MasterCard Joins Hands With Citibank To Regain Lost Glory

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Mar 10, 2015
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New York based MasterCard Inc. (MA, Financial) recently entered into a deal with Citibank Inc. (C, Financial) envisaging a 10 years global expansion joint agreement. The deal entails Citibank shifting its consumer proprietary credit card and debit portfolio’s to Master Card this year. Citi is one of the largest issuing partners for MasterCard and the 10 year lockup through this deal will provide a favourable pitch for MasterCard. The co-branded consumer and commercial cards will also involve other networks. The deal will fortify MasterCard’s position with key partners which is a strategic advantage in the wake of the shakeups occurring in the issuing dynamics of the co-brand space. It is noteworthy to mention that Citi already is one of the biggest clients of MasterCard and as has a large portfolio of MasterCard co-branded cards.

The deal in Detail

In term of numbers, MasterCard is likely to encroach on as much as $125 million worth annual revenue space of Visa Inc. (V, Financial) which adds up to 8 cents per share in annual earnings for MasterCard. Analyst at Barclays Plc. believe that through this deal, Visa will see 4% of its revenues shift to MasterCard which is a sizable chunk of annual revenue loss for Visa. The 10 year period of agreement between Citi and MasterCard worsens the situation for Visa, which might see a visible drop in its revenues over time. Visa recorded $12.7 billion in net revenues for its fiscal year ended September 30 last year.

Analysts believe that Visa currently quantifies 2-3% of Citibank’s global payment volumes. Even a 50% shift of the volumes to MasterCard would mean 1-2% accretive to the EPS in 2016. Analysts also fear retaliation from Visa as the two companies often operate in a tit-for-tat manner.

J.P. Morgan Chase & Co. (JPM, Financial), one of the biggest credit card lenders in the U.S., entered into a similar agreement with Visa in 2013 which saw a shift of 20% consumer card volumes of JP Morgan from MasterCard to Visa. The sheer difference in comparable percentage of this deal and the MasterCard & Citibank deal speaks volumes about the true gainer in the overall scenario. The said deal also involved development of an exclusive processing service to allow JP Morgan to negotiate direct deals with the merchants.

Stock Performance

MasterCard has a strong market cap at 104 Billion. It announced an EPS of $3.10 per shares last year which is higher from $2.60 in the previous year and $2.21 in the year prior to that. This reflects a consistent improvement. MasterCard declared 16 cents per share quarterly dividend in February. The stock scores 87% on the P/E growth front; 92% on overall growth value. The current dividend yield stands at 0.70%. After the announcement of its results for September 2014, the stock price has shown a sudden spike since October 2014 and onwards. From price band of $70 the stock price shifted gear and moved into the $80 and above price band in the last quarter of 2014. It is currently trading in the $90 range. Last week, Keefe, Bruyette & Woods maintained an Outperform rating and $109 price target on MasterCard. Street consensus stands at ‘Hold’ or ‘Buy’ guidance.

Our Take

Visa continues to lead the global payment volumes and MasterCard follows in at the second position. MasterCard needs to strike many more similar deals to be able to regain the ground it lost to Visa in 2013.