TD Sops Up Liquidity in Chrysler Deal

Toronto-Dominion Bank's deal for Chrysler Financial is about finding parking — for deposits.

The Canadian company is paying $6.3 billion for a means to deploy the enormous amount of deposits it amassed in its whirlwind expansion into the United States.

It hopes that Chrysler Financial, which lent $30 billion a year in its heyday, will help it lend some of the $134 billion of deposits it has collected through five U.S. bank acquisitions in as many years. Putting that money to work has been tough: Toronto-Dominion is one of the most liquid banks in the country, with $60 billion in personal and business loans at the end of October. So it has billions of dollars it is desperate to earn interest on.

"We are a deposit-rich bank," said Bharat Masrani, head of Toronto-Dominion's 1,269-branch U.S. banking subsidiary, TD Bank. "This moves us closer to having a balance sheet that is more … balanced."

Toronto-Dominion's agreement to purchase Chrysler Financial from the private-equity firm Cerberus Capital Management LP is the second deal in less than two weeks to illustrate the new prominence of Canadian banks, which didn't suffer as much as banks in other parts of the world in the financial crisis. Last week, Bank of Montreal agreed to buy the ailing Marshall & Ilsley Corp. of Milwaukee.

What those deals have in common is that they show that strong banks are in a privileged position when it comes to scouting profit-boosting acquisitions.

But they differ in one important way: Toronto-Dominion's deal is purely about positioning for asset growth. The M&I transaction is closer to a classic bank merger. Bank of Montreal is out to boost deposits and cut costs by merging M&I with its Chicago subsidiary, Harris Bank.

There will be a lot of other institutions like M&I ripe for consolidation by healthy U.S. institutions and other well-capitalized foreign institutions.

Chrysler Financial, however, is a rare opportunity. There aren't many big, well-known specialty lenders up for grabs. One of the few parallel examples is Citigroup Inc.'s student lending operation, which Discover Financial Services bought for $600 million this year.

Cerberus is one of the few private equity shops to dabble in lending. It entered the business when it purchased a majority of DaimlerChrysler AG. There aren't a lot of investment firms looking to unload lending businesses. Few bank are eager to spin off their lending operations

Toronto-Dominion's deal for Chrysler Financial could be a coup — if it pans out the way the $600 billion-asset lender is hoping.

Auto lending has been one of the few bright spots in banking: Car loan losses — and loan demand — have been modest while banks for more than year have run off more business and consumer loans than they could originate.

Car sales are expected to rise in 2011 as people that have been making do with old cars go shopping again.

Toronto-Dominion said it expects the $700 billion auto lending market to grow by about $200 billion in the next several years.

Banks are in a better position than they've been in years to benefit from that trend because the recession wiped out most alternative financiers, experts said. Automakers also pulled away from running in-house loan operations during the downturn, although they have been slowly getting back into it.

Though most banks got out of car lending years ago, institutions such as Toronto-Dominion that stayed involved may be able to book quality, interest-generating assets.

Comerica Inc. of Dallas and Huntington Bancshares Inc. of Columbus, Ohio, have been trying to drum up more auto lending business.

"It is very popular right now to be a commercial and industrial lender, but let's face it — the demand for C&I loans is not very good," said Brett Rabatin, an analyst with Sterne, Agee & Leach Inc. "Banks will look for every avenue they can to have loan growth."

Bank car loans have been yielding in the range of 5% to 6%, which is much better than what can be earned investing in low-yielding Treasury bills or by simply holding on to cash.

The success of Toronto-Dominion's play will come down to execution, said Bert Ely, an independent bank consultant in Alexandria, Va. The big risk is that it makes poor pricing and underwriting decisions as competition increases.

"They can end up slitting their throats. Car lending is not a no-brainer business," Ely said. "If some of these lenders get too aggressive in their pricing, they'll kill it for everybody."

For his part, Masrani said history is on his side. Toronto-Dominion is adept at managing risk, he said, and the auto loan market has held up better than the mortgage market in the last few years.

"We're conservative," Masrani said.

It also is no stranger to auto lending.

Toronto-Dominion already has a $3.3 billion auto lending business in the United States through 1,100 dealerships. Chrysler Financial would deliver $7.5 billion of loans at more than 2,000 dealerships should the deal close by the middle of next year as expected.

By 2013, Toronto-Dominion hopes to be originating as much as $1 billion per month through at least 5,000 dealers across the country.

Its triple-A credit rating and big liquidity stockpile gives it an edge to outcompete other lenders on rates and service, he said.

The deal caps a busy 2010 in mergers for the company. Earlier this year it bought three failed banks in Florida as well as the South Financial Group Inc. in Greenville, S.C. In 2007 it bought Commerce Bancorp and in 2005 it acquired Banknorth.

Masrani said Chrysler Financial fulfills Toronto-Dominion's ambitions in mergers and acquisitions for the time being. While it isn't actively looking for any more bank or business line purchases, he said it is always open to "a compelling opportunity."

"Never say never. … We always said at some point we will find a platform to accelerate" lending, he said. "This is a natural evolution for us. It accelerates our consumer lending."