Why These 2 Research Firms Think The Deal With Costco Will Benefit Citigroup

Costco Wholesale Corporation (NASDAQ: COST) on Monday announced that Citigroup Inc (NYSE: C) and Visa Inc (NYSE: V) would be its new credit partners. This follows last week's announcement about Costco and American Express Company (NYSE: AXP) ending their partnership.

In an equity research report rolled out Tuesday morning, analysts at JP Morgan upgraded shares of Citigroup from Neutral to Overweight, as the Costco co-branding deal win adds "a third leg to the Citi story."

One of JP Morgan's concerns about Citi has been "about tepid fundamentals and loss of market share in key businesses such as US credit cards." However, the Costco co-branding deal "should reverse this in US credit cards."

The deal also increased the firm's "confidence in the utilization of DTA and enhances the story to a three pronged one: large capital return potential, improving operating efficiency, and better growth in North America Consumer Bank revenues."

The analysts highlight three key drivers of improvement in performance:

1. Faster revenue growth and higher profitability
2. Faster utilization of DTA (deferred tax assets)
3. Improving efficiency ratio

Sharing a similar sentiment was Morgan Stanley. According to a report about Visa issued Tuesday morning, the Costco win is "a positive for Citi" since it shows the company can utilize excess capital for accretive acquisitions.

The analysts continued, "Makes sense that Citi won Costco as it needs to replace the ~$400M in earnings from OneMain sale." Going forward, they see the Costco partnership boosting both spending and loan growth at Citi. The deal "is contingent on Citi's purchase of the existing portfolio from Amex, so expect Citi will add the ~$14B portfolio (~2% of Citi's card loans and ~0.8% of Interest Earning Assets) before April 1, 2016."