Credit Cards Miss Target, Target Won't Miss Credit Cards

This post first appeared on Minyanville.

JPMorgan's (JPM) going shopping again.

Amid pressure from activist investor William Ackman and rising loan defaults, Target (TGT) agreed to sell JP Morgan 47% of its credit card business for $3.6 billion. The Wall Street Journal reports the sale fetched nearly twice the expected price, providing the retailer some much needed capital to open new stores, repay debt and buy back shares.

The division has been a source of angst for management since last September. Ackman and other shareholders pushed for a spin-off of the unit, but no buyers emerged. In March, despite worsening economic conditions, the company saw outstanding credit card loans jump even as defaults inched higher. This trend is particularly troublesome, especially as most financial institutions scale back lending operations. Higher balances and higher losses signal more trouble ahead.

The purchase is not JPMorgan's first foray into the private-labeled credit card business; it already owns portfolios backed by loans issued by Kohl's Corp (KSS) and Circuit City (CC). The bank hopes to cross-sell new customers with other banking products.

Target has followed these and other retailers in jettisoning its credit card business, once a reliable source of profits. During good economic times, consumer loan portfolios are relatively easy to manage. However, as credit conditions deteriorate, losses continue to mount. Higher delinquencies wipe out profits and erode balance sheets. Loan loss reserves tie up precious hoards of cash.

The consumer is increasingly being forced to choose which debt payments to make and which to let slip. The phenomenon of borrowers walking away from mortgages is proof of how significant these decisions are becoming for certain Americans.

The credit bubble produced a buffer zone, a false sense of security facilitating lifestyles that outpaced means. Now, as access to home equity lines, credit cards and all types of debt dries up, previously comfortable consumers are being forced to cut back. The fortunate can simply rein in expenditures, but those who got too far forward on their skis face a steeper slope ahead.

Position in TGT