If you have been wondering why Citi has been offering long term 0% interest as introductory offers, some time extending well into 2019, you are not alone. It looks like these deals, intended to capture business, is causing stress on the firm’s Return on Assets (ROA). Mercator discussed the industry’s profound challenge in ROA earlier this year in a research note titled “In Search of a Profit.”
Our research used data from the Federal Reserve which pointed to the critical ROA metric. We illustrated how the bank card ROA fell swiftly from 4.94% in 2014 to 4.04% in 2016. We alsoo forecasted a 3.49% for 2018.
WSJ suggests that Citi will be between 2.15% and 2.25% this year, quite a variation from the industry norm. One of the big components is the long term 0% strategy, which costs the Citi money when compaed to today’s Prime Rate, which is currently 4.25%. WSJ points thatwhile Citi relies on credit cards to add ballast to consumer lending; the mix may be too high to mitigate risk. Consider this:
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Peer Group Lending: Credit Card Revenue as a Percent of Total Lending
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Citi: 24%
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Chase: 15%
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Bank of America: 10%
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Wells: 4%
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Credit cards generate high levels of revenue, but the mix must balance with other asset classes. Right now, the extensive portfolio is not delivering appropriate income, most likely due to the long term zero percent funding. As a matter of fact, card net revenue for the quarter is slightly higher than $300 million, literally half what it was in 2014.
Maybe another reason that the Citi never sleeps? When you have been gaining scale through low/no interest offers, it is tough to turn a battleship. With deteriorating credit quality anticipated for 2018, this could be a double whammy.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
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