TORONTO (Reuters) - Toronto-Dominion Bank (TD.TO) has agreed to replace Canadian Imperial Bank of Commerce (CM.TO) as issuer of the popular Aeroplan credit card, a move that could pressure CIBC's bottom line at a time when Canadian banks are struggling to drive profit growth.
Shares of Aimia Inc (AIM.TO), which runs the Aeroplan loyalty program, rose nearly 10 percent after it announced the proposed 10-year agreement with TD on Thursday. Shares of the two banks were up modestly.
CIBC and Aimia have partnered for 22 years on the profitable "Aerogold" rewards card, which allows customers to accumulate Aeroplan points that can be cashed in for travel on Air Canada ACb.TO and its partner airlines, as well as other goods.
Analysts estimate the card produces around 10 percent of CIBC's profits. The bank, Canada's fifth-largest, does not disclose financial results from its cards business.
"In the short term, definitely a headwind for earnings for CIBC," said Jeffrey Bradacs, a portfolio manager at Manulife Asset Management, which owns shares of both banks.
CIBC and Aimia entered talks to renew their agreement last year. But CIBC said last month it was going ahead with a plan to create an alternative rewards card in the event the partnership was not renewed.
Under the terms of the current agreement, CIBC can still hold on to the Aimia partnership if it matches the terms of TD's deal by August 9, but observers said that seemed unlikely. If that happens, TD is entitled to a breakup fee of C$80 million.
"While this is a possibility, we do not believe that it is probable as the relationship between the two organizations has likely become tarnished through these developments," Barclays Capital analyst John Aiken said in a note.
CIBC would not comment on the likelihood of it exercising its right to match the offer, but said in a statement that "the notice by Aimia has been presented in a way that is inconsistent with our understanding of our rights."
The bank added it was reviewing the proposed agreement.
Canadian banks have been facing the double-whammy of slowing loan growth, driven by a cooling housing sector, as well as low interest rates, which narrow the margins they make on loans.
TD has been building up its credit card business in recent years with deals such as its 2011 purchase of the MBNA Canadian credit card business from Bank of America (BAC.N).
While credit card loans are considered riskier than the mortgages that make up the bulk of Canadian bank loan books, they also boast more lucrative rates.
TD said the agreement, to take effect January 1, 2014 if it goes through, would not have a material impact on its 2014 earnings but would make a "solid contribution" to 2015 earnings.
The bank will make a C$100 million ($95.32 million) upfront payment as part of the deal and commit to annual miles purchases for the first three years. The bank said it plans to offer a new suite of cards beginning in 2014.
Shares of TD, which is Canada's No. 2 bank, were up 0.7 percent at C$83.97.
CIBC, which has fallen 5 percent since the bank suggested in late May that the Aeroplan agreement might not be renewed, was up 0.9 percent at C$75.73.
Aimia said in a statement that the deal with TD would bring improved growth and strong free cash flow generation over the longer term.
Aimia's shares were up 9.8 percent or C$1.37 at C$15.29.
($1 = $1.0491 Canadian)
With additional reporting by Euan Rocha; Editing by Jeffrey Hodgson and Phil Berlowitz