More Card Issuers Buy up Retail Credit Card Portfolios

  Last year, a large number of retailers hung for-sale signs on their credit card portfolios. They were not disappointed by the response.
  "It was a big year for retail card portfolio sales," says Steven Jacowitz, managing associate for Auriemma Consulting Group Inc.
  Among the deals included J.P. Morgan Chase & Co.'s acquisition of Sears Canada Inc.'s $2.1 billion private-label and MasterCard cobranded card portfolios. Citigroup Inc. agreed to buy the card receivables of Federated Department Stores Inc.'s portfolio that included a proprietary card program and a Visa-cobranded one.
  That deal also included The May Department Store Co. card portfolio (Federated bought May last year). The combined portfolios had $3.2 billion in receivables at the end of 2004.
  HSBC Retail Services purchased for $640 million the private-label card portfolio of Nieman Marcus Group and its subsidiary, Bergdorf Goodman Inc. Nieman Marcus had about 1 million active cardholders. HSBC Retail, the private-label arm of HSBC North America, also agreed to buy the $300 million proprietary card program of department-store retailer Bon-Ton Stores and OfficeMax Inc.'s card portfolio with $81.6 million in receivables.
  GE Consumer Finance purchased Dillard Inc.'s private-label card portfolio for $1.1 billion. The department-store chain's portfolio included the assumption of $400 million of securitization liabilities, the purchase of owned accounts and an undisclosed premium. Later, GE bought Belk Inc.'s private-label card program. Belk is a Charlotte, N.C.-based department-store chain.
  The private-label card portfolio purchases have continued into 2006. GE Money, the credit card-issuing arm of GE Consumer Finance in Canada, in February bought Hudson's Bay Co.'s private-label card program for $321 million.
  Hudson's Bay is Canada's leading retailer. In March, Chase Private-Label Services, which is owned by J.P. Morgan Chase, purchased retailer Kohl Corp.'s 13 million private-label card portfolio for $1.5 billion. In April, HSBC bought Boscov Department Stores' private-label card program, which has $170 million in receivables, for nearly $200 million.
  The competition in the retail card space also led to changes in leadership.
  The top buyers of retail card programs are Citi, GE, HSBC and Alliance Data. Chase, however, passed Alliance as the fourth-largest third-party operator of retail card programs when it bought Kohl's card portfolio.
  Retailers generally sold their card programs to focus on their core business. "They have decided to get the asset off their books so they can increase top-line growth by selling more merchandise," says Jacowitz, who at one time ran Saks Fifth Avenue's private-label card program.
  Parent Saks Inc. sold its private-label card program to Household International, now HSBC Retail, for $1.3 billion in 2003.
  Issuers are attracted to private-label card programs, in part, because of the low response rate from direct-mail solicitations for general-purpose cards, which makes it much more costly to sign up new cardholders, Jacowitz says.
  "Issuers that buy a retail portfolio spend in the range of $30 per account," Jacowitz says. "When an issuer signs up a new account solicited through the mail, the company spends about $150 per account."
  Issuers also like retail accounts because they can charge cardholders a high annual percentage rate, sometimes upwards to 20%.
  "Retailers don't worry about credit card interest rates because they compete on merchandise," Jacowitz explains. "On the other hand, general-purpose card issuers have to limit the rate they charge good customers because of competition."
  General-purpose card issuers also can quickly grow their card portfolios by purchasing a retail card portfolio instead of spending years organically growing them, Jacowitz says.
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