversely impact its earnings by reducing
fee and net interest income.
Changes in Laws and Regulations, and Legal Proceedings
Changes to current laws and regulations, including changes in their
interpretation or implementation, and the introduction of new laws
and regulations, could adversely affect the Bank, such as by limiting
the products or services it can provide and increasing the ability of
competitors to compete with its products and services. In particular,
the recent financial crisis resulted in, and could result in further,
unprecedented and considerable change to laws and regulations
applicable to financial institutions and the financial industry. 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 its reputation.