Credit Card Portfolio Sales: From Heyday to Mayday

Credit card portfolio sales by credit unions have virtually ceased in the past 12 months. From 2003 to 2006, about 65 portfolios sold each year with an annual value of about $450 million. Sales began declining in 2007, with total value falling to $390 million, the lowest level since 2002. Then in 2008 the bottom fell out of the market with only 22 portfolios selling for a value of about $95 million. In fourth-quarter 2008, the total value sold was less than $5 million.What happened? In every market the volume reflects supply and demand, and there have been changes on both sides of this market.First, consider demand. In the past, CUs were able to consider a bevy of buyers willing to pay attractive premiums above outstandings-in excess of 20% in some cases. Today there are few active buyers, and they are not making such offers. Many of the buying banks have put acquisitions on hold due to their own challenges and constraints. There are also increased concerns about portfolio risks and the strength of selling credit unions. Premiums are way down and buyers are very choosy or simply sitting it out.But changes in supply came even earlier-before buyers lost interest in buying, CUs were losing interest in selling. First, CU card portfolios turned from losing market share to dramatically outperforming large bank portfolios. This reflected the offering of rewards and more product choices, along with better management practices and the natural advantages associated with member loyalty, low costs and low loss rates.One result of this CU success was that buyers’ promises of better products and growth sounded less convincing. Additionally, an asset that had generally been performing well all along in terms of return was now growing instead of shrinking. And finally, it suggested that CUs were providing the products that members wanted.On another front, surveys of credit union executives who sold their credit card portfolios revealed dissatisfaction with post-sale partnerships. Less than half of those surveyed would recommend their buyer, and three-quarters expressed concerns with their buyer’s service, products, or pricing. Post-sale growth was also disappointing, with nonsellers actually growing faster than the portfolios managed by large buying banks.We don’t think these failures represented the intentions or weaknesses of buyers so much as an honest miss-match. In many cases, the CU portfolios were tiny compared to the banks’ other portfolios, so buyers did not devote the attention that the CU expected or deserved.A final reason that CUs have less interest in selling is that premiums are way down and a sale no longer offers the boost to capital Our analysis of sellers revealed this to be an important motivation for selling in the past, with sellers typically (although not uniformly) having lower net worth or greater declines in net worth than CUs that had not sold.Ironically, a good candidate for a credit card portfolio sale is most likely a credit union that does not need to sell its portfolio. If your institution is strong, if your portfolio is performing well and if you are not seeking a high premium, you may be in luck. In this case motivation to sell might simply boil down to an interest in eliminating risk, focusing resources on other core competencies or the promise of ongoing revenue sharing.If your credit union needs to sell its credit card portfolio due to rising delinquencies or charge-offs, poor performance or balance sheet issues, the offers may not be many or good.The first step, for any issuer, is to know what you have. Assess your portfolio’s key performance metrics: account and balance growth, cards as a percentage of total assets, average balance per account, percentage of members with your card, credit line utilization, delinquencies and charge-offs. Identify your expenses and determine your ROA.Next, consider how your credit card program fits into your overall strategic plans. Evaluate your pricing and marketing in the context of risk management. If you are trying to grow your portfolio, make sure your acquisition and activation campaigns support that goal. In addition, watch for red flags by monitoring credit scores and credit line usage. Contact your processor to find out what tools and help are available to help you fine tune your portfolio management.A relatively new option for card issuers is to consider outsourced management. Under this scenario, the credit union card issuer retains the balances, yet hires a third party to handle various aspects of the day-to-day management of the credit card program.The card portfolio world has certainly changed. The bad news is that CUs have less attractive choices than they used to if they want to sell their card portfolios. The good news is that they are happier to hold onto them than in the past as CU portfolios grow faster and have lower losses than bank portfolios, and they provide income and asset diversification while reinforcing member relationships.