DBRS Comments on TD’s Acquisition of Target’s U.S. Credit Card Portfolio

DBRS notes that the Toronto-Dominion Bank (TD or the Bank) has today announced its acquisition of Target Corporation’s (Target) existing U.S. Visa and private label credit card portfolio. The deal also includes a seven-year agreement where TD will act as the exclusive issuer of Target-branded Visa and private label consumer credit cards to Target’s U.S. clientele. There are no rating actions as a result of this announcement.

The transaction is consistent with TD’s strategy to bolster its credit card portfolio south of the border while continuing to build a presence in the affinity space. The Target credit card portfolio is viewed as a positive for the Bank’s expansion into the United States. Additionally, the utilization of core deposits from TD’s U.S. operation will be beneficial for funding the acquired portfolio.

The transaction will involve TD acquiring US$5.9 billion in gross outstanding loans from over five million active Visa and private label accounts. The program agreement has TD and Target sharing profits generated from the portfolio, with Target receiving a more substantial interest. The split of responsibility appears to be appropriate, with each party focusing on their respective strengths. TD will control risk management, regulatory compliance and will fund the portfolio while Target will manage the operational elements, bear the operating costs to service the portfolio and handle customer service. The Bank is expecting the portfolio to produce a return on assets in the 100 basis point range in the first year following the acquisition.

The acquired credit card portfolio is stated to have credit quality in line with industry benchmarks. The quality of credit card clients is believed to be above average in regards to credit risk characteristics. The acquisition will have a moderate impact on capital, with the Bank expecting to see a 20 basis point decrease in its Tier 1 capital ratio and a 14 basis point drop in its Basel III common equity Tier 1 (CET1) ratio upon closing of the transaction. The drop in capital metrics still positions TD comfortably in regards to regulatory limits, with the Bank reporting a CET1 ratio of 7.7% at July 30, 2012, well above the regulatory requirement of 7% targeted for the first quarter of 2013.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organizations (June 2012), DBRS Criteria: Rating Bank Preferred Shares and Equivalent Hybrids (June 2009) and DBRS Criteria: Intrinsic and Support Assessments (February 2009), which can be found on our website under Methodologies.

The source of information used for this commentary includes the Toronto-Dominion Bank.