Citi’s digital-first deposit strategy paying off — for now

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Citigroup’s strategy of growing deposits by marketing checking and savings accounts to its credit card customers is so far paying off, but don’t be surprised if the nation’s third-largest bank starts opening branches in new markets to keep the momentum going.

Citi said Tuesday that its U.S. consumer bank took in about $2 billion of deposits in the third quarter, largely by offering such perks as points and cash back to credit card customers who open accounts via digital channels. Year-to-date, the digital-first approach has brought in some $4 billion of consumer deposits — two-thirds of which have come from outside of its traditional branch footprint.

It’s a decidedly different tack than the one taken by rivals JPMorgan Chase and Bank of America, both of which have been chasing deposits by opening branches in select markets where they previously had no retail presence.

On the company’s third-quarter earnings call, CEO Michael Corbat said that Citi intends to stick with the digital strategy — for now.

“I wouldn’t rule out branch openings, but first it’s going to come from digital engagement,” Corbat said.

Brian Kleinhanzl, an analyst with Keefe, Bruyette & Woods, said Citi might find problems sustaining this growth in digital deposits once it works through its “wide net” of existing cardholders who may open accounts.

“In digital by itself, you’ll get an initial boost and that’s what they got,” Kleinhanzl said. “From here, we expect it to be more of a challenge than that.”

Citi reported $191.6 billion in North American consumer deposits for the third quarter, up 5% from the same period last year.

If the $2 trillion-asset bank wants to increase overall deposits substantially, but Kleinhanzl said it would have to take a harder look at adding physical locations in new markets.

Citi has just 700 branches in the U.S., primarily in major metropolitan markets. JPMorgan Chase, by contrast has roughly, 5,000 branches and Bank of America has about 4,300. Even banks that are far smaller than Citi, such as Fifth Third Bancorp in Cincinnati and Regions Financial in Birmingham, Ala., have roughly twice as many branches as Citi.

Apart from fueling deposit growth, Citi’s card unit has also been a key driver of revenue growth.

The company said Tuesday that revenue climbed 1% in the third quarter when compared with a year earlier to $18.6 billion, thanks primarily to growth in its credit card business. Executives attributed the growth to more customers converting promotional balances into more profitable interest-earning balances.

Net income increased 6.5% year over year to $4.9 billion. Citi’s earnings per share of $2.07 were 12 cents higher than the mean estimates of analysts polled by FactSet Research Systems.

Expenses were up 1% for the quarter but remain down for the year.

Executives said they have lowered expenses by reducing head count by about 4% and continuing to consolidate data centers. Corbat said the company will continue looking for ways to cut expenses next year without sacrificing some of the investments it needs to make to drive revenue growth.

He added that Citi expects to announce new partnerships to help fuel growth in its consumer bank “in the not too distant future,” but he declined to offer specifics.

The bank’s net interest income came in below analyst estimates even as its funding costs have declined as a result of the Federal Reserve’s interest rate cuts. Chief Financial Officer Mark Mason attributed the decline to lower yields from trading activity, which he said are “overshadowing” the benefit from lower rates overall.

The bank did get a break on its taxes to help its bottom line. Citi took a $180 million benefit from reducing its valuation allowance tied to its deferred tax assets. The company’s effective tax rate for the quarter was 18%, down from 24% during the same period last year. The benefit boosted earnings by 10 cents per share.

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