Under pressure to protect its profitable credit card business, Canadian Imperial Bank of Commerce is negotiating to split its lucrative Aeroplan portfolio with Toronto-Dominion Bank, hoping to stave off a battle with rival banks looking to steal clients.
After months of heated negotiations, CIBC threatened in May to abandon its long-standing partnership with Aeroplan parent Aimia Inc. and launch its own independent travel rewards card. Because Bay Street analysts estimate that credit cards contibute between 5 and 20 per cent of CIBC's net earnings, investors have fretted about whether the end of a two-decade partnership would cut into that income.
The stakes rose when Aimia announced in June that it signed a 10-year agreement with TD, making the bank its primary card issuer. Therefore, CIBC would need to offer a new non-Aeroplan-affiliated credit card product to its existing Aerogold Visa cardholders. That would leave the bank vulnerable to defections among customers who like their existing cards.
CIBC announced Monday that it is negotiating with TD and Aimia to keep Aeroplan cardholders who have other CIBC relationships, such as bank accounts or mortgages. The deal would allow TD to buy the remainder – which account for over half of CIBC's Aeroplan portfolio. By doing so, CIBC would retain important clients and remain a secondary Aeroplan card issuer for 10 more years. (American Express is also an Aeroplan card provider, though its higher annual fees make it more of a niche player in Canada.)
Investors appear to like CIBC's approach. The bank's shares closed 2.03 per cent higher in Toronto, their biggest one-day gain since May 31, 2013.
John Aiken, financial services analyst at Barclays Capital, said the proposal is "a common sense approach that should accrue benefits to both CIBC and TD."
However, both banks said, in separate statements Monday, that a deal isn't assured. CIBC, TD and Aimia have until August 26 to reach an accord. That is likely to require revisions to TD's original agreement with Aimia, which involves paying the loyalty rewards company $100-million up front, as well as 15 per cent more per air mile.
Though the proposed agreement with CIBC would provide for a relatively seamless client transfer to TD, no deal can fully protect the acquirer from rival banks' competition. David Barnes, vice-president of advertising and communications at American Express Canada, acknowledged that there will be a "feeding frenzy" for the clients that TD purchases.
American Express and its rivals, he said, are likely to try to entice Aeroplan clients with special signing bonuses if they part ways with TD or CIBC and everyone expects the Canadian market to be indunated with offers, especially before TD becomes the new Aeroplan partner on January 1.
There is also skepticism about how much CIBC will gain from a three-way deal.
"Although CIBC is making the best of a difficult situation, the bank will still cede a meaningful competitive edge to a rival that already has operating scale and distribution scope advantages in Canadian personal and commercial banking," National Bank Financial analyst Peter Routledge noted. "TD will wind up with a new product feature that will help differentiate the bank in a very lucrative market."
Still, there is potential for CIBC to expand by launching its own travel rewards card that offers flexible travel redemption, such as Royal Bank of Canada's Avion card. But Linda Mantia, RBC's head of credit cards, warned that developing a product like Avion isn't an easy task. "To build our program, it's taken 10 years of continuous feedback" with cardholders and redemption partners, she said.
"We think it's very, very difficult to replicate," she said.