Canada's big banks continue to demonstrate a strong desire to add to their high-yielding credit card portfolios in an environment where traditional loans are generating slim returns.
In the latest deal, National Bank of Canada has agreed to acquire 42,000 Canadian Automobile Association-branded MasterCard credit cards from Bridgewater Bank, a Calgary-based chartered bank that is a wholly owned subsidiary of the Alberta Motor Association.
National Bank also signed an agreement with the CAA, allowing the bank to issue new cards to cardholders in seven regional CAA clubs – and making the card available to all CAA members, which number more than six million.
"With the National Bank CAA Rewards MasterCard, they'll be able to enjoy a host of advantages, especially when they travel, be it in Canada, the United States or anywhere else in the world," Pierre Dufour, National Bank's vice-president of card and payment solutions, said in a statement.
National Bank did not comment further on the terms of the deal.
The bank has stated previously that it is keen to expand beyond its home base in Quebec, and the deal appears to satisfy that goal given that the seven regional CAA clubs are located in Alberta, Saskatchewan, Manitoba, Ontario and the Atlantic provinces.
However, in a December conference call with analysts following the release of fourth-quarter results, National Bank's chief executive officer Louis Vachon did not target credit cards specifically.
"Outside Quebec we are implementing several targeted initiatives including, one, commercial lending penetration in specialty markets where we have recognized expertise; two, opening carefully selected locations for high-net-worth individuals for private banking in Western Canada; and, three, locate retail banking branches in close proximity to [National Bank Financial] wealth management offices in Canadian markets following the successful pilot in British Columbia," Mr. Vachon said to analysts.
Still, the Bridgewater deal does not come as a big surprise. Regulatory and funding costs for the banks are rising at a time when lending fees are low, squeezing interest margins and putting pressure on bank profits at a time of economic uncertainty.
This backdrop makes the more robust yields on credit card balances look very appealing. But there is a downside: Credit cards are considered to be far more vulnerable to economic downturns than, say, mortgages, raising the attention of credit rating agencies.
Indeed, when Moody's Investors Service downgraded the long-term debt of Bank of Nova Scotia by one notch in January, it pointed to Scotiabank's rising exposure to credit cards – along with auto finance – as a reason.
"Over the last two years, in accordance with its strategic initiatives, Scotiabank has accelerated the growth in its credit card and auto finance portfolios – both of which are particularly prone to deterioration during an economic downturn and exhibit higher defaults and loss severities than mortgage portfolios," Moody's said in its January statement.
David Berman