The seven-year agreement announced Tuesday will also have TD Bank (TSX:TD) become the exclusive issuer of Target-branded credit cards in the United States.
The bank said that Target's credit card business has a gross outstanding balance of US$5.9 billion, with about five million active accounts under both Visa and private-label brands. TD will also fund the receivables for existing and new accounts.
"Our agreement with Target will significantly expand our presence in the North American credit card business," said president and CEO Ed Clark in a release.
The transaction will be funded with the bank's available resources, it said, but still requires regulatory approval and other closing conditions. TD expects it to close in the first half of 2013.
Over the past two years, the Canadian bank picked up a number of credit card portfolios from U.S.-based operators as it moves to expand its presence stateside.
The bank added that the partnership with Target will help it reach its adjusted earnings target of US$1.6 billion for its U.S. personal and commercial banking business in 2013.
The move comes as the U.S. retailer prepares to enter the Canadian marketplace next year. Target (NYSE:TGT), which is based in Minneapolis, plans to open 124 stores across Canada starting in March and April 2013.
"This transaction achieves all of Target's strategic and financial goals for a portfolio sale," said the retailer's president and CEO Gregg Steinhafel.
"We look forward to working with this premier global financial institution to continue Target's long history of innovation in our guest-focused financial services strategy."
Barclays analyst John Aiken said that he considers the transaction a positive development because it allows TD to boost its net interest margin through a more profitable use of its liquidity.
"The fact that TD will not issue equity will likely be viewed positively by the market," he wrote in a note.
In late 2010, TD Bank acquired Chrysler Financial, the automaker's old lending arm, from U.S. private equity firm Cerberus Capital in a deal valued at about $6.3 billion.
Several months later, the bank made a separate agreement to acquire the Canadian credit card business of Bank of America Corp. (NYSE:BAC) with about $8.5 billion in receivables.
TD Bank shares were down $1.17 at $81.75 at midday Tuesday on the Toronto Stock Exchange.