TD Upgraded to Pfd-2(high) by DBRS

DBRS has announced that it:

upgraded the long-term ratings of The Toronto-Dominion Bank (TD or the Bank) and its related entities, including TD’s Long-Term Issuer Rating to AA (high) from AA. The Bank’s Short-Term Issuer Rating is confirmed at R-1 (high). The trend on all ratings is now Stable. TD’s Long-Term Issuer Rating is composed of an Intrinsic Assessment (IA) of AA and a Support Assessment (SA) of SA2, which reflects the expectation of timely systemic support from the Government of Canada (rated AAA with a Stable trend by DBRS). The SA2 designation results in a one-notch uplift to the Long-Term Issuer Rating. Under the new Canadian Bank Recapitalization Regime, DBRS expects to eventually remove the uplift from systemic support once the Bank has issued a sufficient level of bail-inable senior debt, which would thereby provide an adequate buffer for non-bail-inable obligations and is then expected to offset the removal of systemic support.

The upgrade of TD’s long-term ratings recognizes the Bank’s improving fundamentals and franchise, including a growing level of earnings in the United States and ongoing strong performance in Canada, as the Bank continues to execute on its lower-risk strategy. DBRS views TD as consistently outperforming most global banks, and the Bank’s upgraded IA is now in line with a few highly regarded U.S. peers. The U.S. retail bank now represents over one-third of the Group’s earnings, which contributes to TD’s geographic diversity. Indeed, the Canadian and U.S. retail operations generate more than 80% of TD’s adjusted net income, providing considerable earnings stability, which is a key factor underpinning the ratings. DBRS notes that the performance of the U.S. franchise has vastly improved as the Bank has built its asset generation capabilities, and it has realized the benefit from margin expansion and lower corporate taxes following U.S. tax reform. However, while historically a source of lower credit risk, TD’s focus on retail lending in Canada, where the consumer is highly levered, makes it somewhat more exposed to a potential downturn in Canada. At present, TD is less exposed (as a percentage of earnings) to capital markets businesses compared with the other large Canadian banks. However, TD is investing to build out its capital markets capabilities, particularly in the United States, which could potentially expose the Bank to greater earnings volatility.

The affected issues are all NVCC-compliant: TD.PF.A, TD.PF.B, TD.PF.C, TD.PF.D, TD.PR.E, TD.PF.F, TD.PF.G, TD.PF.H, TD.PF.I, TD.PF.J, TD.PF.K, TD.PF.L and the new issue.

Update, 2019-5-31: DBRS corrected an error regarding TD’s subordinated debt.

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