Bank of Montreal is taking a major leap forward in the corporate payment card business, yet another field whose ranks are being reshaped by crisis-driven divestitures.
The Toronto banking company said Tuesday that it had agreed to buy the North American Diners Club franchise from Citigroup Inc. for $1 billion in cash, roughly the face value of the receivables. The purchase would more than double Bank of Montreal's corporate card business, which it said is already the largest in its home country.
Mike Kitchen, the $367 billion-asset company's senior vice president for personal and commercial banking, said his company's strength in corporate cards has historically been in purchasing cards, which help businesses manage spending, and in Canada. The acquisition, he said, would let it "leapfrog" ahead in its previously organic efforts to expand in the travel-and-entertainment card sector and accelerate its expansion in the United States.
For Citi, the transaction is the latest in a string of divestitures — including a number of sales in the cards space — the company has undertaken to rid itself of more than $700 billion of unwanted assets. Assets still on the block include Citi's retail partners credit card business, which had about $58 billion of receivables at Sept. 30.
The deal also follows American Express Co.'s purchase last year of General Electric Co.'s corporate payment services unit for about $1.1 billion. GE, whose financial services arm lost about $3 billion pretax during the 12 months through Sept. 30, had been trying to sell its private-label card business since December 2007 but gave up on that about a year later, citing the poor environment for a sale.
"You're just seeing everybody who's in all these businesses decide, 'Is this good for me? Or am I better off doing what I'm really good at?' " said Timothy Kolk, the president of TRK Advisors LLC, a credit card advisory firm in Peterborough, N.H.
Terry Wellesley, Bank of Montreal's managing director of spend and payment solutions, said the franchise it is buying is heavily weighted toward travel and entertainment, and would give his company the scale it needs in that business.
Kitchen said the company's "primary focus" will return to organic growth, but if additional portfolios become available, "we would of course look at them."
Though Bank of Montreal was primarily drawn to the franchise's corporate business, he said, the company plans to develop the personal card business, which caters to wealthy people, and "hasn't been actively grown for quite some time."
Citi said it does not expect the sale to materially affect its profits or capital ratios. The company said it still has corporate payment card operations it intends to keep as a part of its core business, and some smaller ones slated for disposal.
Kolk said consumer credit card portfolios generally "are not going for much more than par these days," so it was not surprising that Bank of Montreal agreed to pay about 100 cents on the dollar even though credit performance is typically better on corporate accounts. Issuers, he said, are "very wary" about transaction volume because of corporate belt-tightening.
Bank of Montreal said that about 80% of the $7.8 billion of transactions that the franchise handles annually comes from the corporate business. "Given the overweighting of this portfolio to corporate, the credit quality is very, very good," Kitchen said.
Despite the slowdown in travel this year, purchasing and travel-and-entertainment cards "have experienced continuous high-single- to low-double-digit industry growth," Bank of Montreal said. The company cited a forecast that "business travel is expected to rebound significantly by 2011."
Robert Hammer, the chief executive of the card advisory firm RK Hammer, said premiums on deals for card receivables have averaged around 13% this year, well off the low 20% range in 2007. But he said it is difficult to compare individual deals without knowing all the terms — for instance whether the seller is holding back bad assets. The "softening" in prices overall has "principally been because the better, bigger, more experienced buyers have had their own problems," he said.
The operation Bank of Montreal is buying licenses its name from Diners Club International, the network that Discover Financial Services bought from Citi for $168 million last year. Citi had transferred processing of Diners Club cards in North America to MasterCard Inc. in 2004. Citi's deal with Discover did not change that, nor would the one with Bank of Montreal.
Kitchen said the MasterCard network was "the only direction" Bank of Montreal could take given its focus in Canada and the sparse acceptance the Discover and Diners Club International brands have in the country.
But that calculation could change "should the Diners/Discover acceptance grow," he said. (In September, Discover said it hoped to have signed merchants in more than 50 countries to accept its cards by the end of the year.) Bank of Montreal "hasn't spent a lot of time with the folks from" Diners Club International, Kitchen said, but "we certainly expect some concurrent activity to promote the brand."
Bank of Montreal and Citi expect to complete the transaction before March 31.