Canada's TD Bank bets $6 billion on U.S. auto lending

TORONTO Wed Dec 22, 2010 12:59am GMT

A window washer cleans the sign on a TD Bank in New York's financial district in this May 1, 2009 file photo. REUTERS/Brendan McDermid

A window washer cleans the sign on a TD Bank in New York's financial district in this May 1, 2009 file photo.

Credit: Reuters/Brendan McDermid

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TORONTO (Reuters) - Toronto-Dominion Bank is buying Chrysler Financial for $6.3 billion, the second time in a week that a Canadian lender has placed a big bet on the U.S. economic recovery.

Tuesday's 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. The bank won't issue any stock to fund its purchase from Cerberus Capital Management, a feature that helped push TD shares up nearly 4 percent.

"The TD Bank acquisition of Chrysler Financial is an example of what can happen when foreign banks are financially strong, flush with cash, and want to expand into the lucrative U.S. market," said Mark Williams, a risk-management expert at the Boston University School of Management.

"U.S. retail banks, such as Bank of America, have plenty to fear. The Canadian bankers are upon us."

This deal follows Friday's $4.1 billion purchase of Wisconsin-based Marshall & Ilsley Corp by Canada's No. 4 lender Bank of Montreal, although BMO irked the market by issuing $800 million in stock to fund its deal.

BETTING ON CARS

The TD deal reflects a growing belief that car sales will help fuel the U.S. economy as the auto sector recovers from its 2008-2009 meltdown.

The acquisition also illustrates the strength of Canada's banks, which emerged from the crisis in much better shape than their U.S. counterparts. With limited growth prospects 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 was the automaker's lending arm, although last year's U.S. government-sponsored restructuring of Chrysler and General Motors reined in its operations.

Cerberus will retain about $1 billion in Chrysler Financial assets, according to a source close to the private equity fund.

The source said that means Cerberus is close to breaking even on the Chrysler transaction as a whole, which would make it the only investor involved in the U.S. auto bailouts that didn't take a loss.

TD said the auto financing business will complement its U.S. East Coast retail banking network, helping to jump-start loan growth as a fragile recovery gains traction.

Jefferson Harralson, an analyst at Keefe, Bruyette & Woods, said he expects banks to get more involved in auto lending.

"In previous recessions, you worried about credit cards and auto loans, not the mortgages. This time that's been reversed."

U.S. auto sales dropped to a 27-year low of 10.4 million vehicles in 2009, but are expected to rebound to nearly 11.5 million this year in a recovery that could run beyond 2012.

TD officials said they expect auto lending to grow to $900 billion over the next three years, from $700 billion now.

TD said the Chrysler Financial purchase should not affect 2011 earnings and will add about $100 million to adjusted 2012 earnings. It may help it exceed its goal of $1.6 billion annual earnings from its U.S. unit in three years.

TD first entered the U.S. market in 2005. It now has a network of about 1,300 branches and it owns about 46 percent of online broker TD Ameritrade.

BIGGER LOAN BOOK

TD already has an auto loan book of C$10.4 billion in Canada and $3.3 billion in the United States. It aims to book $1 billion a month in new loans by 2013.

It will compete against Chase, Wells Fargo, Capital One, Bank of America and Fifth Third Bank, as well as other major U.S. banks.

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 will establish TD's national loan presence.

"Because we generate so many more deposits than we generate loans (at the U.S. branch bank), we've always said if we could find the right asset generating franchise, we would buy it," TD CEO Ed Clark said in an interview.

Chrysler Financial CEO Tom Gilman is staying on with the company and will run the bank's auto business out of Toronto

In 2007, Cerberus bought Chrysler for $7.4 billion from Daimler AG in a deal financed by a host of Wall Street's marquee investment banks including J.P. Morgan Chase & Co. The automaker owns the Jeep, Dodge and Chrysler brands.

Surging oil prices and a slump in sales in 2008 hobbled Chrysler, which relied 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. 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 lender formerly known as GMAC.

TD's Toronto-listed stock rose C$2.64 to close at C$73.16.

(Additional reporting by Megan Davies, Kevin Krolicki, Deepa Seetharaman, and Joseph Rauch; Editing by Frank McGurty and Janet Guttsman)

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