OREANDA-NEWS. Fitch Ratings has affirmed The Toronto-Dominion Bank (TD) long- and short-term Issuer Default Ratings (IDRs) at 'AA-' and 'F1+' respectively. The Rating Outlook is Stable.

This rating action follows Fitch's periodic review of the Canadian Banks Peer Group, which includes Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce (CIBC), Caisse Centrale DesJardins (CCD), National Bank of Canada (NBC), Royal Bank of Canada (RBC) and Toronto-Dominion Bank (TD).

For more information, please refer to the Canadian Banks Peer Review special report available at www.fitchratings.com.

KEY RATING DRIVERS
IDRS, VRs AND SENIOR DEBT

The affirmation reflects TD's solid franchise in Canada and the U.S., strong asset quality, continued earnings stability, strong funding and liquidity position, sound capital position, and favorable metrics relative to international peers. These strengths help support TD's already high ratings, which are at the top of Fitch's global rating universe for financial institutions.

However, Fitch believes that all Canadian banks, including TD, are vulnerable to credit deterioration in their domestic loan portfolios given high levels of consumer indebtedness in Canada, combined with Fitch's view of some overvaluation in the Canadian housing market. This limits housing affordability and makes consumers particularly susceptible to negative shocks to their income levels. The rapid decline in global oil prices has caused an economic slowdown in Canada which could begin to impact employment levels and hasten potential credit deterioration. Either way, Fitch believes provision expenses will be a growing headwind to earnings over the medium term.

Fitch believes that Canadian Mortgage and Housing Corporation (CMHC) insurance plays an important role in supporting the balance sheets of all Canadian banks, although the availability of mortgage insurance is expected to continue to decline. TD is currently at the high end of the peer group, in terms of mortgage insurance, with over 56% of its residential mortgage portfolio insured at fiscal year-end 2015 (FYE15) and uninsured mortgages had a loan-to-value ratio of 61%. Fitch believes this profile will help to insulate the bank from material disruptions in housing prices or marked deterioration in the consumer leverage profile, on a relative basis.

Additionally, Fitch continues to expect that earnings growth in consumer banking and lending in Canada will be challenged, given the maturity of the market and the increasingly strained consumer. Moreover, net interest margin (NIM), will likely remained pressured given the prolonged low rate environment. As a result, banks will need to focus on growth in wealth management; an increasingly competitive business, and be keenly focused on cost controls in order to meet earnings targets over the medium term. TD's adjusted efficiency ratio remained fairly steady at 54.3% supporting its profitability. Fitch does not expect material efficiency improvements in 2015, as the bank continues to spend money on growth initiatives.

From a capital perspective, TD's position is sound for the rating category. At Oct. 31, 2015, the bank's Basel III Tier I common equity ratio (CET1) was 9.9%, on an all-in basis, which is below the peer average, but above minimum regulatory requirements. The CET1 ratio declined from the prior year due to restructuring charges and RWA growth, but remains within expectations. On a relative basis, Fitch considers TD's capital risk-weighting to be more conservative than peers as its U.S. mortgage business is subject to higher standardized risk-weights.

SUPPORT RATING AND SUPPORT RATING FLOOR

The affirmation of the TD's Support Rating (SR) at '2' and Support Rating Floor (SRF) at 'BBB-' reflect Fitch's view that the likelihood of support remains relatively high for Canadian Banks due to their systemic importance in the country, significant concentration overall of Canadian banking assets amongst the institutions noted above, which account for over 90% of total banking assets, the large size of the banking sector with banking assets at 2.1 times Canada's GDP, and the Canadian banks' position as key providers of financial services to the domestic economy.

In Fitch's view, Canadian banking authorities through the CDIC Act, have wide latitude to resolve a troubled bank including re-capitalizing an institution, creating a bridge bank, or imposing losses on creditors.

Fitch recognizes that the government's willingness to provide support for D-SIFI's in Canada has been reduced demonstrated by Department of Finance consultation paper which outlines the proposed bail-in regime as Canadian banking regulators seek to protect tax payers from the risk of a large financial institution failing. This is evidenced by the issuance of non-viability contingent capital (NVCC) instruments, resolution powers given regulatory authorities under the CDIC Act, and other initiatives that demonstrate the Canadian government's progress to reduce the propensity of state support for banks going forward.

