Thursday, June 24, 2010

Citi on Card Networks (V)/MA); PIN Debit Risk Post Durbin; Sensitivity Analysis & Perspective



Citigroup Inc. (NYSE:C) Logo

Citigroup (NYSE:C) on MasterCard (NYSE:MA) and VISA (NYSE:V)
Citigroup Inc. (NYSE:C) analyst took a moment to talk about Card Networks such as MasterCard, and VISA according to a StreetInsider.com report.
Citigroup analyst stated, “In a surprise move, the final Durbin language included a provision ending exclusivity for PIN debit networks. In simple terms, V/MA PIN debit cards will be required to include at least a second network bug (i.e. regional PIN networks such as STAR & Pulse) and merchants will be permitted to direct the routing of the debit transaction to their preferred payment network.”
“V Has More Risk Than MA, But Manageable Overall — V has a 35-40% market share in U.S. PIN debit versus MA’s roughly 10%. We estimate that 60-70% of V’s debit cards are exclusive (meaning no other network bug) compared to our est for MA of 40-50% (co’s do not disclose exclusivity). To us, exclusive cards are the source of potential risk. In a worst-case scenario on lost trans volume, we estimate that only 0.8% of full year EPS is at risk for V and 0.3% for MA. Our worst-case assumes that 20% of exclusive cards get routed away.”
“Overall, we see the PIN debit exclusivity as more of a stock issue than a meaningful earnings risk. This issue does create an overhang on the stocks until the Fed provides guidance, which may take 9 months or more. V/MA valuations are getting more attractive (V 16x our ’11 estimate, MA 14x) but we don’t see multiple expansion until we get visibility from the Fed, despite improved global spend. We would be buyers of American Express (NYSE: AXP) (12.5x) to capture the spend catalysts and strip out debit / Durbin risk. Separately, Discover (NYSE: DFS) (via Pulse) could benefit.”
Shares of Citigroup Inc. stock last opened at for trading at 3.95 and closed at 3.89.  MasterCard last opened at 221.26 and closed the day out at 219.85.  VISA opened at 78.96 before closed down to 77.76.  American Express opened at 41.99 and closed positive for the day at 42.17, while Discover opened at 13.84 before closing up at $14.01 to end trading.


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