And then there was ... one? Not quite. But consolidation among the largest credit card issuers continued with a bang in June with Bank of America Corp. announcing it would buy MBNA Corp.
The fireworks followed the purchase of Providian Financial Corp. by Washington Mutual Inc., and Citigroup Inc.'s buy of the credit card portfolios of Federated Department Stores and May Department Stores ("Spring Blooms a Return to Consolidation, and Issuers Credit Card Portfolios Grow," July).
Experts are predicting the buying frenzy will keep popping this year, with Capital One Financial Corp., Discover Financial Services, Metris Companies Inc. and even American Express Co. as likely targets.
But the huge news in early summer was BofA's announcement it would pay $35 billion in cash and stock for MBNA, a 30.5% premium over MBNA's stock price the day before the deal. BofA would take a restructuring charge of $1.25 billion after taxes, and the combined business would cut about 6,000 jobs.
The deal is scheduled to close in the fourth quarter. BofA expects to save $850 million after tax in 2007 through efficiencies from combining operations.
The card business would be the nation's largest and will offer BofA international opportunities. Bruce L. Hammonds, MBNA's chairman and chief executive, would lead the new Bank of America Card Services division as president and CEO. The division would claim a 20% market share of the U.S. credit card business, with $143.2 billion in receivables and 40 million active accounts.
The agreement would create a marketing juggernaut, wedding $1.2 trillion asset BofA with the MBNA "selling machine," as described by Kenneth D. Lewis, BofA's chairman and chief executive. BofA has a national retail network of 5,800 branches, while MBNA brings its sophisticated affinity network of 5,000 partner organizations. The buzzwords are scale and cross-sell.
Lewis made clear, however, that BofA was in charge, noting that MBNA cards quickly would be rebranded with the BofA brand.
So why did MBNA sell?
The days of 20% to 25% annual growth for MBNA were gone, Hammonds admitted. "Our growth was at 2% to 3%. We needed to diversify internationally and in products," he said.
BofA offers that, with its deep pockets, retail outlets and full-range of banking products. Aligning with BofA should lower the card units' borrowing costs by $180 million in the next two years alone, BofA reported.
Becoming part of BofA means that MBNA would lose some of the card-issuing agent deals it has with many banks, including Wachovia. An estimated $17 billion of MBNA's $82 billion in U.S. receivables came from its agent relationships with 350 banks, executives said. Wachovia accounted for $6.5 billion.
Such deals often allow a partner to pull out if there is change in ownership, and many banks may not want their customers carrying cards with the BofA brand. Lewis estimated about 7% of the portfolio could leave, while Hammonds said that past deals have led to a loss of 15% of receivables.
BofA's takeover, along with WAMU's $6.85 billion purchase of Providian and Citi's expansion in retail cards, has many speculating on the next issuer to be bought.
Top on the list is Capital One, a one-time monoline that reported total managed loans of nearly $80 billion at the end of 2004. Unlike MBNA, Cap One has diversified. It plans to purchase Louisiana retail bank Hibernia Corp. for $5.3 billion by the end of the year, and 12.5% of its portfolio is made up of auto loans.
Another buyout possibility is Metris, but it has specialized in risky subprime consumers, a once high-flying segment that many issuers now avoid. In the last two years Metris has cleaned up its portfolio, but it now reports receivables of $6.2 billion, down from $11.4 billion in 2002. A long shot is American Express Co., the blue-chip issuer and network that plans to spin off its Financial Advisors group to focus on its card business.
Rumored to be on the prowl for acquisitions are Citi, eager to regain the No. 1 credit card issuer spot, and London-based HSBC Holdings plc, a massive international bank with dreams of expanding its U.S. card operations.
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