Over the past six months, EMI has monitored new credit card launches by leading issuers and identified 10 trends.
- Issuers are moving away from long-duration introductory rates on purchases and balance transfers (BTs), in particular on travel cards.
- A basic earn rate of more than 1% (or 1 mile/point per dollar) is common.
- Most cards are offering a higher earn rate for spending in specific categories.
- Issuers are not competing aggressively on APR.
- The two new affluent cards are metal.
- Many cards continue to promote acquisition-and-activation bonus offers
- Three premium cards (with annual fees) all offered 50,000 bonus points.
- Three other cards (with no annual fees) promoted bonus offers of 10,000 miles or $100.
- In a significant departure from the previous norm, two new no-annual-fee airline cards have been launched
- For higher-end cards with annual fees, the robust travel benefits are emphasized over the rewards program as the core justification for the fees.
- No foreign transaction (FT) fees on travel cards is now becoming a standard feature.
- American Express remains an outlier, by continuing to apply a 2.7% FT fee on its travel cards.
- Most issuers continue to apply BT fees.
In a recent blog post, EMI discussed growth trends in credit card outstandings and charge-off rates, and the importance of ensuring that both remain at manageable levels. Now, our analysis of 2Q17 financials for leading issuers, as well as the latest reports from the FDIC and FFIEC, reveal the following trends on these two key credit card metrics:
- Issuers continue to report steady y/y growth in credit card outstandings, although the rate of growth has moderated in recent quarters. According to the FDIC’s Quarterly Banking Profile, credit card loans rose 4.5% to $780 billion. The growth rate was unchanged from the previous quarter, but marked a reduction from the 6%+ rates in the first three quarters of 2016.
- According to FFIEC call reports, regional bank card issuers like Huntington, SunTrust and City National reported the strongest y/y growth rates in credit card loans in 2Q17. Leading issuers also generated steady credit card loan growth: Citibank (+14% y/y, boosted by the acquisition of the Costco portfolio), Chase (+7%), Capital One (+6%) and Bank of America (+3%).
- Leading issuers are growing credit card outstandings across the FICO Score spectrum. Our analysis of selected credit card issuers’ 2Q17 10Q SEC filings found that issuers are reporting loan growth in all of their FICO Score segments, with most experiencing strongest growth in the sub-prime and near-prime categories. However, significant differences remain in the FICO Score composition of different card portfolios. For example, 35% of Capital One’s consumer credit card outstandings are held by people with a FICO Score of 660 or lower, but this segment only accounts for 12% of Chase outstandings and 14% of Citi’s portfolio.
- The rise in credit card outstandings is being mirrored by continued growth in net charge-off rates. According to the FDIC Quarterly Banking Profile, the average charge-off rate was 3.66% in 2Q17. This marked a significant y/y rise of 55 basis points. However, the rate was only up 3 bps from the previous quarter, indicating a slowdown in the growth trajectory. Moreover, the current rate remains low by historic standards.
Most of the leading U.S. credit card issuers—portfolios of more than $500 million— reported y/y growth in their average credit card outstandings in the first quarter of 2017.
However, all of these issuers are also experiencing significant growth in credit card net charge-offs (gross charge-offs minus recoveries). Of the 19 issuers:
- 10 reported y/y charge-off increases of more than 20%.
- For 17, charge-off rises outpaced outstandings growth.
These recent significant increases in charge offs follow an extended period of declining charge-off rates in the aftermath of the 2008-9 Financial Crisis. During the 2010-2015 period, issuers tightened up their credit card underwriting considerably, and consumers moved away from racking up high levels of credit card debt. According to the FDIC, the credit card net charge-off rate fell from a recessionary high of more than 13% in 1Q10 to less than 3% in 3Q15. Since then, the rate rose slightly—to 3.16% in 4Q16—but still well below levels seen prior to the Financial Crisis. And five of the issuers in the chart above (Chase, Bank of America, Discover, BB&T and SunTrust) still had net charge-off rates of less than 3% in 1Q17.
Even though current charge-off rates are low by historic averages, issuers must be careful not to allow charge-off momentum to grow to a problematic level. One area of potential concern: many leading credit card issuers are reporting strongest outstandings growth for their low FICO Score segments, which tend to have significantly higher credit risk profiles.
Of course, when focusing on growing credit card loans, issuers accept that charge offs will rise. However, they can help to ensure that these charge offs remain at a manageable level by:
- Maintaining underwriting discipline
- Avoiding a race to the bottom in credit card pricing; it’s notable that, according to CreditCards.com, the average credit card APR reached a record high of 15.80%)
- Providing content and tools to educate consumers on how to use credit cards responsibly
- Continuing to market credit cards as both payment tools and sources of credit