TD Bank (TSX:TD) has signed a deal to buy Chrysler Financial from U.S. private equity firm Cerberus for $6.3 billion in a bid to grow its auto lending business across North America.
The Canadian bank said it bought the former lending division of the U.S. automaker as part of an investment strategy for the $80 billion worth of assets currently held by its U.S. banking arm.
“Part of our strategic quest has been to find ways to grow out our asset-generation businesses and this is frankly one of the best asset-generation businesses we’ve ever seen,” said Tim Hockey, group head of Canadian banking and insurance and president and CEO of TD Canada Trust.
The deal includes $5.9 billion in net assets and about $400 million in goodwill. The acquisition follows several deals by TD to expand its U.S. retail banking business along the eastern seaboard.
“The banks that we have acquired are great at attracting deposits and in today’s environment a key opportunity for banks is to find good asset growth businesses,” Hockey said.
“So to complement our strength on the deposit side, we needed to find essentially businesses like this one or industries like this one that generate good quality assets and that are looking for high-quality funding.
The deal is expected to be neutral to earnings in 2011 on an adjusted basis and add about $100 million in adjusted earnings in 2012, the first full year of operations, the bank said.
It is expected to shave 55 to 60 points off of TD’s Tier 1 capital ratio. The bank’s Tier 1 capital ratio at the end of its 2010 financial year was 12.2 per cent.
“We want to go slowly and ramp up, but at the same time we think there’s great opportunities to have a running rate portfolio of about $20 billion in about three to four years,” Hockey said.
TD said it plans to combine its existing car lending business at TD Canada Trust and its U.S. operations with Chrysler Financial, which will be rebranded under the TD banner next year and be headed by Chrysler Financial chief executive Tom Gilman.
Stonecap Securities analyst Brad Smith called the deal potentially positive for the bank.
“The need to veer off strategy into an auto lending business investment, however, underscores the inherent challenge that management sees in achieving its former earnings guidance of $1.6 billion for the U.S. segment,” Smith wrote in a note to clients.
RBC Capital Markets analyst Andre-Philippe Hardy, who rates TD “outperform” with a $92 price target, said the deal adds to the bank’s earnings potential.
“The value of the goodwill will be justified if TD can successfully capitalize on the existing operating infrastructure of Chrysler Financial to grow this book of business,” Hardy wrote in a note to clients.
Hockey noted that the auto lending business held up better than was expected during the recession, compared with the meltdown in mortgage-backed securities and other lending.
“Even in the recession we found the loss rates on car loans both in Canada and the U.S. to be substantially lower than what we would have thought pre-crisis,” he said.
“There are actually more stable returns in this business than you would think.”
TD also owns about 40 per cent of TD Ameritrade (Nasdaq:AMTD), a discount brokerage based in the U.S. Midwest.
The bank now has more than 1,000 branches throughout the U.S. Northeast, Mid-Atlantic, Florida and Washington, D.C., areas.
TD stock closed up $2.64 at $73.16 Tuesday on the Toronto Stock Exchange.