Citigroup Vends Credicard to Itau

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In furtherance of its strategy of reducing international operations, on Tuesday, the Brazilian unit of Citigroup Inc. (C) came up with the announcement of the sale of its credit card and consumer finance units in Brazil for $1.37 billion (R$2.77 billion). The agreement has been penned with Brazil-based Itau Unibanco Holding S.A. (ITUB), which will take over Credicard, the non-banking credit card and consumer finance business of Citigroup.

Citigroup’s decision to sell off its consumer operations in Brazil comes as part of its restructuring initiatives to counter the fall in revenues. Aimed at increasing the efficiency of the company’s overall business, the initiatives include streamlining operations and optimizing footprints across geographies.

With the completion of this agreement, the position of Itau Unibanco will be consolidated in the card market in Brazil. Moreover, Itau Unibanco’s existing leadership in the consumer finance and credit card markets with a diverse portfolio of products and services and specialized platforms will be strengthened.

Notably, with the buyout of Credicard, Itau Unibanco’s credit card base will surge to 37.7 million from 32.8 million as of Apr 2013. However, Citigroup will continue its institutional and retail consumer banking businesses in Brazil.

Terms of the Deal

As per the terms of the deal, Itau Unibanco will acquire Banco Citicard SA and Citifinancial Promotora Ltda along with the Credicard card brand. Notably, the deal includes the acquisition of 96 Credicard stores and about $3.26 billion in consumer loan balances as of Dec 31, 2012.

However, the takeover deal excludes Corporate cards, the Citi and Diners branded portfolios, and the Credicard Platinum portfolio (except for Exclusive), or Credicard American Airlines cards. These cards will be transferred to Citi brand and Citigroup will continue to manage these.

After receiving approval from the regulatory authorities, Citigroup expects to make an after-tax gain of about $300 million or 10 cents per share following the closure of the deal. Moreover, Citigroup will reflect these business activities as discontinued operations beginning in the second quarter of 2013.

Similar Moves

Earlier in Apr 2013, Citigroup entered into a deal with DenizBank, the Turkish unit of Sberbank, Russia’s largest lender to vend its consumer banking unit in Turkey. Price for the transaction was undisclosed. Moreover, the deal is expected to be completed in third-quarter 2013.

As per the terms of the agreement, DenizBank will take over 1.2 billion liras ($650 million) worth of assets and 1.5 billion liras (about $800 million) of deposits of Citigroup’s Turkish unit.

Background

Earlier in Mar 2013, at an investor conference in Boston, Mike Corbat, the new chief executive officer (CEO) of Citigroup came up with financial targets for the company, set to be achieved by 2015. Additionally, the CEO announced restructuring initiatives for the markets where Citi operates its business.

Corbat aspires to earn a return of 10% on tangible common equity in 2015, up from 7.9% earned in 2012. Moreover, return on assets is expected in the range of 0.9% – 1.1%, up from 0.62% in 2012, adjusted for certain items. Specifically, at Citicorp, efficiency ratio is aimed to improve in the mid–50%.

Citigroup operates in numerous markets worldwide. Therefore, Corbat has planned to restructure, reduce or exit some of the operations in 21 markets globally to enhance returns. Though names of such markets were undisclosed, but it was intimated that most of them involve consumer businesses. Notably, in Dec 2012, Citi announced its plans to exit consumer businesses in Uruguay, Paraguay, Turkey, Romania and Pakistan.

Our Viewpoint

With the ambition of achieving financial targets in 2015 by restructuring the business, Corbat aims to provide clients with products globally. Streamlining of operations and efficiency improvements would aid Citi to accomplish its goals within the stipulated time.

Further, in a challenging operating environment, lower returns and stringent capital norms, bolstering revenues has become a challenge. Hence, many Wall Street banks are downsizing their businesses and announcing layoffs.

Citigroup currently carries a Zacks Rank #3 (Hold). Some well performing banks include JPMorgan Chase & Co. (JPM), Fifth Third Bancorp (FITB) and State Street Corporation (STT), all of which carry a Zacks Rank #2 (Buy).

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