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Citigroup Estimates Boosted on Retail-Card Unit

Monday, 24 Oct 2011 05:47 PM

Citigroup Inc., the third-biggest U.S. credit-card lender, climbed more than 4 percent as the bank’s decision to keep its retail-partner card portfolio prompted Atlantic Equities to boost earnings estimates.

“This is a highly profitable business,” Richard Staite, an analyst at London-based Atlantic Equities LLP, said today in a note to clients. “Strategically we would prefer a sale, but from an earnings perspective it makes sense to retain it.”

Citigroup, led by Chief Executive Officer Vikram Pandit, 54, said last week that it would shift the retail-partner unit and “a vast majority of its assets” out of Citi Holdings, a division Pandit created in January 2009 to hold and sell the bank’s unwanted businesses.

The retail-partner unit, which issues store-branded credit- cards for merchants including Home Depot Inc. and Exxon Mobil Corp., posted a $2.2 billion pretax profit through the first nine months of the year, New York-based Citigroup said in an Oct. 17 statement.

“This division, which has $44 billion of assets, is one of Citigroup’s more profitable businesses,” Staite said.

Citigroup climbed $1.30, or 4.3 percent, to $31.60 in New York trading. The shares have dropped 33 percent this year.

Staite, who maintained an “overweight” rating on Citigroup, increased his 2012 and 2013 estimates for earnings per share by 3 percent to $4.72 and $5.57, respectively.

His opinion on Citigroup’s decision to keep the retail- partner unit contrasts with that of Moody’s Investors Service, which said the move hurts the bank’s credit quality.

‘Higher Default Propensity’

“It will expose Citigroup to card customers with a higher default propensity,” Sean Jones, a Moody’s analyst, said today in a report. “A troubled card holder will choose to default on their limited-use retail-branded card over their more functional general-purpose credit card.”

The portfolio was a “source of sizable losses” for Citigroup, with write-offs peaking at 13.7 percent in the first quarter of 2010, Jones wrote. The third-quarter loss rate fell to 7.5 percent, he wrote.

The retail-partner unit also issues credit cards for companies including Sears Holdings Corp., Zale Corp., RadioShack Corp., Royal Dutch Shell Plc, Office Depot Inc. and Staples Inc., Elizabeth Fogarty, a Citigroup spokeswoman, said in an e-mail.

Credit-card lenders were among the best-performing financial stocks today as McLean, Virginia-based Capital One Financial Corp. advanced 5 percent. Discover Financial Services, based in Riverwoods, Illinois, climbed 5.6 percent. The 81-company Standard & Poor’s 500 Financials Index rose 2.2 percent.

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