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REDCARD GROWTH

Target’s credit card business has been growing as the chain offers 5% discounts for users of the so-called REDcard and gives cardholders free shipping for online orders. In the second quarter, the percentage of sales in Target stores paid for with Target’s REDcard credit and debit cards rose to 12.8% from 8.7% a year earlier.

Under terms of the deal, Target will keep earning a substantial portion of profits generated by the Target credit card and Target Visa portfolios.

A week ago, Target Chairman and Chief Executive Gregg Steinhafel said the company expected to find the right buyer for the credit card business by the end of the year.

Target first said it wanted to sell its receivables portfolio in January 2011, then put those plans on hold in January 2012, saying it would restart talks after paying off financing it had with JP Morgan Chase & Co.

Target said its third-quarter earnings would reflect a pre-tax gain of about $150 million as it changes the accounting treatment of its receivables from “held for investment” to “held for sale.” It expects to recognize an additional pre-tax gain of US$350-million to US$450-million when the deal closes.

Target plans to use about 90% of the proceeds from the deal to reduce its net debt position, and use the remaining funds to repurchase its shares over time.

Target expects net profit from the profit-sharing arrangement, along with the benefit of debt reduction and share repurchases, will leave adjusted earnings per share about 10 cents lower in the first year after the deal closes than they would have been if Target kept funding the portfolio.

Over time, Target expects that the deal will be neutral to adjusted earnings per share.

TD owns over 1,150 retail banking outlets spread across Canada and roughly 1,300 outlets spread across the United States.

TD said it expects its Tier 1 capital ratio to decrease by about 20 basis point on closing the deal. The bank reported a Tier 1 capital ratio of 12.2%, as of July 31.

Last year, TD acquired the credit card portfolio of MBNA Canada – one of the largest MasterCard issuers in Canada, from Bank of America Corp.

© Thomson Reuters 2012