NEW YORK—Citigroup Inc.'s decision to retain rather than sell a portfolio of retail credit cards is the latest boost of confidence for the card industry.
Besieged by high loan-loss rates and a stagnant economy, many lenders that specialized in so-called partnership cards turned their backs on such programs during the recession to get their portfolios in order.
But store cards have experienced a resurgence of sorts in the past year as the performance of many lenders has improved, with Citi's announcement Monday the latest sign of a comeback.
"We're back active into the business," Bill Johnson, chief executive of the retail partner cards unit, said in an
interview.
The New York bank, whose portfolio includes credit cards issued on behalf of merchants including Sears Holdings Corp., Home Depot Inc. and Zale Corp., started to shop the retail partner cards unit two years ago when it formed Citi Holdings, its so-called bad bank that holds unwanted assets.
Earlier efforts to sell the portfolio, which now includes about $41.4 billion in loans, stalled due partly to the portfolio's size as well the challenges of managing such loans, analysts said. Citi more recently signaled an interest in keeping the business, though, as loan performance improved, they said.
The credit-card market overall has rebounded as consumers have worked to pay down balances and have been conservative about making new charges.
Citi said Monday the percentage of retail card loans that were at least 30 days late ticked up slightly in the third quarter to 3.23% from 3.14% in the previous quarter but was down from 4.16% a year ago. The portfolio's net charge-off rate, or the percentage of loans deemed uncollectible, continued to decline, hitting 7.51% compared with 12.24% a year ago.
Citi's portfolio includes both private-label cards, or those that a customer can use only at specific retailers, and co-branded cards that can be used at different merchants.
Many banks flocked to retail cards several years ago as a way to generate new account growth, but such programs can be challenging for lenders to manage during economic downturns, analysts said. That is partly because such cards have traditionally been marketed to a broader swath of consumers, including those with poorer credit.
"As a general rule of thumb, you'd expect a higher loss rate on a private-label credit card," said Leigh Allen, a managing director with consulting firm Kessler Group. "You're also charging a much higher interest rate."
Since putting the retail card portfolios in Citi Holdings, the bank has worked to improve its marketing of the programs to ensure it and its partners are targeting the most ideal borrowers, Mr. Johnson said.
Citi has seen an increase of more than 20 points in the average FICO score, or credit rating, of borrowers in the portfolio, Mr. Johnson said. He added that the average score for new accounts originated is above 740. Citi is the latest lender to cast a vote in favor of retail credit cards.
Capital One Financial Corp. in August said it was buying HSBC Holdings PLC's U.S. cards unit for $2.3 billion. The portfolio of $30 billion loans includes a large amount of retail partner cards. Capital One, which expects the deal to close next year, also acquired the store card portfolio of Kohl's Corp. from J.P. Morgan Chase & Co. earlier this year.
General Electric Co. also remains a significant player in the retail card market after exploring the sale of some portfolios a few years ago, said John Grund, a partner with First Annapolis Consulting, which advises banks on credit card issues.
"It's been gradual but I think with Citi's announcement, clearly competition … has officially returned to the market and in particular to the partnership segment after a period of retrenchment," Mr. Grund said. Citi expects to invest in the business going forward and will look at acquisition opportunities as they arise, Mr. Johnson said.
"We've seen people come in and out of this space over time and what I'm confident in is that by organizing the way that we have and dedicating resources to focus on it, that we'll be able to perform at or above any of our competitors in this space," Mr. Johnson said.
Citi is moving the retail card portfolios into Citicorp, which includes its core business segments, and making it part of its North American consumer banking unit. The transition is expected to be completed by year's end.
