TD Bank has signed a deal to acquire U.S. retailer Nordstrom’s existing U.S. Visa and private label consumer credit card portfolio, which totals roughly $2.2-billion (U.S.) in receivables.Dave Chan/The Globe and Mail
After Toronto-Dominion Bank announced a deal on Tuesday that will see the lender acquire retailer Nordstrom Inc.'s U.S. Visa and private-label consumer credit card portfolio, it became clear that the lender's credit-card ambitions are far from satisfied.
TD has emerged as a serious player since 2013, after acquiring Target Corp.'s $5.9-billion (U.S.) credit-card portfolio and buying half of the Aeroplan portfolio from Canadian Imperial Bank of Commerce for another $3-billion (Canadian) in balances.
These deals are adding up: TD's Canadian credit-card loans have grown to nearly $19-billion and U.S. loans add another $8.5-billion, as of the fiscal first quarter of 2015.
In 2010, the total stood at just $9-billion.
The deal with Nordstrom – expected to be finalized in the second half of this year – looks like a relatively small addition: The way things stand right now, it will add $2.2-billion (U.S.) in receivables. In addition, TD will issue Nordstrom-branded Visa and private-label cards to Nordstrom customers.
TD had little to say about the deal because the bank is in its "quiet period" ahead of reporting its fiscal second-quarter results on Thursday. However, in a statement, TD's chief executive officer Bharat Masrani stressed the importance of the Nordstrom name in retailing: "TD will be working with one of the most highly respected retail brands in the world and one with a well-established, national customer base" – implying that it sees considerable room for growth.
What's arguably more important here is TD's efforts to increase its profit margins in the United States, where the lender's significant operations are tilted heavily in favour of taking deposits rather than making loans.
Peter Routledge, an analyst at National Bank Financial, refers to TD's U.S. balance sheet as "loan-light and deposit-rich," where the ratio of loans to core deposits stands at just 70 per cent, versus a peer average of 107 per cent.
As he explains in a note, "TD has yet to redeploy much of its U.S. holding company's balance sheet into higher-yielding assets from low-yielding securities, thereby inhibiting margin expansion."
In other words, credit-card loans generate more income than typical investments derived from bank deposits.
How much more? TD won't say, yet. But Mr. Routledge noted that when TD announced its deal with Target, the bank estimated it would earn a one-percentage-point spread on gross receivables. If the bank gets the same spread in the Nordstrom transaction, the analyst believes it would look very attractive next to the 0.48-point spread that TD generated from its U.S. holding company's earning assets.
"In short, TD will generate greater yield from its U.S. balance sheet as a result of this transaction," Mr. Routledge said. "To gain access to these assets, TD will essentially 'rent' its core deposits to Nordstrom."
John Aiken, an analyst at Barclays Capital, made a similar point: "TD is following a well-worn path in its acquisition of credit-card portfolios and we have little doubt that the Nordstrom acquisition and strategic partnership will bear fruit over time. Further, the acquisition of assets in the U.S. provides for more optimal deployment of its surplus liquidity."
TD is not alone in its pursuit of more card balances, as Canadian banks seek new sources of growth amid a slowing domestic economy and low interest margins. Bank of Nova Scotia recently completed a deal with South American retailer Cencosud SA, giving the Canadian lender about $1-billion in credit-card balances; Scotiabank has also taken a 20-per-cent stake in Canadian Tire Corp. Ltd.'s financial-services division, which is Canada's eighth-largest issuer of credit cards.