Bank of America is spending more then $35 billion to acquire MBNA, the country’s leading stand-alone credit-card provider.
Bank of America announced on Thursday June 30th that it plans to buy MBNA. Bank of America is the country’s second-biggest bank. MBNA is its largest stand-alone credit-card provider. And $35 billion—the price tag—is the second-biggest deal announced in America so far this year.
MBNA’s shares had been drifting up for weeks, but no one expected a deal so big or so soon. The acquisition will more than double Bank of America’s base of active credit-card customers to 40m, with over $140 billion in outstanding balances—placing it firmly in the top tier of American credit-card companies along with Citigroup and J.P. Morgan Chase.
The deal makes is very reasonable for Bank of America, which has been looking for something to do with its capital. After spending $48 billion on Fleet Boston, the largest bank in New England, it has already strike its limit in retail banking—10% of national deposits—and under the regulators’ rules cannot acquire additional banks.
Banks like the credit-card business because the very high interest rates on card balances, combined with their own cheap deposits, produce fat profits. The credit-card business also offers access to a huge customer base. Three weeks ago, Washington Mutual, America’s seventh-biggest bank, bought Providian Financial, a credit-card provider, for $6.5 billion. Citigroup has been a serial acquirer of store-card portfolios.
For the credit-card operators, merging with a bank is making sense too. MBNA grew rapidly in the 1990s, attracting new customers by offering low rates of interest. Recently, the growth rate has slowed dramatically in the credit-card sector and their business has gone flat. The company warned that full-year earnings will be “significantly below” its earnings-growth target of 10%.
The credit-card business in America is highly concentrated now. The top ten credit issuers control 80-85% of the market, so it is very difficult to gain market share. Competition from the big banks is putting pressure on stand-alone operators such as MBNA and Capital One. The business and credit cycles may be about to turn nasty and the merging with the biggest banks can help get over those period.
