Is Citigroup’s Card Business In Better Shape Than Capital One’s?

by Trefis Team
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Citigroup (NYSE: C) and Capital One (NYSE: COF) are among the five largest credit card issuers in the U.S. Since the recession, Citigroup has transformed itself from a financial institution with a significantly diversified business model to one that focuses considerably on core-banking services. Citigroup’s card business has remained a key part of its business model with an average revenue share of 27% over the last decade. In comparison, Capital One is dependent much more on its credit card business, even though the segment’s revenue share has decreased over from 72% in 2008 to 64% in 2018 due to an increase in Capital One’s consumer lending business.

Trefis captures trends in the credit card business for Citigroup vs. Capital One in an interactive dashboard and concludes that although Citigroup has a larger credit card business both in terms of credit card loans and purchase volume, it is less profitable than its peer. Further, Capital One has delivered a better return on credit card loans and generated higher fees per dollar of purchase volume.

Citigroup has higher revenues, but Capital One has shown higher growth over recent years

  • Although Citigroup has reported higher credit card revenues than Capital One over the last 4 years, its revenues have grown 3% between 2015 and 2018 as opposed to the 21% increase in Capital One’s figure.
  • Citigroup’s credit card business is bigger than its peer in terms of purchase volume and outstanding card loans. Its segment revenues increased from $19.1 billion in 2015 to $19.7 billion in 2018 – 11% more than Capital One’s figure in 2018.
  • However, Capital One’s credit card division has grown at a much faster pace than Citigroup – growing at an average annual rate of 6.7% over 2015-2018. Citigroup’s card revenues grew at an average rate of 1.1% over this period.
  • Going forward, we expect Citigroup’s credit card revenues to improve 6% and cross $20.9 billion in 2019, whereas Capital One is expected to report $18.1 billion in card revenues – up 2.6%.
  • This growth of 6% in Citigroup’s credit card revenues would be driven by higher net interest income from credit card loans due to an expected increase of 50 bps in the segment’s net interest yield.
  • Capital one’s annual growth rate has decreased over recent years, from 9% in 2016 to 4% in 2018. This could be attributed to slower growth in outstanding credit card loans and a decrease in fees as % of purchase volume due to an increase in competition in the industry.

Our interactive dashboard for Citigroup details the factors that have driven changes in revenues of Citigroup’s individual revenue streams over recent years along with our forecast for 2019-2020.

 

Credit cards contributed more than 63% to Capital One’s revenues in 2018, which was 2.4x Citigroup’s figure.

  • Capital Ones credit card revenues have averaged around 62.9% of total revenues, while Citigroup’s figure was less than half of its peer – around 26.5% of total revenues.
  • This implies that Capital One is heavily dependent on the credit card business compared to its peer.

 

Citigroup’s outstanding card loans in 2018 were almost 1.45x of Capital One’s figure.

 

However, Capital One’s net interest yield from credit card loans was 108 bps more than Citigroup’s figure in 2018.

  • Capital One has reported a higher net interest yield from credit card loans than Citigroup over each of the last three years.
  • This implies that Capital One is generating better returns on its credit card loans as compared to its peer.

 

Citigroup’s Card Purchase Volume was 1.4x more than Capital One’s figure in 2018

 

However, Capital One generates higher fees on every dollar in purchase volume

  • Although fees as % of purchase volume have decreased for both the banks over recent years, Capital One’s figure of 0.91% in 2018 was still 6.5x of its peer.
  • As a result of this stark difference in fees percent, Capital One has generated significantly higher fees income than Citigroup despite lower purchase volume.
  • Capital One reported card fees of $3.5 billion in 2018, which was 4.6x Citigroup’s figure.

 

Capital One’s credit card business is more profitable than Citigroup despite its higher card provision rate

  • Higher return on credit card loans and better fees income from purchase volume have helped Capital One’s card division pre-tax margin to average around 22% over the last four years, which was higher than the 15.6% average pre-tax margin for Citigroup’s card business.
  • Capital One’s credit card business is much more profitable than its peer: it reported a pre-tax margin of 23.5% in 2018 – significantly higher than Citigroup’s figure of 11.8%.

 

Conclusion: Although Citigroup’s credit card business is larger, Capital One’s card operations are more profitable

  • Although Citigroup has a larger credit card business both in terms of credit card loans and purchase volume, it is less profitable than its peer.
  • Capital One has delivered a higher return on credit card loans and has generated more card fees per dollar of card purchase volume.
  • Citigroup has diversified revenues streams with credit card business contributing almost 27% of total revenues over the last decade. On the other hand, Capital One is heavily dependent on credit card business which accounts for more than 60% of its revenues.
  • Notably, the difference in credit card revenues for both the banks is not huge, and given the higher return on loans and purchase volume of Capital One, it is possible for Capital One’s card business to grow larger than Citigroup’s in the foreseeable future.

 

Trefis estimates Citigroup’s stock (shows cash and valuation analysis) to have a fair value of $82, which is roughly 5% higher than the current market price (Our price estimate takes into account Citigroup’s earnings release for the third quarter).

 

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