Costco ties up with Citigroup, Visa for U.S. co-branded cards

By Avik Das and David Henry

(Reuters) - Warehouse club Costco Wholesale Corp (COST.O) has chosen Citigroup Inc (C.N) and Visa Inc (V.N) to run its co-branded credit card starting next year, replacing American Express Co (AXP.N), which lost the coveted tie-up last month.

Citigroup will exclusively issue the Costco branded cards and Visa will provide the payment network in the United States and Puerto Rico from April 1, 2016, Costco said. The deal means that Costco customers will only be able to use Visa credit cards at its stores, as is currently true with American Express cards.

While terms were not disclosed, the high profile partnership could be lucrative for both companies given that Costco caters to relatively high-income customers compared with Wal-Mart Stores Inc (WMT.N) and Target Corp (TGT.N). Still, margins on such deals can be thin.

American Express said in February that it had been unable to reach a deal with Costco that would have made "economic sense" even though the loss of the contract would hurt its earnings for the next two years.

The Costco portfolio of card loans has been a "thin margin" business, but Citigroup - the world's largest credit card issuer - has the scale, with some $146 billion of card loans, to manage it, analyst Glenn Schorr of Evercore ISI wrote in a note.

Visa shares rose 2 percent to a record high of $277.00 in early trading, while Citi shares rose 1.5 percent to $53.22.

"Costco is a solid co-brand partner given its affluent, captive member base and represents a solid win for Visa," J.P. Morgan Securities analyst Tien-tsin Huang wrote in a note.

Citigroup Chief Financial Officer John Gerspach said an investor conference that the bank is attracted to Costco's "loyal customer base."

Stifel Nicolaus and Co Inc analyst John Davis said it was an "impressive win" for Visa, considering that 90 percent of Citi's U.S. credit cards are MasterCards.

The deal is expected to add $120 million of annual revenue to Visa or roughly about 10 cents in earnings per share, Davis added.

Costco, which sells everything from jewelry to fresh produce at its cavernous members-only stores, had already replaced AmEx with Capital One Financial Corp (COF.N) and MasterCard Inc (MA.N) as its card partner in Canada since the start of this year.

That move had raised speculation that the same companies could also replace AmEx in the United States.

(Reporting by Avik Das in Bangalore and David Henry in New York; Editing by Maju Samuel, Savio D'Souza and Christian Plumb)