TD Bank 2014 Annual Report Download - page 62

TD BANK GROUP ANNUAL REPORT 2014 MANAGEMENT’S DISCUSSION AND ANALYSIS60
OSFI continues to require Canadian banks to meet the assets-to-capital
multiple (ACM) requirement until December 31, 2014, when it will be
replaced by the Basel III leverage ratio. The ACM is calculated on a
Basel III “transitional basis”, by dividing total assets, including specified
off-balance sheet items, by Total Capital.
Capital Position and Capital Ratios
The Basel framework allows qualifying banks to determine capital
levels consistent with the way they measure, manage, and mitigate
risks. It specifies methodologies for the measurement of credit, market,
and operational risks. The Bank uses the advanced approaches for the
majority of its portfolios which results in regulatory and economic
capital being more closely aligned than was the case under Basel I.
Since the U.S. banking subsidiaries (TD Bank, National Association
(TD Bank, N.A.), including South Financial and Chrysler Financial) were
not originally required by their main regulators to convert to Basel II
prior to being acquired by the Bank, the advanced approaches are
not yet being utilized for the majority of assets in TD Bank, N.A.
For accounting purposes, IFRS is followed for consolidation of
subsidiaries and joint ventures. For regulatory capital purposes, insur-
ance subsidiaries are deconsolidated and reported as a deduction from
capital. Insurance subsidiaries are subject to their own capital adequacy
reporting, such as OSFI’s Minimum Continuing Capital Surplus
Requirements and Minimum Capital Test. Currently, for regulatory
capital purposes, all the entities of the Bank are either consolidated
or deducted from capital and there are no entities from which surplus
capital is recognized.
Some of the Bank’s subsidiaries are individually regulated by either
OSFI or other regulators. Many of these entities have minimum capital
requirements which they must maintain and which may limit the
Bank’s ability to extract capital or funds for other uses.
The CAR guideline contains two methodologies for capital ratio
calculation: (1) the “transitional” method; and (2) the “all-in” method.
Under the “transitional” method, changes in capital treatment for
certain items, as well as minimum capital ratio requirements, are being
phased in over the period from 2013 to 2019. Under the “all-in”
method, capital is defined to include all of the regulatory adjustments
that will be required by 2019, while retaining the phase-out rules for
non-qualifying capital instruments. The minimum CET1, Tier 1 and
Total Capital ratios, based on the “all-in” method, are 4.5%, 6% and
8%, respectively. OSFI expects Canadian banks to include an additional
capital conservation buffer of 2.5%, effectively raising the CET1 mini-
mum requirement to 7%. Including the capital conservation buffer,
Canadian banks are required to maintain a minimum Tier 1 Capital
ratio of 8.5% and a Total Capital ratio of 10.5%.
At the discretion of OSFI, a countercyclical common equity capital
buffer (CCB) within a range of 0% to 2.5% could be imposed. No CCB
is currently in effect.
As at October 31, 2014, the Bank’s CET1, Tier 1, and Total Capital
ratios were 9.4%, 10.9%, and 13.4%, respectively. Compared with
the Bank’s CET1 Capital ratio of 9.0% as at October 31, 2013, the
October 31, 2014, CET1 Capital ratio increased primarily as a result
of strong retained earnings growth, common share issuance through
participation in the Bank’s dividend reinvestment plan, and exercise
of stock options, partially offset by an increase in RWAs across all busi-
ness segments including $6.2 billion CVA charge within Wholesale
Bank and U.S. Retail segments. The CVA capital add-on charge repre-
sents approximately 32 bps, of which 57% (or 18 bps) is included in
the 2014 CET1 Capital ratio, per OSFI’s determined scalar phase-in.
As at October 31, 2014, CET1, Tier 1, and Total Capital RWA include
57%, 65%, and 77%, of the CVA charge, respectively. During the
year, the Bank generated approximately $4.5 billion of CET1 Capital
through organic growth and balance sheet optimization activities.
In 2014, the Bank was able to fund acquisitions, support business
growth, and improve the Bank’s capital position largely without raising
additional capital.
Common Equity Tier 1 Capital
CET1 Capital was $31 billion as at October 31, 2014. Strong earnings
contributed to the majority of CET1 Capital growth in the year.
Capital management funding activities during the year included the
common share issuance of $538 million under the dividend reinvest-
ment plan and from stock option exercises. The growth in CET1
Capital is partially offset by share repurchases and the impact of
acquisitions during the year.
In November 2011, the BCBS published the final rules on global
systemically important banks (G-SIBs). None of the Canadian banks
have been designated as a G-SIB. In March 2013, OSFI designated six
of the major Canadian banks as D-SIBs, for which a 1% common
equity capital surcharge will be in effect from January 1, 2016. As a
result, the six Canadian banks designated as D-SIBs, including TD, will
be required to meet an “all-in” Pillar 1 target CET1 ratio of 8%
commencing January 1, 2016. In July 2013, the BCBS issued an update
to the final rules on G-SIBs. The update provided clarity on the public
disclosure requirements of the twelve indicators used in the assess-
ment methodology. As per OSFI’s draft Advisory issued February 2014,
the six Canadian banks that have been designated as D-SIBs are also
required by OSFI to publish, at a minimum, the twelve indicators used
in the G-SIB indicator-based assessment framework for 2014 year-end
data by no later than the date of the bank’s first quarter 2015 public
disclosure of shareholder financial data. Public disclosure of data for
year-ends subsequent to 2014 is required no later than the date of the
bank’s annual disclosure of shareholder financial data.
OSFI’s Regulatory Target Ratios under Basel III on an “All-In” Basis
Capital OSFI Regulatory OSFI Regulatory
BCBS Conservation Targets without D-SIB Targets with
Basel III Capital Ratios minimum buffer D-SIB surcharge Effective Date surcharge D-SIB surcharge Effective Date
Common Equity Tier 1
Capital ratio 4.5% 2.5% 7.0% January 1, 2013 1.0% 8.0% January 1, 2016
Tier 1 Capital ratio 6.0 2.5 8.5 January 1, 2014 1.0 9.5 January 1, 2016
Total Capital ratio 8.0 2.5 10.5 January 1, 2014 1.0 11.5 January 1, 2016