By David Henry
NEW YORK, July 17 (Reuters) - When consumers have trouble making ends meet, bills from retailers that have gone bankrupt or closed tend to go toward the bottom of the pile.
The trouble for lenders like Citigroup Inc is that the debt is actually owed to them.
Citigroup, the fourth-largest U.S. bank by assets, said on Friday that it is having trouble collecting on store-branded cards, which is leading to higher losses.
To reverse that trend, the bank has been stepping up its outreach to shoppers who finance purchases from chains like Macy's and Sears with Citigroup store-brand credit cards which the bank has stood behind for more than a decade. The bank recently doubled the number of text messages it sends to borrowers.
"We've begun to see some evidence of progress, but it's slower than what we had originally targeted," said Chief Financial Officer John Gerspach.
He expects to charge-off 4.6 percent of the store-branded credit card portfolio this year, up from an earlier forecast of 4.35 percent.
Credit cards is the only major consumer business in the United States that Citigroup has been trying to grow since refashioning itself after the 2008 financial crisis. It is an important lever for Chief Executive Officer Michael Corbat to hit financial targets he has not yet met.
Store-branded cards are a special focus for Citigroup because they have generated strong profits lately. Last year, that slice of the card business contributed $1.26 billion worth of profits for Citigroup, some 8.4 percent of income from continuing operations across the entire bank.
Investors and analysts have started to worry that Citigroup will experience ripple effects from growing problems in the brick-and-mortar retail sector, where bankruptcies, store closures, emergency financing and distressed acquisitions have become the norm.
Citigroup appears to be most at risk from relationships with Macy's Inc, Sears Holdings Corp, Office Depot Inc and Staples Inc, Moody's Investors Service said in a recent report. Moody's expects such chains to be closing stores in coming years.
The cards Citigroup issues for those chains often cannot be used elsewhere, so when stores close, customers are likely to spend and borrow less, analysts said.
Another problem: Retailers generally expect banks to lend to less creditworthy customers than they do with general purpose cards. While retailers share in losses, they are ready to take more chances on loans in order to sell more merchandise, especially when they are struggling to generate revenue.
People with FICO credit ratings of less than 660, which some consider the bottom for prime borrowers, accounted for 25 percent of money owned to Citigroup on store-branded cards as of the end of March. That was twice the proportion inside the rest of the card portfolio, which carries the Citi brand.