Royal Bank of Canada (RBC) buys Ally Financial

Canadian banks snapping up consumer loans

John Greenwood | Oct 23, 2012 7:42 PM ET | Last Updated: Oct 23, 2012 8:49 PM ET

Against a backdrop of rising concern around the crisis in
Europe and slowing consumer loan growth domestically, Canada’s banks are under
pressure to maintain the steady earnings growth that markets have come to
expect of them.

But players are finding ways to make it happen.

Royal Bank of Canada on Tuesday confirmed reports that it
is buying the Canadian subsidiary of auto lending giant Ally Financial Inc. for
$1.4-billion, net of excess capital.

business has always had an attraction to us

A significant player in this country, Ally Canada has
about $9-billion of assets and RBC expects it to generate roughly $120-million
of earnings in the first 12 months after the transaction closes.

“The business has always had an attraction to us,” Dave
McKay, RBC’s head of personal and commercial banking, said in an interview.
“[The deal] has allowed us to basically double the size of our position in the
[auto finance] market place with a high quality, established player with a
broad base of relationships across the country.”

The announcement comes the same day as Toronto-Dominion
Bank, the country’s second-biggest lender, said it will buy retail behemoth
Target Corp.’s U.S. credit card portfolio which has assets of US$5.9-billion.
Target said that it expects to book pre-tax gains associated with the sale of
the portfolio of up to US$600-million.

Under the agreement which includes a seven-year funding
commitment from TD, the two companies will split the profits from the portfolio
with Target getting the larger share.

In a statement, Ed Clark, chief executive of TD, said the
acquisition will “significantly expand” the bank’s presence in the North
American credit card business.

“This asset purchase aligns perfectly with our risk
profile and strategy, and will contribute to achieving our stated adjusted
earnings target of US$1.6-billion from our U.S. P&C segment in 2013,” Mr.
Clark said.

The big banks have traditionally earned the lion’s share
of their profits from their retail lending operations which for the past ten
years or more have enjoyed a huge lift from falling interest rates and a rising
housing market. But that’s coming to an end.

So to keep their loan books getting fatter, the banks are
essentially buying loans made by other companies — or at least, that’s one way
to look at the Ally and Target deals.

Analysts say that also describes Bank of Nova Scotia’s
recent acquisition of Internet lender ING Direct.

Formerly known as GMAC, Ally Financial ran into trouble
in the financial crisis and is now 74% owned by the U.S. Treasury. In a bid to
raise capital it’s been selling off parts of its international operations so
the sale of Ally Canada was widely expected.

The business provides inventory financing for 580
dealerships, primarily GM and Chrysler, across the country and loans to 450,000

Auto finance is appealing to the banks because the loans,
which are secured, carry relatively high interest and require only limited
bricks and mortar investment, since consumer lending is done out of the

Mr. McKay said the transaction which is expected to close
next year will take Royal to a number-one position in terms of auto loan market
share with about $24-billion in assets, up from a number two or three.

Mr. McKay rejected suggestions that buying Ally was simply
about goosing growth in a stagnate economy.

“We bought a stable business with good growth prospects,
with distribution expansion and a top franchise,” he said. “Whether loans were
growing really well or not, we would have gone after this company.”

TD is also a big player in auto lending in the wake of
its $6.3-billion purchase of Chrysler Financial at the end of 2010, and indeed
it’s been jockeying with RBC the top spot in marketshare.

CIBC World Markets analysts Rob Sedran called Ally an
“interesting acquisition” for RBC “in that it adds heft in one of the few
domestic businesses in which it did not already have a dominant position.”

But he cautioned in a note to clients that growth prospects “may be
hampered somewhat” by over-heavy consumer indebtedness and rising competition.



Leave a Reply

Your email address will not be published. Required fields are marked *