Can financial stock T-D Bank swallow GE Capital?

GE Capital’s assets are seen as a good fit for TD Bank. But Toronto-Dominion is likely to face competition from other financial sector companies if it submits a bid.

At first glance, General Electric Co. (NYSE─GE) and the Toronto-Dominion Bank (TSX─TD) would seem to have little in common.

One is a manufacturer of lights, engines and electric motors; the other, a provider of a wide range of financial sector services. But GE and TD could soon know each other a whole lot better.

That’s because General Electric, as part of a major repositioning, plans to sell GE Capital, its financial services arm.

And GE Capital boasts financial services assets that could be just what Toronto-Dominion is looking for — especially, in the U.S., says Peter Routledge, an analyst with National Bank of Canada in Toronto.

Mr. Routledge notes that TD’s U.S. banking operations have a surplus of stable deposits, but a lack of high-yielding assets. As a result, Toronto-Dominion earns a low spread on the cost of its deposits.

But should TD buy GE Capital’s higher-yielding assets, the bank could fund them with its low-cost deposits, thus relieving some of the pain that banks have suffered at the hands of the U.S. Federal Reserve.

Should TD try to carve up GE’s financial sector assets?

Of course, GE Capital might be a little hard to swallow — even for a bank as big and as powerful as Toronto-Dominion. True, TD boasts assets of $862.5 billion. But at $627.9 billion, GE Capital’s assets are hardly small potatoes either.

And although TD in 2013 generated revenue of $27.6 billion, GE Capital more than doubled that number one year later.

For Mr. Routledge, the solution is simple: Toronto-Dominion should only look at two of GE Capital’s financial services divisions. One is its commercial lending and leasing business which boasts assets of $74 billion; the other is GE Capital’s private equity sponsor portfolio, which has assets of $16 billion.

Toronto-Dominion, of course, may face competition for the assets. Indeed, there may be several parties seeking to grab a piece of GE Capital, says Mr. Routledge.

Jeffrey Immelt, General Electric’s CEO, would seem to agree. In a recent interview, he said it’s now a perfect time to sell financial services assets, given America’s low interest rates, as well as its strong demand for yield.

TD is a full range financial services provider

In the meantime, TD continues to score high in our market analyst survey. Of the 11 we recently surveyed, all recommended Toronto-Dominion as a financial stock to “buy”, lofting it into fourth place this month in our list of top-10 buys.

One of Canada’s oldest and biggest financial companies, Toronto-Dominion is a full range financial services provider including banking, brokerage, investment banking, insurance and, of course, wealth management.

Although nurtured by Canada, TD in recent years has expanded aggressively into the U.S., gobbling up a string of retail branches from Maine down the Eastern Seaboard to Florida. In fact, it now boasts more branches in the U.S. than in Canada.

TD is particularly well-represented in New York City where its more than 460 branches blanket the five boroughs. The bank also boasts a big presence in Florida, a state whose population continues to swell from an influx of new residents and retirees alike.

For the three months ended Jan. 31, TD’s net earnings grew to $2.1 billion or $1.12 a share, from $2 billion, or $1.06 a share, for the similar period in 2014. And although revenue rose less than one per cent year over year, it still finished up at a respectable $7.6 billion.

But at 15.1 per cent, Toronto-Dominion’s return on common equity was 110 basis points below where it was in 2014.

GE Capital is a world-wide financial services provider

Based in Fairfield, Conn., General Electric is one of America’s oldest companies, having been established in 1892. One of its founders was Thomas Edison, perhaps America’s best-known inventor.

Ranked by Fortune magazine in 2011 as America’s 26th biggest company by gross revenue, it was also singled out by Fortune as the 14th most profitable. Yet, on Forbes Global 2000, General Electric was listed as the fourth-biggest company in the world.

In addition to the U.S., GE Capital boasts operations in Mexico, Europe, the Mideast, Africa and Asia. In Europe, the company counts more than 350,000 customers whereas in the Asia-Pacific region, GE Capital services over 15 million accounts.

Besides real estate, GE Capital boasts expertise in aviation and energy, among other industrial and commercial sectors.


Investor’s Digest of Canada, MPL Communications Inc.
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