HOW AEROPLAN CHANGES MAY AFFECT CIBC, TD

Air Canada’s decision to launch its own loyalty program in June 2020 means both Canadian Imperial Bank of Commerce and Toronto-Dominion Bank will lose their primary relationship with the airline through Aeroplan.

That has investors wondering what impact the decision potentially has to erode the banks’ credit card portfolios over the next three years.

Gabriel Dechaine, an analyst at National Bank Financial, believes the changes will be less disruptive for CIBC, although it appears to have more to lose from an earnings standpoint.

Based on an assumed five- per- cent return on assets for credit cards and $3-billion worth of balances, Dechaine estimates Aeroplan accounts for roughly three per cent of CIBC’s 2017 earnings per share.

“We do not, however, believe that investors should assume that these earnings evaporate,” the analyst said, noting CIBC retained customers after the Aeroplan portfolio was split between the two banks.

He also pointed out CIBC has put a lot of money into its proprietary Aventura travel rewards program.

The analyst doesn’t know what TD’s plan is and that’s cause for concern.

Although TD’s Aeroplan cards portfolio represents a smaller proportion of overall earnings, at an estimated two per cent of 2017 EPS, the bank has made a bigger effort to partner with Aeroplan after it took on $3 billion of receivables in 2014.

“Unlike CIBC, it would appear that TD does not have an easy product conversion strategy in place,” the analyst said.

He believes TD could push forward with Aeroplan, and that might mean altering its structure to assign a cash value to the travel rewards.