Royal Bank of Canada, Toronto- Dominion Bank (TD) and Bank of Nova Scotia, three of the world’s soundest financial firms, are seeking to boost profit with more than C$12 billion ($12.1 billion) in consumer-oriented acquisitions.
Royal Bank yesterday agreed to buy a unit of auto lender Ally Financial Inc. (ALLY) for as much as C$3.8 billion. About 20 minutes later Toronto-Dominion said it would buy Target Corp. (TGT)’s $5.9 billion U.S. credit-card portfolio. Combined with Scotiabank’s C$3.1 billion agreement in August to buy the Canadian unit of ING Groep NV (INGA), the country’s three largest lenders by assets are on the biggest buying spree since 2010.
Bankers including Toronto-Dominion Chief Executive Officer Edmund Clark, 65, have warned that domestic consumer banking profit may slow next year with household debt levels at a record. The Toronto-based lenders, ranked the soundest for the past five years by the World Economic Forum, have also looked to asset management and foreign banking to increase earnings.
“The banks have now realized they no longer can just go out there and cross-sell their way to better growth; they are going to have to go out and acquire assets,” Craig Fehr, a strategist at Edward Jones & Co., said in an interview yesterday in Bloomberg’s Toronto office.
Canada’s six biggest banks agreed to spend $7.07 billion on 13 takeovers announced last year and $16 billion in 23 deals in 2010, according to data compiled by Bloomberg.
“While we have a very good market in Canada, there are great opportunities elsewhere,” Scotiabank CEO Richard Waugh said in an interview after a conference in Toronto yesterday. “That’s where Scotiabank has been looking, and also at a few opportunities in Canada.”
Royal Bank was little changed at C$57 at 4 p.m. in Toronto while Toronto-Dominion fell 0.8 percent to C$81.44. Scotiabank was little changed at C$53.55. The eight-member Standard & Poor’s/TSX Commercial Banks Index has risen 6.8 percent this year, outperforming the 2 percent gain of the S&P/TSX Composite Index.
Royal Bank, Canada’s largest lender by assets, said yesterday it plans to buy Ally’s Canadian auto-finance and deposit business in a cash deal that Ally said will generate $4.1 billion for the Detroit-based company. RBC said the total price will range from C$3.1 billion to C$3.8 billion, depending on the size of a dividend taken by Ally before the deal is completed. It would be the largest takeover ever for Royal Bank, eclipsing a $2.16 billion purchase of Centura Banks in 2001.
Ally 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 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 acquired business will have a return on equity in the “high single digits,” said David McKay, head of personal and commercial banking. Combined, RBC’s auto-lending business will have a return of 15 percent or more, he said.
RBC is buying a business that offers inventory financing to more than 580 auto dealerships across Canada, the lender said. RBC said it will have C$24 billion in auto loan receivables and offer financing to more than 890 dealerships after this transaction, expected to close in the first quarter of 2013.
“It speaks to a very healthy, profitable banking industry that is well-capitalized and has the ability to expand, so I think that is a real positive.” McKay said in a phone interview. “You’re seeing the Canadian banks with capital to deploy based on strong performance that are able to expand.”
The transaction, as well as TD Bank’s card acquisition, are demonstrations of the “capital allocation theme that drives our thinking for 2013,” Mario Mendonca, an analyst at Canaccord Genuity, said yesterday in a note. “We believe that with capital strength established across the industry, investors will become intensely focused on capital allocation.”
Some banks will return capital in the form of “significant” buybacks while others, especially Toronto- Dominion and Scotiabank, are more likely to invest in growth, Mendonca said.
Toronto-Dominion said its pact with Minneapolis-based Target will significantly expand the bank’s presence in the North American credit-card business. 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.
“The Canadian consumer cannot constantly leverage themselves up, and so we had a pretty classic leverage-driven expansion in Canada that aids the banks,” Clark said at a conference in Toronto in September. “You’re going to see slower growth.”
Yesterday’s buying binge compares to one in 2007, when the country’s two biggest lenders announced deals valued at about $9 billion within minutes of each other. On Oct. 2 that year, Royal Bank agreed to buy RBTT Financial Holdings Ltd. in Trinidad and Tobago while Toronto-Dominion agreed to buy Commerce Bancorp Inc.
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