Western Alliance Bancorp has much riding on its new affinity credit card division.
The $4.8 billion-asset Las Vegas company says it started the division last week to help offset the real estate slowdown, which has caused commercial lending opportunities to dry up for its seven regional banks in the Southwest.
Though the affinity business, like the broader credit card market, is dominated by large issuers, Western Alliance says it can carve out a niche for itself by pursuing partnerships with small and midsize companies and nonprofits that the top players have overlooked. (It has already signed up two such deals.)
The company has also set what analysts called lofty income and receivables goals for the card division, PartnersFirst Affinity Services.
For instance, Western Alliance’s chairman and chief executive, Robert Sarver, has projected that within five years profits from PartnersFirst should exceed the parent company’s current earnings. (Last year Western Alliance earned nearly $40 million.)
To run the affinity division, the company has recruited veterans of card giants like Bank of America Corp., MBNA Corp., JPMorgan Chase & Co., American Express Co., and Visa U.S.A. Inc. When the division was formed, Western Alliance said that each of PartnersFirst’s seven executives would put money into it; for example, James H. “Hal” Erskine, the former MBNA executive hired to lead the division, would invest $4 million.
PartnersFirst, for now part of Torrey Pines Bank in San Diego, eventually will become a separate unit, Western Alliance said. Dale Gibbons, the company’s chief financial officer, said in an interview last week that it will begin issuing cards next quarter.
Western Alliance says it expects the division to turn a profit as early as next year.
To do that, the division would have to generate at least $250 million of receivables, the company said.
“We think that’s pretty doable,” Mr. Erskine said last week in a conference call.
Mr. Sarver added, “We’re projecting that we can grow $500 million a year in outstandings.”
The foray into the highly consolidated card business surprised analysts.
“The conventional wisdom is that they’re too small, the credit card market is dominated by large banks, and banks who did have smaller portfolios have exited the market,” said Manual Ramirez, an analyst in the San Francisco office of KBW Inc.’s Keefe, Bruyette & Woods Inc.
Brad Milsaps of Sandler O’Neill & Partners LP said he was surprised because small banks have found they cannot achieve scale in the card business.
Chris Theoharides, the president of Advantage Consulting Inc. of Massapequa, N.Y., said that the affinity market, like the rest of the card industry, is saturated.
“A new entrant into the market at this late juncture” would face significant challenges, because there are no big, unsigned potential partners left, he said.
But Brent Christ of Fox-Pitt, Kelton Inc. said that in the long run the division can succeed, because small and midsize affinity groups are underserved.
Still, he said Western Alliance’s aggressive targets have fueled skepticism. “They are basically starting from nothing. It just depends how quickly they can sign up the right customer base, and once they get the customer base, they need to get them to use it. It’s going to take a little while to win traction.”
Mr. Gibbons said that PartnersFirst would use teaser rates in some cases, in addition to air miles and other rewards, to encourage use.
Mr. Erskine said PartnersFirst’s first two contracts — with Academic Financial Services, a Tampa student lending unit of Business Financial Solutions Inc. founded in 2003; and the U.S. Squash Racquets Association, which has more than 15,000 members — are indicative of the type of deals it will pursue.
GE Money, a unit of General Electric Co., entered the affinity market by signing deals last fall with Northwestern University and Boston College and this month with San Diego State University. B of A, the biggest affinity issuer, has more than 5,000 partners.
Mr. Sarver said on the call that expanding Western Alliance through the affinity card operation would be more profitable than opening another bank.
The return on assets “of successful affinity card programs substantially exceeds those of commercial banks,” he said. “If you look at the history of MBNA and First USA, their returns were almost double what the commercial banking industry is.” On the other hand, “the value of making a business loan” or a “commercial real estate loan is significantly down for what it has been historically in our business.”
Mr. Gibbons said that the card business would diversify Western Alliance’s business mix and expand its geographic reach.
Also, calling on small potential partners is “very similar to the kind of niche that we serve in the Southwest for commercial clients,” mostly small-business owners like doctors and lawyers, he said. “I think it’s an area that’s not getting maybe as much attention.”
PartnersFirst’s managers are “seasoned professionals from the largest successful players in this market, and they’re very hungry and anxious to show what they can do,” Mr. Gibbons said.
In addition, “they are going to have an ownership stake in this enterprise.”
Mr. Erskine is a 15-year veteran of MBNA, which B of A bought in 2006. Kevin Skirde, PartnersFirst’s chief operating officer, joined from Amex.
Sean Byrnes, the chief financial officer, has worked for B of A. James Duncan, the chief marketing officer, worked at Amex and Visa.
David Mihalko, who handles risk management for PartnersFirst, worked at MBNA and JPMorgan Chase.
Don Finch, the head of sales, helped found MBNA and in recent years has helped run several university affinity programs. Harry Tower, who leads partner management, worked in advertising before joining PartnersFirst.
