TD Canada Trust bank at Yonge and Eglinton, Toronto. August 27, 2013.Gloria Nieto/The Globe and Mail
Toronto-Dominion Bank does not need more deposits in the U.S., which might be one of the best reasons out there for not spending something like $12-billion to buy Royal Bank of Scotland's U.S. retail bank. Instead, the Canadian bank might want to look at something like CIT Group Inc.
The speculation about RBS Citizens Financial Group Inc. is no surprise. Citizens is up for sale. At a glance, TD likes the U.S., and a big U.S. bank that does okay is on the block.
Except for this: TD needs loans in the U.S., not more deposits, as National Bank Financial analyst Peter Routledge points out.
Deposits are a liability to a bank, worth having only if you can lend them out to capture the spread in interest rates for deposits and loans. And TD does not do nearly enough lending in the U.S.
As Mr. Routledge points out, TD has a "major strategic shortcoming in the U.S. – a very low loan to deposit ratio." TD lends out 54 per cent of its deposits, compared with an average for peers of 93 per cent. There is still an $86-billion (with a 'B') gap between the deposits that TD has in the U.S. and its loans.
That is a good way to a sad-sack profit line. Instead of lending at a premium, TD is stuck investing those deposits in things that don't yield much at all.
And that is why TD has been buying things such as Chrysler Financial and Target credit card portfolios.
"Simply put, TD does not need hundreds of new branches that it will inevitably transform into deposit-gathering powerhouses," Mr. Routledge said. "What the bank needs are asset-originating powerhouses in the United States."
There are some more tempting acquisitions, if that is TD's real plan.
General Electric Co. is said to be gearing up for an initial public offering of its retail store credit card issuing division. It has $50-billion in loans, which would go nicely toward closing that gap, and sales are always more simple than IPOs, as the Wall Street Journal points out.
The issue there is that TD would suddenly become very concentrated in consumer lending. Perhaps too concentrated.
What might make more sense is a bid for CIT Group, which has been rumoured in the past. The price would be in the same ballpark as Citizens, but the fit would be better from a balance sheet perspective.
CIT's issue is funding, with deposits funding only a quarter of its assets. TD's issue is too much funding. CIT has a more diversified loan portfolio in such areas as trade finance and loans to small and medium-sized business.
As of the most recent quarter, CIT's total assets were just shy of $45-billion (U.S.), with two-thirds of that in the form of leasing and commercial finance.
Buying CIT would be "the epitome of an asset-focused acquisition for TD," Mr. Routledge wrote earlier this year when TD-CIT rumours came up.
(Disclosure: The author owns shares of GE.)