Closing in on the credit card industry's top tier, Providian Financial Corp. has agreed to acquire $1.1 billion of receivables from First Union Corp.
The loans would increase Providian's third-quarter 1997 credit card total by 14%, to about $9 billion. Currently 12th on the bank card industry ranking, the San Francisco company would need more than $1 billion more to crack the Top 10.
Spun off from its insurance company parent last June, Providian has taken on the characteristics of a monoline lender and has been one of the fastest-growing and most profitable card issuers.
The company said the First Union business would have an immediate positive impact on earnings after the deal's anticipated completion in about a month.
The purchase "should allow the company to exceed the upper end of its long-term earnings per share growth goal of 22% to 25%," Providian said.
"Pursuing highly selective, opportunistic acquisitions has been a component of our growth strategy since the company went public," said Providian chairman and chief executive officer Shailesh Mehta. "The purchase of this portfolio is consistent with that strategy and our financial goals."
Though financial terms of the purchase were not disclosed, Providian said it is buying the First Union balances at a discount, or below book value.
The transaction is the latest in a string of consolidations that include Banc One Corp.'s purchase of First USA Inc. last year and recent agreements by Fleet Financial Group to buy Advanta Corp.'s card business and by Citicorp to take over AT&T Universal Card Services.
But another trend is at work on the sell side: regional banks' rethinking of national credit card ambitions. Having set out in 1994 to join the top tier through mass marketing outside its main banking areas, First Union will now be integrating card services more closely with its core business.
It will be left with about $5.4 billion of managed card receivables.
"Our strategy is to reposition our portfolio and build our credit card and other consumer business by expanding relationships with our growing customer base on the East Coast," said Jack M. Antonini, executive vice president of First Union's consumer group.
"We are going to see a lot of issuers that aren't in the top tier getting out of national lending and focusing on some sort of niche they do well," said Michael Auriemma, president of Auriemma Consulting Group of Westbury, N.Y.
Unsecured lending to customers who do not also have deposit accounts-a profitable specialty for the likes of MBNA Corp. and Capital One Financial Corp.-will be left to "a dozen or so players," Mr. Auriemma said.
"First Union has not been lighting fires with their national portfolio," he added. "I don't think it's a surprise that they are getting out of national card issuing."
James Shanahan, a partner of Business Dynamics Consulting, Nyack, N.Y., had a contrarian view, saying First Union would find it harder to add high- quality credits. "It's difficult to grow your business if you restrict your geography," he said.
First Union suffered high chargeoff rates outside its home markets and expects them to go down after the divestiture, said company spokesman Jeep Bryant. Third-quarter writeoffs were 7.63% of card loans, up from 5.75% a year earlier.
Providian considers dealing with higher-risk and higher-margin accounts a core competency. Net credit losses on managed loans were a relatively high 6.2% in the third quarter, but total managed assets (including secured credit cards, home loans, and securitized loans) were up 19%, to $10.8 billion; net income rose 28%, to $48.6 million; and return on equity was a healthy 38.58%, though down from 41.72%.
Year-to-year comparisons were pro forma, as Providian did its initial public offering in June after the spinoff from Providian Corp. The latter's core insurance business was sold to Aegon of the Netherlands.
Providian's share price rose 81.25 cents Tuesday, to $46.0625, and is well above the initial $29.50 of June 10.
Moshe A. Orenbuch, an analyst at Sanford C. Bernstein & Co., New York, said Providian is well suited to handle its new accounts. "They are much better at customer service and account management than other national players," he said.