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The lack of clarity around new credit card regulations has become an impediment to issuers acquiring card portfolios, industry banker and three consultants told dealReporter.
Once the regulations created by the CARD Act are implemented next February, card portfolios on the block like GE’s (NYSE:GE) private-label business and parts of Citigroup’s (NYSE:C) private-label card business will likely gain renewed interest from bargain hunters, but at even further discounts to previous deals, the banker and two of the consultants agreed.
GE’s GE Money unit runs one of the largest private label credit card businesses in the US. It has said publicly since 2008 it would consider a sale or partnership for the business. Citigroup has also indicated interest in selling parts of its card portfolios.
In addition, card portfolios not yet known to be on the market could also be up for grabs following the implementation of the new regulations, the banker and consultants said.
”Anybody in this business today has to have someone looking at how to exit the business,” said the banker, who is directly involved in both buy and sell side discussions for credit card portfolios.
Citi holds its private label card portfolio within Citi Holdings where the company retains around USD 850bn worth of its non-core assets, including the retail brokerage, asset management and consumer finance businesses it plans to sell or unwind. The larger remainder of the Citi bank-branded cards make up a large part of the USD 1.1trn worth of “core” assets retained within Citicorp.
US Bancorp’s (NYSE:USB) purchase of three of Citigroup’s card portfolios representing about USD 1.3bn of loans was considered a small deal by industry standards and does not represent a bounce back in appetite for acquisitions. One of the consultants estimated the premium to book value paid by US Bancorp (not a publicly disclosed figure) for the Citi portfolios to be in the single digits.
Private label card businesses have been the most common card portfolio category up for sale because it offers less opportunity for new growth but provides acquirers with a high annual percentage rate performance relative to bank branded cards, noted a second consultant, John Grund, partner at First Annapolis.
Buyers of credit card portfolios are likely to emerge, attracted by the discounted values.
At the end of 2007 credit card portfolios were trading at around 21% above book value in off market sales; last year they were trading at 16%, and this year credit card portfolios are valued closer to 12%, the banker commented.
Deal volume too has dropped dramatically from approximately 50-60 transactions during the course of the 2008 calendar year representing around USD 40-50bn of assets, to approximately USD 10bn worth of assets traded in eight transactions this year, the banker added.
Buyers that were initially on the sidelines because of rising charge-off rates and worsening unemployment are now waiting to see whether the Federal Reserve regulations hold issuers to more onerous standards already outlined in the Act.
“The educated buyers clearly have a view but there are still huge clouds of uncertainty because parts of the CARD Act just aren’t done yet, and that creates a huge overhang, otherwise would be a real opportunity for players with a long term commitment to the card business to selectively buy portfolios,” Grund said.
The consultants agreed that card issuers are most interested in the restrictions that regulations will place on their ability to charge customers late fees. Currently, guidance in the card act outlines that fees should be “fair and proportionate”. The third consultant said it is possible the government could decide to cap late fees.
On 22 May President Barack Obama signed the Credit Card Accountability, Responsibility and Disclosure Act into law and while some provisions were effective August this year, most of the provisions will be implemented by the Federal Reserve on 22 February.
This news service previously reported House Financial Services Chairman Barney Frank said Congress may decide to push forward the effective date of the new regulations.
All card issuers including JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C), American Express (NYSE:AXP), Capital One (NYSE:COF), and Discover Financial Services (NYSE:DFS) have indicated they will be impacted by the Act.
The Act alone will result in a 100bp impact on card issuer revenue, which card issuers will attempt to make up in a large part by cost reduction methods including diluting rewards and reducing operating expenses, according to a third consultant, Rich Tambor, a managing director at Novantas.
Buyers will likely return to the market to scout strategic opportunities ”when it’s a known quantity as to what this is going to do to your systems,” the banker said referring to the impact of the CARD Act.
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