Canadian banks snapping up consumer loans - Financial Post

Against a backdrop of rising concern around the crisis in Europe and slowing consumer loan growth domestically, Canada?s banks are under pressure to maintain the steady earnings growth that markets have come to expect of them.

But players are finding ways to make it happen.

Royal Bank of Canada on Tuesday confirmed reports that it is buying the Canadian subsidiary of auto lending giant Ally Financial Inc. for $1.4-billion, net of excess capital.

The business has always had an attraction to us

A significant player in this country, Ally Canada has about $9-billion of assets and RBC expects it to generate roughly $120-million of earnings in the first 12 months after the transaction closes.

?The business has always had an attraction to us,? Dave McKay, RBC?s head of personal and commercial banking, said in an interview. ?[The deal] has allowed us to basically double the size of our position in the [auto finance] market place with a high quality, established player with a broad base of relationships across the country.?

The announcement comes the same day as Toronto-Dominion Bank, the country?s second-biggest lender, said it will buy retail behemoth Target Corp.?s U.S. credit card portfolio which has assets of US$5.9-billion. Target said that it expects to book pre-tax gains associated with the sale of the portfolio of up to US$600-million.

Under the agreement which includes a seven-year funding commitment from TD, the two companies will split the profits from the portfolio with Target getting the larger share.

In a statement, Ed Clark, chief executive of TD, said the acquisition will ?significantly expand? the bank?s presence in the North American credit card business.

?This asset purchase aligns perfectly with our risk profile and strategy, and will contribute to achieving our stated adjusted earnings target of US$1.6-billion from our U.S. P&C segment in 2013,? Mr. Clark said.

The big banks have traditionally earned the lion?s share of their profits from their retail lending operations which for the past ten years or more have enjoyed a huge lift from falling interest rates and a rising housing market. But that?s coming to an end.

So to keep their loan books getting fatter, the banks are essentially buying loans made by other companies ? or at least, that?s one way to look at the Ally and Target deals.

Analysts say that also describes Bank of Nova Scotia?s recent acquisition of Internet lender ING Direct.

Formerly known as GMAC, Ally Financial ran into trouble in the financial crisis and is now 74% owned by the U.S. Treasury. In a bid to raise capital it?s been selling off parts of its international operations so the sale of Ally Canada was widely expected.

The business provides inventory financing for 580 dealerships, primarily GM and Chrysler, across the country and loans to 450,000 consumers.

Auto finance is appealing to the banks because the loans, which are secured, carry relatively high interest and require only limited bricks and mortar investment, since consumer lending is done out of the dealerships.

Mr. McKay said the transaction which is expected to close next year will take Royal to a number-one position in terms of auto loan market share with about $24-billion in assets, up from a number two or three.

Mr. McKay rejected suggestions that buying Ally was simply about goosing growth in a stagnate economy.

?We bought a stable business with good growth prospects, with distribution expansion and a top franchise,? he said. ?Whether loans were growing really well or not, we would have gone after this company.?

TD is also a big player in auto lending in the wake of its $6.3-billion purchase of Chrysler Financial at the end of 2010, and indeed it?s been jockeying with RBC the top spot in marketshare.

CIBC World Markets analysts Rob Sedran called Ally an ?interesting acquisition? for RBC ?in that it adds heft in one of the few domestic businesses in which it did not already have a dominant position.?

But he cautioned in a note to clients that growth prospects ?may be hampered somewhat? by over-heavy consumer indebtedness and rising competition.

Source: http://business.financialpost.com/2012/10/23/canadian-banks-snapping-up-consumer-loans/

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