TD Bank 2014 Annual Report Download - page 52

TD BANK GROUP ANNUAL REPORT 2014 MANAGEMENT’S DISCUSSION AND ANALYSIS50
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 esti-
mates 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 expo-
sures across all portfolios and categories. The collectively assessed
allowance for incurred but not identified 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 and
structure 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 pooled portfolio level with
each pool comprising exposures with similar credit risk characteristics
segmented, for example by product type and PD estimate. Recovery
data models are used in the determination of the LGD for each pool.
EAD is a function of the current usage and historical exposure experi-
ence at default.
As at October 31, 2014 the collectively assessed allowance for
incurred but not identified credit losses was $2,505 million, up from
$2,328 million as at October 31, 2013. Excluding debt securities
classified as loans, the collectively assessed allowance for incurred
but not identified credit losses increased by $216 million, or 10%
from the prior year.
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. Allowance
for credit losses are further described in Note 8 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 incurred credit-related
losses in the Bank’s loan portfolio. Provisions in the year are reduced
by any recoveries in the year.
The Bank recorded a total provision for credit losses of $1,557 million
in 2014, compared with a total provision of $1,631 million in 2013.
This amount comprised $1,484 million of counterparty-specific and
individually insignificant provisions and $73 million in collectively
assessed incurred but not identified provisions. The total provision for
credit losses as a percentage of net average loans and acceptances
decreased to 0.33% from 0.38% in 2013 largely due to improved
credit quality in the Canadian personal and U.S. commercial portfolios.
In Canada, residential mortgages, consumer instalment and other
personal loans, and credit cards, required counterparty-specific and
individually insignificant provisions of $789 million, a decrease of
$76 million, or 9%, compared to 2013. Business and government
loans required counterparty-specific and individually insignificant provi-
sions of $84 million, an increase of $10 million, or 14%, compared to
2013. 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 $562 million, an increase of
$226 million, or 67%, compared to 2013, primarily due to acquisition
of the Target credit card portfolio. Business and government loans
required counterparty-specific and individually insignificant provisions
of $20 million, a decrease of $124 million, or 86%, compared to 2013
primarily due to improved credit performance in the real estate and
financial sectors.
Geographically, 59% of counterparty-specific and individually insig-
nificant provisions were attributed to Canada and 39% to the U.S.
in 2014. Canadian counterparty-specific and individually insignificant
provisions were concentrated in Ontario, which represented 46% of
total counterparty-specific and individually insignificant provisions,
down from 50% in 2013. U.S. counterparty-specific and individually
insignificant provisions were concentrated in New England and New
Jersey, representing 10% and 7%, respectively, of total counterparty-
specific and individually insignificant provisions, up from 8% and 5%
respectively in 2013.
The following table provides a summary of provisions charged to the
Consolidated Statement of Income.
(millions of Canadian dollars) 2014 2013 2012
Provision for credit losses – counterparty-specific and individually insignificant
Provision for credit losses – counterparty-specific $ 168 $ 231 $ 447
Provision for credit losses – individually insignificant 1,849 1,644 1,415
Recoveries (533) (394) (287)
Total provision for credit losses for counterparty-specific and individually insignificant 1,484 1,481 1,575
Provision for credit losses – incurred but not identified
Canadian Retail and Wholesale Banking 8 (53) 183
U.S. Retail 65 203 37
Other – – –
Total provision for credit losses – incurred but not identified 73 150 220
Provision for credit losses $ 1,557 $ 1,631 $ 1,795
PROVISION FOR CREDIT LOSSES
TABLE 34