Issuers Report Strong Credit Card Loan Growth Across FICO Segments in 2017

According to the latest FDIC Quarterly Banking Profile, U.S. credit card loan growth accelerated in 4Q17, rising 8.2% to $865 billion.

Given the strong overall growth in credit card receivables, are issuers focusing their growth ambitions on particular FICO Score categories? To address this question, EMI analyzed 10K SEC filings for leading credit card issuers.  Overall, we found that issuers reported strong credit card loan growth across their FICO Score segments. We also studied trends in different issuer categories.

  • In the aftermath of the Financial Crisis, the three leading issuersChase, Bank of America and Citi—focused attention away from near-prime and sub-prime segments and towards superprime consumers.  This led to significant declines in both outstandings and charge-off rates.  More recently, as economic growth and consumer confidence returned, these issuers have refocused on loan growth and are once again targeting lower FICO Score segments.  This is seen in the chart below that shows changes in outstandings by FICO Score segment between end-2016 and end-2017.  As these issuers are pursuing loan growth, their credit card net charge-off rates have also increased (+26 bps y/y at Bank of America, +30 bps to at Chase, +59 bps at Citi-Branded Cards North America).  However, charge-off rates remained below 3% for each of these issuers in 4Q17, and issuers should continue to focus on loan growth while charge-off rates continue at these low levels.

  • Second-tier national credit card issuers—Discover, Capital One and Synchrony—reported relatively strong growth, but with different FICO Score segment trends.  Discover reported 9% y/y growth, with no y/y change in share of outstandings for the <660 and 600+ segments.  Capital One had a similar overall growth rate (8%), but this was driven in part by the acquisition of the Cabela’s card portfolio, which boosted the >660 FICO segment’s share of outstandings.  It is also worth noting that the <660 FICO segment accounted for 34% of Capital One’s credit card portfolio at the end of 2017, compared to 25% of Synchrony’s portfolio, and 18% at Discover.

  • Regional credit card issuers present a mixed picture when it comes to the FICO Score segment composition of their credit card portfolios. This is driven by a number of factors, including a large variation in portfolio sizes, as well as their credit card underwriting standards.  Most issuers report growth across their portfolios, with strong growth rates in the low FICO Score segments.  Fifth Third reported very strong growth for its <660 segment, but this segment only accounts for 3% of its portfolio.  Regions’ 20% growth in its <620 FICO segment was driven by its launch of a credit secured card in July 2017.

Finally, as most issuers reported strong growth in their credit card portfolios in 2017, charge-off rates are also on the rise, growing 45 bps y/y to 3.61% at the end of 2017.  While the overall charge-off rate has risen from a low of 2.19% in 3Q15, it is down both from post-recessionary highs of 13.13% in 1Q10, and even the 4% levels in 2007, prior to the Financial Crisis.  With charge-off rates still below 4%, the leading issuers continue to be comfortable with promoting credit card loan growth.

Summarizing 2Q17 Credit Card Outstanding and Charge-Off Trends

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.

Credit Card Issuers Focusing Growth on Different FICO Score Segments

The Wall Street Journal recently reported that credit card outstandings may reach the $1 trillion threshold in 2016, for the first time since before the 2008 Financial Crisis.  This is mainly due to overall economic growth and the rise in employment.  Issuers are now increasing their focus on growing outstandings by making aggressive acquisition-and-activation offers (American Express is currently offering a bonus of up to $300 on its Blue Cash Everyday Card), promoting lengthy introductory offers, and increasing credit lines for existing cardholders.

A big question for issuers is, should they concentrate efforts on particular FICO score segments, or seek to drive growth across the FICO score spectrum?  In the aftermath of the Financial Crisis and the resulting huge spike in charge-off rates, many leading issuers narrowed their focus, concentrating on the high-FICO score affluent segments, and ignoring subprime and low-prime consumers.  However, as the economy has continued to recover, at appears that some issuers have renewed interest in the lower-FICO score categories.

EMI’s analysis of leading issuers’ 1Q16 SEC filings reveals that issuers are following different approaches:

1. Growing outstandings across all FICO score segments.  Regional bank card issuers like Wells Fargo and Regions have relatively strong growth across all FICO score segments.  It is notable that the <600 subprime segment accounts for 9% of Wells Fargo’s outstandings, a higher percentage than for other issuers.  Wells Fargo issues a subprime card and recently incorporated a free FICO score into its mobile banking app.

outstandings_change_1Q16a

2. Generating stronger outstandings growth in low-FICO score segments.  Capital One, Discover and SunTrust all have markedly strong growth rates in outstandings for low-FICO segments.  35% of Capital One’s outstandings come from the <660 FICO segment, whereas this segment accounts for only 18% of Discover’s outstandings.  Discover grew <660 outstandings by 12% (to $10.0 billion), and it is worth noting that Discover launched the Discover it Secured Card in January 2016.  SunTrust grew its <620 FICO portfolio by 39%, although this was coming from a low base of just $45 million.

outstandings_change_1Q16b

3. Continuing to focus outstandings growth on higher FICO score segments.  The three largest issuers—Chase, Citi and Bank of America—all continue to experience declines in outstandings in their lower FICO score segments, which is offset by growth in higher FICO score categories.  Regional bank card issuer PNC also follows this pattern.

outstandings_change_1Q16c

As issuers look to continue to grow outstandings (and appear to be willing to let charge-off rates rise from their current low levels), they will need to develop approaches to target the different FICO score segments, including:

  • Ensuring they have products in place to target different FICO score—and demographic—segments.
  • Developing messaging, pricing, acquisition/activation offers and ongoing incentives to both attract new cardholders and encourage existing cardholders to increase their spending and borrowing
  • Creating tools (such as free FICO scores) to educate consumers on understanding how their credit scores are determined and how they can practice good credit management