Citi's One-Two Punch in 'Bad Bank' Cards

Beyond announcing the sale of three credit card portfolios Monday, Citigroup Inc. is taking more drastic steps to rid itself of some of the least attractive card assets.

The New York company is shutting down the cobranded cards it issues for a prominent retail partner, Home Depot Inc.

The three portfolios it sold to U.S. Bancorp, and the Home Depot accounts, are all part of the Citi Holdings unit it formed in January as part of a plan to sell or unwind unwanted assets, including cards that it issues for retailers and affinity groups or as an agent for smaller banks.

Both moves are "a result of a focused effort that's finally starting to bear fruit," said Leigh Allen, a former Citi investment banker and a consultant at Global Consumer Finance Advisory LLC. "A lot of this requires prioritization on the part of Citi. They've only got so many resources to go out and do these things, and generally it appears that some of that priority focus has turned around to credit cards."

The three card portfolios account for only $1.3 billion of managed loans — a small percentage of Citi Holdings' card assets, but they are the unit's first sales.

U.S. Bancorp confirmed Tuesday afternoon that it was the buyer; it and Citi did not identify the portfolios, or specify the terms, but people familiar with the deal said it included the bank and affinity card portfolios of KeyCorp, Associated Banc-Corp and the American Dental Association.

Analysts said that such portfolios tend to be of a higher quality than retailer-branded portfolios and that, despite the dismal portfolio sales market this year, Citi probably made a modest profit on the transaction.

Citi "sold programs that are ongoing, with affinity or connection to cardholders. Those tend to go for premiums, not discounts," said Robert Hammer, the chief executive of the card advisory firm RK Hammer.

In contrast, Home Depot's client base has been hit particularly hard by the housing crisis.

Timothy Kolk, a consultant with experience brokering portfolio sales, said that the Home Depot cards were probably a harder sell and speculated that Citi had been unable to find a buyer for the portfolio, or at least a buyer that would make an acceptable offer.

"They're obviously willing to sell these assets, … but there's a price at which it makes sense and a price at which it doesn't, and I'm guessing they couldn't get a price" that was palatable, he said.

If the only way to sell the Home Depot portfolio was at a discount, "Citi's earnings are under such pressure — even if it's rational, they might not be able to afford that," Kolk said. For Citi especially, which is about 34% owned by the U.S. government, "there are political considerations of selling at a discount."

Cobranded cards, which are network branded and can be used like general-purpose credit cards, have historically been considered more attractive — and less loss-prone — than private-label cards, which can only be used at one specific retailer.

But the consultant Allen said that the recession has upset many issuers' thinking. These days, a private-label credit card is "actually a more secure lending device," he said. "A cobranded card is general-purpose — it's got a higher credit line, it's got cash-advance, there are usually balance transfers" — all of which increase the issuer's exposure.

Home Depot confirmed Tuesday that Citi would close the general-purpose cobranded card accounts by Oct. 31 but will continue to issue the private-label cards that Citi is contractually obliged to offer for Home Depot customers; those cards can be used only in Home Depot stores. The cobranded cards make up a small percentage of the combined total of 12.5 million cards that the retailer offers through both programs.

Shannon Bell, a Citi spokeswoman, said in an e-mail Tuesday that the Home Depot "MasterCard Rewards products did not perform as expected."

Citi first signed Home Depot as a retail partner in 2003, and introduced cobranded cards in 2006.

Steven Jacowitz, a former credit executive at Saks Fifth Avenue, Bloomingdale's and Filene's, and now the director of alliance development at Auriemma Consulting Group Inc., said that for many issuers cobranded cards are generally more expensive to issue for retail partners than private-label cards are. "There's generally a higher bounty paid for the cobrand card by the issuer," he said. "The retailer will push the cobrand card — and then the consumer won't really use it outside the retailer."

Jacowitz was reluctant to interpret Citi's ability to sell these assets as a sign of improving conditions in the card market. Given "the fact that there have not been a lot of individual transactions done lately, it's a ray of hope for the industry, but I wouldn't want to read too much into it," he said.

But "I think it says positive things for U.S. Bank — they're in the growth mode, they're looking to grow." (The $1.3 billion worth of assets that Citi sold appears even smaller when compared with the $81.9 billion of "core" cards the company is retaining.)

But Allen took a more optimistic view. "If you lived in the neighborhood and you suddenly saw a bunch of people selling their houses, it's a good sign that, in a market like this, deals get done and there are buyers out there."

(Associated Bank confirmed Tuesday evening that it was one of the portfolios Citi sold to U.S. Bank's Elan Financial Services. Valentine J. Glytas, the Green Bay, Wis., company's director of consumer lending services, said in an email, "As a local company, Elan knows our markets well and will provide our customers with best in class products and service.  We are excited about this new partnership.")