Citigroup Inc is having trouble finding buyers for its $50 billion portfolio of retailers' credit card loans, and it might end up holding onto the business for years, people familiar with the assets said.
Buyers are reluctant to buy credit card assets of any kind now, because regulators are revamping rules for the industry, making profits more difficult to forecast.
But the portfolio that Citigroup is selling is particularly difficult to unload, in part because it is big and because these types of cards are prone to higher-than-average losses.
Citigroup once prided itself on being the industry leader in store cards, but in the first quarter of 2010, the bank's unwanted credit card businesses had net credit losses of $1.9 billion. The unwanted credit card assets include retail credit cards and about $5 billion worth of other partner cards.
Citigroup is not willing to accept fire-sale prices that would-be buyers want, according to two people briefed in the matter who were not authorized to discuss it.
Industry analysts and portfolio brokers said this kind of situation is common now.
“What Citi's trying to unload is some junk, and junk takes a lot longer to sell,” said Robert Hammer, the chief executive of R.K. Hammer Investment Bankers, which brokers card portfolio sales and has managed private label credit card companies.
“It could take them a lifetime,” he added.
Citigroup spokeswoman Shannon Bell declined to comment, but pointed to the bank's efforts to clean up the portfolio. Net credit losses on Citigroup's unwanted credit card businesses have declined for the last three quarters, in part due to Citigroup's efforts to reduce the size of those assets.
Citigroup's difficulties in selling the portfolio reflect how tricky it is for Chief Executive Vikram Pandit to remake the third-largest US bank.
Pandit hopes to shed some $500 billion of assets outside of Citigroup's main businesses, but as financial institutions around the globe shrink their balance sheets, there are few obvious buyers.
Regulators frown on retailers buying credit card portfolios. Banks that specialize in retail cards, including HSBC Holdings PLC's US arm and General Electric Co's GE Money Bank, are uninterested in taking on more assets, according to the two sources and John Grund, an industry consultant not briefed on the matter but familiar with retailer credit cards.
GE put its own $30 billion retailer card business up for sale in late 2007 but did not find a buyer. Representatives for GE and HSBC declined to comment.
Private equity firms and foreign banks that are expanding their operations in the United States, including Banco Santander, are more likely potential buyers for Citigroup's unwanted credit cards, according to one of the people briefed and to Grund, a partner at the card consulting firm First Annapolis Consulting.
In the current market, those suitors are unlikely to pay the price Citigroup wants for the portfolio, they said.
Banco Santander spokesman Peter Greiff declined to comment.
In the coming weeks, the Federal Reserve will issue final rules on late fees as part of the 2009 Credit Card Accountability, Responsibility, and Disclosure Act. The rules will go into effect in August, but their impact could take months or even years to become manifest.
Even aside from the broader issues in the industry, Citigroup's portfolio is a tough sell, in part because it performed poorly even before the credit crunch, one of the people familiar with the assets said.
About 40% of the loans in the portfolio are from Sears Holdings Corp credit cards. The bank bought the then-$29 billion Sears portfolio for a $3 billion premium in 2003, when it was already plagued with losses. Citigroup at the time was snapping up retail credit card assets.
A turnaround proved difficult, and by January 2007 then-Chief Executive Charles Prince identified it as “a real drag on the overall growth” of Citigroup's credit card business.
After Sears, the biggest retailers in the portfolio are Macy's Inc and Home Depot, according to the people familiar with the assets.
There are other obstacles to selling the retail card portfolio, including the bank's refusal to break it into smaller pieces, the two people briefed in the matter said.
Separating out individual retailers' card portfolios would create more work for Citigroup, and the bank fears buyers would take the best performing assets and leave Citi with the duds, those people said.
Also, the universe of potential buyers is limited by the special computer systems and expertise required for banks to handle retail credit cards, said Grund.
For example, banks working with retailers have to be prepared to accept applications through stores instead of through the mail or bank branches. Few lenders have those systems in place.
KEPT IN LIMBO
Citigroup's failure to find a buyer is testing the patience of its partners, including Sears.
“We'd like to have Citi figure out as fast as possible whatever the final disposition of this business is going to be,” Susan Ehrlich, the president of Sears Financial Services, said in an interview last month.
Some investors praised Citigroup's wait-and-see approach, especially considering the low price it would currently get for the portfolio.
Citigroup no longer faces huge capital shortages, so it does not need to be in a rush to sell, said Anton Schutz, president of Mendon Capital Advisors, which owns Citigroup shares. (Reuters)