TD Ameritrade big winner in $4B deal

TORONTO — Toronto-Dominion Bank’s purchase of Scottrade Bank for $1.3 billion US is a deal that came together because of the Canadian bank’s relationship — and 42 per cent holding — in U.S. discount brokerage TD Ameritrade.

And the impact will be felt mainly south of the border where Ameritrade picks up Scottrade brokerage platform in the combined $4-billion US transaction.

“In terms of the strategic implications, it seems clear that this is far more impactful to Ameritrade than it is to TD Bank,” said Rob Sedran, an analyst at CIBC World Markets.

In a note to clients Monday after the deal was announced, Sedran said it would be an “oversimplification” to suggest that TD is involved simply to facilitate the transaction for Ameritrade.

“That said, we do not believe TD would have pursued Scottrade Bank as a stand-alone acquisition,” the analyst wrote, declaring that it would have been “much harder” for this transaction to come together without the Canadian bank’s involvement.

TD will pick up $4 billion US in loans and leases, and $15 billion US in sweep deposits. The acquisition represents a “marginal positive” for TD, due to anticipated earnings accretion expected to be felt mainly in fiscal 2018, Sedran said.

In contrast, TD Ameritrade expects 15 per cent to 20 per cent accretion within two to three years of the closing of the transaction. There will be benefits for the Canadian bank, including providing access to more bank deposits in the U.S. to fund loans. Core deposits are generally cheaper than wholesale funding from outside the bank, which increases net interest income.

Brokerages such as Scottrade generate what are known as sweep deposits for banks when cash awaiting investment in a brokerage account is automatically deposited or “swept” into an interest-bearing deposit accounts. In the case of Scottrade, these deposits will go TD Bank N.A.

“These are low 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. “It will also add to a good quality source of earnings with low volatility.”

When the deal closes, TD plans to purchase $400 million US Ameritrade shares to maintain its holding in the U.S. discount brokerage at 41 per cent.