Citigroup Puts Brazil Consumer Finance Business On The Block

by Trefis Team
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Citigroup (NYSE:C) continues to work its way through non-core and less profitable business units. The global financial group is reportedly looking for a buyer for Credicard – its Brazil-based consumer finance unit, which has about 7 million customers, largely from the lower economic strata. [1] Credicard is a notable issuer of credit cards with about 3.8 million cards in circulation, which account for about a tenth of all credit card sales in the Latin American country. [2] But falling interest margins and changing customer behavior have squeezed out any profitability from the business, prompting Citigroup’s exit. Various Brazil-based banking groups are likely to show interest in Credicard, as the consolidation may help them eke out more value from their existing operations.

We maintain a price estimate of $42 for Citigroup’s stock, which is about 10% ahead of its current market price.

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Credicard’s presence in Brazil can be traced all the way back to the 1970s, and Citigroup held a 50% stake in the business for a good three decades before it decided to buy out the other stakeholder, Banco Itaú Holding Financiera SA, in a $139-million cash transaction in 2006. The deal clearly did not work out the way Citigroup had imagined, as the economic downturn of 2008 quickly changed the existing scenario. Interest rates dipped, eating into revenue figures and customers also stepped away from the prevalent practice of handing out pre-dated checks for servicing their loans, resulting in higher charge-offs on outstanding loans.

Citigroup’s focus on divesting the assets housed under the Citi Holdings business division has helped it gradually return to health over recent years, and the proposed sale of Credicard is in line with this strategy. Given the fact that the unit’s performance over the recent past has been notably worse than in 2006, when a 50% stake was valued at $139 million. We reckon that Citigroup will likely have to settle for a price of under $200 million for Credicard.

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Notes:
  1. Citigroup plans sale of Brazil consumer finance unit, Reuters, Jan 30 2013 []
  2. About Credicard, Credicard Website []
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