EMI’s review of 3Q 2016 financials for the largest U.S. bank and credit card issuers revealed several trends:
Acceleration in outstandings growth. Average outstandings rose 6% y/y in 3Q16 for the 13 issuers in the study; this growth rate marks an increase from previous quarters (3% in 2Q16 and 2% in 1Q16).
American Express reported a 14% y/y decline, due to the loss of the Costco and JetBlue portfolios; excluding these portfolios, it grew loans by 11%.
Bank of America reported no change in average outstandings, ending a protracted period of loan declines due in large part to divestitures.
Regional bank card issuers continue to focus their attention on cross-selling credit cards to existing clients. Regions grew outstandings by 11% and reported that its credit card penetration rate rose 130 basis points (bps) y/y to 18.2%.
Continued volume growth. EMI analyzed volume data for 8 leading issuers, and found cumulative y/y growth of 9% in 3Q16.
American Express’s sale of the Costco card portfolio to Citi led to a 15% decline in its card volume, while Citi’s volume rose by 57%.
Issuers are launching new rewards cards and enhancing existing rewards programs to drive additional volume. Discover reported that its rewards costs rose 13% y/y to $368 million in 3Q16, and its rewards rate rose by 13 basis points to 1.20%. However, Discover has been struggling to grow volumes in recent quarter, with y/y growth of just 2% in 3Q16, down from 4% in 1Q16 and 3% in 2Q16.
Ramp up of card account production. Related to—and encouraged by—the growth in outstandings, issuers are ramping up new card acquisition.
Bank of America issued 1.32 million new U.S. consumer credit cards in 3Q16, the strongest quarterly performance since 2008.
Chase benefited from the launch new cards (Sapphire Reserve and Freedom Preferred) to grow new card production 35% y/y to 2.7 million. Chase reported at the BancAnalysts Association of Boston Conference this week that it opened more than 1 million new Freedom Unlimited accounts in the five months following its launch.
Issuers are investing more in marketing in order to drive growth. American Express grew its marketing and promotion spend 10% y/y for the first 9 months of the year, to $2.4 billion.
Charge-off rates remain very low. For many issuers, net charge-off rates continue to operate at or near historic lows, with seven issuers reporting rates below 3%.
There is some evidence of upward movement in charge-off rates as issuers chase growth. 8 of the 12 issuers in the chart below reported y/y rises. And most issuers are reporting y/y rises in 30+ day delinquency rate (which have traditionally been an indicator of future charge-offs).
However, issuers expect that rates will not rise significantly in the coming quarters. For example, Chase reported a charge-off rate of 2.51% in 3Q16, and projects that this rate will rise to about 2.75% in 2017.
Capital One did report a 66 bps y/y rise in its charge-off rate; this is related to the fact that it is continuing to target low-FICO segments; the <660 FICO score segment accounted for 36% of Capital One’s outstandings at the end of 3Q16, up from 34% at the end of 3Q15.
The following are four key takeaways from the 1Q14 financials for 13 U.S. banks with significant credit card operations.
Some improvement in outstandings performance
Continued volume growth
Charge-off rates at or below historic norms
Little change in industry profitability
Average outstandings for the 13 issuers in 1Q14 were unchanged y/y, an improvement from a 2% y/y decline in 4Q13.
For the four largest issuers—Chase, Bank of America, Citi and Capital One—the rate of decline in average outstandings improved from 5% in 4Q13 to 3% in 1Q14. Capital One highlighted progress made in working through run-off portions of the acquired HSBC portfolio, and it expects outstandings growth in the second half of 2014. Other issuers are ramping up new account production: Bank of America originated more than 1 million new accounts for the third consecutive quarter, while Chase opened 2.1 million new accounts in 1Q14, 24% higher than 1Q13.
For Tier 2 bank card issuers—Wells Fargo and U.S. Bank—the rate of outstandings growth rose from 7% in 4Q13 to 8% in 1Q14. Wells Fargo benefitted from the continued growth in credit card penetration of its retail banking households, which rose from 34% in 1Q13 to 38% in 1Q14.
Similarly, regional bank card issuers grew average loans 6% in 1Q14, compared to 5% in 4Q13.
Credit card loan growth rates for the former ‘monolines’—American Express and Discover—were unchanged at 4%.
Eight leading issuers reported 7% y/y growth in credit card volume in 1Q14, slightly lower than the 4Q13 increase. Three issuers—Wells Fargo, Chase and U.S. Bank—reported double-digit percentage growth in 1Q14. In general, issuers appear committed to continuing to push volume growth, as evidenced by the launch of new rewards cards with strong earnings potential (e.g., American Express Everyday), as well as enhancements to existing rewards programs.
