With Toronto-Dominion Bank's $6.3 billion agreement to buy Chrysler Financial from the private equity firm Cerberus Capital Management, the Toronto banking giant is betting that demand for auto loans will pick up as the economy rebounds.
Toronto-Dominion Chief Executive Ed Clark said in a conference call that his $600-billion asset company — having weathered the recession better than most banks — has the financial strength to take a bigger slice of the estimated $700 billion U.S. auto loan market as people start buying cars again.
Auto lending is attractive because it is second in size only to mortgages when it comes to consumer lending, he said. A bank also doesn't need to have a physical location in the regions where it makes auto loans, relying instead on local dealers.
There's lots of room for growth: Chrysler Financial, which has been running off loans as part of its restructuring under Cerberus, is operating way under capacity, Clark said. It has about $7.5 billion in outstanding loan and lease balances, which are worth about $5.9 billion given that some are delinquent. In its heyday as the auto arm of Chrysler, it had $75 billion of assets.
Clark said the U.S. auto lending industry should grow by about $200 billion assets in the next several years.
Chrysler Financial — together with Toronto-Dominion's existing $3.3 billion U.S. auto lending business through 1,100 dealers — gives it a bigger platform to go after that business. Toronto-Dominion has plenty of cheap funding it's eager to deploy: more than $90 billion of U.S. personal and business deposits in the most recent quarter.
"The question is can we grow the book of business to in fact get it restored to where it was?" he said. "It has lots of capacity to grow."
Its growth targets are to do business with more than 5,000 dealers and to be originating at least $1 billion of auto loans per month by 2013. Right now Chrysler Financial does business with more 2,000 U.S. auto dealers; Toronto-Dominion has 1,100 dealer relationships.
The deal includes $5.9 billion of assets and $400 million of goodwill. Toronto-Dominion, which controls a 1,250-branch retail bank on the East Coast of the U.S., says the deal will create one of the five-largest bank-owned auto lenders in North America.
Toronto-Dominion is one of at least two Canadian banks that have been taking advantage of disruption in the U.S. banking market to extend its reach across the boarder. Bank of Montreal last week agreed to purchase Milwaukee's Marshall & Ilsley Corp. and merge it with its Chicago subsidiary, Harris Bank.
Earlier this year, Toronto-Dominion bought three failed Florida banks and Greenville, S.C.-based South Financial Group.