Royal Bank of Canada and Toronto- Dominion Bank (TD) announced purchases today of almost $20 billion in combined assets from U.S. companies to bolster profit ahead of a slowdown in domestic consumer lending.
Royal Bank, the nation’s largest lender, plans to buy Ally Financial Inc. (ALLY)’s Canadian auto-finance and deposit business in a deal that Ally said will generate $4.1 billion for the Detroit- based lender. Toronto-Dominion agreed to acquire Target Corp. (TGT)’s $5.9 billion U.S. credit-card portfolio for an amount equal to the gross value of the outstanding loans at the time the deal is completed, the firms said.
Canadian lenders, ranked as the soundest for the past five years by the World Economic Forum, are seeking to bolster domestic consumer-banking profits next year with household debt at record highs.
“The banks are more optimistic than I expected in 2013,” Peter Routledge, an analyst with National Bank Financial, said in a phone interview. “To me it’s a sign of optimism.”
The total price for Ally’s business will range from C$3.1 billion ($3.1 billion) to C$3.8 billion, depending on the size of a dividend taken by Ally before the deal is completed, the Canadian lender said in a statement. It would be the largest takeover ever for Royal Bank, eclipsing a $2.16 billion purchase of Centura Banks in 2001.
“Auto loans came through the crisis as a very, very good asset,” Routledge said. “It was profitable, credit quality was better than people expected, yields were decent so it’s good risk-return. It just seems to me like a good asset for Royal Bank.”
RBC Chief Executive Officer Gordon Nixon has said Royal Bank would explore “strategic acquisitions” amid a slowdown in Canadian consumer lending. The company posted a record C$1.13 billion profit at its domestic-banking unit in the third quarter, fueled by increasing deposits, mortgages and loans.
“Of the deals that we’ve looked at in Canada, this was one that we really wanted,” Nixon, 55, said today in a conference call.
Ally, which said it’s getting $620 million above liquidation value, put its non-U.S. operations up for sale in May to help repay a $17.2 billion taxpayer bailout that left the U.S. government with a 74 percent stake.
Royal Bank said it expects the Ally Canada business to generate C$120 million in profit, excluding C$50 million in one- time costs, and “modestly” add to per-share earnings in the first year.
The transaction includes Ally’s ResMor Trust unit, which had $3.8 billion in deposits and $4.2 billion in assets at the end of September. ResMor’s deposits come at a cost, according to Dave McKay, RBC’s group head of personal and commercial banking. Ally’s high-interest savings account pays 1.8 percent, compared with 1.2 percent at Royal Bank, he said.
RBC eventually may resell the ResMor unit, with Home Capital Group Inc. and Canadian Western Bank as possible suitors, Michael Goldberg, a Desjardins Securities analyst, said today in a note to clients.
“We’re not sure yet how to manage the business going forward,” McKay said in an interview. “We’re not going to discount any option at this point.”
Toronto-Dominion’s pact with Minneapolis-based Target “will significantly expand our presence in the North American credit-card business,” Toronto-Dominion CEO Edmund Clark, 65, said in a statement.
TD agreed to a seven-year deal to underwrite, fund and own consumer loans made with the retailer’s Target- and Visa Inc.- branded credit cards in the U.S.
“We think it makes financial sense, because it leverages our deposit base,” said Michael Rhodes, Toronto-Dominion’s executive vice-president of North American credit cards and merchant services. “It makes strategic sense because we have a lot of interest in expanding our North American card business.”
Toronto-Dominion, which has more branches in the U.S. than Canada, said the transaction will help it meet a forecast for $1.6 billion in U.S. consumer-banking profit by next year.
“TD has been looking for assets in which to deploy its significant liquidity in the U.S.,” said John Aiken, an analyst at Barclays Plc in Toronto.
Target, the second-largest U.S. discount retailer, said about 90 percent of proceeds from the sale will be used to pay off debt, and the rest for repurchasing shares.
The retailer will record a pretax gain of about $150 million in the third quarter and an additional $350 million to $450 million when the deal is completed, the company said. Target suspended the sale of the card portfolio in January after failing to find a buyer for a year.