bank credit card valuation

drona · March 29th, 2015, 6:48 pm

HelloI am looking for some ideas on how to think about valuation of credit card portfolios. Would appreciate ideas on how to think about them.The cash flows in a card portfolio I believe are1. Customer principal and interest rate payments. Inflow2. Card fees - inflow.3. Service cost - outflow.What discount rate should be applied to these casflows ? Should I use the transfer pricing rate for this line of business. Is it the cost of funding - deposits and debt ?Any ideas really appreciated.Thanks

Traden4Alpha · March 30th, 2015, 12:39 am

This is not my area, but what about:4. new customer charges (outflow)5. disputed charges (outflow)There's also the issue of customers that pay the full balance each month (entailing a discount rate that might be 5-7 weeks in duration) vs. those that repay over much longer time periods on months or years.

acastaldo · March 31st, 2015, 6:35 pm

Not my field, but generally there is an aging effect. If a credit card account is new, the delinquency rate can be fairly high. Accounts that are older have a lower default rate, as the problem accounts are gradually weeded out.Also there are different type of accounts in terms of profitability: with some you make money on the lending, with others you only get fee income.So I would model these various groups separately.

drona · April 10th, 2015, 7:59 pm

Thank you both. Sincere apologies for the delayed response. The points you mention help me forecast future cashflows for the business. If I wanted to discount these cashflows what discount rate should I use? for e.g. if I were to discount debt of a company I would use the current funding curve etc.Best Regards