In order to offset potential losses from new legislation signed by President Obama, rising credit card defaults and increasing unemployment, Citigroup (C) is considering charging its credit card customers an annual fee.

In May, the president signed the Credit Card Accountability, Responsibility and Disclosure — Credit CARD Act — of 2009 into law. The legislation will improve consumer disclosures and end some egregious practices in the credit card industry but stops short of capping interest rates and fees. Most of the provisions go into effect from Feb. 22, 2010, unless otherwise stated.

Despite being touted as a victory for consumers, the bill could have unintended consequences as credit card companies look for ways to make up for potential lost revenue.

Credit card companies have been gearing up for the new landscape for months, mailing consumers a spate of warnings about fee and interest rate changes. Citigroup is in the process of informing some cardholders that it will institute an annual fee, about $30, on certain accounts.

American Express Co. (AXP) recently sent out notice that it will eliminate over-the-limit fees on its consumer credit cards in October.

Competitors Bank of America Corp (BAC), Discover Financial Services (DFS) and JP Morgan Chase & Co. (JPM) have yet not decided to levy annual charges on its card holders.

Citigroup is among the best-reserved banks, though charge-offs are expected to rise in the near term. Citi’s firm-wide allowances are sufficient to cover anticipated future losses.

As net charge-offs level off and as management gains more insight into the severity of losses, we anticipate Citigroup will reduce its reserve building rate across loan portfolios and eventually begin to allow their allowance to shrink. This will gradually reduce the provisions, despite high charge-off levels, and will eventually buffer earnings.
Pending further developments, we recommend a Neutral rating on the shares for now.
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