Until Monday, Toronto-Dominion Bank had an underwhelming credit card portfolio for the country’s second largest bank.
And it’s something TD’s management acknowledged. "While we have grown the business.... we remain below what we would perceive as our natural market share,” said Tim Hockey, TD’s head of Canadian banking, on a conference call Monday.
By acquiring, MBNA Canada’s credit card business, TD’s credit card book will be immediately beefed up to about double its current size. At the end of 2010, TD had about $8-billion in credit card balances on its book, while MBNA’s are worth about $8.5-billion. However, TD said about $2-billion of the acquired balances will be run off over the next two years or so, because they are too risky for TD’s liking.
For those who don’t know MBNA well, they are an aggressive credit card issuer who offers promotions such as teaser rates that allow cardholders to pay a low interest rate for the first two years, and then get saddled with much higher rates thereafter. MBNA also targets riskier groups, such as undergraduate students, even though they aren’t exactly the most likely to pay back their balances because most don’t have jobs.
The loss rates demonstrate the differences. TD’s current book has a loss rate of 4.2 per cent, while MBNA’s is 6.4 per cent. Combined in 2012, TD said its loss rate will probably jump to about 5 per cent. MBNA cardholders also have a higher average balance at $4,700 compared to TD’s at $2,000.
But TD is okay with adopting the higher risk because it's going to let some the most hazardous balances run off. "We just don't get enough return for the risk,” Mr. Hockey said. Plus, buying MBNA's Canadian card business will also make TD a dual-card issuer. (MBNA is Canada’s biggest MasterCard issuer.) That means a lot to retail clients. "We know our customers like to hold both a Visa and a MasterCard,” Mr. Hockey said.
Following the acquisition, TD card services will add about 1 million new customers, bringing its total to about 12 million customers. MBNA current has 1.8 million cardholders, but some of them are already TD cardholders.
TD also announced that it will issue about 8 million common shares to bolster its Tier 1 capital ratio under Basel III. Although the issuance is tied to the acquisition, chief financial officer Colleen Johnston said TD is also acting because of the current market uncertainty.