After a year of struggling with deteriorating credit quality, Wachovia Corp. has hired Credit Suisse First Boston to help it decide whether to divest Wachovia Bank Card Services, the country's 12th-largest bank card issuer.
The Winston-Salem, N.C., banking company said Tuesday that it would consider all options, including a joint venture. But selling the issuer, which has $8 billion of receivables and 2.8 million accounts, would add Wachovia's name to a list of U.S. regional banks that have left the increasingly competitive card business.
PNC Financial Services Group and SunTrust Banks Inc. sold their card units to MBNA in 1999, the same year Mellon Financial Corp. sold its card unit to Citigroup Inc.
L.M. "Bud" Baker Jr., Wachovia's chairman and chief executive, said that though its card unit is profitable, "there are pressures to spend heavily on marketing programs designed to retain and acquire customers to achieve growth."
Mr. Baker added that the business was "not as relationship-focused as other lines of business."
Analysts said a sale of the business would give Wachovia capital to invest in key growth areas.
"It is a continuation of a trend we have been seeing," said Jennifer Thompson, an analyst at Putnam Lovell Securities. She estimated that Wachovia could sell its unit for a 17% to 19% premium on the receivables, meaning the company could get $1.4 billion in pretax earnings through the sale.
Just last year Wachovia was adding to its card business, buying the $2 billion Partners First portfolio, which was owned principally by Bank of Montreal and its U.S. subsidiary, Harris Bancorp of Chicago.
But since then Wachovia has experienced a bit of a slowdown. It reported in January that its fourth-quarter profits dropped by about 7%, because of charges for a restructuring plan. Last year Wachovia took $100 million of charges for severance and other items in an attempt to boost performance.
Wachovia has also been trying to keep after rising credit costs. The company increased its loan-loss reserve by $200 million and said its nonperforming loans would grow 30%.
During the fourth quarter, the provision for loan losses was $117.5 million, compared with $66.2 million during the same period in 1999, and the bank added $23 million to loan-loss reserves during the quarter. Wachovia reported $499.9 million of nonperforming loans, up $55 million from the third quarter.
The deteriorating credit quality trend is probably one reason behind Wachovia's interest in selling, Ms. Thompson said. "If you decide to cash in, this is pretty good timing," she said. "My guess is if they are even thinking about it, the leaning is toward selling it."
By selling the credit card unit, Wachovia could clean up its loan portfolio, increase its loan-loss reserve and buy back shares, analysts said.
On the downside, Wachovia would have to replace a good income source. In 2000 the credit card unit accounted for $200 million in pretax earnings.
But analysts said the pluses would outweigh the minuses. "Credit card operations benefit from economies of scale," said Katrina Blecher, an analyst at Sandler O'Neill & Partners. "Now is an excellent time to divest this operation."
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