TD Tier 1 Capital : October 2007

TD has released its Fourth Quarter Report and Supplementary Information; I will analyze this in the same format as was recently done for BMO

Step One is to analyze their Tier 1 Capital, reproducing the summary I prepared last year:

TD Capital Structure
October, 2007
& October 2006
  2007 2006
Total Tier 1 Capital 15,645 17,079
Common Shareholders’ Equity 131.5% 112.0%
Preferred Shares 6.2% 7.7%
Innovative Tier 1 Capital Instruments 11.1% 7.3%
Non-Controlling Interests in Subsidiaries 0.1% 14.0%
Goodwill -49.0% -41.1%

 The change in the “Non-Controlling Interests in Subsidiaries” bears review: TD’s Second Quarter Report advises:

The Bank’s non-controlling interests in subsidiaries as at April 30, 2007 declined $2.4 billion from October 31, 2006 due to the privatization of TD Banknorth in the current quarter.

Next, the issuance capacity (from Part 3 of last year’s series):

Tier 1 Issuance Capacity
October 2007
& October 2006
  2007 2006
Equity Capital (A) 12,931 14,510
Non-Equity Tier 1 Limit (B=A/3) 4,310 4,837
Innovative Tier 1 Capital (C) 1,740 1,250
Preferred Limit (D=B-C) 2,570 3,587
Preferred Y/E Actual (E) 974 1,319
Post Y/E Issuance (F) 250 0
New Issuance Capacity (G=D-E-F) 1,346 2,268
Items A, C & E are taken from the table
“Risk Weighted Assets and Capital”
of the supplementary information;
Note that Item A includes Goodwill and non-controlling interest
Item B is as per OSFI Guidelines
Items D, F & G are my calculations

Items (E) and (F) need a little explanation. The decline in preferreds outstanding is due to the redemption of  $344-million worth of preferred shares issued by TD Mortgage Investment Corporation, mentioned in Note 12 of the 2006 Annual Report. The post-Y/E issuance is TD.PR.P, which settled November 1, subsequent to year-end.

Of the $974-million outstanding, $350-million is TD.PR.M and $200-million is TD.PR.N. Both are retractibles, but have been grandfathered by OSFI such that they count towards Tier 1 Capital. I do not have the details of the grandfathering, but given that they both carry coupons less than the TD.PR.P retractible – which is in turn less than what a new issue would carry – we can expect the two retractibles to stay on TD’s books for quite a while.

We can now show the all important Risk-Weighted Asset Ratios!

Risk-Weighted Asset Ratios
October 2007
& October 2007
  Note 2007 2006
Equity Capital A 12,931 14,510
Risk-Weighted Assets B 152,519 141,879
Equity/RWA C=A/B 8.48% 10.23%
Tier 1 Ratio D 10.3% 12.0%
Capital Ratio E 13.0% 13.1%
A is taken from the table “Issuance Capacity”, above
B, D & E are taken from the Supplementary Report
C is my calculation.

Note that, as with BMO, the Equity/RWA ratio and Tier 1 Ratio have both deteriorated over the year, while the Total Capital Ratio has remained constant. This is largely due to an increase in the amount of Subordinated Debt, which is junior to deposits, but senior to Tier 1 Capital.

It is disappointing to see the deterioration in the Equity/RWA ratio over the year – I consider this to be a measure of the safety of the preferred shares, as it is the “total risk” of the bank’s assets (as defined by the regulators) divided by the value of capital junior to preferreds (which therefore takes the first loss). It is by no means anything to lose a lot of sleep over, as it still remains strong – the preferreds are better protected than the sub-debt of a lot of global banks – but … geez, the direction’s wrong!

I won’t discuss the annual results to any great extent – there will be innumerable reports over the next few months released by analysts with a great deal more time to spend on the matter than I have.

I am advised that the bank expects the Tier 1 Capital Ratio to be 8.75-9.00% after the deal with Commerce Bancorp closes next spring, but I am unable to verify this claim. During an analyst call on October 2, the question was asked and not answered:

Andre Hardy – RBC Capital Markets – Analyst Just a few numbers questions, Colleen, to start with. You usually provide us with a tangible equity ratio as well in your presentation, so could you please update us on that? And as well, where would that Tier 1 capital ratio be under Basel II?

Colleen Johnston – TD Bank Financial Group – CFO So you had a number of questions, Andre. Why don’t I start with the Basel II scenario? I think it’s probably a little premature at this time to comment on Basel II. We’re still going through the process around with OSFI in terms of risk-weighted assets in the new regime which will obviously take effect in Q1 of 2008. And you’re well aware of then the deferral that we have in terms of the TDA deduction from Tier 1. So we’re not going to talk about Basel II today.

Update: The expected Tier 1 Capital Ratio is announced in the October 2 Presentation, page 5, slide 10. Oops!

3 Responses to “TD Tier 1 Capital : October 2007”

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