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New retailer relationship a driver of Citi's card growth

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New retailer relationship a driver of Citi's card growth

Concerns about the status of Citigroup Inc.'s long-standing relationship with Sears Holdings Corp. notwithstanding, the Citi Retail Services business grew strongly in the third quarter thanks in part to contributions provided by the bank's more recent agreement with another retailer.

Citi Retail Services launched a new card for customers of L.L. Bean Inc. in July and acquired $1.5 billion of receivables from the outdoor retailer's past co-brand card-issuing partner prior to the end of the second quarter. At the same time, a Citi executive sought to downplay concerns about the immediate implications of the high-profile Oct. 15 Chapter 11 bankruptcy filing by Sears.

The bank reported 7.6% year-over-year growth in Citi Retail Services end-of-period loans to $49.4 billion in the third quarter. End-of-period Citi-branded card loans, which includes the Costco Wholesale Corp. co-brand product, increased at a slower pace: 2.4% overall and 3.9% when excluding results associated with the since-divested Hilton Worldwide Holdings Inc. portfolio from the Sept. 30, 2017, result. Loan growth in Citi Retail Services was slightly slower at approximately 7.5% in the second quarter of 2018; thus, the third-quarter result marked the segment's fastest pace of expansion since the second quarter of 2014.

Card loans expanded at low- to mid-single-digit rates at several key Citi competitors during the third quarter: 2.4% at Bank of America Corp. nearly 4.7% at JPMorgan Chase & Co. and 4.3% at Wells Fargo & Co., according to their respective earnings reports. Citi Retail Services' growth would have been more in line with those results at 4.4% had the $1.5 billion in L.L. Bean business been backed out of its third-quarter total.

Given the timing of the addition of the retailer's business, the effects of the transition emerged at a different pace in Citi Retail Services' purchase sales tally. At $22.1 billion in the third quarter, Citi Retail Services purchase sales marked an increase of 10.5%. Year-over-year growth fell short of 4.9% in the second quarter and last hit double digits in the second quarter of 2014.

While Citi executives touched briefly on higher revenues within Citi Retail Services during a recent earnings conference call, they faced questions from analysts about the Sears business just days before the retailer sought protection from its creditors. CFO John Gerspach expects no immediate impact on Citi "at all" from the bankruptcy. The associated portfolio largely consists of co-brand accounts, and more than 70% of the customer spend on that product is conducted outside of Sears.

"That's consistent with what we would consider to be top-of-wallet customer behavior," he said, adding that Citi had taken Sears' store closures into account in its financial planning process. A full Chapter 7 liquidation of the retailer would have more significant financial implications, Gerspach noted, but the retailer filed its Chapter 11 petition in support of plans to restructure its liabilities.

Sears and Citi extended their relationship in May by five years through 2025, and their new agreement gives the bank "the right to own" the associated card portfolios. For Sears, according to a bankruptcy court declaration by CFO Robert Riecker, the extension provided a "significant" infusion of $400 million of needed liquidity, reflecting a $425 million payment by Citi net of a $25 million reserve established by the retailer on the bank's behalf.

Sears' connection to the credit card business extends far beyond its relationship with Citi. In 1985, for instance, the retailer introduced the Discover Card, which it pitched as the first credit card to offer cash-back rewards to holders based on the volume of their purchases. Discover Financial Services currently issues that card operating as a stand-alone entity, the result of various divestitures of financial services business by Sears over the years.

Citi acquired the Sears private-label and Sears-branded general-purpose card business, which had $29.54 billion in gross receivables, from the retailer in 2003.