Capital One Financial Corp. is looking for another private-label credit card portfolio to buy on the heels of absorbing the U.S. card business of HSBC Bank USA and last year’s acquisition of the Kohl’s Corp. store card portfolio, CEO Richard Fairbank tells analysts.
Private-label card portfolios represent “a significant growth opportunity for us,” Fairbank said during the conference call to discuss third-quarter earnings. “For a long time,” private-label card operations were pushed into the background by faster growing cobranded card programs, he noted.
“I think (private-label’s) demise has been greatly exaggerated,” Fairbank said. As Cap One shops for additional private-label card programs, it will be selective and “sensitive to the sort of auction price nature of how some of these portfolios move,” he said.
Cap One in August announced plans to buy HSBC’s $30 billion credit card business, which includes cobranded bankcards and private-label card programs for Best Buy Stores Inc., Neiman Marcus Inc. and Saks Inc.’s Saks Fifth Avenue. Fairbank said the bank plans to close the HSBC deal during the second quarter of 2012.
The McLean, Va.-based issuer in 2010 acquired 20 million store-branded card accounts of Kohl’s Corp.
One reason private-label cards have gained appeal is that receivables growth in general-purpose bankcard products has slowed as consumers have reduced spending dramatically and fewer are revolving balances from month to month, Fairbank suggested.
Private-label programs target a broader array of customers, and while Fairbank acknowledged that the HSBC portfolio contains some “subprime branded stuff,” it also has “massive prime and top of the market” customers whose spending patterns show promising growth.
On the bankcard front, Cap One is engaged in a costly marketing war with JPMorgan Chase & Co., American Express Co. and other major issuers to capture prime customers who use credit cards for everyday spending, Fairbank said.
“We’re investing very heavily, as frankly, are Chase and Amex in particular, in the real top of the market heavy spender, and these are very expensive accounts to get,” he said. “As everybody knows, when you get them, they tend to have great performance and very heavy spending patterns, and they’re long annuities.”
As a result, direct-mail volume “is returning dangerously close to sort of where it used to be,” Fairbank added, noting that surprisingly the recent influx of credit card offers “don’t even show that a lot of the marketing has moved to the Internet.”
Mintel Comperemedia data earlier this year showed a significant uptick in direct mail offers, including cash incentives encouraging consumer to switch issuers.
Cap One reported higher credit card purchase volume for the third quarter and lower cardholder defaults, which Fairbank attributed in part to stepped-up marketing efforts.
The issuer’s credit card business generated net income of $663 million for the quarter ended Sept. 30, up 5.1% from $631 million a year earlier. Total revenues for the card operation rose 3.8%, to $2.7 billion from $2.6 billion.
Total marketing expenses for Cap One rose 24.8%, to $312 million from $250 million.
Net income for the U.S. card unit was $637 million, up 17.1% from $544 million, with revenues reaching $2.34 billion, up 3.1% from $2.27 billion.
U.S. purchase volume rose 27.3%, to $31.7 billion from $24.9 billion.
Net interest income for the U.S. card operation rose 3.6%, to $1.75 billion from $1.69 billion, and income from fees and other sources rose 2.3%, to $588 million from $575 million.
The provision for loan losses declined 34%, to $381 million from $577 million. The U.S. charge-off rate was 3.92%, down 431 basis points from 8.23% a year earlier.
Cap One’s U.S. card unit held $53.82 billion in loans at the end of the quarter, nearly flat with $53.84 billion a year earlier.
The international credit card unit produced $26 million in net income, down 70% from $87 million a year earlier, with revenues reaching $379 million, up 11.8% from $339 million.
International purchase volume was $3.2 billion, up 45.5% from $2.2 billion.
Net interest income rose 18.9%, to $289 million from $243 million, while income from fees and other sources declined 6.3%, to $90 million from $96 million.
The provision for loan losses rose 56.6%, to $130 million from $83 million, and the charge-off rate was 6.15%, down 145 basis points from 7.6%.
The international cards unit held $8.2 billion in loans at the end of the quarter, up 9.3% from $7.5 billion last year.
