Bank of America's Perfect Fit

Bank of America's deal

Bank of America's decision to buy MBNA Corp, the world's largest independent credit card lender for $35bn has been labelled "the perfect fit" by a number of analysts, says Jonathan Stempel on Reuters.co.uk. Not only will the combination create one of the world's biggest credit card issuers, the deal should lead to cost cutting of some $850m after-tax, to be realised by 2007. Moreover, rivals such as Citigroup and JPMorgan have increasingly upped their stakes in the credit card business, so BofA's acquisition is certainly not inappropriate.

The deal comes only a year after Bank of America's takeover of FleetBoston for some $47bn. Back then shareholders "vilified it", says Rob Cox on Breakingviews.com, only to be proven wrong as the deal actually lived up to its promises. And the deal with MBNA could well follow in its footsteps.

So what are the problems? Well, it could just be the timing, says Cox. As everyone "and their barber in the US knows", the balance sheets of American citizens are becoming increasingly stretched. So to buy a credit card company as the cycle starts to turn could potentially be disastrous for BofA. Or not: while MBNA may be struggling amid heightened competition from rival card issuers and from banks offering lower rates, MNBA still slashed its earnings guidance in the first quarter, largely because so many people were paying off their debt. BofA investors could just be glad that it's "diluting its mortgage portfolio with credit cards".

 

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