Sunday, June 30, 2013

CIBC Pressured as Aimia Picks TD Bank for Aeroplan

Aimia (AIM) Inc.'s decision to move its Aeroplan reward-partnership to Toronto-Dominion (TD) Bank is a blow to Canadian Imperial Bank of Commerce, which stands to lose customers and as much as C$3 billion ($2.9 billion) in credit-card balances.

Toronto-Dominion, Canada's second-largest bank, conditionally agreed yesterday to become the primary credit-card partner for Aimia's Aeroplan program starting Jan. 1, replacing an accord with Canadian Imperial that expires at year end. CIBC, Canada's fifth-largest lender, has the right to match the terms of the new agreement by Aug. 9 to retain the partnership.

"It hamstrings CIBC," Cameron Webster, who helps manage C$250 million including Toronto-Dominion shares at Sandstone Asset Management Inc. in Calgary, said yesterday in a telephone interview. "It's a bit of a dent to CIBC and it creates the potential for them to lose some customers."

Canadian Imperial (CM) said it's being shut out in the new agreement. The deal "appears to have been intentionally structured in a way that attempts to nullify CIBC's right of first refusal and any ability to match," the bank said yesterday in a statement. "Given the structuring of the document and our contractual rights, we are exploring our options."

Aerogold Visa

The bank's 22-year partnership with Aimia has made the CIBC Aerogold Visa its most popular credit card. Toronto-based CIBC buys Aeroplan miles from Montreal-based Aimia to give to cardholders on purchases, including flights with Air Canada (AC/A), the country's biggest carrier. Aimia, which owns and manages rewards programs including Nectar in the U.K. and Italy, counts CIBC as its biggest partner.

"The effect on CIBC, whether the bank renews or not, is negative," Mario Mendonca, an analyst with Canaccord Genuity in Toronto, said yesterday in a note.

CIBC's adjusted per-share earnings may fall 40 cents to 65 cents next year -- or as much as 7.5 percent -- as it loses as much as C$3 billion in card balances to Toronto-Dominion and other card providers, Mendonca said. He estimates that half of CIBC's card balances are tied to Aeroplan and that 50 percent to 60 percent of the cardholders would move to the new provider if they didn't renew.

Shares Rise

CIBC fell 0.9 percent to close at C$74.64 at 16:07 a.m. in Toronto today, while Toronto-Dominion gained 0.7 percent. Aimia rose 2.2 percent to C$15.74 after surging 11 percent yesterday, the biggest gain in about four years. CIBC is the worst performer on the eight-company Standard & Poor's/TSX Commercial Banks Index this year, falling 6.1 percent.

CIBC is Canada's largest credit-card issuer based on outstanding balances, according to an April 2013 issue of the Nilson Report, a credit-card industry publication. Toronto-Dominion is the second-largest.

Aeroplan began in 1984 as a promotional tool for business travelers on Air Canada. CIBC Aerogold Visa was started in 1991, according to Aimia. The card allows users to collect Aeroplan points for travel on Air Canada and get goods from retailers.

The Aerogold program accounts for 8 percent to 10 percent of CIBC's earnings, Robert Sedran, an analyst at CIBC World Markets in Toronto, said yesterday in a note.

"Some of this business will no doubt be lost -- and not just by TD," Sedran said. "The Aerogold program has been very successful and contributes a meaningful amount of earnings to CIBC."

Marketing Spending

Kevin Dove, a CIBC spokesman, and TD's Ali Duncan Martin declined further comment from the bank statements.

Toronto-Dominion would commit C$100 million to the loyalty program and agree to minimum annual miles purchases as part of a 10-year agreement. The two companies also agreed to spend about C$140 million over four years on marketing. TD is entitled to an C$80 million fee to cover costs if CIBC agrees to match the terms of the agreement and continues as Aimia's partner.

"The tone of the press release and Aimia's conference call suggest that the likelihood of CIBC matching the terms is low," CIBC's Sedran said. "CIBC will choose not to renew its deal with Aimia, preferring to build its own travel card."

The agreement Aimia negotiated with TD brings the price for the Aeroplan loyalty points much closer to market rates than the current pact with CIBC, according to Aimia Chief Executive Officer Rupert Duchesne.

Pay More

"With the existing agreement with CIBC, we've made a reasonable level of profit out of it, nothing extraordinary," Duchesne, 53, said yesterday in a phone interview. "For CIBC is was an extremely profitable relationship."

There are "well more than a million" Aeroplan members who accumulate points with Aimia's two card partners, CIBC and American Express Co. (AXP), according to Duchesne. Aeroplan has almost five million members, he said.

Aimia's new agreement would see its bank partner pay at least 15 percent more for Aeroplan miles, and the extra money will go to improving its rewards program, Duchesne said.

CIBC has been preparing to go it alone with its own card. CEO Gerald McCaughey, 57, said on a May 30 conference call that the bank is spending more than C$50 million over four quarters to create an alternative card if the Aimia agreement isn't renewed. Canadian Imperial also has its Aventura Gold Visa card, which it introduced in 2003 to offer lifestyle and travel rewards with purchases.

Maximum Return

CIBC investor Anil Tahiliani of McLean & Partners Wealth Management Ltd. said the bank shouldn't be held hostage to the Aimia agreement.

"I prefer they stick to their guns on where they can get the maximum return," Tahiliani, who helps manage C$1 billion at the Calgary-based firm, said yesterday in an interview. "If they think they can do better having their own card or their own rewards program rather than be married to Aimia, I'm fine with that."

TD has increased its push into cards through acquisitions, including its purchase of Bank of America Corp.'s MBNA Canada unit to gain its MasterCard portfolio in December 2011.

"I don't think this will be instant riches for TD," said David Cockfield, a fund manager with Northland Wealth Management in Toronto, who helps manage C$225 million at the firm including TD shares. "It's not an area free of competition, but it's a step in the right direction."

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