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MasterCard-KeyBank Tie Knot

Zacks Equity Research

MasterCard Inc. (MA) announced a strategic alliance with US-based bank-related financial company – KeyCorp’s (KEY) KeyBank NA, in order to issue various different kinds of credit cards for the bank. This further extends the 15-year old work relationship between both the companies, which till now involved debit payment processing and ATMs.

KeyBank offers services related to deposits, lending, cash management and investments in about 14 states across the US. These services are doled out to individuals as well as small and medium-sized businesses.

Recently, the bank also acquired a credit card portfolio worth $725 million, which highlights the role of MasterCard to issue credit cards and strengthens the payment processing network. Hence, the companies have come together to produce a special suite of MasterCard-branded credit cards for consumer, business and commercial purposes. These new set of MasterCard-branded credit cards will be launched by KeyBank later this year.

The agreement also complements KeyBank’s strategy to bolster its relationship with customers as it plans to offer rewards on these cards. On the other hand, the new contract should enhance MasterCard’s payment volumes and number of processed transactions, thereby supporting the financials.

Such long-term contracts are also crucial for boosting MasterCard’s market position and brand value, particularly against card giants such as American Express Co. (AXP) and Visa Inc. (V).Given the strong competition, currency and interest rate fluctuations along with stringent regulatory reforms that have disturbed the pricing, credit allocation and business model of the card giant, we believe MasterCard will require consistent top-line growth along with strong expense management in order to maintain the stability in its margins.

Nevertheless, MasterCard enjoys strong liquidity with no long-term debt for over a couple of years now, despite the economic turmoil that eroded the reserves of most of the organizations. This further augurs long-term organic growth opportunities.

Earnings Review

MasterCard is scheduled to release its fourth-quarter 2012 earnings results before the bell on January 31, 2013. The Zacks Consensus Estimate pegs the earnings for the fourth quarter at $4.79 per share, which is about 19% higher than that of the year-ago quarter. For 2012 and 2013, earnings per share are expected to climb about 17% and 16%, over the prior year, to $21.99 and $25.58, respectively. MasterCard carries a Zacks Rank #2, which implies a near-term Buy rating, while our long-term recommendation remains Neutral.

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