Struggling banks find their plastic is their gold


NEW YORK -- The fraction of a penny's worth of plastic that banks stick in your wallet may be the most valuable asset they have to offer.

This was underscored by reports that Citicorp, the nation's largest bank, might sell 20 percent of its credit-card division as part of its publicly disclosed effort to raise $4 billion to $5 billion to replenish capital eroded by losses on traditional loans. For some time the bank was said to have been attempting to raise equity through routine stock offerings, but investors had displayed little enthusiasm.

Susan Weeks, Citicorp spokeswoman, declined to comment yesterday on the possibility of selling part of the credit-card division, which was reported this week in the Bank Letter, a trade publication.

The potential deal comes in the wake of Baltimore-based MNC Financial Inc.'s highly successful, billion-dollar sale of its own credit-card operation in January.

James McDermott Jr., an analyst at Keefe Bruyette & Woods, said it might presage further deals for cred

it-card operations, though large banks would prefer to retain full ownership because such operations provide fat profit margins and predictable returns.

In recent years, many smaller banks have sold their credit-card operations to a handful of major financial institutions with greater marketing clout. But MNC was the fourth-largest issuer in the country and had a dominant position in a desirable niche -- issuing cards to trade organizations composed of doctors, dentists and other groups perceived to be particularly good clients.

MNC's decision to sell was prompted by financial needs rather than marketing strategy, and many other major banks in the same tough straits might take similar steps.

Citicorp's credit-card business is four to five times as big as MNC's, with 27 million cards and $28.9 billion in assets under management (the industry term for consumer debts stemming from charges on Citicorp cards).

Analysts have estimated the division's earnings at about $600 million a year, a sum particularly relevant given Citicorp's 1990 net income of $458 million.

Whether credit-card operations continue to be as successful as they have been is a point of controversy, the stock market seeming to argue yes and the bond market no.

Since MNC's initial public offering Jan. 22, the share price of MBNA -- the name of the spun-off credit-card operation -- has risen to $25.625 from $22.50.

But bonds backed by MBNA receivables, as well as bonds issued by other credit-card issuers, are trading at low prices compared with those of more traditional bonds that have similarly top-flight credit ratings, a trader at a major bank said.

The widening disparity stems from people's increasing reluctance, or inability, to pay credit-card bills.

"The data we have on pools of credit-card receivables indicates that defaults are up, delinquencies are up, and that's what you would expect, given a recession," said Claire Robinson, a senior analyst at Moody's Investor Services.

Moody's readings are echoed by statistics compiled by MasterCard International and Visa USA. But the increase in defaults -- from about 3.35 percent at the beginning of the year at MasterCard to about 4 percent at the end of the year, according to preliminary figures -- could be more than offset by the additional revenue banks have gleaned by keeping credit-card interest charges high while the rate they pay for money has slid.

The average interest rate charged on credit-card debt had risen from 18.64 percent at the beginning of 1989 to 18.88 as of Tuesday, according to the Bank Rate Monitor, a publication in North Palm Beach, Fla. Meanwhile, the rate on money-market funds has dropped to 5.69 percent from 6.35 percent.

"Though their [banks'] cost of funds has come down, they have given nothing back to consumers in rates," said Hugo Ottolenghi, editorial director of the Bank Rate Monitor.

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