asks today whether Toronto-Dominion Bank is overpaying for Commerce Bank.
They’re both customer-serviced, says RBC analyst Gerard Cassidy, but they have
very different profit margins:
The difference, Mr. Cassidy told The Times, is that Toronto-Dominion, which
operates in a much less competitive market, pampers its customers at a much
lower cost. The Canadian bank, Mr. Cassidy calculates, spends about 50 cents
for every dollar it generates. That amount is 74 cents at Commerce.
It’s true that Commerce’s home base of New York and New Jersey is less competitive
than, say, Toronto. But I’m not entirely sure what Cassidy is talking about
when he refers to dollars "generated". If he means loan income, then
he’s not really talking about the cost of pampering customers, he’s talking
instead about ability to generate loans. Here’s what Murray wrote in the comments
to my last blog entry:
CBH is great at attracting depositors. But it’s terrible at putting those
assets to work: it hates lending – at 36% its loans to deposit ratio is among
the lowest (TD’s is 65%). So it put majority of deposits in a securities portfolio
that it’s been losing money on here and there for the last 2 years. Not clever.
In other words, if Commerce’s costs remain the same, but it increases its loan-to-deposit
ratio from 36% to 54%, then – presto – its cost-to-income ratio
will fall from 74% to Toronto-Dominion’s 50%. And if TD can loan out the same
proportion of Commerce’s deposits that it does at the rest of its banks, then
Commerce’s cost-to-income ratio would fall (assuming costs stay the same) all
the way to 41%.
Now, it’s certainly possible that there’s some deep connection between Commerce
Bank’s customer service, on the one hand, and the fact that it makes very few
loans, on the other. Maybe it’s good at being nice to its customers because
it owes its customers money, rather than the other way around.
But banks buy and sell loans to and from each other every day: if Commerce
didn’t want to lend money to its customers, it could just buy loans from the
bank next door instead, and let that bank have the bad customer relationship.
Loan-to-deposit ratios are easy to increase.