The credit card business has a high profit margin, but it is also risky. Credit card debt is akin to an unsecured loan and it makes credit card portfolios vulnerable, especially during economic downturns. That is why the recent acquisition of Nordstrom (NYSE: JWN) Card Service's Credit Card portfolio by TD Bank (NYSE: TD) is raising eyebrows (the Canadian bank recently bought Nordstrom's credit card business for a cool $ 2.2 billion).
TD Bank is the second largest bank in Canada by assets. In neighboring US, it is the 10th largest bank. The company has been aggressively expanding its credit card business in recent years. The company is already the largest credit card issuer in Canada.
Nordstrom will retain control over client interface, but funding will be handled by TD Bank. Risk management will also go to the latter. TD Bank is obviously excited to make the deal. The Bank's chief executive, Bharat Masrani said that the deal was the result of extensive back room negotiations and effort from both sides. He also said that TD Bank was happy to be chosen by Nordstrom as its credit card partner.
TD seems to be on a buying spree
TD Bank has bought over $20 billion in US credit card debt since 2011, including credit card assets from Bank of America, HSBC Holdings and Target Corp. The Bank has also snagged credit card assets in its home country Canada from Canadian Imperial Bank of Commerce and others. It indicates that TD Bank might make more deals like this in the future too.
Analysts have approved of the deal. John Aiken at Barclays Capital has praised the move as far sighted (he said the acquisition will 'bear fruits over time'). David Beattie, who is with Moody's Investors Services, said that TD Bank has bought a 'quality portfolio'.
Is the deal a pyrrhic victory for TD Bank?
So how does Nordstrom benefit from this deal? According to company insiders, the deal will improve Nordstrom's capital efficiency, while still keeping its link to customers. The company will receive substantial revenue from the credit card accounts. It will also retain account servicing, manage the company's loyalty programs and keep control over its debit cards.
TD Bank must introspect about the impending increase in interest rates by the Federal Reserve. One wonders if this deal is a pyrrhic victory for TD Bank. A pyrrhic victory is a victory that has come at such a huge cost, so in sense it is not a victory at all. Only time will tell.