Target sells credit card business to TD Bank

Target Corp. may be good at running a credit card business. But that doesn't mean it wants to run a credit card business.

So the Minneapolis-based retailer Tuesday said it will sell its $5.9 billion credit card portfolio to TD Bank Group for face value, a deal both sides expect to close in the first half of 2013.

For Target, exiting the portfolio will help the company focus on its core retail business and give it cash to pay down debt and repurchase shares. David Strasser, an analyst with Janney Capital Management, estimates Target can shave off $250 million in interest expense by using most of the money from the sale to reduce its debt.

"We have a great product," Terry Scully, Target's president of financial and retail services, told the Star Tribune. "There's no question the portfolio is performing well. But we are a retailer. [The credit card business] exists to support retail sales."

Under the seven-year agreement, Target and Toronto-based TD Bank will split the profits from the business, with Target earning "a substantial portion" of the money, though it declined to give an exact percentage. Target will also continue to market and service the credit cards, including Target Visa, but TD Bank will finance the accounts and oversee regulatory compliance and risk management.

"Our agreement with Target will significantly expand our presence in the North American credit card business and will establish TD as a key player in this space," TD Bank CEO Ed Clark said in a statement.

TD Bank has a tough act to follow, given Target's skilled management of the business. In fiscal 2011, Target said bad debt from its credit cards dropped to $154 million from $1.18 billion two years prior. In that period, profits jumped to $606 million from $201 million.

But credit cards are a risky business, and Target wants to avoid the financial pain that swept through banks during the Great Recession that began in 2008, said Amy Koo, an analyst with Kantar Retail consulting near Boston.

That same year, Target sold 47 percent of its then $8.1 billion portfolio to New York financial services giant J.P. Morgan Chase & Co. for $3.6 billion.

At the time, Target was under pressure from activist investor William Ackman, who owned about 10 percent of the company. Since losing a bid for a board a seat in 2009, Ackman has sold much of his Target holdings.

Scully, the Target executive who oversees the credit card business, said a complete sale will help simplify Target's balance sheet, especially in the eyes of debt-rating agencies like S&P and Moody's.

Analysts say Target credit card customers will also get access to much lower interest rates, thanks to TD Bank's credit lines. Scully suggested Target could use TD Bank's balance sheet to offer new products and services to customers, though he declined to give specifics.

"I think it's safe to say we will able to leverage TD Bank for other financial offerings," Scully said.

He did say, however, Target is unlikely to sell consumer financial products that Wal-Mart offers, like money transfers and check cashing.

Overall, Strasser the analyst said, selling the credit card business will allow Target to do what it does best: sell stuff.

"We believe that Target's increased focus on the retail segment should allow them to implement new strategies ultimately driving higher sales and profitability," Strasser said.

Thomas Lee • 612-673-4113