Capital One (COF) is backpedaling from one of its two big deals last year, dumping a $7 billion credit card portfolio as it struggles to justify the rest of its investment.

The McLean, Va., bank said Tuesday it has agreed to sell its portfolio of Best Buy credit cards to Citigroup, less than a year after buying those cards from HSBC. Capital One initiated the early breakup of its relationship with Best Buy, a bank spokeswoman says; a Best Buy spokeswoman, without addressing timing of its decision, says the retailer solicited proposals for new partners and picked Citigroup.

The deal endorses Citigroup's renewed commitment to retailer credit card lending, after it spent years trying to sell the business.

The Best Buy accounts were some of the flagship assets in a $30 billion HSBC cards portfolio that Capital One swallowed to rapidly expand its business of issuing credit cards on behalf of retailers. But cracks are starting to show in that strategy. Last month, Capital One issued unexpectedly low profit guidance for 2013, warning that its HSBC and ING Direct acquisitions were generating fewer returns, less goodwill and more credit losses than initially expected. Now the bank is releasing a large credit card business, for reasons that left some analysts scratching their heads.

"This seems a little strange," says analyst Sameer Gokhale, of Janney Montgomery Scott. "I don't think that any investor is looking at the ING and HSBC acquisitions and saying that they appear to be home runs. … Now that they're turning around and selling [the Best Buy portfolio], it certainly does seem to be disappointing."

Capital One agreed to an early termination of its contract with Best Buy and is essentially giving Citigroup the assets at face value. The deal will close in the third quarter and is not expected to materially affect the banks' earnings, the companies said Tuesday.

In an email, Capital One spokeswoman Tatiana Stead cited "some key differences in our strategic goals for the partnership, so we came to a decision that it was best to end the partnership." She would not be more specific, although she said that the bank continues "to believe that partnerships are a great business, and that we can leverage the … portfolio of partners we acquired from HSBC for future growth."

Chief Executive Richard Fairbank said last week that the bank intended to be more "selective" in its choice of retailer partners, although it appears to be culling them unusually late in the process.

"The key to success in this [private-label credit card] business is selectivity. While it is a scale-driven business, I think sometimes as people have tried to just really get big in the space, they've ended up with a number of problems," Fairbank said at a Credit Suisse financial services conference.

When asked specifically how Capital One could be selective after buying several retailer relationships at once from HSBC, Fairbank responded, "We have, over time, been working through those partnerships and the good news is many of the very important ones are really at the high end of the criteria that we would lay out. There is a continuum there in terms of our own partnerships. Just like the marketplace in general, we want to manage that selectively."

Big banks are also facing increased capital requirements, and analysts point out that credit card portfolios — especially retailer credit card portfolios and their lower-credit-quality accounts — tend to impose an extra burden on banks that own them.

"Right now with most asset trades going on in the banking space, it's not only about the net income they generate, it's about the net income relative to the capital charge they require in a Basel III world," says analyst Eric Wasserstrom of SunTrust Robinson Humphrey.

Capital One has so far retained the most "high end" credit cards it acquired from HSBC, including those used by affluent shoppers at Neiman Marcus and Saks Fifth Avenue. But Best Buy's fortunes have been dropping. The big-box electronics retailer has been struggling to keep up with cheaper Internet competitors like And its customers generally have less incentive to regularly use their Best Buy cobrand or private-label cards; unlike at department stores, where shoppers might return frequently and regularly buy goods with their store cards, most Best Buy customers don't need to buy more than one flat-screen television or computer every few years.

Instead, industry members say that Best Buy customers tend to use their store cards to finance big-ticket purchases over several months. That's a lending model that Citigroup has experience providing, although it has wavered in its commitment to it; in 2010, the bank sold General Electric (GE) some $1.6 billion of similar equipment-financing assets, as part of its larger efforts to get out of the retailer-card business.

But now Citigroup has recommitted to that business. After the financial crisis, buyers for its "retail partner card" unit were thin on the ground and unwilling to pay what Citigroup considered a good price. In late 2011, then-CEO Vikram Pandit welcomed the unit back into the bank's fold, and Citigroup has since signed new partners, including Ford (NYSE:F). Winning Best Buy's business is another step in the unit's rehabilitation, analysts say.

"This will add another premier retail franchise and high-quality card portfolio to Citi Retail Services and significantly expand our already strong position as a market leader in North America," Bill Johnson, CEO of the business, said in a press release.

Bank CEO Michael Corbat, who abruptly replaced Pandit in October, oversaw Citigroup's efforts to dispose of the business when he was the head of the bank's Citi Holdings repository for unwanted assets. But now he appears to be embracing it. 

In the private-label and cobranded cards market, "we've seen Citi become more aggressive lately," says John Costa, a managing director of Auriemma Consulting Group. "They've been on the sidelines for a bit, but they're back in the game."

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