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With U.S. Regional Bank Risks Higher, Is Increasing Exposure to the U.S. Still Right for TD?

In light of the recent global banking sector turmoil driven by the two significant bank failures in the United States (Silicon Valley Bank and Signature Bank, both unrated by DBRS Morningstar), the risks associated with the U.S. regional banking sector have increased. The Toronto-Dominion Bank (TD or the Bank; rated AA (high) with a Stable trend by DBRS Morningstar) is currently the eighth-largest bank in the U.S. by assets and the largest foreign-owned bank. TD also has an ownership interest in the Charles Schwab Corporation (Schwab) of approximately 12%, with a carrying value on TD’s books of CAD 8.4 billion. TD's planned $13.4 billion acquisition of First Horizon Corporation (First Horizon) would further increase TD's exposure to the U.S., propelling it to the position of sixth-largest bank by assets on a pro forma basis.

Key highlights include the following:

-- TD has the largest exposure to the U.S. regional banking system out of the Canadian banks, as well as being the largest investor in Schwab. TD's planned acquisition of First Horizon will further increase the Bank's U.S. exposure.

-- The First Horizon transaction is facing increased uncertainty as U.S. regulatory approval delays have come during a period of heightened volatility in the U.S. banking sector, resulting in higher risk premiums for U.S. regional banks.

-- TD's fundamentals remain solid with ample liquidity and strong capital levels, and the pending First Horizon acquisition remains aligned with the Bank's U.S. growth strategy.

“First Horizon's total deposits dropped 15% year over year, or $11.4 billion, in F2022 and are below TD's initial expectations. However, the Bank remains optimistic about the planned acquisition based on the merits of the deal that were noted when the transaction was first announced,” said Carl De Souza, Senior Vice President, North American Financial Institutions. “With respect to the U.S., approximately 30% of TD's deposits (including cash sweeps with Schwab but excluding First Horizon) are uninsured. TD has demonstrated its proven U.S. acquisition model and has delivered solid growth in the country for nearly two decades. Size and scale remain critical to competing in the U.S. banking sector, and First Horizon will accelerate TD's U.S. growth strategy.”