Troubles Are Deepening At Target's Credit-Card Unit

NEW YORK -(Dow Jones)- New data indicate that delinquencies for Target Inc.'s (TGT) securitized credit-card portfolio are rising at historic rates and the trend is accelerating.

The sharp deterioration raises questions about a stepped-up role by partner JPMorgan Chase & Co. (JPM).

Target says it can hold out at least through next month before the banking giant would begin exercising its right to step in and mandate underwriting and risk-management changes.

Delinquencies for Target's $8.71 billion securitized credit-card portfolio in October jumped to a rate of 8.1%, or by 230 basis points, to $709 million, on a year-over-year basis. This is the third month in a row that year-over-year delinquencies have risen at such a historically fevered pitch, Credit Suisse said.

Around 20%, or 47 basis points, of the overall 230 basis-point rise came just last month.

The 8.1% total is the portfolio's highest monthly level since at least 2001, industry data show. It came as net charge-offs for Target's portfolio topped 10% for a second consecutive month, coming in at 10.2%. Charge-offs rose to 10.1% in September.

And problems have been getting worse.

Aggregate collections fell to an 11% rate of average receivables in October, down 281 basis points from a year ago.

Roughly $333 million, or 4%, of average receivables are four or more payments behind.

A little over $150 million, or 1.73%, of average receivables had experienced three missed payments at October's end.

Target also reported that customers with two missed payments account for $225 million, or 2.59%, of average receivables.

The figures are contained in a regulatory filing by Target on Thursday and give a fuller picture of how the company's credit-card operations are boring a major hole into the company's profitability.

Target on Monday said third-quarter net income dropped 24% 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 credit-card bills.

The deteriorating economy is trouncing the credit-card division's performance and raising questions about whether JPMorgan Chase may take a greater hand in the operation.

Target in May sold 47% of its stake in the credit-card unit to JPMorgan Chase for $3.5 billion. Under terms of the sale, the portfolio's performance must remain "sufficiently strong."

If "substantial unanticipated portfolio deterioration" occurs, JPMorgan 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.

According to Jefferies retail analyst Daniel Binder, Target told him that its "2008 outlook anticipates performance above" the threshold at which JPMorgan Chase can exercise this degree of involvement.

A Target spokeswoman declined to discuss what may occur beyond then, saying only that Target is "firmly in control of our credit-card operations."

A JPMorgan Chase spokeswoman declined to discuss the situation.

Still, 2009 is just over a month away and economic conditions are showing signs of further deterioration. The Federal Reserve on Wednesday said the U.S. economy could contract for as much as a year.

source : http://money.cnn.com/news