More Banks Likely to Buy Back Card Portfolios

More banks are likely to follow in Regions Financial Corp.'s footsteps and bring their credit card portfolios back in-house as the worst of the recession's damage recedes and they look to increase revenue.

As issuers' capital levels improve, loan-loss reserves and defaults decrease and the overall quality of borrowers continues to improve, the stakes are changing for card issuers, said Robert Hammer, the chairman and chief executive of the credit card consultancy R.K. Hammer in Thousand Oaks, Calif. "We're likely to see a movement back toward 'insourcing' as card issuers realize certain new advantages of marketing cards under their own roofs," Hammer said.

Over the past decade, when the credit card industry relied heavily on direct-mail marketing and promotional pricing, many issuers handed their portfolios off to large operations to maximize efficiency. Such deals usually include noncompete contracts that typically endure for seven to 10 years, and as those come up for renewal more issuers may follow Regions' lead in rethinking their portfolio management strategies, Hammer said.

Citing a desire to expand its credit card business as part of its overall financial offerings, Regions on June 6 announced an agreement to pay $1 billion this quarter to purchase its branded card portfolio from FIA Card Services, a Bank of America Corp. subsidiary. Regions will begin providing account servicing on the 500,000 accounts in the portfolio beginning in the middle of 2012.

The deal could provide Regions with a way to cross-sell more products because the card accounts are already Regions' customers. "They have generally two to five services with us already," David Turner, the chief financial officer and senior executive vice president at the Birmingham, Ala., bank, said Wednesday at a Deutsche Bank conference.

"It's not just going to buy a credit card portfolio," Turner said. "We're getting our customers back. We think then that gives us the ability to really sell through our remaining customer base credit cards."

The move could also help Regions cope with lost revenue under the Federal Reserve Board's pending caps on debit interchange fees, Turner said.

Now that most troubled accounts have been flushed from portfolios following widespread account closures over the past couple of years, other issuers are likely to retool their credit cards and integrate them more closely into their overall bank offerings instead of marketing them as stand-alone products, Hammer said.

"The wave of regulatory challenges to marketing cards has eased with the implementation of the Credit Card Accountability, Responsibility and Disclosure Act, and issuers feel less of a threat to their business models," Hammer said. "Some of these banks have large branch networks they can harness to market cards, and they can also capitalize on their existing branding operations to get better results."

Although the pace of card portfolio sales remains sluggish, the premiums such card deals fetch are holding steady with the first half of last year and may rise by yearend, Hammer said.

So far this year, eight card portfolio sales have closed, representing a total of $4.4 billion in card loans and 2.6 million in total accounts, according to Hammer. The average premium paid on top of the asset size on deals this year was 13.92%, which is "about par" with last year at this time, Hammer said.

"It's a far cry from the frothy days of 2007 when we saw 40 or 50 deals a year with average premium prices around 21%, but the latest deals suggest we are starting to climb out of the ditch," he said.

Card portfolio premiums were 21.4% in 2007, 16.57% in 2008, 13.3% in 2009 and 15% last year. Hammer expects to see a total of "15 to 20" card portfolios change hands this year, similar to last year, while premiums will likely increase to near 15% by yearend.