Revenues from Citicorp's profitable credit-card business will fall by $150 million next year because of lower card rates, according to a senior executive.
The projection marks the first time that Citicorp, the nation's biggest card issuer, has publicly indicated how much the credit card interest rate war is costing it.
It is unclear exactly how the revenue decline would affect Citicorp's earnings, because the company does not break out revenues or profits from credit cards. But the line of business figures to remain highly profitable for the company.
Still, the projection by executive vice president James Bailey, which came last month in testimony at an antitrust trial involving Sears, Roebuck & Co. and Visa U.S.A., surprised some analysts because it indicates that Citicorp is marketing reduced rates more extensively than believed.
"That's a noticeable amount of money," said Lawrence Cohn, an analyst with PaineWebber. "Low-rate cards and lower fees are proving to be very popular with consumers."
In April, Citicorp announced a plan to slash interest rates on its cards for its best customers. The bank then indicated to analysts that the program would lower its return on equity from credit card businesses.
Brent Erensel, an analyst at UBS Securities, recently estimated that the card affiliates contribute $600 million to $800 million of net income to the company's bottom line.
Consumer Business Vibrant
In 1991, Citicorp lost $457 million, but its consumer business -- led by credit card banking -- earned $549 million. In the first nine months of this year, consumer profits were $681 million, versus $116 million for the holding company.
Citicorp has about $34 billion of credit card loans outstanding, and continues to charge interest rates of 19.8% to cardholders who do not qualify for its new Premier Membership plan.
Under the new program, which took effect June 1, holders of Citicorp's standard card automatically qualify for a rate of prime plus 9.4 points -- currently 15.4% -- if they meet certain spending and credit criteria.
At the trial, Mr. Bailey revealed that the lower pricing schedule is being offered to some new card applicants. The bank had said that Premier Membership would be limited to cardholders who had a Citicorp-issued card for at least one year.
In addition, Mr. Bailey said, cardholders who miss some monthly payments are no longer disqualified from Premier Membership for one year but can requalify within six months.
"We thought [one year] was a little too punitive," he said.
Projections Too Low
Citicorp initially projected that nine million of its 30 million cardholders would qualify for the preferred interest rates, but Mr. Bailey upped the number in his testimony.
"We just put another million customers into this product," he said. "Our view is that we would like all of our customers to achieve this lower price."
Richard J. Srednicki, general manager of Citibank's MasterCard and Visa programs, said in an interview on Thursday the company is satisfied with the progress of its Premier Membership program.
"So far, so good," he said. "We have no regrets at this time."
A |Different Personality'
In his testimony, Mr. Bailey said about 52% of Citicorp's standard cardholders still pay the fixed 19.8% rate.
"The bank has a totally different personality than it did," commented Robert B. McKinley, president of RAM Research U.S.A., Frederick, Md. Only 10% of Citicorp's cardholders paid rates below 19.8% three years ago, he said.
Mr. Bailey's remarks came in a case in which Visa was trying to prevent an affiliate of Sears, Roebuck and Co. from issuing a bank card. A federal court ruled in favor of Sears, citing antitrust violations by the bank-owned card group.
Several analysts noted that Citibank's new card program has the potential to enhance revenues in the long term. By lowering the interest rates that consumers pay, the bank company can expect higher sales volumes, lower cardholder attrition rates, and lower credit losses.
"If you go through the math of lower interest rates [Mr. Bailey's revenue] numbers are probably correct," said Frank R. DeSantis Jr., an analyst at Donaldson Lufkin & Jenrette. "But it is only one side of the impact."
Others said the company has little choice in lowering its rates.
Citicorp is "doing what it has to do to defend its franchise," Mr. Cohen said.