TD Bank 2012 Annual Report Download - page 58

TD BANK GROUP ANNUAL REPORT 2012 MANAGEMENT’S DISCUSSION AND ANALYSIS56
(millions of Canadian dollars) 2012 2011
Credit risk
Retail
Residential secured $ 22,220 $ 19,119
Qualifying revolving retail 12,816 13,436
Other retail 38,175 35,143
Non-retail
Corporate 89,222 78,649
Sovereign 2,827 1,340
Bank 9,969 10,671
Securitization exposures 7,302 6,399
Equity exposures 1,148 1,081
Exposures subject to standardized or IRB approaches 183,679 165,838
Adjustment to IRB RWA for scaling factor 5,012 4,950
Other assets not included in standardized or
IRB approaches 12,589 12,617
Total credit risk 201,280 183,405
Market risk
Trading book 12,033 5,083
Operational risk
Standardized approach 32,562 30,291
Total $ 245,875 $ 218,779
1 Prior to Q1 2012, the amounts are calculated based on Canadian GAAP.
During the year, RWA increased $27.1 billion, primarily due to the
following reasons: the Basel 2.5 changes related to market risk
amendment, closing of the MBNA acquisition in the first quarter
of 2012, and organic growth in the retail and commercial businesses
in both Canada and the U.S.
RISK-WEIGHTED ASSETS
Based on Basel II, RWA are calculated for each of credit risk, market
risk, and operational risk. Operational risk represents the risk of loss
resulting from inadequate or failed internal processes, people and
systems or from external events. The Bank’s RWA were as follows:
RISK-WEIGHTED ASSETS – BASEL II1
TABLE 45
INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS
The Bank’s Internal Capital Adequacy Assessment Process (ICAAP) is an
integrated enterprise wide process that encompasses the governance,
management, and control of risk and capital functions within the Bank.
It provides a framework for relating risks to capital requirements through
the Bank’s economic capital modeling and stress testing practices which
help inform the Bank’s overall capital adequacy requirements.
The ICAAP is facilitated by Risk Management and is supported by
numerous functional areas who together help determine the Bank’s
internal capital adequacy assessment. This assessment ultimately repre-
sents the capacity to bear risk in congruence with the risk profile and
stated risk appetite of the Bank. Risk Management leads the ICAAP and
assesses whether the Bank’s internal view of required capital is appro-
priate for the Bank’s risks. Treasury and Balance Sheet Management
determine the adequacy of the Bank’s available capital in relation to
required capital.
DIVIDENDS
The Bank’s dividend policy is approved by the Board of Directors.
As at October 31, 2012, the quarterly dividend was $0.77 per share,
consistent with the Bank’s current target payout range of 40-50%
of adjusted earnings. Cash dividends declared and paid during 2012
totalled $2.89 per share (2011 – $2.61). For cash dividends payable on
the Bank’s preferred shares, see Notes 18 and 21 to the Consolidated
Financial Statements. As at October 31, 2012, 916.1 million common
shares were outstanding (2011 – 901.0 million). The Bank’s ability to
pay dividends is subject to the Bank Act and the requirements of OSFI.
See Note 21 to the Consolidated Financial Statements for further
details on dividend restrictions.
CAPITAL RATIOS
Capital ratios are measures of financial strength and flexibility.
The Bank’s capital ratios are calculated using OSFI’s guidelines which
are based on the capital adequacy rules included in Basel II. At the
consolidated level, the top corporate entity to which Basel II applies
is The Toronto-Dominion Bank.
OSFI measures the capital adequacy of Canadian banks according to
its instructions for determining risk-adjusted capital, risk-weighted assets
(RWA) and off-balance sheet exposures. 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 regulatory capital divided
by RWA. OSFI has established a target Tier 1 capital ratio of 7%.
• The Total capital ratio is defined as total regulatory capital divided
by RWA. OSFI has established a target Total capital ratio of 10%.
The Bank’s Tier 1 and Total capital ratios were 12.6% and 15.7%,
respectively, on October 31, 2012, compared with 13% and 16%,
respectively, on October 31, 2011. The year-over-year changes were
influenced by several factors, including the increase in RWA partially
offset by the increase in capital described above in Tier 1. As at
October 31, 2012, the Bank exceeded its internal medium-term target
for Tier 1 capital.