Allied Irish Banks moved yesterday to stanch the bad debts that have been a drag on its US credit card operations, selling a large section of its business to a rival bank, Chase Manhattan. Although the terms of the deal were not disclosed, AIB will be pleased to have jettisoned the Bell Atlantic co-branded portfolio, which contributed towards a provision of $19 million (£13 million) for losses for the first half of this year alone.
"We sold at a premium (over book value) and we're pleased that we've negotiated this arrangement with Chase Manhattan," said Mr Declan McSweeney, AIB's chief financial officer. "This book was not earning a profit for us; it was losing money."
In July, the bank said its bad debt provision for credit cards had risen to $19.2 million, compared with just $4 million for the first six months of 1996. Writeoffs were running at around 7 per cent.
Mr McSweeney said the $360 million of loans in the Bell Atlantic portfolio represented the bulk of business for AIB's US credit card subsidiary, First Omni Bank. The bank's total credit card loans now stood at around $140 million, he added.
Industry analysts say the US credit card business has become increasingly difficult, as customers use bankruptcy laws to clear their debts and start afresh. Bankruptcy filings reached a record level of 367,000 in the April-June period this year. From June 1996 to June 1997, some 1.3 million Americans declared bankruptcy, a rise of 20 per cent on the previous year's tally.
"It has become a way of personal financial planning," one industry watcher said. "If people feel they're in over their heads, they just declare and wipe the slate clean. The irony is that they then become a very good credit risk, because under the laws they can't declare bankruptcy for another seven years."
The opportunity to make the sale presented itself to AIB when Bell Atlantic, a large local telephone company, bought NYNEX, another telecommunications outfit. Both companies had co-branded credit card arrangements - Bell Atlantic with the AIB subsidiary and NYNEX with Chase Manhattan. In light of the merger, a single credit card co-branding arrangement seemed a natural development.
AIB said it could not disclose how much Chase Manhattan had paid for the portfolio, but insisted that the price had been more than its $360 million paper value.
Bell Atlantic said it was "extremely pleased" with the deal, pointing to the economies of scale from which a single credit card product would benefit.
"Chase brings financial strength and broad industry experience to the Bell Atlantic credit card," said Ms Marianne Berry, vice-president of the telecommunication company's credit card services division. "This is a real win for our card members, and one more way we can continue to give them top value."
She said she hoped the new, combined card would attract more customers when it was introduced next year.
Mr McSweeney said that, while First Omni would not be making any credit card acquisitions, the bank would continue to offer its services to AIB's two main US subsidiary retail banks - First Maryland and Dauphin Deposit.
