The Credit Card Accountability, Responsibility and Disclosure Act legislation, most of which went into effect in February, will cost Citigroup Inc. $400 million to $600 million in pretax revenue this year, John Gerspach, Citi chief financial officer, told analysts July 16 during a conference call to discuss second-quarter earnings.
Moreover, the legislation will cause revenues from Citi’s retail partner cards program to drop by $150 million to $200 million net of mitigation this year, an increase from the issuer’s previous estimate of $50 million to $150 million, he said.
Revenues for Citi’s North America Regional Consumer Banking business totaled $3.7 billion, down 3% from the first quarter, mostly because of lower volumes and the effects of the Credit CARD Act, Gerspach said.
Under the legislation, introductory or promotional interest rates must endure for at least six months before switching to a previously disclosed “go-to” rate. Issuers also cannot raise borrowers’ interest rates unless customers are more than two months late with a payment, and they must restore the previous interest rate after the customer makes on-time payments for six months.
The Federal Reserve Board in June issued final rules that will cap credit card late and other penalty fees at $25, somewhat lower than the $39 industry average. Those rules take effect Aug. 22 and could drive down fee income.
Citi’s average card loans declined 4% during the quarter, as higher payment rates and fewer accounts offset a 9% increase in purchase sales, Gerspach said. “Net credit losses declined 1%, to $2.1 billion, as credit quality in the branded cards portfolio improved,” he said.
Early-stage delinquencies in both Citi’s branded cards and retail partner cards improved during the quarter, though the pace has been faster in the retail cards program, Gerspach said. “Retail partner cards have a shorter account life and lower credit lines and balances, which allow for the portfolio to turn faster,” he said. “As a result, the current portfolio reflects more recent vintages, which are a better credit quality given the tightening of underwriting criteria.”
Historically, the improvement in credit card loans 30 to 89 days past due and those longer than 90 plus days past due has been a positive sign for future trends, Gerspach noted. “Additionally, during the quarter we placed fewer accounts into forbearance, and the results of these programs have remained positive,” he said. “We continue to see the cumulative loss on accounts that were put into forbearance to be one-third lower compared to similar accounts that did not go into these programs.”
Gerspach downplayed the effects of the financial-reform bill Congress approved last week, particularly as it relates to potential reductions in interchange revenue. “Debit purchase is not a significant business for us; our volumes show that, and we’re about one-tenth of the volume size of market leaders,” he said.
