By Saabira Chaudhuri
MasterCard Inc.'s chief executive warned that sanctions on
Russia have had a significant impact there and that resulting
regulatory changes within the country could create serious
complications for the company.
CEO Ajay Banga's comments came after MasterCard posted a 14%
increase in first-quarter profit. The company noted that
cardholders made more purchases and said U.S. consumer confidence
is improving. Shares climbed 2.7% in early afternoon trading as
results topped analysts' estimates.
On a call with analysts, Mr. Banga said legislation is likely to
be passed in Russia to change its domestic-payments market
structure. The changes would be in response to Western sanctions
and contain provisions requiring business to be done onshore. The
legislation also would require collateral for foreign-payment
companies, both of which could be challenging for MasterCard.
"Russia will be complicated to work through," Mr. Banga said.
"What we have in place today does not, I believe, meet all of the
new Russian requirements."
The company expects the situation in Russia to have a small
financial impact on its results for 2014, but said it is hard to
quantify the impact beyond this year. Russia represents a little
more than 2% of MasterCard's revenue. In an interview, MasterCard
Chief Financial Officer Martina Hund-Mejean noted that growth in
Russia has been slowing for the past year, a trend that has nothing
to do with the recent crisis in Crimea but is instead due to the
larger economic environment there.
Earlier this week, MasterCard, along with rival Visa Inc., said
it would pull the plug on at least two more Russian banks following
an expansion of U.S. sanctions. The move means holders of those
cards won't be able to make purchases with them, although
cardholders still will be able to get cash from automated-teller
machines and offices of those banks.
Visa CFO Byron Pollitt recently said the card company had seen a
drop-off in cross-border volume, which measures payments made in
one country with a card issued by a bank in another country, due to
the situation in Russia and Ukraine. Visa expects the situation to
affect its per-share earnings by several cents over the fiscal
year.
Guggenheim analyst David Darst noted that MasterCard's situation
in Russia differs from Visa's in that the Purchase, N.Y., company
doesn't have the same level of issuer risk as Visa does. Still, Mr.
Darst said both companies face similar challenges in complying with
pending legislation to bring certain aspects of completing a
transaction on soil.
MasterCard posted earnings of $870 million, or 73 cents a share
Thursday, up from $766 million, or 62 cents a share, a year
earlier. Revenue improved 14% to $2.18 billion. The growth was
driven by increases in volume and processed transactions, and
offset by an increase in rebates and incentives.
Analysts polled by Thomson Reuters had projected per-share
profit of 72 cents and revenue of $2.14 billion.
MasterCard again warned that revenue growth for the year could
come in at the low end of its three-year target of 11% to 14% due
to the loss of a consumer credit-card portfolio at J.P. Morgan
Chase & Co. and some impact from the tensions in Russia.
Mr. Banga said U.S. consumers continued to spend more on
airlines, lodging, restaurants, furnishings and furniture,
reflecting increased confidence. He also said spending was hurt by
a harsh winter and a later Easter. In Europe, MasterCard reported
improved consumer and business sentiment, with transaction growth
driven by countries like Russia, Sweden, Turkey and the U.K.
Mr. Banga said MasterCard saw "really no direct impact" from the
sanctions on Russia on consumer behavior in the first quarter.
"People were doing what they had to do," he said, adding that the
company was seeing some slowdown on cross-border activity, which
accounts for a minority of its revenue from Russia.
Overall, cardholders made $1.05 trillion in purchases with
MasterCard cards in the quarter, an increase of 14% on a
local-currency basis compared with year-earlier results. The
company logged a 17% rise in cross-border volume.
Rebate and incentive payments, which MasterCard pays to banks
when signing new contracts and renewing agreements, increased 12%
to $733 million. Higher rebates and incentives can be viewed as a
good sign for the company because it means it is winning new deals,
but it also can be a concern for investors who worry about banks
demanding better pricing from MasterCard, according to
analysts.
Operating expenses rose 12% to $892 million, driven by increases
in all expense categories.
On the call, MasterCard said it had signed new agreements during
the quarter that will make it the leading debit brand in Sweden,
and the leading payment plan in the Baltic s by the end of the
year. Those announcements come after Target Corp. said Tuesday that
its store-branded debit and credit cards will be enabled with
MasterCard's so-called chip and PIN technology by early next year.
Existing Visa cards will be switched over to the MasterCard
network. Meanwhile in April, Wal-Mart Stores Inc. said its
co-branded credit cards will soon carry MasterCard's logo rather
than that of Discover Financial Services. MasterCard in recent
years has fought to win more co-branded partnerships to boost
transaction volume over its payments network.
MasterCard also said it expects a European regulatory proposal,
which would limit so-called interchange fees that determine how
much merchants pay to accept credit and debit cards, to be adopted
in the first half of next year. In addition to capping interchange
fees, the European proposal also would prohibit companies such as
MasterCard from tying, or "bundling," the sale of
transaction-processing services and card-branding services.
On the call, Mr. Banga said the legislation's current wording is
onerous in parts, noting that the latest version of these rules
looks to control fees on commercial credit cards in the same way as
those on consumer cards. He said MasterCard is discussion on issues
like this with regulators in Europe.
"I continue to believe that Europe is an enormous opportunity
given that so much of Europe's expenditure outside of the Nordics
is still in cash, " he said.
Michael Calia contributed to this article
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com
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