Toronto-Dominion Bank is buying Chrysler Financial from Cerberus Capital Management for $6.3 billion, the second time in a week that a Canadian lender has placed a big bet on the resilience of the U.S. economy.
The cash deal, which includes about $400 million in goodwill, will make Canada's No. 2 bank one of North America's biggest bank-owned auto lenders, TD said on Tuesday. The bank won't issue any stock to fund the transaction, a feature that helped push TD's shares up 3 percent.
The purchase comes as the U.S. auto market moves out of a period of slow growth that followed a near-collapse in demand and credit availability in 2009.
I think it's a bet on the economic recovery, said Craig Fehr, an analyst at Edward Jones in St. Louis. There's been a significant rebound in auto sales and the auto industry as a whole from the depths of the recession.
The acquisition also reflects the strong capital position of Canada's banks, which emerged from the financial crisis in much better shape than their U.S. counterparts. With growth prospects difficult at home, some are looking to the United States to deploy their capital.
I think you'll see a blending of the Canadian and U.S. banking systems over the next few years. The Canadian banks can't expand in Canada anymore, said Richard Bove, bank analyst at Rochdale Securities.
Chrysler Financial, the former lending arm of the automaker, had its operations reduced as part of a U.S. government-sponsored restructuring of Chrysler and General Motors last year.
As part of the TD deal, Cerberus is retaining Chrysler Financial assets of about $1 billion, according to a source close to Cerberus.
That means the private equity fund is close to breaking even on the entirety of the Chrysler transaction, the source said, which would make it the only investor involved in the U.S. auto bailouts not to have taken a loss.
For TD, the auto financing business will complement its extensive U.S. East Coast retail banking network, helping to jump-start loan growth as a fragile recovery gains traction.
The deal will allow TD to leverage the huge deposits it has built up at the retail operation, using them to fund auto loans, Chief Executive Ed Clark said.
It is the second time in less than a week that a Canadian bank has snapped up a U.S.-based lender struggling to regain its stride against the headwinds of a sporadic U.S. recovery.
On Friday, Bank of Montreal agreed to buy troubled Marshall & Ilsley Corp, a Midwest bank based in Wisconsin, for $4.1 billion.
Jefferson Harralson, an analyst at Keefe, Bruyette & Woods, said he expects to see more banks push into auto lending due to the decline in car companies' lending businesses and the prospects for the sector.
In previous recessions, you worried about credit cards and auto loans, not the mortgages. This time that's been reversed. The car has become more of a necessity in this generation than previous ones, he said.
U.S. auto sales for 2009 dropped to 10.4 million vehicles, the lowest in 27 years but are expected to rebound to nearly 11.5 million this year. Some believe the industry is in the early stages of a recovery that will run into 2012 and beyond.
TD first entered the U.S. market with the purchase of Banknorth in 2005. It now operates a network of about 1,300 branches and owns about 46 percent of online broker TD Ameritrade.
TD said the Chrysler Financial purchase should not affect 2011 earnings and will add about $100 million to adjusted 2012 earnings. It could also help it exceed its goal of reaching $1.6 billion annual earnings from its U.S. unit in three years.
BIGGER LOAN BOOK
TD Bank officials said they expect auto lending to grow to $900 billion from its current $700 billion over the next three years.
TD already provides auto loans through its Canadian and U.S. branches, and has a loan book of C$10.4 billion in Canada and $3.3 billion in the United States.
It will compete against Chase, Wells Fargo, Capital One, Bank of America and Fifth Third Bank and other banks that are major auto lenders in the United States.
Chrysler Financial has $7.5 billion in loans and leases outstanding, as well as a U.S. platform with about 2,000 dealer relationships that TD aims to use to build a nationwide loan presence.
Really this deal is about the platform and the asset generation capabilities, CEO Clark said on a conference call.
By 2013, the bank expects to be booking new loans at a rate of $1 billion a month.
Chrysler Financial CEO Tom Gilman will remain with the company and run the bank's auto business out of Toronto
Cerberus bought Chrysler, which owns the Jeep, Dodge and Chrysler brands, for $7.4 billion from Daimler AG in 2007 in a deal financed by a host of Wall Street's marquee investment banks including J.P. Morgan Chase & Co.
But surging oil prices and a slump in sales in 2008 hobbled Chrysler, which relied heavily on trucks and sport utility vehicles for the majority of its sales.
Chrysler's automotive arm filed for bankruptcy funded by the U.S. government and is now managed by Fiat SpA, which owns 20 percent of the company. Cerberus maintained a controlling stake in Chrysler Financial, a separate entity that was not involved in the bankruptcy.
Some of the financing company's operations were taken over by Ally Financial Inc, the auto and mortgage lander formerly known as GMAC.
TD's Toronto-listed shares were up C$2.11 at C$72.63.
(Additional reporting by Kevin Krolicki, Deepa Seetharaman, and Joseph Rauch)