With its purchase of a U.K. insurance lender, MBNA Corp. has expanded its European business beyond credit cards and picked up around two million small-business and professional customers.
It may also have hedged against an expected drop in European interchange revenue.
The Wilmington, Del., company's European unit, which is based in Chester, England, said Tuesday it had purchased Premium Credit Ltd., the United Kingdom's largest independent insurance premium finance company.
MBNA did not say how much it paid for Premium Credit, but Bradley Ball, an analyst at Prudential Equity Group Inc., said he had seen an estimated price of $360 million, which would be a 24% premium on its $1.5 billion of outstanding loans. The deal closed Tuesday.
Premium Credit, of Epsom, Surrey, is Britain's largest originator of loans to small businesses and professionals, such as doctors and dentists, for paying premiums on property, general liability, and other types of insurance. The privately held company says it has nearly half the U.K. third-party insurance premium finance market.
At a financial services conference sponsored by Citigroup Inc.'s Smith Barney on Wednesday, MBNA's president and chief executive officer, Bruce L. Hammonds, called Premium Credit "a very low-risk business" with "pretty high" margins.
Mr. Hammonds had foretold such a deal as far back as November, at a financial services conference in New York sponsored by Merrill Lynch & Co. "The insurance premium business has a huge customer population" that includes "65% of all medical professionals, and that fits us well," he said at the time.
Diversifying its U.K. operations may help MBNA hedge against the expected drop in interchange income in Europe, where regulators have been challenging the bank cooperatives Visa and MasterCard.
In February of last year the U.K. Office of Fair Trading told MasterCard's member banks there that their interchange rates, which the regulator estimated at around 1.1%, were too high. A spokesman for the office said Wednesday that the issue is still being considered.
Last year Visa EU reached an agreement with the European Commission to reduce interchange rates by 20% by 2007, to an average of 0.7%.
In his November speech, Mr. Hammonds said he expects European interchange, which he estimated at 115 to 120 basis points, to drop to around 35 basis points by 2005. "We are planning like it's going to go down significantly. We will make it up in annual fees, or other fees, or raise the APR. No matter what it takes."
James Donohue, an MBNA spokesman, said Wednesday the purchase was not a reaction to interchange fears but "a great business opportunity … [that] fits well with our affinity marketing strategies."
MBNA says it has a share of about 15% of the U.K. credit card market. MBNA Europe's managed loans at yearend rose 29% from 2002, to $17.2 billion. The parent issues cards in Ireland and Spain, but most of its European loans come from the United Kingdom. Its Canadian portfolio stood at $3.6 billion at yearend.
Before Tuesday's acquisition, MBNA offered only credit cards outside the United States, but domestically it markets several types of consumer and small-business products and services, including unsecured consumer loans, home equity and aircraft loans, and credit insurance protection. It does not sell insurance premium loans here.
At yearend it had $11.9 billion of U.S. consumer loans. This month it purchased a $402 million portfolio of unsecured small-business loans from the Textron Financial unit of Textron Inc.
In a press release Wednesday, Richard K. Struthers, the chairman of MBNA Europe, called Premium Credit a good strategic fit with MBNA's U.K. card business. "Many of Premium Credit's customers are professionals and business owners, who are typical of the kinds of people MBNA has been marketing credit cards to for years."
Arielle Whitman, an analyst with Sandler O'Neill & Partners LP, called the insurance premium service an extremely safe type of lending, with renewable terms of around 10 months and relatively few defaults. Premium Credit's loans are sold through a network of independent brokers, an added sales channel for MBNA.
"MBNA sends a check to the insurance company, but if the business doesn't pay the bill, MBNA cancels the insurance" and cuts its losses, said Mr. Whitman, who called the purchase good news for the company. "My take on it is they wouldn't invest more" in the United Kingdom "if they weren't making money there."
In a research note, Michael S. Hodes, a Goldman Sachs Group Inc. analyst, wrote the insurance premium finance business was more established in the United Kingdom than it is in the United States, but "MBNA expects to potentially enlarge its U.S. capability in this area, given its natural business relationship with affinity groups."
Separately, BB&T Corp. of Winston-Salem, N.C., on Wednesday announced a stock deal for the Charlotte insurance premium finance company Capital Premium Plan Inc. And Paymentech Inc., a merchant processing joint venture of First Data Corp. and Bank One Corp., is expected to announce today that it is opening its first European office, in Dublin, to serve U.S. customers that do business in Europe.
