The sluggish market for credit card portfolios may pick up this year, if card losses continue to abate and potential buyers stay on the path of rebuilding capital.
Absent a very large, $30 billion portfolio sale announced late last year, 2011 credit card portfolio deals would have remained soft, at $5.5 billion in receivables compared with $5.4 billion in 2010, according to R.K. Hammer & Associates, a Thousand Oaks, Calif.-based consultancy.
But if the largest sale were included, deals would have been similar to 2008, when $55 billion in card receivables sold, according Hammer & Associates.
Hammer forecasts unannounced new card-portfolio sales deals this year to reach “between $5 billion and $7 billion,” bringing total anticipated deals closed in 2012 to $37 billion.
“We’re starting to see some deals flow,” Robert Hammer, the firm’s chairman and CEO, tells PaymentsSource. “Banks are recapitalizing, which makes buyers stronger, and charge-offs continue to fall to lower levels, which makes portfolios worth more.”
So far no other giant deals are on the horizon. The most noteworthy recent deals involved Bank of America Corp. unloading card portfolios worth about $1 billion to U.S. Bancorp and First National Bank of Omaha in transactions that will close this year.
Deals dwindled when the economy tumbled, and a modest recovery still has many banks in “hunker-down” mode, Hammer said in a research note. Issuers also are trying to restore dividends and capital, and they have had a bigger focus on operating-expense control and rebuilding their business models, something over which they can still exert control, he said.
The impact of recent credit/debit legislation that cut into revenues also affected credit card portfolio buyers. “The largest, most active buyers in the past have simply had their own troubles to deal with,” Hammer said. “This, however, brings a new chance for smaller regionals to fill in the gap and buy.”
Softer premium prices have necessarily reduced the number of potential sellers as well. And fewer buyers, coupled with fewer sellers, represented a double hit to the deal-flow trend, Hammer said.
Subsequently, the card return-on-investment earnings have dropped considerably since 2008, causing lower sale prices than during earlier periods. “And that prompted some prospective sellers to pull their portfolios from the transaction process altogether, rather than consider selling below their hurdle,” Hammer said.
“Deals are still being made¬–just fewer, and at lower prices,” he said. “Distressed portfolios (at discounted prices) are also making a comeback, too.”
Looking ahead, merger-and-acquisition growth this year should be more robust, with buyers having improved their managed balance sheets and charge-offs having reduced to more manageable levels¬–thus turning their attention back to addressing the marketplace, Hammer said.
“More card buyers will return to the deal war room actively looking for good deals, and sale prices rising accordingly, he said.