Bank's stock is up 22% this year, but cracks in a crucial unit stand to complicate the picture
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (November 14, 2017).
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One of the bright spots in Citigroup Inc.'s turnaround strategy is starting to lose a little luster.
For years, the New York-based bank has steadily grown its card business, boosting loans and investing heavily despite problems elsewhere that ranged from headaches in Mexico to regulatory problems that lingered after the financial crisis.
But now, some cracks in the card business have emerged, raising questions just as CEO Michael Corbat has shored up the bank's other issues.
This summer, the bank lowered its profitability potential for Citi-branded credit cards to at least a 2.15% return on assets, down from 2.25%. The seemingly narrow nugget in one part of Citigroup's sprawling empire is getting a lot of attention, in part because credit cards have been a crucial business for a bank that has spent much of its efforts getting smaller and simpler.
Citigroup is the largest card lender globally by some measures and is the second-biggest in the U.S. by balances, according to industry tracker the Nilson Report, despite the fact that it has cut hundreds of U.S. branches since the financial crisis.
Among the factors pressuring the business are more activity on cards that don't tend to generate as much lending income and consumers' increasing demand for rewards. "It's clear that the company has gotten off to a slower-than-expected start" on meeting card-growth goals, wrote Compass Point analyst Charles Peabody in a note.
The worries contrast with an overall rise in investor expectations. Citigroup's stock has risen 22% in 2017, the highest gain among the big U.S. banks. Mr. Corbat has declared restructuring at the once-troubled bank over, and in July, it unveiled a plan to return more than $60 billion in capital to shareholders by 2020 through dividends and share buybacks.
To sustain that momentum, the bank has made consumer cards a priority. Today, cards make up 24% of Citigroup's total lending -- a far bigger share than its rival big banks, including J.P. Morgan Chase & Co. and Bank of America Corp., which remain focused on mass-market retail banking.
While revenue and profits in the U.S. branded card business haven't taken off in recent years, the bank's aim was for its investments to start paying off in the second half of this year. However in the third quarter, North American revenue from Citi-branded cards fell 1% from a year ago. The bank did grow revenue from the second quarter to the third quarter. Its results compare with a July forecast for 3% annual revenue growth through 2020 in the unit.
In October, Chief Financial Officer John Gerspach told analysts that "we are seeing slower than anticipated revenue growth," due largely to increases in "the competitive dynamics in the rewards offerings in the U.S." The bank has also noted heavy volume in card partnerships with big merchants, which are cards that people tend to use for spending rather than borrowing.
Still, Citigroup didn't change its longer term growth or return forecasts for the branded card business. Citigroup has sought to boost growth in part by promoting no-interest card borrowing, a tactic that it has long used. Over the past three years through September, the bank has mailed about 1.9 billion offers in the U.S. for credit cards with zero-percent interest for a promotional period, according to market research firm Mintel Group Ltd.
The maneuvers have helped the bank maintain and grow its vast card business. Citigroup in 2015 outbid American Express Co. to win the rights to issue credit cards for shoppers at retail giant Costco Wholesale Corp., adding millions of new accounts and more than $10 billion in loans.
But giving up interest for a period has been costly, especially with rising interest rates that should boost lending revenue. The bank's aim has long been to dial back these offers, grow interest income, and also lean on other things, like its mobile application features or rewards points.
Under global cards head Jud Linville, who joined Citigroup in 2010 from American Express, the bank has invested to boost cards' appeal. It introduced new proprietary cards such as the Double Cash card, made it easier to spend rewards points online, and is adding more than 800 new mobile functions this year.
The goal is "building huge engagement with our customers," Mr. Linville said in an interview earlier this year. Mobile users have risen 22% as of the third quarter from 2016.
Citigroup says for now it is sticking with no-interest offers as a tactic to acquire customers, as it faces intense competition from rewards-packed cards such as J.P. Morgan's Sapphire Reserve.
One Citigroup card, Simplicity, offers a 21-month period of zero interest charges on purchases and balance transfers. That is more than twice the roughly 10-month average, according to card comparison site WalletHub.com.
Citigroup also promotes the no-interest periods on its credit card solicitations. About 23% of all such offers that arrived in Americans' mailboxes in the third quarter came from Citigroup, more than any other bank, according to Mintel.
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November 14, 2017 02:47 ET (07:47 GMT)