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Moody's Affirms TD Bank's Ratings, Outlook Remains Stable

Zacks Equity Research

The Toronto-Dominion Bank TD and its affiliates, including TD Group US Holdings LLC’s ratings have been affirmed by Moody’s Investors Service, the rating division of Moody’s Corp. MCO. Also, the ratings outlook has remained stable.

Notably, Moody’s has affirmed the short-term and long-term debt and deposit ratings, the issuer ratings, the Counterparty Risk Ratings, the Counterparty Risk Assessments and standalone baseline credit assessments (BCAs).

Shares of TD Bank have gained 16.6% so far this year, outperforming 3.8% growth recorded by the industry.



Reasons for Affirmation

The rating action was due to Moody's unchanged credit assessment for TD Bank. This follows the recent announcement of an all-stock acquisition of TD Ameritrade Holding AMTD by Charles Schwab SCHW. TD Bank, a major shareholder of TD Ameritrade, has entered into a new Stockholders' Agreement, and a revised and extended Insured Deposit Account (IDA) agreement with Schwab.

According to the newly-framed IDA agreement, IDA deposits might be reduced at Schwab's discretion by $10 billion a year, starting in July 2021, with a floor value of $50 billion. Currently, TD Bank’s IDA deposits stand at $103 billion.

While some of the negative factors of the deal are likely to be mitigated by cost synergies and minimum capital impact at closing, TD Bank anticipates the transaction to lower its earnings for nearly three years post the deal’s closure. Such expectations of the company are based on Schwab estimates of integration charges, reduction in earnings under the IDA agreement and increase in TD Bank’s amortization of intangibles.

David Beattie, senior vice president at Moody's Investors Service, noted “This transaction allows Toronto-Dominion Bank to continue to participate in the evolving wealth industry in the US through a meaningful stake in a new industry leader with enhanced scale and breadth of product offerings."

Per Moody's, TD Bank’s social risks are moderate and environmental risks are low, with both risks being consistent with its general assessment for the global banking sector. Moreover, the company’s governance risks are mostly internally driven, rather than being externally driven. Moody’s does not seem to have any particular governance concerns with respect to TD Bank.

Given the company’s strong fundamentals and continuation of profitable operations, Moody’s maintains the outlook at stable.

What Can Lead to a Rating Upgrade/ Downgrade?

Since TD Bank’s current ratings are very high, further ratings upgrade is unlikely, although the company’s reduced exposure to Canadian consumer credit card and auto finance debt is anticipated to be a positive for the BCA and the ratings.

However, the ratings might be downgraded if TD Bank increases its dependence on capital markets earnings, or U.S. operations income, where the company’s franchise strength is lower compared to that in Canada. Also, increase in unsecured Canadian consumer debt’s exposure or experienced risk management and increased volatility in the earnings due to governance failures might cause a downgrade in the ratings.

Another reason for a negative impact on the ratings could be lower protection for senior creditors due to a reduction in Moody's assumptions regarding expected issuance of junior senior debt.

Currently, TD Bank carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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