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TD now has an important ownership stake in a wealth industry leader with the size, scale and capabilities to compete, drive growth and generate value
Bharat Masrani, CEO, TD Bank Group
Barclays analyst John Aiken said TD’s Schwab stake gives them “optionality,” so that if a possible deal were to arise, those shares could be used to fund it. That said, the benefits from the Schwab takeover and the COVID-19-induced economic uncertainty that continues to linger could be persuasive arguments for another option — sitting still.
“In the immediate term, I think they are going to be quite happy to see how the integration plays out and continue to collect the earnings contributions they receive from the stake on an ongoing basis,” Aiken said in an interview.
TD Ameritrade had been a significant source of earnings for TD Bank, adding $317 million to the lender’s bottom line for the three months ended July 31. TD also had a deal with TD Ameritrade under which it held cash from the latter’s customer accounts, earning interest for clients in return for a 0.25 per cent service fee, which is being lowered to 0.15 per cent for Schwab.
Those insured deposit account balances at TD had been surging — to around US$142 billion in July from US$103 billion a year earlier, according to a note Canaccord Genuity analyst Scott Chan wrote to clients — as the pandemic has prompted people to save money. Beginning next July, Schwab can start moving up to US$10 billion of those deposits a year to its own balance sheet, with a US$50-billion floor on that migration.
Chan also noted that the terms of the revised IDA deal have been extended until 2031, and that the scale added by the TD Ameritrade acquisition could allow Schwab to drive down operating costs and cross-sell customers from both companies. Schwab, which is moving its corporate headquarters from California to Texas, says adding TD Ameritrade will give it combined client assets of about US$6 trillion and 28 million brokerage accounts. The integration period for the deal is to last 18 to 36 months.
