DBRS Comments on TD Announced Tri-party Agreement with Aimia and CIBC

DBRS today notes The Toronto-Dominion Bank’s (TD or the Bank) announced tri-party agreement with Aimia Inc. (Aimia; rated BBB, Stable) and Canadian Imperial Bank of Commerce (CIBC; rated AA, Stable), and believes this agreement will not have a material impact on the credit risk profile of the Bank. TD will acquire approximately $3 billion in existing Aerogold credit card receivables from CIBC and will become the primary issuer of Aeroplan Visa credit cards starting January 1, 2014. There are no rating implications for TD at this time.

The acquisition is consistent with TD’s objective to grow its credit card portfolio. With this $3 billion credit card portfolio from CIBC, TD will be the largest credit card issuer in Canada by outstanding balances. Additionally, DBRS believes that, under the terms of a ten-year program agreement, whereby TD will offer new co-branded Aeroplan Visa credit cards and be the exclusive mass marketer of Aeroplan Visa credit cards, TD will be able to further strengthen its number one position. 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.

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 to facilitate the launch and enhanced program.

The transaction is expected to attract $550 million of capital (a $50 million payment to CIBC, a $100 million credit mark and $400 million for operating capital) and result in a decrease in the common equity Tier 1 (CET1) ratio of 19 basis points. Notwithstanding the drop in capital, the Bank is well above the regulatory requirement, with the Bank reporting a CET1 ratio of 8.9% on July 30, 2013.

Within the agreement, there is also the potential for payments related to the migration of credit card customers from CIBC to TD or vice versa.

Based in Toronto, The Toronto-Dominion Bank has a full-service banking operation in retail and wholesale banking and wealth management in Canada and retail banking, auto finance and discount brokerage operations in the United States.

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

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (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 the DBRS website under methodologies.