Citi’s credit card business reaches a turning point

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Now that it has lured them in, Citigroup is ready for its credit card borrowers to turbocharge its bottom line.

Citi spent years reeling in customers with promotional rates as low as 0%. Many of those rates have expired or soon will. Thus, many customers will now start paying interest on their credit card balances and become more profitable for the bank.

With commercial loan growth sluggish, mortgage banking revenue constrained by higher interest rates and stock market investors worried about the economy’s direction, Citigroup and other banks will need to rely on U.S. consumers’ thirst for debt to accelerate profit growth.

“Promotional rate loans decline, new balances grow, and that's what's driving” the bank’s projection of continued growth in card revenue, Chief Financial Officer John Gerspach said during a Friday conference call to discuss earnings.

Citi has spent the last few years meticulously crafting its credit card portfolios for this moment. Citi and its rivals showered consumers with myriad rewards and promotional rates to build market share. More recently, Citi has pared down the number of cardholders with 0% rates.

Those consumers can go one of two directions, Gerspach said. Some have left Citi by transferring balances to other banks offering low or 0% promo rates. But a significant number have stayed with Citi and agreed to pay higher rates on their balances. That is evident in the quarterly comparison on revenue from branded cards in the U.S.; that figure rose 2% from the second quarter to the third quarter to $2.1 billion.

“You're hoping that those clients, once they're finished with the promotional period, will like the value proposition that they see based on the card that they've taken and then stick with you and convert to a full-rate revolving loan,” Gerspach said. “That’s exactly what we’re seeing.”

It has been a long time coming, but it seems like Citi has set the stage for meaningful profit growth from cards next year, said Lisa Kwasnowski, an analyst at DBRS. That is more important for Citi than other large banks, she said.

“This is something we’ve been waiting for quarter after quarter,” Kwasnowski said. “It should be a revenue tailwind to Citi. [Cards are] a big portion of their consumer business, much bigger than their peers.”

Citi executives were especially cheered by the turnaround in total net interest revenue for its branded cards in North America. It was $1.9 billion in the third quarter, up 3.4% from the same period last year and 6% since the second quarter. Net interest revenue is the difference between a bank's interest and fee income and its cost of funds.

Purchase sales for branded cards in the U.S. rose 11% to $87 billion. Citi’s branded card business includes cards it issues for Costco, American Airlines and others. (All figures for branded cards exclude results from the Hilton card portfolio that Citi sold in the first quarter to American Express.)

Due to the large shift of its portfolio out of promo rates to interest-earning rates, Citi expects that it will post full-year revenue growth in branded cards for 2019, Gerspach said. However, he did not say how large that growth would be. Revenue from branded cards in the U.S. fell 3% in the third quarter to $2.1 billion.

“We feel really good about the prospects of U.S. branded cards,” Gerspach said.

To be certain, with so many customers now paying interest-generating card balances, credit quality could start to erode. However, net credit losses for credit cards have remained at around 3% this year, which is an acceptable range, Gerspach said.

“We might have a slight increase in delinquencies, but we are still very confident” with credit quality staying manageable, he said.

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