Toronto-Dominion Bank could reach an agreement to acquire about half of Canadian Imperial Bank of Commerce’s Aerogold Visa portfolio, expanding its credit-card offerings as banks try to counter a consumer-lending slowdown.
Toronto-Dominion said today in a statement that it is continuing discussions with Canadian Imperial on a possible acquisition of the card portfolio. The lenders initially set today as a deadline for reaching an agreement.
A card deal would be the third in two years for Toronto-Dominion, which has led Canada’s biggest banks on a buying spree for C$17 billion ($16.2 billion) of credit-card assets since 2009. The next opportunity may be Canadian Tire Corp., the country’s largest sports retailer, which said Aug. 8 it’s seeking a financial partner for its C$4.4 billion MasterCard portfolio.
“It’s all about the ability to connect to customers,” Brad Smith, an analyst with Stonecap Securities Inc. in Toronto, said in an Aug. 12 interview. “Cards are just going through an incredible premium in this marketplace, and that is reflective of the perception of an extended period of slower growth here.”
Canada’s six biggest banks, which report third-quarter results this week, are seeking ways to expand their businesses as debt-laden Canadians pare record borrowing. Those lenders will collectively see per-share profit growth in the three months ended July 31 ease to 1.2 percent on slower loan growth and tighter interest-rate spreads, underscoring the appeal of cards, said Peter Routledge, a National Bank Financial analyst. He expects TD and CIBC to reach an agreement on cards.
The six banks had profit growth of 5.8 percent in the second quarter and 9.6 percent a year earlier, he said.
“Affluent people are spending more money, feeling more confident about the economy and they’re using their cards more frequently,” Routledge said in an Aug. 16 telephone interview from Toronto. “Purchase volumes in Canada on credit cards are growing at 6, 7 percent, which is a lot faster than loan growth or growth of the overall economy.”
The eight-company Standard & Poor’s/TSX Commercial Banks Index rose 5.4 percent this year, trailing the 26 percent increase of the KBW Bank Index of two dozen U.S. lenders. Toronto-Dominion advanced 0.2 percent to a record high close of C$88.96 at 4 p.m. in Toronto trading. Canadian Imperial climbed 1 percent to C$80.69.
Canadian Imperial was the country’s largest credit-card issuer last year with C$15.5 billion of outstanding balances, followed by Toronto-Dominion with about C$15.4 billion, according to an April issue of the Nilson Report, a credit-card industry newsletter. Royal Bank ranked third at C$13.9 billion, followed by Scotiabank with C$10.1 billion and Bank of Montreal with C$8.32 billion of balances.
Adding unsecured credit card debt is not without risk when consumer debt is near record levels and Canada’s economy is predicted by economists to grow next year at a slower pace than in the U.S. Still, the country’s credit-card losses fell to 3.47 percent of loans at the end of October from a high of 5.37 percent in 2009. Delinquency rates have also declined, according to the Canadian Bankers Association.
“I’ve always felt cards are a pretty good, albeit a little bit more risky investment,” John Kinsey, who helps manage about C$1 billion including bank shares at Caldwell Securities Ltd. in Toronto, said in an Aug. 15 interview. “It’s higher risk but it’s also higher reward.”
Credit cards contribute 2 percent to 10 percent of profit for Canadian banks, depending on the lender, with the percentage share for Canadian Imperial probably in the mid-to high-teens, National Bank Financial’s Routledge estimated.
“Credit cards are important to the banks because it’s a high-spread product and because it’s a high fee revenue business on top of that,” Routledge said. “As a consequence, it’s a very productive use of capital.”
Card purchases by Canadian banks accelerated after the country’s Competition Bureau changed the rules in November 2008 to let financial-services firms issue both Visa Inc. and MasterCard Inc. credit cards. Banks previously had to select one or the other under restrictions that were unique to Canada.
Toronto-Dominion has increased its push into cards through acquisitions. The Toronto-based lender paid C$6.84 billion cash for Bank of America Corp.’s MBNA Canadian MasterCard portfolio in December 2011 to gain C$7.36 billion of loans, according to the company’s 2012 annual report. In March, Toronto-Dominion bought $5.7 billion of U.S. credit-card balances from Target Corp. and agreed to purchase HSBC Holdings Plc’s C$495 million private-label card portfolio, according to financial statements.
