Are Credit Woes Straining Target-JPMorgan Setup?

Copyright 2008 SourceMedia, Inc.All Rights Reserved American Banker <br> <br> <span id="x_hitDiv1">December 1, 2008 Monday <br> <br> CARDS; Pg. 10 Vol. 173 No. 230 <br> <br> 735 words <br> <br> <br> Are Credit Woes Straining Target-JPMorgan Setup?<br> <br> Maria Aspan <br> <br> <p></p> After six months as a passive 47% shareholder in Target Corp.'s credit card portfolio, JPMorgan Chase & Co. may soon have reason to take a more active role. <p></p> In each of the last two months, the retailer has charged off more than 10% of the $8.7 billion portfolio. In Target's fiscal third quarter, which ended Nov. 1, its profits from the card business dropped 83% from a year earlier. <p></p> Target has responded by slowing receivables growth and tightening underwriting standards. But the retailer is entering a holiday shopping season in the midst of weak consumer spending. <p></p> Observers said Target, like many retailers, relies on its cobranded and private-label cards to drive consumer spending in its core retailing business. This gives Target less of an incentive to pull back as much as JPMorgan Chase might like. <p></p> "They may say they both have the same objectives. But the retailer's primary objective - even though their credit card may be profitable -their primary objective is to sell more product," said Steven Jacowitz, the director of alliance development at Auriemma Consulting Group Inc. "I don't think I'd want to be in the middle of those two." (He is a former credit executive of Saks Fifth Avenue, Bloomingdale's, and Filene's.) <p></p> For now, Target controls underwriting standards for the portfolio. But if the deterioration continues long enough, JPMorgan Chase would be contractually entitled to a bigger say in how the business is run. <p></p> When it announced the deal in May, Target said that "in the event that substantial unanticipated portfolio deterioration were to occur ... JPMorgan Chase would gain certain rights to direct Target's credit card team to implement alternative underwriting and <span id="x_hitDiv2">risk <span id="x_hitDiv2">management practices, until portfolio performance improved." <p></p> At the time, Target said it "envisions cash-basis portfolio yields" in the current fiscal year that would be "more than 500 basis points above the level at which these rights would be triggered." <p></p> The Minneapolis company maintains it is far from hitting that threshold. <p></p> "We're hundreds of basis points away from anything being triggered," Target spokesman Eric Hausman said Wednesday. He would not elaborate. (The portfolio yielded 23.07% in October, 374 basis points less than a year earlier.) <p></p> JPMorgan Chase would not discuss the matter. <p></p> Its deal with Target, in which the banking company receives a capped pro rata share of the profits, is unusual. But analysts said few retailer-issuer relationships are currently untroubled. <p></p> John Grund, a partner at First Annapolis Consulting Inc. who advises retailers on private-label cards, would not discuss Target, a client. But as a general matter, he said: "There is a natural tension built into almost every card partnership between a retailer and an issuer that is accentuated during the credit crisis. And almost no partnership could have completely contemplated the magnitude of the current credit crisis." <p></p> Mr. Hausman said that "even if some of these triggers are hit, we will not be giving over the rights of our operations. If this were to happen, JPMorgan Chase would have the right to direct our team" to implement underwriting and <span id="x_hitDiv3">risk <span id="x_hitDiv3">management practices - but only until the portfolio improves. <p></p> And "just because they have the right doesn't mean they'll take it," he pointed out. "This is not an adversarial relationship in any way with JPMorgan Chase." <p></p> Doug Scovanner, Target's chief financial officer, said on its fiscal third-quarter earnings conference call last month that he expected chargeoffs to peak around the second quarter of the next fiscal year. <p></p> Target has been "granting fewer new accounts with lower average credit lines, aggressively reducing open credit lines on many existing accounts and pursuing more proactive collections activities," he said. <p></p> Later, in response to an analyst question, Mr. Scovanner said, "Tightening of credit across all U.S. credit card issuers has already had a very important adverse effect on our sales and I'm sure it will continue to do so." <p></p> Daniel Binder of Jefferies & Co. Inc., the analyst who asked the question, told American Banker that Target has so far adequately balanced driving sales with tightening standards. <p></p> When it saw mounting chargeoffs, "they started to move aggressively," Mr. Binder said. "So they've moved rationally. If at this point they don't anticipate JPMorgan Chase stepping up to do something in 2008, then I think that says a lot." <br> <br> <a href="http://www.americanbanker.com/">http://www.americanbanker.com/</a> <br> <br> November 28, 2008 <br> <br> <div> <div class="x_nshr"> <center></center> <center><a href="http://www.lexis-nexis.com/lncc/about/copyrt.html" target="_new" class="x_pagelinks">Copyright © 2008 LexisNexis, a division of Reed Elsevier Inc. 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