Some Wall Street analysts have begun to question whether Citigroup Inc’s (C.N) big bet on credit cards will backfire if the U.S. economy enters a recession, despite the bank saying it is underwriting responsibly.
The New York-based lender is the third-largest card issuer by payments, according to industry publication The Nilson Report. Its card business accounts for one-third of overall revenue and half the profits of its consumer business.
Citigroup is also among the most aggressive promoters of zero-interest balance transfers, according to market research firms that track the data. Those deals tend to lure borrowers with debt burdens rather than affluent spenders who chase rewards.
Citi offers four credit cards with zero-interest balance transfers. Most major rivals offer one or two cards with the 0% offer, according to Ted Rossman, a credit card industry analyst at consumer finance company Bankrate LLC. The bank also offers the longest interest-free period on the market with one of its cards at 21 months, compared to an industry average of 12.16 months, according to credit monitoring site WalletHub’s analysis.
“The risk is Citigroup is over-indexed to credit cards,” said Wells Fargo banking analyst Mike Mayo. “We are worrying every day about what could go wrong.”
Still, with the card business continuing to perform well, Mayo has given a “buy” rating to Citigroup stock, which is up 35% so far this year.
Citigroup spokeswoman Elizabeth Fogarty said the bank is lending responsibly, through balance transfer offers as well as other products.
“They are one lever within a strategic, balanced growth strategy,” Fogarty said.
“We diligently monitor market and environmental conditions on a continuous basis and will make adjustments as needed,” she added.
Some analysts say potential downside lies with borrowers like Jacqueline Alvarado, a Pennsylvania truck driver who now owes $12,000 in credit card debt.
Over the past five years, Alvarado, 40, says she has moved balances around on 19 cards, including one from Citigroup. If 0% promotional offers dry up, she said, so do her hopes of paying off that debt.
“That’s the only way I can stay afloat,” she said. “This works out for me for now, until they change it.”
Citigroup executives emphasize that strong underwriting procedures will prevent catastrophic losses, and that they are sticking with the card strategy because it is crucial to hit growth targets.
Citigroup’s card delinquency rates are far below the industry average, according to federal data and filings.
(For a graphic on Citigroup’s credit card delinquencies and charge-offs, see: tmsnrt.rs/2ZtH9QF)
After this article was first published on September 6, Citigroup provided data to show its mail promotions of 0% balance transfer offers have declined significantly over the past two years.
Citigroup now accounts for 13% of those deals, down from 25% in the fourth quarter of 2017, statistics from third-party research firm Mintel Group Ltd show. It remains one of the top three promoters, according to the data.
The other two are Discover Financial Services (DFS.N) and Capital One Financial Corp (COF.N).
Discover, known for flooding mailboxes with promotions, has said on earnings calls it is pulling back on promotional offers and tightening personal loan underwriting due to concerns about the economy. Capital One, which pioneered balance transfers in the early 1990s, said on public investor calls it has become more conservative in extending credit while targeting wealthier clients who typically do not carry balances.
The two companies declined to comment for this article.
Customers who apply for balance transfers are considered riskier than those that don’t because they often use the offers to rack up more debt, several underwriters and banking analysts said.
“It’s a fine line between finding customers who need your product and customers who will also be good customers and pay their bill,” said Julian Kheel, a card expert at personal finance site The Points Guy.
RELYING ON PLASTIC After receiving three taxpayer bailouts to survive during the 2007-2009 financial crisis, Citigroup exited many businesses and narrowed its focus to a few key areas, including cards.
Today, its card business is an important driver of deposit growth. By marketing online checking and savings accounts to its 28 million cardholders, Citigroup was able to add $2 billion in consumer deposits during the first half of 2019, executives said. That is more than double what it gathered all of last year, the executives said.
Though the customers who sign up for those deals may be riskier, Citigroup is betting they will stick around once promotional periods expire. At that point, they face annual percentage rates of up to 27%, according to sites that compare cards.
Citigroup’s interest-bearing balances rose 10% in the second quarter versus the year-ago period. That growth helped boost overall profits on consumer lending by 9%, according to its financial statements.
“The good news is this is not Citigroup 2007,” said Mayo, the bank analyst. “There is better risk control, better awareness of potential pitfalls and frankly a stronger consumer.”
Citigroup started scaling back promotional offers in 2017, but executives say they believe the bank now has the right mix of customers — both in 0% and interest-bearing accounts — to start investing in promotions again. That will help Citigroup grow its card business through next year, Chief Financial Officer Mark Mason said at a conference this week.
Citigroup is also adding new features to encourage borrowers to use their cards more. The bank this year introduced a new card that rounds up to the nearest 10 reward points on every new purchase, and rolled out installment loans for large transactions.
Anand Selva, head of consumers strategy, said he expects the business to continue picking up steam with the right mix of consumers.
“We sort of hit our sweet spot,” Selva said.