TD Bank 2012 Annual Report Download - page 49

TD BANK GROUP ANNUAL REPORT 2012 MANAGEMENT’S DISCUSSION AND ANALYSIS 47
Collectively assessed allowance for incurred but not identified
credit losses
The collectively assessed allowance for incurred but not identified credit
losses is established to recognize losses that management estimates to
have occurred in the portfolio at the balance sheet date for loans not
yet specifically identified as impaired. The level of collectively assessed
allowance for incurred but not identified losses reflects exposures
across all portfolios and categories. The collectively assessed allowance
for incurred but not identified allowance for credit losses is reviewed on
a quarterly basis using credit risk models and management’s judgment.
The allowance level is calculated using the probability of default (PD),
the loss given default (LGD) and the exposure at default (EAD) of the
related portfolios. The PD is the likelihood that a borrower will not be
able to meet its scheduled repayments. The LGD is the amount of the
loss the Bank would likely incur when a borrower defaults on a loan,
which is expressed as a percentage of exposure at default. EAD is the
total amount the Bank expects to be exposed to at the time of default.
For the non-retail portfolio, allowances are estimated using borrower
specific information. 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
collectively assessed allowance for incurred but not identified credit
losses is calculated on a portfolio level and is based on statistical esti-
mates of loss using historical loss and forecasted balances. Recovery
data models are used in the management of Canadian retail portfolios
and are validated against historical experience.
At October 31, 2012 the collectively assessed allowance for incurred
but not identified loan losses was $1,943 million, up from $1,645 million
at October 31, 2011. Excluding debt securities classified as loans
collectively assessed allowance for incurred but not identified loan
losses increased by $292 million, or 20% from the prior year primarily
due to the acquisition of the MBNA Canada credit card portfolio.
The Bank periodically reviews the methodology for calculating the
allowance for incurred but not identified credit losses. As part of this
review, certain revisions may be made to reflect updates in statistically
derived loss estimates for the Bank’s recent loss experience of its credit
portfolios, which may cause the Bank to provide or release amounts
from the allowance for incurred but not identified losses. During the
year ended October 31, 2012, certain refinements, not material indi-
vidually or in aggregate, were made to the methodology, and the
resulting net reduction was included as an item of note. Allowance
for credit losses are more fully described in Note 7 to the Consolidated
Financial Statements.
PROVISION FOR CREDIT LOSSES
The provision for credit losses is the amount charged to income to
bring the total allowance for credit losses, including both counter-
party-specific and collectively assessed allowances, to a level that
management considers adequate to absorb all credit-related losses
in the Bank’s loan portfolio. Provisions in the year are reduced by
any recoveries in the year.
The Bank recorded total provision for credit losses of $1,795 million
in 2012, compared with a total provision of $1,490 million in 2011.
This amount comprised $1,575 million of counterparty-specific and
individually insignificant provisions and $220 million in collectively
assessed incurred but not identified provisions. Total provision for
credit losses as a percentage of net average loans and acceptances
increased to 0.45% from 0.42% in 2011 primarily due to the acquisi-
tion of the MBNA Canada credit card portfolio.
In Canada, residential mortgages, consumer instalment and other
personal loans, and credit cards, required counterparty-specific and
individually insignificant provisions of $731 million, a decrease of
$34 million, or 4%, over 2011. Business and government loans
required counterparty-specific and individually insignificant provisions
of $105 million, an increase of $47 million, or 81%, over 2011.
Business and government counterparty-specific and individually
insignificant provisions were distributed across all industry sectors.
In the U.S., residential mortgages, consumer instalment and other
personal loans, and credit cards, required counterparty-specific and
individually insignificant provisions of $319 million, an increase of
$105 million, or 49%, over 2011. Business and government loans
required counterparty-specific and individually insignificant provisions
of $300 million, an increase of $48 million, or 19%, over 2011. Similar
to impaired loans, business and government counterparty-specific and
individually insignificant provisions were highly concentrated in the real
estate sector. The increase in allowance for credit losses is partially due
to a provision of $54 million related to Superstorm Sandy.
Geographically, 53% of counterparty-specific and individually
insignificant provisions were attributed to Canada and 39% to the
U.S. Canadian counterparty-specific provisions were concentrated
in Ontario, which represented 39% of total counterparty-specific
provisions, down from 43% in 2011. U.S. counterparty-specific provi-
sions were concentrated in New Jersey and New York, representing
6% and 5% of total counterparty-specific provisions, compared to
8% and 4% respectively in 2011.
Table 36 provides a summary of provisions charged to the
Consolidated Statement of Income.
PROVISION FOR CREDIT LOSSES1
TABLE 36
(millions of Canadian dollars) 2012 2011
Provision for credit losses – counterparty-specific
and individually insignificant
Provision for credit losses – counterparty-specific $ 447 $ 421
Provision for credit losses – individually insignificant 1,415 1,298
Recoveries (287) (264)
Total provision for credit losses for counterparty-
specific and individually insignificant 1,575 1,455
Provision for credit losses – incurred but not identified
Canadian Personal and Commercial Banking
and Wholesale Banking 183 –
U.S. Personal and Commercial Banking 37 32
Other – 3
Total provision for credit losses – incurred
but not identified 220 35
Provision for credit losses $ 1,795 $ 1,490
1 Certain comparative amounts have been reclassified to conform with the
presentation adopted in the current year.