Toronto-Dominion Bank has launched an aggressive bid to lure the Aeroplan business away from Canadian Imperial Bank of Commerce, as TD looks to take a bigger share of the lucrative credit card market.
The deal with Aeroplan, announced Thursday, would make TD the loyalty program's primary card provider, while severing a decades-long relationship between CIBC and Aeroplan.
Until very recently, TD was a relatively small player in Canadian credit cards. But over the past two years, the bank has been pushing to make a name for itself, and an Aeroplan agreement would go a long way to boost its presence.
However, there is no guarantee that TD will become the new provider, despite offering $100-million up front to win the bid. CIBC's existing contract with Aimia Inc., Aeroplan's parent company, offers the bank a right of first refusal, meaning CIBC can match TD's offer and automatically renew its Aeroplan agreement.
For now, CIBC is staying mum on its intentions. But should the bank let the contract lapse and then launch its own travel rewards card in response, analysts expect a feeding frenzy as financial institutions try to steal CIBC's existing Aeroplan clients. BMO Nesbitt Burns analyst John Reucassel estimated this week that the banks could spend between $500-million and $700-million to target these clients through aggressive advertising campaigns.
CIBC acknowledged the possibility of such a frenzy during its last quarterly conference call. After hinting that CIBC might launch its own card and spend $50-million over the next year to support it, chief executive officer Gerry McCaughey said "frankly, we expect several market players will also spend significantly."
The window for TD to swoop in on the Aeroplan contract opened after Aimia hit a stalemate with CIBC while negotiating the renewal of their existing contract. The partners have worked together for over 20 years, and their current agreement expires at the end of 2013.
Instead of waiting for CIBC to make up its mind, Aimia held an auction for a new partner, which TD won by agreeing to boost the amount Aimia is paid per air mile by 15 per cent, while also paying the $100-million upfront.
In return, Aimia agreed to pay TD an $80-million break fee should CIBC ultimately renew the contract -- suggesting Aimia is relatively confident about the prospects of switching to TD.
As part of TD's recent push into credit cards, Canada's second-largest bank bought MBNA's credit card portfolio in 2011, adding $8.5-billion of credit card receivables and 1.8-million active accounts.
Regardless of which bank wins the contract, Aeroplan will tweak its travel rewards program as it fights to remain a leader amidst tough competition from the likes of Royal Bank of Canada, whose Avion card allows clients to cash in their reward miles on any airline. Under revised terms, Aeroplan members will no longer lose their unused reward miles after seven years, and some clients will see discounts on the number of miles required to purchase their flights.
Aimia CEO Rupert Duchesne said he isn't concerned about losing customers should TD takeover the contract. "We're very confident in the transition arrangements," he said in an interview, citing Canadian studies that found 80 per cent of clients moved over to the new card provider in similar situations.
On a conference call, Mr. Duchesne noted the majority of Aeroplan customers do not have a banking relationship with CIBC beyond the credit card, so they don't have much tying them to the bank.
In a statement released Thursday, CIBC did not say if it would match TD's offer. However, the bank took issue with the way Aimia structured its proposed contract with TD. "Upon legal review, we have concluded that the notice and document provided by Aimia to CIBC appears to have been intentionally structured in a way that attempts to nullify CIBC's right of first refusal and any ability to match," the bank said, adding that it is now exploring its options.
Although CIBC hasn't disclosed which way it is leaning, some analysts are surprised the bank is considering launching its own card -- regardless of a new card's potential to offer clients the right to redeem points on any airline. They estimate that without the Aeroplan contract, CIBC could see its earnings per share drop anywhere between 25 cents and 65 cents next year.
That drop is larger than the hit to earnings per share that CIBC would see even if it agreed to match TD's more expensive contract, according to analyst Peter Routledge at National Bank Financial.
The stakes are particularly high for CIBC because the country's fifth-largest bank is more reliant on credit cards, relative to its peers. Credit cards comprising between 20 and 25 per cent of CIBC's profit, according to analyst calculations, and BMO's Mr. Reucassel estimated that this contribution is more than double what credit cards contribute to other banks' profits.
With files from Guy Dixon