BofA Completes Transformation With Credit Card Business Sale

As part of its efforts to transform into “a single-brand business serving core retail customers in the United States”, Bank of America Corporation (NYSE:BAC) closed the deal to divest its U.K. consumer credit card operations, MBNA Ltd. to Lloyds Banking Group (LON:LLOY) plc (NYSE:LYG) . The transaction was announced in Dec 2016.

The transaction completes BofA’s efforts to exit international consumer card operations as part of its strategy to focus on core domestic business. At the time of the announcement, the deal was valued at $2.35 billion.

Financial Impact

As of Mar 31, 2017, the U.K. consumer credit card portfolio had roughly $9.4 billion in credit card receivables. Further, BofA reported $211 million of interest income in the first quarter of 2017. With the closure of the deal, BofA is expected to record a decline in net interest income.

The transaction should lead to a marginal after-tax gain for BofA, which is expected in the second quarter. Further in the current quarter, the sale should enhance the bank’s Basel 3 risk-based capital ratios by nearly 11 basis points (bps) under the Advanced approaches and 15 bps under the Standardized approach.

For Lloyds, the deal represents a step in the right direction. It will strengthen its share in the U.K. credit card market to 26% from the present 15% and is expected to place it in direct competition with Barclays (LON:BARC) PLC (NYSE:BCS) . Currently, Barclays has approximately 27% share in U.K.’s credit card market.

Lloyds’ CEO, António Horta-Osório said that the transaction “…increases our participation in the UK prime credit card market, where we were underrepresented, and strengthens our position as a UK focused retail and commercial bank.” Additionally, the U.K-based bank projects the deal to result in a rise in net interest margin and an improvement in revenues as well as earnings.

What Next?

BofA, which suffered significant deterioration in financial performance following the 2008 crisis, has come a long way. The company undertook efforts to strengthen its balance sheet and simplify operations through offloading non-core businesses.

All these have paid off and the company now is on track to reach nearly $53 billion expense target by 2018. Also, BofA continues to align its banking center network according to customers’ needs, through divestitures and consolidations of branches.

Improving interest rate scenario, rise in deposit balances and gradual increase in loan demand should continue supporting BofA's top-line growth in the quarters ahead. However, uncertainty related to potential policy changes under Donald Trump's administration make us apprehensive.

Despite this concern, BofA seems focused on improving its bottom line based on strong fundamentals. This is reflected in the company’s improved share price performance. The bank’s shares have gained 57.2% in the last one year, outpacing the 24.3% rally for the Zacks categorized Major Regional Banks industry.



Currently, BofA carries a Zacks Rank #3 (Hold).

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