Credit Card Deal on Target for JP Morgan and Target

Implications: The credit card deal announced between Target and JP Morgan makes sense for both parties.  It allows Target to address shareholder concerns regarding its card business and mitigate potential growing credit losses. It enables JP Morgan to further develop its private label retail card strategy by taking a substantial interest in the Target portfolio, while placing limits on its loss exposure. There is protection for both parties as well as options to further extend the relationship.

Analysis:

The Target/ JP Morgan credit card deal makes sense for both parties. It provides protection and upside for both.

For Target the deal provides relief from Pershing Square shareholder pressure and mitigates the impact of a rise in credit delinquency and losses. Target retains control over important credit operations and marketing.  This structure allows Target management a means to respond to Pershing Square pressure to sell the portfolio without a sale.  This deal with its provisions to share revenue, losses and allowing target to retain operating control, offers Target an opportunity to avoid the issues Neiman-Marcus experienced with HSBC in their card program.

For JP Morgan the deal provides a means to further develop its private label retail card business with loss protection. The retail card industry is undergoing significant change providing an opening for a new player to take market share. The three largest players: GE Money, Citigroup and HSBC/Household have all been hurt by slower growth and increased credit losses. Alliance Data Systems the fourth largest player saw its deal with Blackstone fall apart earlier this year. This creates an opportunity for JP Morgan Chase to expand its retail credit business. The Target deal is an initial step to do so.

I like the deal for what it is; a first step is determining how well Target and JP Morgan can work together. If this deal helps target address its immediate shareholder concerns and JP Morgan Chase is satisfied with its loss experience we will see this relationship extended. Target will have gained new funding and loss mitigation. JP Morgan will gain a cornerstone  program for a retail card business.