Toronto-Dominion, which on Aug. 12 was named the new primary card partner for Aimia Inc.’s Aeroplan rewards program, may gain half of CIBC Aerogold cardholders if it concludes a deal with its smaller rival, the company said in a statement. Canadian Imperial, which has been Aimia’s partner for 22 years, wants to keep those Aerogold cardholders who are also bank customers. Kevin Dove, a CIBC spokesman, said the bank could retain rights to continue issuing Aerogold cards for at least 10 more years.
“Should this happen, there could be an Aeroplan co-branded credit-card earning Aeroplan miles offered by both CIBC and TD from Jan. 1,” Rupert Duchesne, chief executive officer of Montreal-based Aimia, said in an Aug. 13 conference call. “This would be an elegant solution that would be a win-win-win for us, TD and CIBC.”
If an agreement with TD isn’t reached, the lender also has the right to pursue legal options under its existing contract with Aimia, CIBC said today in a statement.
There’s no assurance a deal will be struck, the banks said today in statements. “The parties will make an announcement when an agreement has been reached or when the discussions have concluded without an agreement,” Toronto-Dominion said in its statement.
Canadian Imperial and Toronto-Dominion will probably reach an agreement, said analysts including CIBC’s Robert Sedran.
“With apparent positives for all sides, we believe there is a deal there to be completed and expect positive resolution,” Sedran said in an Aug. 12 note.
Other Canadian lenders have been active in cards. Royal Bank of Canada bought the Shoppers Optimum MasterCard portfolio in September for an undisclosed amount from Bank of America, and CIBC acquired Citigroup Inc.’s C$2 billion Canadian MasterCard portfolio in 2010. Bank of Montreal bought the Diners Club North America card business from Citigroup in 2009 for C$838 million, gaining C$873 million in loans.
“If you can bring in new clients to your bank and cross-sell them other products, that’s a very attractive value proposition,” Linda Mantia, executive vice president of cards and payment solutions at Toronto-based Royal Bank, said in an Aug. 8 interview.
Bank of Nova Scotia is considering adding credit cards for its ING Direct unit. The Toronto-based lender is working on a credit-card strategy with management of the Canadian banking business acquired in November from ING Groep NV for C$3.1 billion, Robin Hibberd, executive vice president of retail products and services, said at a June 12 investor conference in New York.
An ING Direct credit card is “something we are committed to exploring,” Scotiabank spokeswoman Michelle Henderson said in an e-mailed statement. “We’ve been growing our credit-card business and remain committed to doing so.”
Canada’s finance minister and the Bank of Canada have warned that mounting household debt poses a risk to the financial system and the economy. The ratio of Canadian household debt to disposable income rose to a record 163 percent in the third quarter of 2012, according to the government’s Statistics Canada agency. The ratio has fallen to 162 percent as of March 31, the data show.
Canada’s housing market is exhibiting few signs of a hard landing even amid warnings from analysts and policy makers that a bubble may be forming. Existing home sales rose 0.2 percent in July from the previous month and 9.4 percent from a year earlier, the Canadian Real Estate Association said Aug. 15. Average sales prices rose 1.9 percent from June, and 8.4 percent from a year earlier, the Ottawa-based group said.
Bank of Montreal and Scotiabank are the first to disclose results for the third quarter when the Toronto-based lenders report tomorrow. Bank of Montreal, Canada’s fourth-largest by assets, is expected to post adjusted profit of C$1.53 a share, up 2.5 percent from a year ago, according to the average of 15 analysts surveyed by Bloomberg. Scotiabank, the third-largest lender, is estimated to report profit of C$1.31 a share, a 7 percent advance.
National Bank of Canada, the sixth-largest lender, is expected to post a 4.2 percent increase in profit to C$2.06 a share when the Montreal-based bank reports Aug. 28, according to analysts surveyed by Bloomberg. Canadian Imperial, the fifth-biggest bank, is estimated to increase profit 3.3 percent to C$2.13 a share on Aug. 29, the same day Royal Bank and Toronto-Dominion report results.
Royal Bank, the largest lender, will post profit growth of 5 percent to C$1.38 a share, while Toronto-Dominion will post profit of C$1.53 a share, a 20 percent decline from a year ago, according to the estimates. Toronto-Dominion said July 30 it’ll report a loss of as much as C$290 million in its insurance business in the quarter, due to C$418 million in charges for flood-related claims in Alberta and Toronto and increased general insurance claims.
Royal Bank, Toronto-Dominion, Scotiabank and Bank of Montreal are expected to raise their quarterly payouts in the quarter, according to Bloomberg’s Dividend Forecast model.