What Could Citi Possibly Be Thinking With This Move?
Feb 19th 2013 1:15PM
Updated Feb 19th 2013 3:30PM
Citigroup just announced it will purchase a $7 billion credit card portfolio from Capital One Financial. In this post-crash age of increased banking regulation -- making it tough all over for banks to find ways to make money -- I was ready to applaud the move, until I saw exactly what Citi was buying.
Lunch? Meet your eater
Two painful words: Best Buy , the increasingly irrelevant big-box electronics retailer that is slowly but surely having its lunch eaten by Amazon.com. Citi is buying Best Buy's entire credit card portfolio, worth $7 billion in existing loans.
In a press release, the superbank said: "This will add another premier retail franchise and high-quality card portfolio to Citi Retail Services ... Best Buy is the leader in consumer electronics and we are excited to partner with them." Really?
Good idea, poor execution
This article isn't about Best Buy, it's about Citi, but I'll digress momentarily to offer a few choice metrics on Best Buy:
- Profit-margin trailing 12 months: -2.43%.
- Earnings per share TTM: -$3.37.
- Year-over-year quarterly revenue growth for the most recent quarter: -3.5%.
Again, post financial crash, many American banks are trying hard -- and scrambling in some cases -- to find new and stable ways to make money. A strong credit card business is an excellent way to do that. And with banks less on edge about lending to consumers, now seems like the perfect time to do it.
But why try to do it with the Best Buy portfolio? Best Buy's business model is an old one, and the company seems to be fading fast. Is this the best option Citi could come up with to boost its credit card business?
Maybe the bank sees some value in running Best Buy's existing credit card business into the ground as the company disintegrates. But if this was the reasoning, (1) it's certainly not how Citi is selling it, and (2) it's not like Citi got a deal on the portfolio: The bank is getting it at book value. Sorry, Citi, there are much better ways to spend $7 billion.
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The article What Could Citi Possibly Be Thinking With This Move? originally appeared on Fool.com.Fool contributor John Grgurich has no position in any of the stocks mentioned. Follow John's dispatches from the bleeding heart of capitalism on Twitter @TMFGrgurich . The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and Citigroup.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a gripping disclosure policy.
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