How do you value a credit card?

There was much back slapping when Standard Chartered acquired Chase''s credit card business. But in one of Asia''s most expensive cities, a bargain isn''t always what is seems.
Chase Manhattan Corporation (Chase) will sell off its “beloved daughter” – its Hong Kong based retail banking business – to Standard Chartered for $1.32 billion. The acquisition includes the Chase Manhattan Card Company, which has 700,000 cards on issue in Hong Kong. This will bring Standard Chartered's share of the territory's credit card market to 25%, making it the largest credit card operator in Hong Kong.

But at what price?

Let us assume that this acquisition is 50% about the credit card division and 50% about Chase’s four branches and $2 billion of deposits. This is a fairly conservative assumption. That would suggest that Standard Chartered has paid approximately $942.50 for each cardholder. Is there a benchmark against which this metric can be measured? Not in Hong Kong, but if you look in Korea there is. Kookmin Bank recently spun-off its credit card division. It is listed on Kosdaq as the Kookmin Credit Card Co Ltd and has a current market capital of $2.24 billion, with some 4.5 million cards on issue. This means that Kookmin shareholders value each cardholder at $497.

Thus it values each customer at roughly 50% of the value Standard Chartered attributed to each customer in Hong Kong.

This opens up an interesting area of debate – how to value a credit card business, especially in the Asian context.  If you do the numbers on Korea you see how phenomenally underdeveloped the market is. On average each Korean credit card holder spends $63.55 per year. In Hong Kong, the tai-tai shopping mecca of Asia that figure is $932 per year.

This suggests that while Korean investors value each customer at half of what Standard Chartered paid, the customers in Korea spend only 6.8% of what Hong Kongers do. Thus, one might conclude that Kosdaq’s investors are overvaluing Kookmin Credit Card Co.

Total credit card spending in South Korea in the first six months of 1999 amounted to W31.6 trillion ($28.6 billion). This figure is an 11.2% increase in spending over the same period in 1998. Compare this with Hong Kong's figure for the same period of HK$204 billion ($26.1 billion), representing a 9.6% increase over the same period in 1998.

Where the valuation issue becomes interesting however is when you look at the future potential. Hong Kong is a highly mature market. On the other hand, the Korean numbers have a lot of scope for growth. If the Korean credit cardholder starts to spend just half the Hong Kong average that implies a credit card market of $230 billion. Today you can buy 10% of that potential market – Kookmin’s market share – for only $2.24 billion – which is Kookmin Credit Card’s market cap.

Going forward, would you want 10% of Korea’s credit card market or 25% of Hong Kong’s?

If you believe that Korea will mirror Japan’s growth pattern, it is difficult not to plump for Korea.

Strategic fit

Valuation aside, the acquisition looks to be a good strategic fit. Peter Wong, Chief Executive and General Manager, Hong Kong, Standard Chartered expects the overlap of customers to be between 10% and 15%.

“At one stroke, it enables us to take clear market leadership in cards in Hong Kong and, importantly, a major share of the young professional market where the Manhattan Card brand is particularly strong,” says Wong.

Subject to regulatory approval, both banks anticipate that the acquisition will be competed within three months.

The new card will be simply be called  the Manhattan Card.

And as for Chase, the sum it receives for its Hong Kong operation will pay for Robert Fleming, the investment bank it bought and which runs Jardine Fleming in Asia.

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