TD Bank has marched into the consumer credit card business by placing a hefty bet on the 1.8 million MBNA credit card accounts currently held and operated by Bank of America, doubling the size of its credit card business and perhaps beginning to rival the position of CIBC.
TD payed $8.6 billion (for a portfolio agreed to be worth $8.5 billion) for the MBNA accounts, as a new way of expanding growth now that the mortgage market is unlikely to return to its mid-2000s heyday, and banks have been looking to other opportunities to continue building their business.
Some analysts have criticized, or at least expressed minor concern, over the relative risk of the MBNA accounts, which were generally acquired through aggressive lending practices that issued cards to less than perfect borrowers, and carry a higher rate of risk than certain other accounts, with a 6.4% loss as opposed to 4.2% for TDā™s credit card portfolio overall.
However, such a move is calculated against the backdrop of the current economic climate, which has been rather tumultuous as of late, to say the least; with consumer spending and saving down significantly, TD is increasing its chances of taking on losses from defaulting borrowers; however, it is likely banking on the recovery of the economy in upcoming years, and snapping up assets at relative bargains under the expectation that such assets will grow. Bank of America has been looking to raise capital in recent months, having been troubled by multiple financial catastrophes relating to the housing market, and has attempted to bolster its position by unloading certain assets at home and abroad.
TD, meanwhile, has been looking to expand during the downturn, having acquired American banks to increase its holdings in the US, and acquiring auto-lender Chrysler Financial. If the economy recovers anytime soon, TD will likely see some major returns if consumers return to pre-recession buying levels. Though inherently a risky move, TD is likely looking at long-term growth rather than short-term returns, at least on these particular deals.
Other Canadian banks have been making similar moves, such as when CIBC acquired Canadian MasterCard issuer Citigroupā™s assets, and in general the Canadian banking sector seems somewhat more capable of making such acquisitions compared to the American banks, at least under current conditions. Market shakeups have seen major banks either selling or buying assets during the crisis, and such developments will likely have significant impacts on the balance sheets of banks able to capitalize on such activity, as well as cause difficulty for those who experienced difficulty during such an era.
Nonetheless, it is not likely that TD will experience meteoric growth from these assets anytime soon, as consumer debt levels are still considered by many at unhealthy highs, and consumer spending will take some time to recover, especially in the United States. But TD will likely win out in the end, and put itself in an increasingly significant position, both at home and abroad, with assets purchased during this time, which may lend some pride to a Canadian institution cleaning up an American mess.
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