UPDATE 3-TD Bank, CIBC reach deal on Aeroplan Visa card

Mon Sep 16, 2013 4:11pm EDT

* TD to pay C$162.5 mln to acquire CIBC portfolio

* To add 10 Can cts/shr on adjusted basis to TD 2014 profit

* To cut CIBC annual profit by 45 Can cts/shr ongoing basis

* Aimia shares reach highest since April 2008

By Cameron French

Sept 16 (Reuters) - Toronto-Dominion Bank agreed on Monday to buy about half of Canadian Imperial Bank of Commerce's Aeroplan Visa credit card portfolio in a deal that will see both banks issue the popular and lucrative rewards card.

The agreement, which drove shares of Aeroplan loyalty program operator Aimia to a five-year high, averts a potential legal battle between the two banks and also eliminates uncertainty over the future of the card that could have seen customers flee to other banks.

"It's safe to say that TD is the winner from this (of the two banks)," said Gavin Graham, chief strategy officer at Integris Pension Management Corp.

TD, Canada's second-largest bank, will pay C$162.5 million ($157.59 million) to CIBC to acquire about 550,000 cardholder accounts, representing about C$3 billion in card balances and C$20 billion in annual retail spending, TD said. It will also become the card's primary issuer.

CIBC, the country's No. 5 lender, will receive an additional payment from Aimia and will keep the remaining 630,000 Aeroplan accounts held by existing banking customers. It will also continue to issue the card under the 10-year deal.

RESOLVES AEROPLAN BATTLE

The deal resolves a months-long battle for control of the lucrative Aeroplan card, which allows customers to earn points that can be cashed in for flights on Air Canada and its partner airlines, as well as other goods.

CIBC has been the card's main issuer for more than two decades, but lost that role earlier this year, after Aimia could not come to terms on an extension with CIBC and instead entered into a partnership with TD.

CIBC had a right to match the terms of TD's deal, but said the deal was structured in a way that attempted to nullify that right. Last month, the banks said they were in talks for a compromise deal, although CIBC noted that if an agreement were not reached it retained its rights to exercise legal options.

TD Chief Executive Ed Clark told Reuters that doing a deal allowed TD to acquire card customers upfront, rather than having to entice them to come to the bank and risk losing them to competitors.

"There's kind of "jump ball" in the marketplace to see who's going to win those customers," said Clark.

"(So) you've got to spend a lot of marketing dollars and try to win every one of those customers over, whereas here, they're automatically your customers."

TD, which plans to launch five new Aeroplan cards in Canada and the United States, said the deal would contribute 10 Canadian cents per share to earnings next year on an adjusted basis and would contribute about 15 Canadian cents a share in 2015.

TD has been bulking up its credit card business for the last several years and with this deal will unquestionably be the market leader in Canada.

The business offers higher margins and return on equity than traditional lending, and TD's increased exposure comes as Canadian consumer loan growth slows amid a cooling housing market.

Barclays Capital analyst John Aiken said the fact that TD would be acquiring customers rather than having to win them over was positive, but said the negative in the deal was that TD would not be the sole Aeroplan Visa issuer in Canada.

"We do not believe that this was the original vision when TD initially pursued the contract with Aimia," he said in a note.

CIBC RETAINS HALF

For CIBC, analysts said the deal was a better outcome than the potential of losing the entire Aeroplan portfolio, which had seemed a possibility after TD reached its deal with Aimia.

However, the bank said the agreement will trim its earnings by about 45 Canadian cents a share on an annual basis, the bank said.

Last month, CIBC disclosed that the Aeroplan card portfolio generated 95 Canadian cents per share in profit over the 12 months ended July 31, or about 12 percent of the bank's overall profit during that period.

Speaking on a conference call, CIBC CEO Gerry McCaughey deflected questions from analysts about why CIBC was unable to reach a deal with Aimia to extend its partnership before TD entered the picture.

"The discussions that went on over the last very long period of time, as to our renewal on a unilateral basis with Aimia, are moot at this point," he said.

In addition to maintaining half of the Aeroplan portfolio, CIBC plans to launch a new flight rewards card.

Shares of TD were up 1.4 percent at C$91.14, while CIBC was up 1 percent at C$81.92. Aimia was up 6 percent at C$17.63, and earlier in the session touched its highest level since April 2008.

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