12 of the 13 issuers reported y/y declines in net charge-off rates in 1Q14.
12 issuers now have charge-off rates below 4%. The only major issuer with a charge-off rate above 4% is Capital One, who reported that the acquired HSBC card portfolio added about 25 basis points to its charge-off rate in 1Q14. It expects that the impact of this portfolio would be mostly gone by the end of the second quarter.
10 reported charge-off rate increases between 4Q13 and 1Q14. This were attributed to seasonality, as well as indications that rates are starting to move back towards normalized levels as issuers seek to build outstandings growth.
However, it is worth noting that delinquency rates—which have traditionally been a leading indicator of future directions in charge-off rates—continue to decline on both a y/y and q/q basis for most issuers.
The six issuers who provide card-related revenue and cost information, reported that card profitability was virtually unchanged between 1Q13 and 1Q14. Revenue growth remains elusive, declining 1%, as net interest income fell 2%. The relatively strong rise in card volume did not translate into similar growth in noninterest income, as issuers are enhancing their rewards programs, which eats into interchange income (e.g., Discover reported that its rewards rate 11 bps y/y to 1.03% in 1Q14). Noninterest expenses (reported by five issuers) were unchanged y/y, while provisions for loan losses rose 6%, as issuers anticipate future charge-off increases.
The leading U.S. credit card issuers continued to exhibit trends that have become established in recent quarters, but there were also some signs of change:
Outstandings: Average credit card outstandings continued to decline y/y, with the big four issuers (Chase, Bank of America, Citibank and Capital One) reporting portfolio decreases. However, both credit card “monolines” (American Express and Discover) and some regional bank card issuers reported relatively strong growth. Even among the big three issuers, there were indications of growth: Chase reported a 6% y/y rise in new accounts (1.7 million); and Bank of America new accounts rose from 850,000 in 3Q12 to more than 1 million in 3Q13.
Volume: Reflecting the change in the industry in recent years from a lend-centric to a spend-centric model, most issuers reported strong y/y volume growth. Wells Fargo volume rose 14%, as new accounts grew 11% and credit card penetration of its retail bank households increased to 35%. And it is looking to further propel volume growth with its recently-launched rewards program. Bank of America and Chase also translated strong new account generation into double-digit volume growth. Discover had relatively low volume growth of 3%, but is aiming to increase volume and outstandings at the same rate.
Credit quality: charge-off rates continue to decline for most issuers. Of the 12 issuers who provided charge-off rate data, 10 have rates below 4%, and three issuers (American Express, Chase and Discover) have rates below 3%. As a result, provisions for loan losses continued to fall for most issuers, which boosted profitability. For 30+ day delinquency rates, issuers reported y/y declines, but q/q increases.
We expect that, as the economic recovery continues, consumer confidence will grow, as will their willingness to take on credit card debt. This may lead to increases in charge-off rates from these historically low levels, but issuers will feel that the resulting growth in noninterest and net interest income will more than offset any rises in provisions for loan losses and noninterest expenses, such as marketing costs.
However, as issuers look to ramp up credit card marketing, they need to factor in the fundamental changes in consumer perceptions and usage of their credit cards. These changes impact various elements of the marketing mix, including:
Positioning: Following the financial crisis, issuers shifted away from positioning credit cards as easy ways to access credit, and towards credit cards as an efficient payments method. As consumer demand for credit recovers, issuers may need to adapt positioning once again to have a balance between a lend-centric and spend-centric focus.
Product: Issuers continue to target more affluent cardholders, so they will need to have a card portfolio that is appropriate for this market. This explains why both Wells Fargo and U.S. Bank recently entered into card-issuing deals with American Express.
Pricing: As the CARD Act places many restrictions on issuers’ ability to change APRs, we expect that there will not be huge price competition in APRs, but rather the focus will be on lengthy zero-rate introductory offers, in particular on balance transfers.
Loyalty: Issuers will continue to enhance rewards programs (and accompanying offers) to drive activation, retention and ongoing spending. To maintain control over costs, issuers are looking to develop more merchant-funded programs, and this trend may gain traction as issuers develop mobile wallets that will enable consumers to manage loyalty programs on their smartphones as well as receive specific merchant offers at the point of sale.
Channel: There has been much coverage of the fact that branches are rapidly losing share for everyday banking transactions. Many banks are looking to redefine the role of the branch, in particular to leverage its potential as a key sales channel. Wells Fargo recently reported that 80% of new card accounts are opened in its branches. The online channel has also become a key credit card sales channel: Chase reported that 53% of new credit card accounts were acquired online in 3Q13.