DBRS Ltd. has confirmed its ratings on Toronto-Dominion Bank (TSX:TD) at AA and R-1 (high), pointing primarily to the bank’s strong position in domestic retail banking.

The rating agency said Tuesday that TD’s Canadian personal and commercial banking division generated $2.5 billion of net income in 2009 and is expected to continue to provide earnings stability. It notes that TD had a solid number one market share ranking in personal deposits and number two in lending in Canada.

“Its retail distribution network expansion, significantly longer hours of service relative to its peers and relentless drive to improve customer service index scores are critical to the bank’s franchise strength and have led to its successful growth in Canadian retail market shares, including credit cards, property and casualty insurance, small business and commercial banking,” it says.

DBRS also says that TD’s large retail operations contribute to its lower business risk profile than some of its peers.

Where there is some risk is in the bank’s U.S. expansion efforts. DBRS notes that TD has been back on the acquisition trail, buying The South Financial Group, and doing an FDIC-assisted acquisition of three Florida banks, although it says that neither of these deals had an impact on TD’s ratings.

“Longer term, DBRS believes successful execution of TD’s U.S. retail and commercial banking strategy will contribute positively to the bank’s business franchise as it begins to generate acceptable returns on invested capital for the bank and becomes a platform for further growth, albeit with a degree of risk. The execution, however, remains a challenge,” it says.

Moreover, it notes that the slowdown in the global economy has negatively affected loan loss provisions in the U.S. and Canadian retail banking segments. “Credit costs are expected to remain elevated in the near term but manageable relative to the TD’s earnings before loan losses and taxes,” it says.

Finally, DBRS says that while TD, and the other large Canadian banks, have increased their capital ratios, “potential changes to regulatory capital rules could negatively affect these ratios.” Nevertheless, it says that the bank has the ability to generate substantial levels of internal capital to offset the effect of these changes, which are likely to be put into effect in fiscal 2013.

IE