TEXT-Fitch: TD Acquisition of Target's U.S. Credit Card Portfolio Ratings Neutral

Tue Oct 23, 2012 6:09pm EDT

NEW YORK, October 23 (Fitch) Fitch Ratings views Toronto-Dominion's (TD, 'AA-/F1+') announced agreement to purchase Target Corporation's (Target) U.S. credit card portfolio as neutral to TD's ratings. In Fitch's view, the transaction is consistent with the bank's expansion strategy in the U.S. and offers TD exposure to the customer base of a well-established U.S. retailer. The acquisition is also viewed as manageable relative to TD's overall capital base and banking franchise.

Under the terms of the agreement, TD will acquire Target's existing U.S. Visa and private label credit portfolio with outstanding balances of approximately $5.9 billion. Over the past few years, TD has built a solid presence and a large deposit franchise in the U.S. through several acquisitions. Today, TD owns TD Bank, NA with branches from Maine to Florida. While relatively small in the context of TD's operations, the transaction is in line with TD's focus on growing assets in the U.S. Further, it allows TD to redeploy its cost-effective core deposits into assets with a comparatively higher risk-return profile. This in turn should help TD, albeit modestly, achieve its goal of generating $1.6 billion adjusted earnings from its U.S. personal and commercial segment in 2013.

Additionally, TD has entered a seven-year program agreement to become the exclusive issuer of Target-branded Visa and private label credit cards to Target's U.S. customers going forward. Under the terms of the program agreement, TD and Target will share the net profits generated by the credit card receivables, with Target having the greater proportion. TD will provide funding, risk management policies, and regulatory compliance for the portfolios while Target will handle all elements of operations and customer service.

Target's credit card portfolio appears to have experienced comparatively elevated credit losses in prior periods. This is partly mitigated by higher yields relative to TD's own credit card receivables. The profit sharing agreement also provides TD with some cushion against outsized credit costs.

The transaction may bring some execution risks associated with the shared responsibilities for the portfolios. The transaction is anticipated to close in 1H'13 subject to customary regulatory approvals. The acquisition is expected to produce a return on assets of approximately 1% a year after closing, according to TD. Credit card receivables will be consolidated on TD's balance sheet from closing onwards. The transaction is expected to reduce Tier 1 capital ratio (Basel II) by approximately 20 bps and Basel III Common Equity Tier 1 ratio by approximately 14 bps at closing, on a pro forma basis as of 3Q'12.