Low FICO Score Categories Drive Loan Growth for Leading Credit Card Issuers

In a March 2017 blog post, EMI highlighted growth in credit card outstandings across the credit spectrum for leading credit card issuers.  Our recent analysis of 3Q17 10Q SEC filings for these companies shows that this trend is continuing.

The top three issuers—Bank of America, Chase, and Citigroup—reported growth across all FICO Score segments, with strongest growth coming in the lowest segment.  In the aftermath of the Financial Crisis, issuers pulled back on lending to low-prime and sub-prime consumers.  With the return to steady economic growth in recent years—and with issuers now believing that they have more robust underwriting and pricing systems—issuers are now refocusing on consumers in lower FICO Score categories.

Assets at both Capital One and Discover skew heavily towards credit card loans.  Discover generated 9% y/y rise in credit card outstandings, led by 16% rise in loans to consumers with a <600 FICO Score.  Capital One bucked the overall trend, with lower growth for its <660 FICO Score segment.  However, it should be taken into account that this segment accounts for 35% of its total credit card outstandings (vs. 15% at Chase, 16% at Citi, and 19% at Discover), so it has less scope for strong growth.

The leading regional bank card issuers—who focus on cross-selling credit cards to existing bank clients—reported a similar pattern.  SunTrust has continued its very strong growth trajectory, with overall growth of 16% led by the <620 category.  Regions followed a similar pattern, with 7% overall growth in outstandings driven by a 35% rise in the subprime (<620) segment. PNC had strong growth across the credit spectrum.  Fifth Third had strong growth in the <660 segment, but from a very low base.  The y/y decline in outstandings in its 720+ category resulted in Fifth Third overall credit card outstandings remaining unchanged.  Wells Fargo’s overall growth rate (+4% y/y) has slowed considerably in recent quarters.  It generated steady growth across most categories, with the exception of the 600-680 FICO range.

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.

Leading U.S. Credit Card Issuers Continue to Shy Away from Lower FICO Segments

The leading U.S. credit card issuers continue to benefit from historically low charge-off rates, but they have struggled to shift the needle in terms of revenue growth.  This is mainly due to anemic outstandings growth, as consumers remain reluctant to borrow, and issuers continue to have strict underwriting criteria.

There are now signs that issuers are looking to build their credit card loan portfolios.  Issuers like Discover, Wells Fargo and SunTrust reported strong y/y growth in end-of-period credit card loans.  And although outstandings for the three leading issuers—Chase, Bank of America and Citi—continued to decline, they have indicated that they expect their portfolios to grow in the coming quarters.

As issuers look to drive outstandings growth, they will need to change underwriting criteria that has resulted in the composition of portfolios switching significantly towards higher FICOs.  And our analysis of the most recent issuer data shows a continuation of this trend.

The following graphic presents changes in outstandings by FICO segment for leading issuers between end-3Q12 and end-3Q13, separated into three issuer categories: big three; fast-growth second-tied issuers; and regional bank card issuers.  We see that most issuers continue to focus growth efforts on the higher FICO segments.

As issuers look to catalyze credit card portfolio growth, they need to focus marketing investments on a broad range of consumer segments.  Issuers must continue to optimize relationships with affluent consumers, through cross-sell campaigns, loyalty programs, as well as targeted offers to drive acquisition, retention and ongoing usage.  They also need to re-engage with lower FICO segments, with new products and pricing, more flexible underwriting, information and advice to help cardholder manage debt, as well as programs to enable secured cardholders qualify over time to be upgraded to an unsecured credit card.  And for all consumer segments, issuers need to develop a balanced positioning of credit cards as effective tools for both making payments and accessing credit.