Citigroup Climbs as Staite Boosts Estimates on Retail-Card Unit

October 24, 2011, 4:07 PM EDT

By James Sterngold

Oct. 24 (Bloomberg) — Citigroup Inc., the third-biggest U.S. credit-card lender, climbed as much as 5.1 percent as the bank’s decision to retain 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 $1.04, or 3.4 percent, to $31.34 at 2:35 p.m. in New York and earlier touched $31.85. The shares had dropped 36 percent this year through Oct. 21.

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 it 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 led financial stocks higher today as McLean, Virginia-based Capital One Financial Corp. advanced 5.2 percent, the best performance in the 24-company KBW Bank Index. Discover Financial Services, based in Riverwoods, Illinois, climbed 5 percent.

-With assistance from Donal Griffin in New York. Editors: Peter Eichenbaum, William Ahearn

To contact the reporter on this story: James Sterngold in New York at jsterngold2@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

Article source: http://www.businessweek.com/news/2011-10-24/citigroup-climbs-as-staite-boosts-estimates-on-retail-card-unit.html

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