By David Henry
NEW YORK, March 5 (Reuters) - Citigroup Inc had at least one advantage in its successful bid for the exclusive right to issue credit cards for Costco Wholesale Corp, rivals and tax specialists say: it lost so much money during the financial crisis that it has billions of dollars of tax credits.
Citigroup and Costco have not disclosed terms of the deal, and outsiders can only speculate about the reasons Citigroup bid aggressively enough to win the business.
But officials at two rival banks said they suspect Citigroup's tax credits allowed it to offer Costco better terms than competitors could. They declined to be identified because the negotiations were confidential.
At the end of last year, Citigroup had $49.5 billion in net tax credits, known as "deferred tax assets." They are a boon to the bank because they can reduce - or even eliminate - its federal income tax liability. Other banks could pay as much as 35 percent of their U.S. income in federal tax, though many also use tax-reduction strategies that push their rates lower.
American Express said last month that it would not renew its deal with Costco because the retailer was demanding terms that were not economic, an indication that the profit margins for anyone taking on the business were likely to be razor thin.
"The deferred tax assets would be quite a dramatic advantage," said Robert Willens, an independent accounting and taxation consultant. Citigroup, he said, may well have won the deal by being able to offer far better terms to Costco than banks that pay more in taxes.
Citigroup responded to questions about its tax advantage in the deal with a written statement: "As the world's largest issuer of consumer credit cards, Citi has unrivaled scale, expertise and capabilities in servicing our partnerships with industry leaders. Costco brings the opportunity for consumer spending growth - when you add Costco's customer loyalty with increased Visa acceptance, it is a win for all parties."
It declined to comment on whether its tax credits helped in winning the business.
In 2014, Citigroup used about $3 billion of deferred tax assets to reduce tax liability.
To competitors, the bank's tax credits are an irritant. A big chunk of the bank's deferred tax assets stem from the billions of dollars of losses it generated during the financial crisis. Citigroup was rescued three times by the U.S. government between 2008 and 2009, and one of the rescues threatened to wipe out some of the bank's deferred tax assets. However, the Treasury and the Internal Revenue Service - which were concerned about the stability of the banking system - relaxed the rules governing such assets to help Citigroup and other banks during the crisis.