Bruce L. Hammonds knows how to take a hit. The president and chief executive of credit-card giant MBNA (KRB) was the quarterback for a semi-pro football team in Maryland after college. It was a low-budget affair; former teammate Mike Foley recalls that he and Hammonds shared equipment. On one play, Hammonds snuck into the end zone for a touchdown -- and took such a wallop from an opponent that he broke the helmet he and Foley shared. "You don't see helmets broken very often," Foley recalls.
No doubt Hammonds, 57, is feeling the pain from a different sort of impact these days. MBNA became a Wall Street darling in the 1990s by branding its cards with the names of thousands of partners, from the National Education Association to L.L. Bean. But the onetime hard charger has hit a wall: Because of ferocious competition from banks and MBNA's own missteps, growth has stalled.
As a result, analysts expect MBNA's earnings to fall this year for the first time since it went public in 1991. After suffering a 25% drop in its share price this year, to around $21, MBNA is suddenly seen as a takeover target. Speculation about a buyout grew after Washington Mutual's (WM) June 6 deal to buy card issuer Providian Financial (PVN) for $6.5 billion.
For his part, Hammonds, a 23-year company veteran who took over as CEO 18 months ago, downplays the prospect of a deal. While he says the company always puts shareholders first and he would never rule anything out, he adds: "There's no 'For Sale' sign" on MBNA's Wilmington (Del.) headquarters.
Of course, the best defense against a takeover is a high stock price. So Hammonds has an ambitious plan to get MBNA's earnings and stock price moving again. He's cutting costs at a company well known for excessive compensation and lavish perks. And he's pushing to diversify into markets such as home-equity lending and loans to medical and dental practices. While he says he's excited about the future, Hammonds concedes: "We don't like where we are today in terms of earnings or the stock price."
At the core of MBNA's woes is a credit-card market that's plagued by slow growth and lowball pricing. For years, MBNA bolstered its growth by acquiring card portfolios, but those opportunities are now few and far between. So last year, Hammonds tried to boost earnings by moving away from the 0% teaser offers that have become common on cards. At the same time, MBNA raised the rates it charged some customers to preserve its margins, as the Fed raised its rates.
Those moves backfired. Instead of pulling back from their own 0% offers, rivals actually got more aggressive, pushing the cheap deals to grab market share. Also, many MBNA customers who were charged the highest rates paid off their balances more quickly when their rates went up. In addition, many consumers are shifting to home-equity loans instead of credit-card borrowing because of the tax benefits and lower rates. The result: MBNA's total loans to customers fell to $116.6 billion in the first quarter, down $1 billion from the year before. And the company had to take a write-off of $206.6 million, partly because of the rapid paydown of balances. "How did they misread their customers so seriously?" wonders Sanford C. Bernstein & Co. analyst Howard K. Mason.
TAKING A HATCHET TO COSTS
This is forcing MBNA to defend its portfolio by revving up its 0% teaser offers again and backing off from raising many customers' rates. And while MBNA forecast as recently as January that earnings per share would be 10% higher this year, excluding a restructuring charge for cost-cutting, in April the company said earnings growth will be "significantly" less than that. Mason figures MBNA's earnings, even excluding that charge, will be flat or even down slightly. "Clearly, a lot of the investment community is frustrated and skeptical," says Jason J. Tyler, a portfolio manager at Ariel Capital Management LLC, which holds 10.4 million MBNA shares.
No surprise Hammonds is taking a hatchet to costs. He has cut managerial ranks by more than 1,000 through buyouts and early retirements. And he has done away with some of the trophies of MBNA's go-go days, including two company jets and two boats. It was actually the board that started the cost-cutting back in November, 2003, when it moved to rein in the compensation of top executives -- and Hammonds' predecessor, Charles M. Cawley, suddenly decided to retire. Hammonds' pay has gone from $14.4 million when he was Cawley's No. 2 to $9 million last year.
But while Hammonds' moves should save up to $300 million annually, MBNA is hardly lean and mean. Its huge Wilmington offices are a maze of seemingly endless corridors. One executive jokes that he spent one of his early days on the job getting intentionally lost so he could learn how to navigate the place.
At the same time, Hammonds is trying to fend off his increasingly fierce rivals. As well as matching the 0% offers, MBNA is ramping up its loyalty programs. Since last fall, for example, people who hold cards branded by their favorite National Football League team can trade their points for visits to training camps or even dinner with the head coach.
But the holy grail is to reduce MBNA's reliance on U.S. credit cards. Hammonds is continuing to push into international markets such as Britain and Canada, and speculation persists that he will buy the Internet bank Egg from Prudential (PUK) PLC. Prudential says it does not comment on market speculation.
Hammonds is also aiming to crack other lending markets. He recently acquired Nexstar Financial Corp., a home-equity lender, and wants to market these loans to members and customers of MBNA's more than 5,000 affinity-card partners. MBNA also bought a company that helps physicians and dentists finance their practices. And he says MBNA is looking at a move into student lending, a natural fit given the hundreds of universities and colleges with which it has card-branding deals. Critics say MBNA waited too long to diversify. "Could we have done it faster? Yes," acknowledges Hammonds.
Coming from behind will be tough. Richard D. Fairbank, CEO at rival Capital One Financial Corp., which began diversifying into auto lending and other businesses back in 1998, warns that new businesses take years to develop. "If you want to diversify, you have to do it long before you need to," he says.
That's why more analysts and investors figure MBNA will ultimately be sold. Among the leading candidates as buyers: Wachovia Corp. (WB). Back in 2000, Wachovia sold its credit-card business to MBNA. But on a recent conference call with Merrill Lynch & Co. (MER), Wachovia CEO G. Kennedy Thompson said: "I think I would like to be in the card business." Others on Wall Street say a foreign bank such as HSBC Holdings PLC (HBC) might also be interested as a way to bulk up its consumer lending. HSBC and Wachovia declined to comment on talk of a deal.
If MBNA does get swallowed up, it might be a painful ending for Hammonds. Raised in a working-class family outside Baltimore -- his father labored as a longshoreman -- Hammonds put himself through the University of Baltimore while working full-time for Sears, Roebuck & Co. (SHLD) as a credit analyst. He even went door-to-door to collect money from customers: "No knee-breaking," he says now with a laugh.
Later, he was lured to the consumer finance business his predecessor Cawley was running for the old Maryland National Bank. He was part of the team that started MBNA in 1982 and helped develop its risk management strategy, which has resulted in some of the lowest loss rates in the industry. Now his biggest risk may be not fixing MBNA fast enough to avoid getting gobbled up.
By Amy Barrett in Wilmington, Del., with Mike McNamee in Washington