Following through on its designs in the U.S. consumer finance market, Royal Bank of Scotland Group PLC announced Tuesday that it had agreed to buy the $2.3 billion credit card business of People's Bank of Bridgeport, Conn.
Royal is Europe's second-largest bank and the United Kingdom's second-largest card issuer, but its U.S. retail bank, Citizens Financial Group Inc. of Providence, R.I., does not issue credit cards.
It is to pay a 15.5% premium for the People's receivables, presumably outbidding the domestic issuers that would have been eager to add a sizable portfolio of high-quality loans. Indeed, the deal stands to make Royal Bank the first foreign financial institution with a significant presence in credit cards in the United States.
At the same time this spells the end of a chapter for People's Bank, one of the last holdouts among midtier U.S. banks in the credit card business.
People's started issuing cards in 1985, when most banks were in the cards business. It was one of several large U.S. bank card companies that started issuing cards in the United Kingdom in the mid-1990s, before quitting that business by selling it to Citigroup Inc. in 2001 for a 23% premium. People's said at the time that its $436 million U.K. card portfolio had outgrown its capacity to manage it.
Analysts who cover the Edinburgh company said an important feature of the deal, apart from what they see as a reasonable price, is the acquisition of the entire People's card platform, including its 540 employees in Bridgeport. Given the shrinking number of meaningful U.S. credit card portfolios going up for sale, an opportunity for the 20th-largest book of prime and superprime card loans - lock, stock, and barrel - was too good to pass up, analysts said.
Under an agent bank deal, Royal Bank would market cards to People's customers. It would also market cards to customers of Citizens Bank, whose agent bank deal with an undisclosed card issuer expired last year. According to Royal Bank, People's 1.1 million card accounts are scattered across the United States, with concentrations in California, New York, Florida, Texas, Pennsylvania, and Connecticut.
Carolyn McAdam, a Royal Bank spokeswoman, said in an interview Tuesday that the People's customer profile "fits the prime/superprime profile we were looking for, and is very much in line with what we're doing in the U.K."
Royal Bank would be able to issue cards with any brand after completing the deal, Ms. McAdam said. She did not say whether it would use the People's or the Citizens name to market cards nationally. "One of the attractions of the platform is the flexibility to adopt a multibrand strategy," she said.
Notably, Citizens' New England footprint overlaps the People's market in Connecticut. Ms. McAdam said People's card operations will "sit within" Royal Bank's consumer finance business and be managed "completely independently" of Citizens. Fred Goodwin, Royal's chief executive officer, has been hinting since last spring about its interest in a U.S. consumer finance acquisition.
In the press release announcing the People's deal, Mr. Goodwin said his company "operates one of the largest credit card platforms in Europe, and this tactical acquisition of a premium credit card portfolio represents a low-risk entry to the important U.S. market positioning us well for growth. We are confident this business offers an ideal platform for expansion in the U.S."
John A. Klein, the president and CEO of People's, said in a conference call with investors that Royal Bank is "choosing what we think is one of the best credit card platforms in the country from which to launch their credit card business" here.
Last year Royal was rumored to be one of the prospective buyers of a portfolio with lower credit quality, the $29 billion receivables of Sears, Roebuck and Co., which eventually went to Citigroup Inc. for a 10% premium. Analysts said European banks were at a bidding disadvantage to U.S. giants such as Citi. Acquiring the People's operations would give Royal Bank more scale, an edge that domestic issuers like Citi enjoy, they said.
"The speculation about foreign interest in the sector is now more tangible - U.S. banks and monolines were presumably outbid here," Goldman Sachs analyst Michael S. Hodes in a report Tuesday.
Buying People's would also mean Royal Bank could stay out of massive bidding wars in the United States, analysts said. With an operation in place, it could add small portfolios instead of acquiring whole businesses to gain market share.
"They do not need to go out and buy a Providian or Capital One, because they don't need the infrastructure from those guys," said Simon Maughan of Allianz AG's Dresdner Kleinwort Wasserstein in London.
One of the last independent midsize card issuers in the United States, People's Bank had resisted consolidation in a market almost impossible to navigate without the advantages of massive scale.
"Over time, it's our job to evaluate all of our businesses," People's comptroller Vincent J. Calabrese, a senior vice president, said in an interview Tuesday. "When we stepped back and looked at the credit card business long-term, we saw that Royal Bank of Scotland has the resources to grow it at a multiple and that it makes more sense for us to dedicate our resources" to retail banking in Connecticut. People's is No. 2 in market share in its home state, Mr. Calabrese said.
People's card portfolio, which carries the MasterCard brand, has had some rough going lately. It stood at $4 billion in 2000, almost twice its current size, and for a couple of years it had shown higher-than-average losses in the lower prime segment.
"They weren't making acceptable returns, so you wondered what was going on there," said Chris Buonafede, an analyst at Swiss Reinsurance Co.'s Fox-Pitt, Kelton Inc.
Mr. Calabrese said the business returned to profitability in the third quarter because of better underwriting standards, retention, and collection.
Mr. Klein of People's said in the conference call that his company's estimated net gain on the deal would be $345 million, including $45 million of loan-loss provisions. People's would also retire $1.2 billion of "extremely expensive borrowings" from its balance sheet, saving itself $19 million per quarter in interest expenses.
People's stands to earn "seven-figure" revenues yearly in fee income from the deal, Mr. Klein said. The agent bank agreement's initial term would last seven years, he said.
Investors in People's welcomed the news. The stock closed Tuesday at $41.80, up 11.1%.
