First Union Corp. has told analysts that it expects no growth in its credit card business next year. Analysts said they believe this means the bank will cut solicitations to potential credit card customers in response to rising chargeoff rates at the bank.
The development, disclosed in a conference call Friday, was the latest sign of a sea change in the credit card business, in which a handful of "monoline" specialists may be solidifying their edge in the battle for market share with regional banks.
"It's plausible that monolines will go after their customers," said Anthony Davis, bank analyst at Dean Witter Reynolds. "They might need to do it to sustain growth to offset their own rising chargeoffs."
First Union shares fell $1.25 Friday to $71.25. Shares rebounded to $71.75 Monday after Keefe Bruyette & Woods reiterated its "buy" rating on the stock.
First Union may be reconsidering its credit card business because its 5.9% loan-loss rate was higher than the industry average of 5%, as estimated by Keefe. The bank said in its third-quarter earnings report that it expects chargeoffs to reach the low to mid 6% range next year.
A bank spokeswoman said she had no knowledge that the subject of marketing credit cards came up during a conference call to analysts.
Reaction to the announcement was split.
Thomas Brown, bank analyst with Donaldson, Lufkin, & Jenrette, called it "an overreaction" to ongoing concerns about credit quality. Credit cards can generate 15% of a typical bank's earnings, said Mr. Brown, so banks shouldn't fixate on a single factor in the business, such as a rise in chargeoffs.
"You have to avoid mono-variable-itis," he said.
Others called First Union's move a sensible response to changing market conditions.
"It's a common announcement," said Gary Gordon, analyst at PaineWebber. "I wouldn't be surprised if we hear more of these."
Mr. Gordon said that third-quarter consumer bankruptcy statistics were alarmingly high, which eventually will mean increased chargeoffs. He said that when consumer debt levels outpace disposable income growth as they now do (see chart), people in previous economic cycles have stopped taking loans and started paying their bills.
"Everyone wants to grow their credit business, but not everyone can," Mr. Gordon said.
First Union's announcement comes at a time when many banks are rethinking their credit card operations.
First Chicago NBD, the fourth-fastest-growing issuer from 1991 through 1995, cut its marketing budget by half last year because of credit quality concerns, said spokesman Tom Kelly. The bank made additional marketing cuts, he said, after posting higher-than-expected losses in its credit portfolio in the second quarter.
And Barnett Banks Inc., which last spring had to write off over $2 billion in bad credit card debts, in September sold $776 million in out-of- region credit card receivables to Household Bank for an undisclosed amount. Barnett said it wanted to focus on credit card customers in Florida and Georgia.
The retreat of the regionals has opened the door for companies that specialize in issuing credit cards to seize additional market share. They are responding by vigorously increasing their solicitation campaigns.
Capital One Financial Corp. spent $60 million on marketing in the third quarter, its most ever, said David M. Willey, vice president and treasurer, said the company plans to spend $200 million this year on attracting new customers.
Advanta Corp., whose budget for new accounts is $100 million this year, is renewing recruiting efforts after spending very little in the second and third quarters, said Janet Point, vice president for investor relations.
In the first half of 1996, Capital One, Advanta, MBNA Corp., and First USA Inc. accounted for 44% of the 788 million solicitations sent by mail.
"They are going hell for leather," observed David Berry, bank analyst at Keefe, Bruyette & Woods Inc.
The specialists are spending heavily on marketing because the proliferation of consumer credit in recent years has made it harder to find new customers. Earnings at the specialists have grown 20% and more a year in recent years, and the companies project that annual level of growth will continue.
But this rising growth is also accompanied by rising chargeoffs. According to Dean Witter Reynold's Mr. Davis, third- quarter chargeoff rates at the credit card specialists rose to 3.95%, from 3.53% in the spring.
Credit card specialists are hoping technology will help keep chargeoffs below the industry average.
First USA posted third-quarter chargeoffs of 4.47%, according to Keefe, Bruyette & Woods, up 44 basis points from the second quarter but still lower than the credit card industry average.
"There's no question there's a bias toward efficiency and being able to target your customers," said Mark Girolamo, fixed-income analyst at Bear, Stearns & Co. "The monolines can afford to do this because credit cards are their only business."
Despite these developments, by no means are all major banks conceding to the specialists.
Chase Manhattan Bank is renewing efforts to attract new customers after pausing in the third quarter because it was merging with Chemical Bank, said Pat Tiffany, head of new accounts acquisition at Chase.
The bank's new credit card offerings include a cobranded card with Wal- Mart.
