Fitch: TD Acquisition of Target's U.S. Credit Card Portfolio Ratings Neutral
NEW YORK -- October 23, 2012
Fitch Ratings views Toronto-Dominion's (TD, 'AA-/F1+') announced agreement to
purchase Target Corporation's (Target) U.S. credit card portfolio as neutral
to TD's ratings. In Fitch's view, the transaction is consistent with the
bank's expansion strategy in the U.S. and offers TD exposure to the customer
base of a well-established U.S. retailer. The acquisition is also viewed as
manageable relative to TD's overall capital base and banking franchise.
Under the terms of the agreement, TD will acquire Target's existing U.S. Visa
and private label credit portfolio with outstanding balances of approximately
$5.9 billion. Over the past few years, TD has built a solid presence and a
large deposit franchise in the U.S. through several acquisitions. Today, TD
owns TD Bank, NA with branches from Maine to Florida. While relatively small
in the context of TD's operations, the transaction is in line with TD's focus
on growing assets in the U.S. Further, it allows TD to redeploy its
cost-effective core deposits into assets with a comparatively higher
risk-return profile. This in turn should help TD, albeit modestly, achieve its
goal of generating $1.6 billion adjusted earnings from its U.S. personal and
commercial segment in 2013.
Additionally, TD has entered a seven-year program agreement to become the
exclusive issuer of Target-branded Visa and private label credit cards to
Target's U.S. customers going forward. Under the terms of the program
agreement, TD and Target will share the net profits generated by the credit
card receivables, with Target having the greater proportion. TD will provide
funding, risk management policies, and regulatory compliance for the
portfolios while Target will handle all elements of operations and customer
Target's credit card portfolio appears to have experienced comparatively
elevated credit losses in prior periods. This is partly mitigated by higher
yields relative to TD's own credit card receivables. The profit sharing
agreement also provides TD with some cushion against outsized credit costs.
The transaction may bring some execution risks associated with the shared
responsibilities for the portfolios.
The transaction is anticipated to close in 1H'13 subject to customary
regulatory approvals. The acquisition is expected to produce a return on
assets of approximately 1% a year after closing, according to TD. Credit card
receivables will be consolidated on TD's balance sheet from closing onwards.
The transaction is expected to reduce Tier 1 capital ratio (Basel II) by
approximately 20 bps and Basel III Common Equity Tier 1 ratio by approximately
14 bps at closing, on a pro forma basis as of 3Q'12.
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