Capital One sells Best Buy credit card portfolio to Citigroup

Brendan McDermid/Reuters - Capital One Financial, the nation’s third largest issuer of store branded plastic, said Monday that it agreed to sell Citigroup its $7 billion portfolio of Best Buy credit card accounts.

Capital One Financial, the nation’s third-largest issuer of store-branded plastic, said Monday that it agreed to sell its portfolio of Best Buy credit card accounts to Citigroup, just two years after buying it.

The move took some bank analysts by surprise because Capital One had recently been bulking up its store card business. Officials at Capital One declined to provide details about the decision.

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The McLean-based financial firm also did not disclose the sales price but said that the value of the Best Buy accounts is $7 billion. Capital One said there would be no significant gain or loss on the transaction, which it expects to close in the third quarter. Capital One’s stock fell about 1.7 percent in regular trading Monday.

Just two years ago, Capital One leapfrogged to the forefront of the store card business with the $2.6 billion purchase of HSBC’s U.S. credit card portfolio, which contained 23 retail partnerships including the Best Buy affiliation.

“It caught us by surprise because a big part of Capital One’s story was buying [the HSBC] portfolio, and they’ve sold a pretty big piece of it,” said Sanjay Sakjrani, an analyst with Keefe Bruyette & Woods. “From what we’ve heard from Capital One, strategically it seems the two parties had a difference of opinion and felt it was best to terminate the contractual obligation.”

Capital One made its foray into the store-branded credit business in January 2011 by snagging the credit card portfolio of Canadian retail conglomerate Hudson’s Bay. That deal was followed up four months later with the acquisition of Kohl’s department stores’s card portfolio, which gave Capital One more than 20 million accounts and the right to issue cards to Kohl’s customers.

Such private-label cards usually carry higher interest rates and lower credit lines than other types of plastic. Consumers with limited credit options rely heavily on these cards, and because they are unsecured there is always the looming risk of default.

But card issuers are drawn to the high fee income of store cards. In addition, banks that issue cards sometimes don’t have to pay marketing costs because the retailer has the incentive to push the product.

After a precipitous decline during the downturn, the store-brand credit card business is rebounding while deliquencies are slowing, said Robert Hammer, head of the consulting firm R.K. Hammer. Stricter standards on traditional cards have made store cards more appealing to consumers.

“The earnings are starting to snap back to a normal 3.5 percent to 4 percent return,” Hammer said. At the height of the recession, he said, profit margins hovered around 2 percent. “Not everybody loves private label, but for those who know how to manage the risk, they can make a lot of money.”

At a conference in New York last week, Capital One chief executive Richard Fairbank explained that the company wants to be more selective about its private-label credit card business.

“We are looking at our own portfolio and . . . really looking to see if we can get new partnerships,” Fairbank said.

Best Buy did not respond to requests for comment. The sale includes Best Buy cards that can only be used at its stores and MasterCards bearing the retailer’s name that can be used anywhere, known as co-branded cards. Best Buy has come under pressure as shoppers have migrated online.

The Best Buy deal represents a reversal for Citigroup, which just a few years ago was planning to exit the private-label card business. Citigroup decided to hang on to the business, which it calls Citi Retail Services, after loss rates on the cards abated.

The unit services nearly 90 million accounts and recorded $1.5 billion in profit in 2012, up from $1.4 billion a year earlier, according to Citigroup. The company said the purchase of the Best Buy portfolio is unlikely to affect its earnings this year.Citi Retail Services chief executive Bill Johnson said the Best Buy deal“will add another premier retail franchise and high-quality card portfolio” to the division and “significantly expand our . . . position as a market leader in North America.”

 
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