NEW YORK (
is the only large bank that should not spin off its credit card business, argues Richard Bove, analyst at Rochdale Securities.
Bove recently published a report saying
Bank of America
should spin off its credit card business, the struggles of which were highlighted in an
published in the
Wall Street Journal
report noted that the unit lost $4.5 billion through the first nine months of 2009, making it the worst performing business at the bank. Bank of America is the second largest credit card lender after
, the article stated.
Bove estimates Bank of America's pretax earnings would have been four times higher without the credit card business.
A spinoff is the only solution, Bove says, because no one would buy the business. That, he notes, is the conclusion that
ultimately came to when it spun off
in 2007. Discover now trades at slightly above half its $28.55 IPO price.
Morgan Stanley decided a spinoff made sense when most people had no inkling of the coming crisis, or the onerous new rules for consumer lenders that would ensue. Bove believes these rules will make it impossible for banks to increase revenues by charging penalties to their customers.
Those penalties, however, are the only way to make money, Bove says, since the U.S. market for credit cards is beyond saturated. The only short term positive, he argues, will come from decreasing loan losses as the consumer recovers.
The exception to this is Citigroup, whose credit card business operates primarily outside the United States.
"If you're going to sell credit cards in China, Korea, India, then you've still got a sizeable growth opportunity because for every one person in the United States, there are 10 people from the Pacific Ocean to India," says Bove. "Those people are seeing their incomes growing faster than in the United States. Those populations are growing faster -- everything tells you that the credit card business is a bonanza business in that area of the world. It is not in the United States."
Written by Dan Freed in New York