Toronto-Dominion Bank’s agreement to buy Bank of America Corp.’s credit-card business in Canada caps a $20 billion buying spree for Canadian lenders taking advantage of their relative strength to pick up assets from U.S. firms.
Toronto-Dominion Bank yesterday agreed to pay C$7.5 billion ($7.6 billion) for Bank of America’s Canadian MasterCard portfolio. The purchase comes almost five months after the Toronto-based lender bought Chrysler Financial Corp. for $6.3 billion and follows U.S. purchases by Bank of Montreal and Canadian Imperial Bank of Commerce over the past 12 months.
Canadian banks, ranked the soundest by the World Economic Forum the past three years, have snapped up assets as troubled foreign lenders retreat from Canada and U.S. banks unload units to shore up their capital.
“Canadian banks are sitting with strong balance sheets and strong and resilient earnings streams have given them the flexibility to do these things,” Robert Sedran, an analyst at CIBC World Markets, said in a telephone interview. “If these assets are being shaken loose, you can expect the Canadians to continue to participate.”
Canadian banks were involved in a record $16 billion of announced acquisitions last year, including Bank of Montreal’s purchase of failed Illinois lender Amcore Bank, according to data compiled by Bloomberg. Announced purchases have been about $12.6 billion in 2011, according to Bloomberg data.
Driven by lower loan-loss provisions, Canadian banks may post average profit growth of 13 percent when the group begins reporting fiscal third-quarter results this month, Sedran said. Canada’s jobless rate fell last month to the lowest since 2008, while home prices climbed to a record in July. U.S. home values have slumped to the lowest in about 10 years.
An index of Standard & Poor’s/TSX financial stocks traded last week for 20 percent more than an index of S&P financial companies relative to forecast earnings, the highest in almost three years.
Toronto-Dominion was downgraded today to “neutral” from “outperform” by Macquarie Capital Markets analyst Sumit Malhotra on concern the bank will “encounter heightened revenue pressure in the U.S.”
Toronto-Dominion fell 62 cents to C$76.26 at 4 p.m. in trading on the Toronto Stock Exchange. The stock has risen 2.7 percent this year.
Profit estimates for Bank of America and other large U.S. lenders may need to be slashed by as much as 30 percent if economic growth slows to 1 percent or less, analysts at Deutsche Bank AG said last week. The analysts were looking at consensus estimates for 2012 and 2013.
Lenders including Bank of America, the largest U.S. bank, and Citigroup Inc., the No. 3 lender, have been selling assets to comply with new Basel III capital requirements, and to focus on its consumer-banking customers.
Toronto-Dominion’s cash purchase of Bank of America’s MBNA Canada unit includes a C$100 million premium and Canada’s second-largest bank will assume about C$1.1 billion in liabilities. The purchase makes Toronto-Dominion the largest MasterCard issuer in the country, and increases its credit-card customer base by almost 50 percent.
“It’s incredibly strategic for us,” Tim Hockey, Toronto-Dominion’s group head of Canadian banking, said in an interview yesterday. “We think of credit cards as being part of a very important and growing part of the payments business.”
American International Group Inc., the New York-based insurer bailed out by the U.S. government, also unloaded some of its operations north of the border. The company sold its Canadian mortgage insurer in April 2010 to a group led by the Ontario Teachers’ Pension Plan, and in 2009 sold its Canadian life insurance unit to Bank of Montreal for C$375 million.
Canadian Imperial, the country’s fifth-biggest bank, bought Citigroup’s $2 billion Canadian MasterCard portfolio in a C$1.2 billion deal last year. CIBC also bought the 50 percent of CIT Business Credit Canada that it didn’t already own in April 2010 from CIT Group Inc.
Intact Financial Corp., the country’s largest property and casualty insurer, agreed in May to buy the Canadian unit of AXA SA for C$2.6 billion.
Canadian financial firms have also been expanding outside Canada. Bank of Montreal, the fourth-biggest bank, completed its takeover of Wisconsin lender Marshall & Ilsley Corp. last month for about $4.56 billion plus a $1.73 billion payment to the U.S. government under the Troubled Asset Relief Program. Toronto-Dominion now has more branches in the U.S. than in Canada after buying banks in New England and the New York area.
“They’re very strategic,” Bob Decker, a money manager at Aurion Capital Management in Toronto, said in a telephone interview. “They’re taking advantage of tuck-under acquisitions concentrated in their core areas, like the Midwest for Bank of Montreal and Northeast for TD.”
Canadian Imperial agreed July 15 to buy a 41 percent stake in American Century Investments from JPMorgan Chase & Co. for $848 million to expand its asset-management business.