RBC, TD spend $20 billion on U.S. assets

Banks look to bolster their profits by acquiring credit-granting companies

TORONTO — Royal Bank of Canada and Toronto-Dominion Bank announced purchases Tuesday of almost $20 billion in combined assets from U.S. companies to bolster profit before a slowdown in domestic consumer lending.

Royal Bank, the country’s largest lender, plans to buy Ally Financial Inc.’s Canadian auto-finance and deposit business in a deal that Ally said will generate $4.1 billion for the Detroit-based lender. Toronto-Dominion agreed to acquire Target Corp.’s $5.9-billion U.S. creditcard portfolio for an amount equal to the gross value of the outstanding loans at the time the deal is completed, the firms said.

Canadian lenders, ranked as the soundest for the past five years by the World Economic Forum, are seeking to bolster domestic consumer-banking profits next year with household debt at record highs.

“The banks are more optimistic than I expected in 2013,” Peter Routledge, an analyst with National Bank Financial, said in a phone interview. “To me it’s a sign of optimism.”

The total price for Ally’s business will range from $3.1 billion to $3.8 billion, depending on the size of a dividend taken by Ally before the deal is completed, the Canadian lender said in a statement. It would be the largest takeover ever for Royal Bank, eclipsing a $2.16-billion purchase of Centura Banks in 2001.

“Auto loans came through the crisis as a very, very good asset,” Routledge said. “It was profitable, credit qual- ity was better than people expected, yields were decent so it’s good risk-return. It just seems to me like a good asset for Royal Bank.”

“Of the deals that we’ve looked at in Canada, this was one that we really wanted,” RBC chief executive officer Gordon Nixon, 55, said in a conference call.

Royal Bank said it expects the Ally Canada business to generate $120 million in profit, excluding $50 million in one-time costs, and “modestly” add to per-share earnings in the first year.

The transaction includes Ally’s ResMor Trust unit, which had $3.8 billion in deposits and $4.2 billion in assets at the end of Septem- ber. ResMor’s deposits come at a cost, according to Dave McKay, RBC’s group head of personal and commercial banking. Ally’s high-interest savings account pays 1.8 per cent, compared with 1.2 percent at Royal Bank, he said.

TD’s pact with Minneapolis-based Target “will significantly expand our presence in the North American credit-card business,” Toronto-Dominion CEO Edmund Clark, 65, said in a statement.

TD agreed to a seven-year deal to underwrite, fund and own consumer loans made with the retailer’s Targetand Visa Inc.-branded credit cards in the U.S.

“We think it makes financial sense, because it lever- ages our deposit base,” said Michael Rhodes, TorontoDominion’s executive vicepresident of North American credit cards and merchant services. “It makes strategic sense because we have a lot of interest in expanding our North American card business.”

Toronto-Dominion, which has more branches in the U.S. than Canada, said the transaction will help it meet a forecast for $1.6 billion in U.S. consumer-banking profit by next year.

“TD has been looking for assets in which to deploy its significant liquidity in the U.S.,” said John Aiken, an analyst at Barclays Plc in Toronto.