Citi Should Buy GE's $31B Private Card Portfolio: BofA Merrill Lynch

NEW YORK ( TheStreet) -- Citigroup ( C) may gain significantly from an acquisition of GE's ( GE) $31 billion private label cards portfolio, Bank of America Merrill Lynch analyst Erika Penala said in a report Tuesday.

While the analyst's shortlist of potential bidders includes Wells Fargo ( WFC), JPMorgan Chase ( JPM), US Bank (USB) and Toronto-Dominion ( TD), Citi is the most logical bidder, "as both the economics and strategic fit appear attractive."

Strategically, the acquisition could catapult Citi to the No. 1 position in U.S. partner cards and would double its exposure, according to Penala.

Citi recently bought Best Buy's ( BBY) card portfolio from Capital One ( COF), an indication that it is interested in expanding its stake in the business. The Federal Reserve approved that deal, suggesting that the regulator is open to targeted deals.

Still, the size of the GE portfolio at $31 billion is considerably larger that the $7 billion Best Buy portfolio, Penala noted, which could mean "more regulatory scrutiny and a longer closing time horizon." But the analyst expects that regulators will still view the deal favorably. "We think that regulators may prefer to have this portfolio belong on a bank balance sheet, funded by core deposits, than on GE's balance sheet, funded by wholesale," she wrote.

Assuming the bank pays no more than a 5% premium, the acquisition would add 10% to its 2014 projected earnings per share and involve a modest hit to its Basel III Capital ratio and its tangible book value. Citi will still be able to achieve its target 9.5% Basel III ratio by the end of 2013.

Also, some of the impact on capital could be offset by the potential release of unutilized deferred tax assets -- assets that can be used to offset a future tax expense provided there is an at least 50% probability that the company will have a positive income in the next accounting period.

Citigroup had $42 billion in total DTA as of the first quarter. As the acquisition would add to its U.S. earnings and tax liability, Citi would be allowed to use some of the DTA, which will also release some capital.

To make this acquisition, however, Citi would likely have to suspend its $1.2 billion buyback in 2013 and will likely repurchase fewer shares in 2014 as well, according to the analyst.

Other large banks are also likely to be interested in the portfolio. "Given how deposit-rich and asset-starved banks are today, we think bank shareholders will receive a potential deal well -- so long as the potential buyer pays, at most, a modest premium (5%) for the asset," Penala wrote.

Wells Fargo could be a close contender in the bidding process, according to the report. Though the deal makes less strategic sense for the bank, Wells has previously expressed interest in partner cards and the "deal economics is solid" according to Penala.

JPMorgan Chase is, however, likely "too distracted to bid," given that it remains "laser-focused" on meeting capital and liquidity compliance this year.

USBancorp and TD Bank are likely to be more interested in parts of the portfolio than the whole, according to the analyst.

-- Written by Shanthi Bharatwaj in New York.

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