Private-Label Credit Cards Make a Comeback

During a downturn, consumers are much more likely to use — and to repay — general-purpose credit cards than retail cards, and pretty much every major retail issuer tried to bail out of the business at some point over the last few years.

But now, instead of stalled sales, there are eager buyers, as with Capital One Financial Corp.'s agreement to purchase HSBC Holding PLC's $30 billion domestic portfolio, and lenders like Citigroup Inc., which has discussed reintegrating its retail card segment into the core of the company.

Despite the lower balances and higher loss rates, issuers are looking for loan growth where they can find it, and private-label vitals are on the mend, mostly tracking with the spectacular rebound in the performance of general-purpose cards (see charts).

The annual chargeoff rate for securitized retail card receivables has fallen 4 percentage points from a peak in February 2010 to 9.5% in June, according to data from Fitch Inc. Credit turned the corner at about the same time for general-purpose cards, whose chargeoff rate fell about 5 percentage points to 6.3% during the same time.

Similarly, the percentage of retail card balances more than 60 days past due had retreated to prerecession levels at 3.3% in June, paralleling the recovery in general-purpose cards.

"It looks like these curves are mirror images," said Madeline Aufseeser, a senior analyst at the Aite Group LLC.

The percentage of retail card balances paid off each month — an indicator of borrowers' capacity to handle their debts — has also increased along with the payment rate for general-purpose cards, and yields, which include interest, interchange fees and other sources of revenue, have held up.

Like the broader industry, cards issued primarily for use at a particular retailer appear to have burned through losses generated by the weakest borrowers.

"A lot of what happened in 2010, for everybody, was so much of the [debt] was just perma-debt that was just lingering a hair away from default and just needed to go 'poof.' A lot of that poof happened," said Brian Riley, a research director in the bank cards practice at TowerGroup.

Notwithstanding the improvement in performance, private-label programs are still tricky to manage. Loss rates are higher than for general-purpose cards even in good times, and the retail card business tends to be more vulnerable to economic weakness.

"The fact remains that when households experience financial stress they will typically do everything possible to keep their general-purpose credit card current, as that card can be used to pay for necessities such as groceries, gas and utilities," said Philip Philliou, a partner with the consulting firm Philliou Partners LLC in New York. "The private-label bill gets put into the unpaid bill pile along with the medical bills."

Philliou also cautioned that the change in sentiment on private-label cards could be shallower than it appears.

"It is shortsighted to evaluate private-label programs without considering how dramatically the cobranded credit card market has changed," he said.

Issuers are sifting through account files in search of deeper customer relationships, hoping to steer borrowers to general-purpose cards and other banking products.