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Continued: Target's credit-card profit drop raises questions
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NEW YORK - Target Corporation's big drop in credit-card profit in the third quarter has raised questions about whether the retailer may ultimately turn certain parts of the operation over to partner J.P. Morgan Chase & Co.
Target in May sold 47 percent of its stake in the card unit to J.P. Morgan Chase for $3.5 billion and, under terms of the sale, the portfolio's performance must remain "sufficiently strong."
If "substantial unanticipated portfolio deterioration" occurs, J.P. Morgan Chase would gain the right to direct Target's credit-card team to put in place alternative underwriting and risk-management practices until sufficient improvement is seen.
While it isn't clear whether J.P. Morgan will eventually take over management of certain parts of Target's credit-card portfolio, the portfolio's deteriorating performance since May shows how quickly the economy's woes have rattled even recent financial plans.
Target on Monday posted a 24 percent drop in net income on reduced profit from the credit-card division. Bad-debt expense more than doubled to $314 million from a year earlier as more customers defaulted on card bills. The deteriorating economy hurt the card division's performance.
J.P. Morgan Chase did not respond to requests for comment.
A Target representative provided comments by the company on Oct. 23, when Terry Scully, president of Target Financial Services, told analysts the company has been tightening underwriting standards and increasing its collection "intensity," with measures that include adding resources and acting more quickly when customers founder.
But given the current condition of the economy, along with uncertainty about what lies ahead, Target's vulnerability does come into question.
J.P. Morgan Chase will likely take into consideration what is going on with the rest of the retail industry before taking any action, said Jefferies retail analyst Daniel Binder.
And then there's the issue of whether J.P. Morgan Chase would even want a fuller hand in the operation, given the banking industry's own difficulties.
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