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TD Bank Inks Deal with CIBC & Aimia

Zacks Equity Research

The Toronto-Dominion Bank (TD) recently entered into a definite agreement with Aimia Inc. (Aimia) and Canadian Imperial Bank of Commerce (:CIBC) to become the primary issuer of Aeroplan Visa credit cards effective Jan 1, 2014. The Aeroplan credit card comes with a loyalty program, which offers diverse services to the cardholders.

Last month, TD Bank declared an agreement with Aimia, wherein the former would become the key issuer of Aeroplan credit cards. However, this was challenged by CIBC, the sole issuer of the particular card at the time.

CIBC claimed that TD Bank’s deal with Aimia was invalid as it was a violation of Aimia’s obligations toward CIBC, under the credit card agreement expiring Dec 31, 2013. Notably, Aimia and CIBC were in a partnership for the last 22 years.

After extensive negotiation, TD Bank and CIBC finally reached a settlement. As per the mutual agreement, 50% of CIBC’s Aeroplan credit card will be acquired by TD Bank for $162.5 million (out of which, $50 million will be paid when the deal closes and the remainder in the next 3 years). Therefore, approximately 550,000 cardholder accounts worth $3 billion in card balances and $20 billion in annual retail spend comes under TD Bank’s domain.

TD Bank has been constantly expanding its credit card business. In 2011, it purchased the MBNA Canadian credit card business from Bank of America Corp. (BAC). The latest deal was a lucrative one for TD Bank, as it gives it an opportunity to become the largest credit card issuer in Canada.

It will likely enhance TD Bank’s credit card business by expanding the card portfolio and boost future earnings. However, TD Bank’s Basel III Common Equity Tier 1 ratio is expected to fall as a result of the transaction.

As per the 10-year agreement between Aimia and TD Bank, the latter expects to revise the existing offers and benefits on the Aeroplan credit card in an attempt to provide better services to customers. Moreover, Aimia will support TD Bank’s endeavors in return of $100 million to be paid by the latter for the same.

TD Bank currently carries a Zacks Rank #3 (Hold). Other better-performing banks include Grupo Financiero Galicia S.A. (GGAL) and Sumitomo Mitsui Financial Group, Inc. (SMFG). Both of these stocks carry a Zacks Rank #1 (Strong Buy).

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