Small Deals Fuel M&A Revival for Credit Card Market

Bank of America Corp.'s deal on Monday to sell its unwanted Canadian card assets is the latest example of how smaller acquisitions are fueling a slow revival in the credit card portfolio sales market.

Bigger deals, like Capital One's planned takeover of HSBC's $30 billion U.S. card portfolio, have grabbed the headlines in recent weeks. But B of A's disposal of its $8.6 billion Canadian portfolio, along with other, smaller sales, will likely account for the bulk of card M&A activity this year, experts say.

Such deals are reversing a years-long trend of smaller companies outsourcing their credit card operations to big banks. Now, as credit card giants like Bank of America try to unload assets they deem distracting, regional banks are taking back the opportunity to compete against larger issuers.

"A credit card relationship is a very powerful banking relationship," says Odysseas Papadimitriou, the chief executive of Evolution Finance Inc.'s CardHub.com, a leads-generation website for credit cards.

"Being able to control that relationship and to leverage it for other banking relationships is very critical. I think smaller banks have started to realize that," he says.

Papadimitriou and other experts point to two recent deals Bank of America's FIA Card Services subsidiary completed with Regions Financial Corp. and Banco Santander SA's Sovereign Bank.

As Bank of America announced the sale of its Canadian card portfolio to TD Bank Group on Monday, it also said it had sold a Sovereign-branded portfolio it serviced back to the Wyomissing, Pa., bank. The number of accounts included in the portfolio was in the low six figures, a person familiar with the sale said.

Sovereign would not comment on the sale.

The deal was completed in June, the same month that B of A finished selling a $1 billion Regions-branded credit card portfolio back to the Birmingham, Ala., bank for an undisclosed amount, according to a B of A spokesman.

At an investors conference in June, Regions Chief Financial Officer David Turner said issuing credit cards was a business his bank had wanted to reenter for a while.

Regions' credit card portfolio is composed of "our existing deposit customers," Turner said. "They have generally two to five services with us already."

He also said the deal is "not just going to buy a credit card portfolio. We're getting our customers back."

Returning to credit card lending could also help Regions make up some lost revenue from the Dodd-Frank financial reform law. A provision of the law capped the interchange fees that banks earn on debit card transactions, but those caps do not affect credit card interchange fees.

B of A also said Monday that it signed an agreement on Aug. 3 to sell its Spanish credit card business to Apollo Capital Management Inc. The largest U.S. bank by assets also sold its $200 million small-business card portfolio to Barclays PLC in April and is putting $19 billion of card assets in the United Kingdom and Ireland up for sale.

Chief executive Brian Moynihan said in a press release on Monday that the deals will help B of A focus on its core businesses, including U.S. cards. The credit cards it issues in Canada and Europe stem from its 2006 acquisition of MBNA Corp., which is now known as FIA Card Services.

"The Canadian portfolios and the European portfolios are essentially MBNA-branded cards and the customers we had … for the most part were single-product relationships," says B of A spokesman Jerry Dubrowski.

"They weren't Bank of America customers that also had a Bank of America card. They had an MBNA card and there was no connection to Bank of America," he says.

B of A intends to remain a leading player in the U.S. card business, according to Dubrowski.

He declined to comment on the bank's plans for domestic portfolios, including affinity partnerships like those it had with Regions and Sovereign. But he says those partnerships are "an important segment that performs well. What we really are looking for is affinity partnerships that result in a higher quality of business."

There have been 13 U.S. general-purpose card portfolio sales worth $4.5 billion announced or completed so far this year, excluding deals for mostly private-label assets like the HSBC portfolio that Capital One Financial Corp. is buying, according to Robert Hammer, chairman of card consultancy R.K. Hammer in Thousand Oaks, Calif.

Capital One, which is already buying the U.S. online banking unit of ING Groep NV, last week said it would pay an 8.75% premium, or $2.6 billion, for the HSBC portfolio, which includes private-label retail and co-branded credit cards.

While Citigroup Inc. also has been looking to sell about $45 billion of similar cards, Hammer says he does not expect to see more deals of that size this year.

Smaller deals, like those involving Regions and Sovereign, are more likely, though those also carry risk for banks.

"I'm a supporter of it," says Megan Bramlette, a director with Auriemma Consulting Group. "I think it's good for the marketplace for there to be more issuers out there."

But the issuing business requires banks to "allocate a lot of money for losses," Bramlette says. "You have to put a lot money aside. You have to keep a lot of cash on hand. That's not something that necessarily everyone is cut out to do. That's a big cost. Not to mention that when you start issuing credit cards, in particular, you sort of live and die with the economy."

Papadimitriou, who worked in marketing at Capital One from 2000 to 2008, added that bringing card issuing in-house can help small and mid-size banks gain operational efficiencies, but it also requires top-notch talent.

"Unless you are pretty savvy and you know what you're doing, you can very quickly lose a lot of money," Papadimitriou says.

For banks that don't do their own issuing and want to get into the business, the decision whether to buy an existing portfolio or begin building one from scratch comes down to cost and projected returns on expenses, says Brian Riley, a senior research director for bankcards at TowerGroup.

"The telling tale here becomes what the revenue stream of the portfolio has been," Riley says.