UPDATE 2-TD Bank seeks to replace CIBC as Aeroplan credit card partner

Thu Jun 27, 2013 5:09pm EDT

* New deal would end CIBC's two-decade partnership with Aimia

* CIBC says offer structure nullifies its right of first refusal

* Aimia rises 10.2 pct, CIBC gains 0.4 pct, TD climbs 0.6 pct

By Cameron French

TORONTO, June 27 (Reuters) - Toronto-Dominion Bank has agreed to replace Canadian Imperial Bank of Commerce as issuer of the popular Aeroplan credit card, a move that could pressure CIBC's bottom line at a time when Canadian banks are struggling to drive profit growth.

Shares of Aimia Inc, which runs the Aeroplan loyalty program, rose more than 10 percent after it announced the proposed 10-year agreement with TD on Thursday. Shares of the two banks rose modestly.

CIBC and Aimia have partnered for 22 years on the profitable "Aerogold" rewards card, which allows customers to accumulate Aeroplan points that can be cashed in for travel on Air Canada and its partner airlines, as well as other goods.

Analysts estimate the card produces more than 10 percent of CIBC's profits. The bank, Canada's fifth-largest, does not disclose financial results from its cards business.

"In the short term, definitely a headwind for earnings for CIBC," said Jeffrey Bradacs, a portfolio manager at Manulife Asset Management, which owns shares of both banks.

CIBC and Aimia entered talks to renew their agreement last year. But CIBC said last month it was going ahead with a plan to create an alternative rewards card in the event the partnership was not renewed.

Under the terms of the current agreement, CIBC can still hold on to the Aimia partnership if it matches the terms of TD's deal by Aug. 9, according to TD.

However, CIBC said in a statement that after reviewing the terms of the deal, it had concluded "that the notice and document provided by Aimia to CIBC appears to have been intentionally structured in a way that attempts to nullify CIBC's right of first refusal and any ability to match."

The bank said it was exploring its options. A spokesman would not provide additional comment or details.

PROFIT PRESSURE

Canadian banks have been facing the double-whammy of slowing loan growth, driven by a cooling housing sector, as well as low interest rates, which narrow the margins they make on loans.

TD has been building up its credit card business in recent years with deals such as its 2011 purchase of the MBNA Canadian credit card business from Bank of America.

While credit card loans are considered riskier than the mortgages that make up the bulk of Canadian bank loan books, they also boast more lucrative rates.

TD said the agreement, to take effect Jan. 1, 2014 if it goes through, would not have a material impact on its 2014 earnings but would make a "solid contribution" to 2015 earnings.

The bank will make a C$100 million ($95.32 million) upfront payment as part of the deal and commit to annual miles purchases for the first three years. The bank said it plans to offer a new suite of cards beginning in 2014.

If CIBC does exercise its right of first refusal, TD is entitled to a breakup fee of C$80 million.

Shares of TD, which is Canada's No. 2 bank, gained 0.6 percent to C$83.90.

CIBC, which has fallen 5 percent since the bank suggested in late May that the Aeroplan agreement might not be renewed, climbed 0.4 percent to C$75.31

Aimia said in a statement that the deal with TD would bring improved growth and strong free cash flow generation over the longer term.

Aimia's shares gained 10.2 percent or C$1.48 to C$15.40.

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