What retail funk? Credit cards juice Citigroup 2Q profit

Citigroup’s consumer banking business — fueled by credit cards — was a gem in a mixed bag of a second quarter for the New York company.

The New York company’s second-quarter profit fell 3.2% from a year earlier to $3.87 billion, or $1.28 per share. That was 7 cents better than the average estimate of analysts compiled by FactSet Research Systems.

But Citi’s total revenue increased 2% to $17.9 billion, beating the $17.4 billion average estimate of analysts polled by Bloomberg. Though Citi’s investment banking and bond trading operations were one of the main reasons for the revenue increase, credit cards were also a major player.

Revenue in Citi’s North American consumer banking division — which excludes investment banking and trading revenue — rose 5% to $4.9 billion from a year earlier. The main driver of the increase was higher revenue from Citi’s credit card business, helped both by its recent acquisition of the Costco card portfolio and by internal card growth.

Both segments of Citi’s U.S. cards business grew. Revenue from branded cards, which includes partnership cards like Costco and American Airlines, rose 10% to $2.1 billion. Revenue from retail services cards, which includes cards branded with the retailers Home Depot and Best Buy, rose 4% to $1.6 billion.

“We continue to see strong client engagement and balance growth” in the cards business, Chief Financial Officer John Gerspach said during a Friday conference call. Additionally, Gerspach forecast an improvement in yields later this year on cards described as “full-rate revolving loans.”

Citi’s total credit card loan balance in North America rose 8% to $131 billion, in part due to the Costco portfolio acquisition.

The card growth helped offset weakness in Citi’s residential mortgage operations. Mortgage revenue in North America fell 33% to $188 million. Mortgage “should continue to be a headwind" for Citi in the third quarter, Gerspach said.

Credit quality was an issue with some of the card portfolio acquired from Costco as net credit losses in the North American consumer banking division rose 27% to $1.3 billion.

The ongoing downturn in the U.S. retail sector, as chain stores like Macy’s and Sears continue to close locations, has not yet affected Citi’s card business, Gerspach said.

“So far we're not really seeing anything like that in the numbers, certainly in our business,” he said. “Our loans are growing nicely in that business right now, and we're still seeing very good customer engagement.”