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Organic, inorganic growth drove big bank card balances in Q2

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Organic, inorganic growth drove big bank card balances in Q2

An acquisitionhelped fuel Citigroup Inc.'ssharp growth in card loans during the second quarter. But for another big bank,a broadening in credit appetite and macroeconomic factors contributed to its fastestexpansion in period-end card loans in recent memory.

Citi-brandedcard loans in the North America portion of Citigroup's consumer banking businesssoared 20.2% year over year to $43.3 billion as of June 30 as the company a large book of co-brandedreceivables from American Express Co.under its new partnership with Costco Wholesale Corp. Year-over-year growth ratesin the Citi-branded book turned positive in the first quarter for the first timesince the onset of the financial crisis.

had organicgrowth to thank for its 4.4% year-over-year growth in card loans during the secondquarter. The bank produced positive year-over-year growth in card loans in sevenof the previous eight reporting periods, but its rates of growth never reached ashigh as 2.6% during that stretch. Its card loans growth was negative for 19 consecutivequarters through the first quarter of 2014. It last generated growth in excess of4.4% in the second quarter of 2009, the final period in which comparisonsbenefited from its purchaseof Washington Mutual Bankassets in September 2008.

Whilebalances are subject to considerable seasonality, the $131.59 billion in card loansreported by Chase at June 30 represented the bank's highest absolute amount of cardreceivables at a period-end since Dec. 31, 2011.

Severalof the card business metrics disclosed by Chase helped explain the bank's expansion.Sales volume increased 8.2% year over year to $136 billion, the largest year-over-yearjump reported by the bank since the fourth quarter of 2014. New accounts openedof approximately 2.7 million represented a year-over-year increase of 28.6%, representingChase's highest tally in a single reporting period since the fourth quarter of 2010.

"Energycontinues to be a tailwind for consumers. The labor market continues to be solidand improving, and sentiment is still good," CFO Marianne Lake said duringa July 14 conference call.

"Consumersare in very good shape, and demand is there for the product," she added. "Andwe've been investing … in the Freedom Unlimited space and also in marketing. We'regrowing — not only because the demand is there but also because we're investing."

Additionally,Lake said between 20% and 30% of Chase's card originations have been coming fromcustomers with FICO scores of less than 700. While she said the overall book isstill characterized by "pristine credit," the share of originations inthat near-prime segment has been "reasonably, meaningfully higher over thecourse of the last couple years."

The Costco deal does not mark the only investment Citi has madein its card business. CEO Michael Corbat said during a July 15 that the bank recently renewed a keypartnership with American Airlines in its Citi-branded business and is "renewing"its partnership with Home Depot in its Citi Retail Services segment.

Although the servicing transition associated with the Costcoportfolio transfer drew some unfavorableheadlines — and Corbat said he believes the bank can "fix"the underlying issues in the short term — Citi CFO John Gerspach described the earlyfinancial results from the new book of business as "very encouraging,"with new account acquisitions that have "far exceeded our expectations"by a factor of 2x or more. The size of the book was $10.6 billion at the time ofacquisition in mid-June, and it had grown to $11.3 billion at quarter's end.

When backing the Costco book out of the $77.5 billion in Citi-brandedcard loans as of June 30, the resulting growth rate of 2.6% would have still representedthe fastest year-over-year pace of expansion the business has seen in any reportingperiod in at least the last seven years.

"We continue to see good momentum from the investments we'remaking in our core products," Gerspach said.

American Express' second-quarter numbers showed the flip sideof the Costco transaction as its total loans held for investment fell to $61.1 billionin the second quarter from $70 billion in the year-earlier period. But its loansheld for investment totaled $55 billion when adjusting the results for the secondquarter of 2015 to back out receivables associated with since terminated partnershipswith Costco and JetBlue Airways, and executives said the company is making progresson its initiatives to accelerate growth.