Dominion Bond Rating Service has confirmed the long-term ratings and stable trends on TD Bank, and removed the ratings from their “under review” status where they were placed on August 26, on news of TD’s proposed acquisition of half of New England-based bank Banknorth Group Inc.

DBRS notes that under the terms of the agreement, TD will pay US$3.8 billion (60% cash and 40% stock) for 51% of the outstanding stock of Banknorth, with a break fee of US$150 million. The transaction is expected to close in February 2005 pending regulatory and Banknorth shareholder approvals.

The rating agency says that its review of Banknorth confirms its preliminary opinion that:

  • Banknorth’s businesses are primarily consumer and small and mid-size commercial lending, which is consistent with TD’s strategy of maintaining a retail/wholesale mix of 80%/20% and complementary to existing wealth management businesses in the U.S.;
  • Banknorth has a history of growth through acquisitions and integrations;
  • its credit quality is solid; and
  • it has a strong deposit franchise in Maine, Vermont, and New Hampshire.

More specifically, DBRS says it has confirmed the TD ratings because it believes TD is addressing its challenge of growth in retail banking, as it has limited opportunities in Canada, through the acquisition of Banknorth. “TD has strengthened its position to participate in bank consolidations in the U.S. through Banknorth. The U.S. Northeast, Banknorth’s home market, remains fairly fragmented, therefore providing growth opportunities via acquisitions. Banknorth has a history of successful acquisitions and integrations under the existing management team,” it notes.

It also points out that TD continues to maintain its conservative retail/wholesale mix strategy, which should provide more earnings stability. Banknorth’s business profile is relatively low risk in that it has little in the way of wholesale operations, it says.

TD’s credit risk profile remains conservative, the integration risk is low given Banknorth’s operations will not be combined with TD’s, , and the financial risk profile is expected to remain reasonable.

DBRS believes some of the challenges facing TD include:

  • managing a large minority shareholder position in Banknorth, despite having effective control through representatives on Banknorth’s board of directors;
  • its lack of knowledge of retail banking in the U.S. Northeast, although partially mitigated with retention of Banknorth’s senior management team; and
  • future funding, including the 60% cash to be paid upon closing of the transaction, and TD’s need to take 51% of future Banknorth share issuances in order to maintain its pro rata ownership.