Why These Two Major Wall Street Research Firms Feel The Deal With Costco Will Benefit Citi

On Monday, Costco Wholesale Corporation

announced that Citigroup Inc

and Visa Inc

would be its new credit partners. This news follows last week's announcement about Costco and American Express Company

ending their partnership. In an equity research report rolled out Tuesday morning, analysts at JPMorgan 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 JPMorgan'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 report states. Related Link: Citi, Visa Win Costco's Business (http://www.benzinga.com/news/15/03/5287980/citi-visa-win-costcos-business) The deal also increases 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 on Citi Tuesday 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 continue: "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."