Is Citi’s Best Buy Deal Worth It
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This article is aimed at exploring the details of Citigroup’s (NYSE: C) deal with Best Buy and what specific benefits Citigroup could extract from it. The deal holds considerable importance for the bank’s shareholders since it reverses Citi's strategy of selling its store-branded credit card business.
The Deal
In a step toward boosting the size of the bank’s business, Citigroup’s CEO Michael Corbat inked a deal with Best Buy to take over the electronics retailer's credit card operations from Capital One Financial. Citigroup will be able to manage and issue Best Buy’s credit cards within the US. According to the news reported by Bloomberg, another deal will enhance Citigroup's loan portfolio with around $7 billion. Since loans are considered a bank's asset, this addition in the loans portfolio will help Citigroup increase its returns. The deals are expected to be closed by the third quarter of the current year, and the Citigroup’s current year’s results would not be affected by the deals.
Strategy Flip Flop
The store-branded cards business is the same business that Citigroup once sought to sell as part of its Citi Holdings unit. However, now the same Corbat who was heading Citi Holdings back then is committed to growing the size of this business. It's considered another premier retail franchise for Citi and already providing support to the bank’s bottom line. Citigroup’s store-branded cards business is already servicing over 90 million customers and reported a bottom line of $1.5 billion during 2012, compared to $1.48 billion in 2011. This growth in the bottom line came despite a 4% decline in the top line over the same time period.
Benefits Of Best Buy Deal
The addition of Best Buy’s portfolio will allow Citigroup to add to its Citi Retail Services card portfolio, which currently ranks at an estimated $40 billion. The announced portfolio acquisition is consistent with Citigroup’s re-segmentation of the business back into “core” operations, and its desire to grow loans and revenues.
My estimate is that this acquisition could add pre-tax profits within the range of $290 million -340 million in 2014. More importantly, this transaction will generate U.S.-based earnings, which will help Citigroup utilize its significant deferred tax assets before they expire. Currently, Citigroup’s deferred tax assets have swelled to over $55 billion and still growing despite three years of profits.
Competition
The decision to keep the credit card business at Citigroup will be fruitful as it has been for its peers. JPMorgan (NYSE: JPM), the largest bank by assets in the US, reported fourth-quarter results that reflected strong underlying performance across virtually all its businesses, with strong lending and deposit growth. Dimon, JPM’s CEO noted that the bank continues to see strong credit performance and favorable credit conditions across its credit card portfolio and wholesale loan portfolio, respectively. Credit card sales volumes climbed 9% over the prior year at JPMorgan, and deposits surged 10% over the same time period to $404 billion, up 3% sequentially.
Bank of America (NYSE: BAC), another money center bank in the US reported 7% year over year growth in the number of new credit card accounts during 2012 while is credit card loss rate plunged during the fourth quarter of the prior year to the lowest level since the second quarter of 2006. The bank also reported 7% increase in the purchase volumes per average active credit card accounts during the fourth quarter.
Foolish Takeaway
I believe Citigroup’s Best Buy deal is strategically and financially attractive. Besides contributing to the bottom line of Citigroup, the deal is expected to help the bank realize some deferred tax benefits.
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