Citi Boosts Cards Business; To Buy Costco Portfolio by June

Citigroup Inc. C is set to acquire U.S. co-brand credit card portfolio of Costco Wholesale Corporation COST from American Express Company AXP. The deal is expected to close in June 2016. Alongside, all Costco American Express Card cobranded accounts will be transferred to Citi.

Financial terms of the deal remained undisclosed. However, the New York-based banking giant stated that it does not expect the acquisition and conversion to have any material impact on its 2016 earnings. For American Express, the sale is likely to generate a gain of around $1 billion, subject to actual assets sold.

The deal does not come as a surprise as American Express, which has been Costco’s exclusive credit card partner since 1999, announced last year that they were terminating their relationship as both parties failed to reach an agreement on renewal terms.

Notably, in March 2015, Costco announced a deal under which Citigroup would be the exclusive issuer of its co-brand credit cards in the U.S. and Visa Inc. V would replace American Express as the card network.  Costco at that time also noted that the materialization of these agreements was subject to the acquisition of its existing co-brand credit card portfolio by Citigroup.
 
For American Express, the deal is a setback to its growth. Earlier, American Express admitted to potential billings and earnings loss in the next couple of years, given its failure to renew the 16-year old Costco account, which accounts for around 8% of the company’s billed business and about 20% of its interest-bearing credit portfolio.

Nevertheless, for Citigroup, one of the largest issuer of consumer credit cards in the world, the deal seems to be a strategic one. The company earlier revealed that its key planned investments for 2016 are tied with US cards including the Costco portfolio acquisition and renewing a number of partnership programs. While the investments are aimed at growing the cards business, it is likely to impact the company’s results in the near term to some extent.

In connection with the latest deal, Jud Linville, Chief Executive Officer, Citi Cards, mentioned,  "We are immensely pleased to have entered into an agreement to acquire the Costco portfolio and look forward to a long-term partnership with Costco and the opportunity to deliver value, convenience and seamless service to their 51 million loyal members across the country.”

Citigroup currently carries Zacks Rank #4 (Sell).

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