TD's IDRs and senior debt ratings do not benefit from support because their Viability Ratings (VRs) are all currently above their SRFs.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by TD and its subsidiaries are all notched down from the VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably.

TD's subordinated debt is notched one level below its VR of 'aa-' for loss severity in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.

The preferred securities of TD Capital Trust III and IV are non-cumulative preferred securities which are notched five below the VR, made up of two notches down for non-performance and three notches down for loss severity.

KEY RATING DRIVERS - SUBSIDIARY AND AFFILIATED COMPANY RATINGS

All of the subsidiaries and affiliated companies reviewed as part of the TD factor in a high probability of support from parent institutions to subsidiaries. This reflects the fact that performing parent banks have very rarely allowed subsidiaries to default. It also considers the high level of integration, brand, management, financial and reputational incentives to avoid subsidiary defaults.

KEY RATING DRIVERS LONG- AND SHORT-TERM DEPOSIT RATINGS

TD Bank, NA's uninsured long-term deposit ratings are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.

RATING SENSITIVITIES
IDRS, NATIONAL RATINGS AND SENIOR DEBT
Given its already high rating levels and the Negative Sector Outlook on Canadian banks, Fitch does not expect any upside to TD's ratings over the medium term.

However, negative rating actions could be driven by significant deterioration in earnings and/or credit performance, particularly if it differs materially from that of other large Canadian banks, as the housing market eventually slows and consumer leverage profiles remain at high levels. Fitch believes TD's ratings are more susceptible to consumer stress, as it is now the largest credit card issuer in Canada. While some credit normalization is expected, Fitch notes that this could be hastened or potentially more severe due largely to exogenous macroeconomic risks such as continued pressure in the global oil and gas markets, as well as macroeconomic weakness in China or Europe that flows through to and adversely impacts the Canadian economy. An alternation of the bank's strategy or risk appetite, a weakening liquidity profile, and/or reduced buffers on regulatory capital minimums could also yield negative rating momentum.

SUPPORT RATING AND SUPPORT RATING FLOOR

SR of '2' incorporates Fitch's expectation that there could be some level of support for Canadian Banks going forward although this has been weakened given credible resolution framework. Although Canadian authorities have taken steps to improve resolution powers and tools, they maintain a flexible approach to bank resolution.

Fitch's assessment of continuing support for Canadian D-SIFI's has to some extent relied upon resolution powers granted regulators under the CDIC ACT as well as the potential size, structure, and feasibility of NVCC implementation.

Fitch's view on support could change should the CDIC Act diminish powers of the CDIC to recapitalize a failing institutions leading to a downgrade of the SR and SRF.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The subordinated debt and hybrid capital ratings are primarily sensitive to any change in the VRs of the banks (or bank subsidiaries).

LONG- AND SHORT-TERM DEPOSIT RATINGS

The ratings of long- and short-term deposits issued by TD Bank, NA are primarily sensitive to any change in TD Bank NA's IDR.

SUBSIDIARY AND AFFILIATED COMPANY RATINGS

The subsidiary and affiliated company ratings are primarily sensitive to any change in the VRs of the ultimate parent, Toronto Dominion Bank.

Fitch has affirmed the following ratings and with a Stable Outlook:

Toronto-Dominion Bank
--Long-term IDR at 'AA-'; Outlook Stable;
--Short-term IDR at 'F1+';
--Short-term debt at 'F1+';
--Viability Rating at 'aa-';
--Senior debt at 'AA-';
--Subordinated debt at 'A+';
--Preferred at 'BBB';
--Support Rating at '2';
--Support Floor at 'BBB-'.

TD Bank U.S. Holding Company
--Long-term IDR at 'AA-'; Outlook Stable;
--Short-term IDR at 'F1+';
--Support Rating at '1'.

TD Bank, NA
--Long-term IDR at 'AA-'; Outlook Stable;
--Short-term IDR at 'F1+';
--Viability Rating at 'a';
--Long-term deposits at 'AA';
--Short-term deposits at 'F1+';
--Senior debt at 'AA-';
--Support Rating at '1'.

TD Capital Trust III, IV
Northgroup Preferred Capital Corporation
--Preferred at 'BBB'.