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Toronto-Dominion Bank pulled the trigger on a $6.3-billion (U.S.) deal for Chrysler Financial Corp., a move into U.S. auto lending that its chief executive officer tried hard to assure investors is not a major gamble.

The country's second-largest bank purchased the nearly-dormant lender with an eye to restarting its operations and capturing a larger piece of the market for U.S. auto financing, as car and truck sales bounce back from a vicious downturn.

TD CEO Ed Clark has already proven that he does not intend to shy away from his long-held ambition to grow boldly in the U.S., even though the country's economy and borrowers are in the early stages of a lengthy recovery. But the purchase of this lending company, which once belonged to its namesake Detroit auto maker, is a far cry from betting the house, he insisted.

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Chrysler Financial stopped making new loans more than a year ago, and consumers continue to pay its large portfolio of old auto loans down. Since those loans are typically for a three-year term, by the time that TD actually takes over the business early next year there will only be about $7.5-billion in loans and leases outstanding. Ninety per cent of those are in the U.S., with the rest in Canada.

Subtract Chrysler Financial's liabilities, and a sliver of loans that consumers might default on, and it should have about $5.9-billion in net assets, meaning TD is really paying less than half a billion to acquire what remains of the Michigan-based lender's operations.

"This was a top-three player in the United States, a machine that could produce $75-billion of [high-return]assets, and the No. 1 rating in customer satisfaction," Mr. Clark said in an interview. "And we got it for $400-million."

What TD will have is a business that needs to be reactivated. Cerberus Capital Management LP, a New York-based private equity fund, has owned Chrysler Financial since 2007 when Cerberus bought 80 per cent of Chrysler Group's operations. At its peak, the auto lender was the third largest in the business.

It still has the framework of a business - including a management team, 1,850 employees, and more than 2,000 dealer relationships -even though it has not been lending.

TD is not a stranger to auto lending. It already has a portfolio of $10.4-billion (Canadian) worth of auto loans through a network of 4,100 dealers in Canada, giving it about 15 per cent of the $65-billion Canadian auto loan business. Banks are not allowed to compete directly with car companies for auto leases in Canada, but do backstop leases offered by dealers. However, some car makers have recently indicated they would not be against Ottawa changing the rules to allow banks into the business in Canada.

While TD is already a significant presence in the Canadian auto loan market, in the U.S. it has only about $3.3-billion (U.S.) of auto loans through about 1,100 dealers, a tiny sliver of the $700-billion business south of the border.

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With Chrysler Financial, which will relocate its headquarters from Michigan to Toronto and be rebranded under TD's name, Mr. Clark hopes to eventually take a $20- to $30-billion slice of the U.S. market, which is projected to grow to $900-billion in the next few years. The recession caused consumers to delay car purchases, but auto lenders expect sales to pick up.

The business that TD plans to build will be different from the one that Chrysler and Cerberus held. Once it's fully up and running it is expected to make about $1-billion in loans per month, compared with $2.5-billion in the past. Currently, 70 per cent of Chrysler Financial's portfolio is loans to prime customers (those with the most solid credit ratings), while 30 per cent is near-prime. TD will try to make 90 per cent of its loans to prime borrowers, noted RBC Dominion Securities Inc. analyst Andre-Philippe Hardy.

The deal will not affect earnings in 2011, but TD expects about $100-million in adjusted earnings in 2012. The acquisition will reduce TD's Tier 1 capital by about 55-60 basis points when it closes, which is expected to be in the second quarter, pending regulatory approvals. Chrysler Financial will be rebranded by spring 2011.

The move also gives TD a needed avenue for making new U.S. loans. When the bank bought New Jersey-based Commerce Bancorp for $8.5-billion in 2007, it picked up a lender with an unusually high ratio of deposits to loans. It has struggled to find ways to deploy the deposits, since U.S. borrowers are working to cut their debt loads.

TD's move is the latest by a Canadian bank to acquire U.S. assets as well-capitalized Canadian lenders take advantage of buying opportunities presented by U.S. financial companies. Last week Bank of Montreal acquired Milwaukee-based bank Marshall & Ilsley Corp. for $4.1-billion (U.S.) worth of stock. That deal, which gave BMO a much bigger branch footprint in Wisconsin and other U.S. states, came with $52-billion in assets.







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