Rating agency DBRS Ltd says that the three-way credit card deal between TD Bank, CIBC and Aimia Inc. will not significantly alter the credit risk profile of either bank, although it also sees challenges for both in the wake of the deal.
Under the deal, TD (TSX:TD) will acquire approximately $3 billion in existing Aerogold credit card receivables from CIBC (TSX:CM) and will become the primary issuer of Aeroplan Visa credit cards starting January 1, 2014. DBRS says that TD will pay $162.5 million to CIBC, $50 million at closing and approximately $37.5 million per year in each of the three years after closing. TD will pay $100 million to Aimia Inc. (TSX:AIM) to facilitate the launch and enhanced program.
“The acquisition is consistent with TD’s objective to grow its credit card portfolio,” DBRS says, noting that it will make TD the largest credit card issuer in Canada by outstanding balances. And it says that, TD will be able to further strengthen its number one position as the primary issuer of Aeroplan Visa cards.
DBRS believes one of the challenges for TD will be the retention of the transferred accounts from CIBC “as other travel card issuers will aggressively try to take advantage of the change.”
Additionally, it reduces the bank’s capital position, DBRS says. The transaction is expected to consume $550 million of capital for TD (a $50 million payment to CIBC, a $100 million credit mark and $400 million for operating capital), reducing its common equity Tier 1 capital ratio by 19 basis points, DBRS reports. Notwithstanding the drop in capital, it says that the bank is well above its regulatory requirements.
As for CIBC, the rating agency says that “the credit risk profile remains solid, notwithstanding the expected loss in earnings from the sale of $3 billion in credit card receivables.” It also notes that CIBC retains the credit card receivables for customers who have more than one product with the bank; and, that it will continue to issue Aeroplan-related cards through its own bank channels, which DBRS says should strengthen the bank’s ability to retain those customers that have broader banking relationships.
Additionally, CIBC is continuing with its previously announced plan to introduce an enhanced proprietary travel loyalty rewards credit card, it says. “This initiative should help CIBC with originations of new credit card customers. However, DBRS believes a challenge is presented in the length of time it will take to organically grow the new credit card portfolio to a material size,” it says.
The deal is expected to close in December. While CIBC will receive $200 million from TD and Aimia, and approximately $37.5 million per year from TD for three years following the sale’s closing, it will also incur $55 million in costs from the sale of the portfolio, DBRS says. “Additionally, the transaction is expected to release $2.5 billion in risk-weighted assets and $460 million of capital on closing ($180 million net after-tax gain and $280 million regulatory capital),” it says.