08/15/2011 07:06 EDT | Updated 10/15/2011 05:12 EDT

TD Buys Bank Of America's Canadian Credit Card Business


TORONTO - TD Bank has agreed to buy the Canadian credit card business of Bank of America Corp., bulking up its position in the cards segment of the Canadian consumer debt market, an area where it has often lagged behind competitors.

The bank said Monday that it would pay a "modest premium" over the value of the assets. Tim Hockey, who heads TD's Canadian banking group and is the president and CEO of TD Canada Trust, said the premium is about $100 million.

The agreement comes as Canadians households saddle more debt than ever, and government officials sound the alarms for the potential dangers that could come from overspending.

TD Bank will pay $7.5 billion cash and assume $1.1 billion in liabilities. The bank will wind up holding $8.5 billion in outstanding balances from about 1.8 million active credit card accounts. The assets are part of the MBNA credit card portfolio that was acquired by Bank of America in 2006.

The bank has been on the hunt for attractive credit card assets for years, after the Competition Bureau forced it to sell off its Mastercard assets when it acquired Canada Trust in 2000.

At that time, Canadian banks were not permitted to offer both Visa and Mastercard cards to clients, which forced Canada Trust to sell of its portfolio. When the rules were changed to open up the credit card market, TD said it struggled to gain a better hold in the market where competitors had a far stronger position.

"The transaction with MBNA Canada address this and more," Hockey said on a conference call.

"The acquisition represents an opportunity to acquire a domestic credit card portfolio of material size, dramatically increasing our scale in one transaction."

Canadians have been building up on debt in recent years, boosting it to unprecedented levels. Bank of Canada governor Mark Carney has warned about the troubling trend, and pointed out that once interest rates start to rise again, it could put many households in a perilous financial position where they're unable to meet their payments.

Hockey said that TD has taken into account the various possibilities, and how they could impact the bank's financial results.

"We've modelled different economic scenarios going forward ... and we're confident that the risks are understandable and manageable," he said.

DBRS rating service said the high level of losses in the MBNA credit card portfolio creates some "risk concerns."

"With the implementation of TD's tighter underwriting standards, new originations are expected to slow in the near term, but credit quality should improve on the margin," it wrote.

TD Bank said the agreement is expected to close in the fiscal first quarter of 2012.

Bank of America has been reworking its credit card division to exit several international divisions, and earlier this month sold its card business in Spain to Apollo Capital Management Inc. The bank also recently sold its U.K. business lending portfolio and is exiting the depository institution affinity credit card business with the recent sales of the Regions and Sovereign credit card portfolios.

"Our strategy is clear: We have been transforming the company to deliver the franchise to our core customer groups, and building a fortress balance sheet behind that," said Bank of America CEO Brian Moynihan in a release.

"While the credit card remains a fundamental core product for our U.S. customers, an international consumer card business under another brand is not consistent with that strategy."

Last week, London-based HSBC Holdings announced it was selling off its U.S. credit card division to Capital One for US$2.6 billion.