Questions about whether the strategy of Citigroup Inc to focus on credit cards will be a problem for it if the United States economy slips into a recession are being asked by some Wall Street analysts.
The bank however has said that it is underwriting responsibly.
According to industry publication The Nilson Report, the New York-based lender is the third-largest card issuer by payments. About one-third of overall revenue and half the profits of its consumer business is accounted for by its card business.
According to market research firms that track the data, the bank also aggressively promotes zero-interest balance transfers. This strategy focuses on attracting borrowers who have high debts instead of customers who are affluent and look for rewards from transactions on credit cards.
There are four cards offers by Citi that have zero-interest balance transfers. According to Ted Rossman, a credit card industry analyst at consumer finance company Bankrate LLC, most of the other rivals of Citi offer one or two cards at the most cards with 0 per cent offer. The longest interest-free period on the market is also offered by the bank. According to credit monitoring site WalletHub’s analysis One of the cards of the bank extends its interest-free period to 21 months while the industry average if is about 12.16 months.
“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, Mayo has given a “buy” rating to Citigroup stock estimating that its card business would continue to do well. The shares of the bank are up 35 per cent so far this year.
The bank is lending responsibly through offers of balance transfer and other products, said Citigroup spokeswoman Elizabeth Fogarty. “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.
Any catastrophic loss would be prevented by strong underwriting procedures, emphasized Citigroup executives. They added that the bank would continue to focus on the card strategy since it is crucial for the bank achieving the growth targets.
According to federal data and filings, the delinquency rates of Citigroup are far below the industry average.
Statistics from third-party research firm Mintel Group Ltd show that Citigroup now accounts for 13 per cent of those deals, down from 25 per cent in the fourth quarter of 2017. According to the data it remains one of the top three promoters.
The other two are Discover Financial Services and Capital One Financial Corp.
Several underwriters and banking analysts said that companies consider those customers to be a greater risk who apply for balance transfers than those that don’t because such customers often use the offers to pile on more debt.
“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.
(Adapted from Metro.US/news)