Is Card Monoline Deal Wave Building?
It’s no secret that scale has become the name of the game in the credit card business, and that low funding costs — particularly with rates rising — may give banks an advantage over monolines.
The need for cheaper funding was one of the main factors in Capital One Financial Corp.’s recent decision to make a $5.3 billion deal for Hibernia Corp. The deal would give Capital One, of McLean, Va., critical access to a deposit base that should lessen its reliance on the capital markets.
“Hibernia’s lower-cost deposits directly reduce Capital One’s combined funding cost” and would help it “operate with better economics, with better certainty,” Richard D. Fairbank, Capital One’s chairman and chief executive, said during a conference after the deal was announced March 6.
Analysts and executives foresee more deals, particularly on the portfolio side of the business, but they don’t necessarily expect other monolines to follow Capital One into retail banking.
MBNA Corp. is one monoline that says it will not shop for a banking company. In an e-mail last week, a spokesman for the Wilmington, Del., company said it has no need to buy a bank, because it already has $31 billion of deposits, “including nearly $24 billion in direct retail deposits.”
Kenneth Posner, who follows credit card and consumer finance companies for Morgan Stanley, said that getting a bank’s deposits would offer monolines an advantage only if it is really cheaper than other sources of funding, such as securitization.
Capital One “paid a $1 billion premium for Hibernia,” so the deposits it would acquire “are not low-cost,” he said in an interview Monday.
Also, at the end of the day deposit funding may not make much of a difference, Mr. Posner said.
“I don’t think the credit card business is given a free ride on the deposit business” at big banks, he said. They also have to pay for funding, partly by going to their own banking units but also partly, like monolines, through securitization.
And the large scale that Citigroup Inc. and JPMorgan Chase & Co. have amassed may not automatically give them an advantage over monolines, Mr. Posner said. “Does being big mean anything? I don’t think you would observe that the bigger companies have lower cost ratios.”
William B. Harrison Jr., JPMorgan Chase’s chairman and chief executive officer, sees it differently. During the New York company’s investor day last month, Mr. Harrison said that scale is part of JPMorgan Chase’s advantage, and he predicted further market concentration.
“We think that at some point in the future you’re talking about certainly less than a handful of real competitors who are getting the kind of returns you’re going to want in that business,” he said.
JPMorgan Chase, which for years was the fifth-biggest credit card company in terms of receivables (behind Bank One Corp. and MBNA, among others), got bigger last year through its acquisition of Bank One.
The acquisition “created scale and leadership business positions for us in this space,” William I. Campbell, the head of Chase Card Services, said during the same investor presentation. It also made JPMorgan Chase No. 2 in receivables, ahead of MBNA and behind Citigroup Inc., according to data from Sandler O’Neill & Partners LP.
Jeff Harte, a Sandler O’Neill analyst, said JPMorgan Chase held a 16.7% market share last year in the revolving credit business, trailing only Citi, with a market share of 18.2%, he said. MBNA was third, with 10%, followed by Bank of America Corp. (7.2%) and Capital One (16%).
Growth in both receivables and market share will probably not be as explosive as it has been over the last few years, Mr. Harte wrote in a report published Feb. 16. However, Citi’s share should grow to 19.3% by next year, while JPMorgan Chase’s should grow to 17.3%, and B of A’s to 7.5%, he wrote.
MBNA’s share will slip to 8.8%, and Capital One’s will not change, he predicted.
Much of the expansion for banking companies in the credit card business has come through acquisitions. Buying Bank One added $74 billion to JPMorgan Chase’s portfolio. Bank One bought the monoline card lender First USA Inc. in 1997, and HSBC Holdings PLC bought Household Financial Corp. in 2003.
Citi bought Sears, Roebuck and Co.’s card portfolio in 2003, Home Depot Inc.’s receivables in 2002, and Associates First Capital Corp., a consumer finance company that had a card business, in 2000.
FleetBoston Financial Corp., which, of course, Bank of America bought in April, had a $14.6 billion card portfolio, though B of A sold $1.1 billion of it in November.
Denis Laplante, the head of bank research at Keefe, Bruyette & Woods Inc., said some bankers may regret getting out of the card business.
For example, the old Wachovia sold its card business to First USA in 2001, shortly before selling itself to First Union Corp., which had sold its portfolio in 2000 to MBNA as part of a repositioning of its business strategy.
Stephen Schulz, Keefe Bruyette’s card analyst, said in an interview Friday, “The credit card business is one of the, if not the most, profitable consumer lending business for banks,” and it gives banks more customer information than most other consumer lending lines.
Revolving credit requires constant monitoring of a customer’s credit behavior, and that monitoring gives a banker a good opportunity to learn a lot about the customer, Mr. Schulz said. That information, in turn, presents opportunities to sell other financial products, such as home equity lines of credit, a major competitor to card loans.
Mr. Harte wrote in his report, “While we are generally skeptical of forecasted revenue synergies from cross-selling opportunities, the potential for cross-selling credit cards to a bank’s existing retail banking client base is compelling.”
Some analysts said that not having branches is one of biggest disadvantages for monolines, and that Capital One overcame that hurdle by acquiring Hibernia.
The monolines’ reaction to the industry consolidation, and to what is perceived as a declining opportunity to gain market share, has been diversification, Mr. Schulz said. Credit card lenders “view the relationship with the customer that you build through the credit card as being a valuable tool to extend into other consumer lending lines.”
For example, Capital One has ventured into auto lending, and MBNA has added products that it says will help it compete with banks. “We’re confident in our ability to compete,” a spokesman for MBNA said last week.
Both MBNA and Capital One have also added home equity loans to their product lineups. But MBNA’s issuing of cards through Wachovia and other banking companies is “the recognition that the branch is still a good distribution point,” Mr. Schulz said. “If it helps … [card lenders] to reduce customer acquisition cost, than that’s a way they pursue. They have been very successful at it.”
But Morgan Stanley’s Mr. Posner said selling cards through branches does not require card companies like MBNA to actually owning a bank. “MBNA has the biggest branch network of all” — its bank partners.
