A series of bail-in bond issuances helped TD Bank shrink the gap between its current and target total loss-absorbing capacity (TLAC) ratios over the three months to end-July. 

The Canadian bank reported TLAC-eligible debt and capital of C$86 billion ($64.7 billion), up 10% on end-April and 22% on end-January. Total capital made up 85.3% of this total, and external TLAC debt the remaining 14.7%.

The firm issued four TLAC-eligible notes in Q3: one Canadian dollar bond of C$1.75 billion, one US dollar bond of $1.5 billion and two Australian dollar bonds totalling A$1.25 billion ($0.84 billion). This helped bring total external TLAC up to C$12.6 billion, from C$6.6 billion at end-April and just C$635 million at end-January. 

Over the past three months, that bank has also increased its amount of outstanding Tier 2 capital by 16% to C$12.3 billion.

At end-July, its ratio of TLAC to risk-weighted assets hit 18.9%, up from 17.3% the quarter prior and 16.1% six months ago. Its TLAC-to-leverage exposure ratio stood at 5.7%, up from 5.3% and 4.9% in each of the previous two quarters.

The bank’s target TLAC ratios, set by the Canadian watchdog, are 23.5% of RWAs and 6.75% of leverage exposure, to be reached by November 1, 2021.

What is it?

The Canadian federal supervisor, the Office of the Superintendent of Financial Institutions (Osfi), implemented guidelines on TLAC on September 23, 2018. The framework requires banks to meet bail-in debt and capital targets by November 1, 2021. 

Why it matters

In common with other Canadian banks, TD Bank has been building up its TLAC buffer to meet its Osfi-set target. With just over two years to go before the deadline kicks in, we would expect the bank to continue issuing more debt in order to close the gap on time.

TD Bank also has a series of TLAC-eligible structured notes outstanding, which can be converted into equity under Canadian bail-in rules. These can prove more attractive investments to third parties, as their derivatives-linked returns can outperform the coupons offered on vanilla debt. In order to diversify its funding, and avoid getting caught in a TLAC debt issuance glut as the 2021 deadline approaches, TD Bank could ramp up its sales of structured notes.

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