Considering selling your credit card portfolio?
CUNA Mutual Group Financial Consultant Tim Gardner demonstrated what credit unions need to look at in order to come to a decision that makes sense both in the short and long term.
Gardner created a case study for a credit union with $200 million in assets where the credit card portfolio made up 5% of the total loan portfolio. In this case study, the credit union is deciding whether it should sell its portfolio to a company that will not market to the CU's membership base, and the CU must pledge not to get back into the credit card business for five years.
The first step is looking at the average life of the credit union's credit card loans. In this case, it's between 1.5 and two years. "I'm told that some members actually do pay off their balances immediately, but I don't know any of those people," Gardner laughed. "Most members will carry a balance."
Next, consider the card's effective yield, which is the interest rate being charged minus the annualized delinquencies and charge-offs for the portfolio. For the purpose of the case study, Gardner said the current rate is 11%, with an annualized delinquency and charge-off rate of 4%, meaning the credit union has a 7% effective yield.
From there, it's time to look at the portfolio's profitability. To determine that, the credit union looked at the cost to originate and maintain a credit card and compared it with the cost to originate and maintain its other loans.
In the case study, credit cards were the cheapest loans to acquire and maintain, coming in at about $109, compared with $181 for a signature loan, $145 for a new auto loan, $183 for a used auto loan, $236 for home equity loans and $273 for first mortgages.
The MCIF can then be used to determine the product's penetration-even delving further to determine what percentage of those cards going to A-paper members, B-paper members, C-paper members, etc.
The result: in the case study, 23% of households had the credit card, with 10% of those cards held by "A" members, 20% by "B" members, 14% by "C" members, 27% by "D" members and 27% by "E" members.
"So the question is, why aren't we making these loans to our A members," asked Gardner. In all likelihood, he said, it has to do with the rate. "How do we make our credit card more attractive to them? Lower the rate. Could risk-based pricing be the answer?"
But there are still more things the credit union has to take into consideration, according to Gardner:
* If the portfolio is sold, what will the money from the sale be used for?
* How would the reinvested money affect the credit union's interest rate risk position?
"Another thing to consider is what are you saving on the cost side of things," Gardner observed. "The credit card was the cheapest to originate and maintain, but there was still a cost there, is there a savings to be had? In this case, probably not, because what's your biggest cost associated with making a credit card loan? The employees, so unless you plan to lay off employees after selling the portfolio, what costs are you saving?"
In going through the case study, most of the session attendees at Garnder's session at CUNA Mutual's Discovery Conference suggested they would keep the portfolio, because of its value in diversifying the total loan portfolio, as well as its decent effective yield and the low acquisition and maintenance cost. But they noted that if there was a good enough strategy for using the money gained from the sale, they would consider selling.