‘Sweep’ deposits sweeten Scottrade deal for TD Bank.
The Toronto- Dominion Bank is getting more than just an expanded stake in the U.S. discount brokerage market for the US$ 1.3- billion it is spending to acquire St. Louis-based Scottrade Bank, part of minority- owned TD Ameritrade’s US$ 4- billion takeover of rival Scottrade.
By teaming up with Omaha- based TD Ameritrade, in which its holds a 41 per cent stake, the Canadian bank will also be able to tap into US$15 billion in “sweep” deposits — brokerage account cash awaiting investment that is automatically deposited, or swept, into deposit accounts that provide a cheap source of funding for the bank.
“These are l ow cost ‘ sticky’ deposits — a good funding source for TD,” said David Beattie, a senior vice president in the financial institutions group at Moody’s Investors Service.
While the deal’s price tag and benefits are clearly larger for TD Ameritrade, the new deposits for Torontobased TD allow the Canadian bank to make good on its strategic objective of deposit growth, according to Peter Routledge, an analyst at National Bank Financial.
In a note to clients, he called Monday’s transaction “shrewd,” and estimated it would boost Ameritrade-linked sweep deposits for TD to more than $100 billion.
Banks use a combination of core deposits and wholesale funding from sources outside the bank to fund loans. The deposits are generally a cheaper source of borrowing, which increases the bank’s net interest income.
Beattie said funding from deposits is considered more stable because it is less “confidence- sensitive” than wholesale sources such as inter- bank funding, bonds, and short- term commercial paper. Sweep deposits have been cited as an important benefit from TD’s interest in the U.S. discount brokerage business since shortly after the 2006 combination of Ameritrade Holding Corp. and TD Waterhouse USA created TD Ameritrade.
TD chief executive Bharat Masrani s ai d Monday’s Scottrade transaction will “further strengthen” the relationship between the Canadian bank and TD Ameritrade. “We are pleased to see TD Ameritrade expand its business and solidify its leadership position in the market,” Masrani said in a statement. When the deal closes, the Canadian bank plans to purchase US$ 400 million Ameritrade shares to maintain its holding in the U.S. discount brokerage at 41 per cent.
The acquisition of Scottrade Bank alone represents a “marginal positive” for TD Bank due to anticipated earnings accretion to be felt mainly in fiscal 2018, said Rob Sedran, an analyst at CIBC World Markets.
In addition to the sweep deposits, TD picks up US$ 4 billion in loans and leases as part of the transaction.
“In terms of the strategic implications, it seems clear that this is far more impactful to Ameritrade than it is to TD Bank,” Sedran wrote in a note to clients.
TD Ameritrade, by contrast, expects 15 to 20 per cent earnings accretion within two to three years of the closing of the transaction.
Sedran said it is unlikely TD would have pursued Scottrade Bank as a standalone acquisition. Though he did not suggest the deal was done solely to allow TD Ameritrade to pick up Scottrade’s brokerage platform, he declared that it would have been “much harder” for the deal to come together without the Canadian bank’s involvement.
TD Bank’s CET1 ratio, a closely watched regulatory capital measure that sat at 10.4 per cent before the transaction, is projected to decrease by 30 basis points.
This will put i t above regulatory requirements, but at the low end of what Sedran refers to as an “oper- ating range.” As a result, the analyst expects the Canadian bank “will look to rapidly build capital in coming quarters.”
TD has been an active investor in the United States. In 2007, the Canadian bank completed the purchase of Banknorth, where it had staked a claim in personal and commercial banking in the U.S. with an investment a couple of years earlier. That was followed by the acquisition of Commerce Bank in 2008.
T he e x pansion from Maine into the southern states continued with smaller acquisitions.
In recent years, TD has been focused on building up portfolios such as credit cards in the United States, though Masrani, who ran the U. S. operations before taking over as CEO in 2014, has remained open to the prospect smaller “tuck- in” acquisitions to beef up operations in the U. S. southeast.
Tim Hockey, a longtime TD executive who was considered a strong contender to run the whole bank before Masrani got the job, instead moved to TD Ameritrade where he took over as CEO last month.