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 are Growing Outstandings…and Charge Offs

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

Leading Credit Card Issuers Focusing Growth on Multiple FICO® Score Segments

In a recent blog, EMI discussed some key takeaways from leading credit card issuers’ 3Q16 earnings, one of which was the relatively strong growth in credit card outstandings.  In this blog, we look deeper into outstandings trends to identify what FICO Score segments issuers are focusing on to grow outstandings.

Firstly, it is notable that leading issuers reported y/y growth in credit card outstandings across multiple FICO Score segments.  However, there were important variations among the issuer categories:

  • Largest issuers:  The following chart looks at y/y changes in outstandings by FICO Score for both Bank of America and Chase. (Citibank also published data on the FICO Score composition of its credit card outstandings, but these were skewed by the acquisition of the Costco portfolio from American Express, so we did not include Citibank in the analysis.)  Bank of America generated low growth across most segments, as it struggles to grow overall outstandings following a protracted period of declines.  Chase’s growth was concentrated in the 660+ FICO Score segment, boosted by the recent launches of both Sapphire Preferred and Freedom Unlimited.

credit_card_FICO_trends_3Q16_BankofAmerica_Chase

  • Monolines: Capital One and Discover both generated strong growth in the lower FICO Score (660 and under) segment.  This segment now accounts for 36% of Capital One’s total credit card outstandings, significantly higher than Discover (18%) and Chase (14%).

credit_card_FICO_trends_3Q16_CapitalOne_Discover

  • Wells Fargo: in spite of the fallout from the recent fake-account scandal, Wells Fargo continued to growth credit card outstandings in 3Q16.  It reported strong growth across most FICO Score segments, with particularly strong growth in the subprime segment.  However, it continues to struggle to grow superprime outstandings, as it lacks a card that can truly compete against high-profile affluent cards like American Express Gold and Platinum, and Chase Sapphire Preferred.

credit_card_FICO_trends_3Q16_Wells_Fargo

  • Regional Bank Card Issuers: SunTrust, Regions and PNC all reported strong overall growth.  SunTrust reported very strong growth across all segments.  Regions’ outstandings growth was concentrated in the low-prime and subprime segments.  However, PNC’s outstandings growth was concentrated in higher-FICO Score segments, driven by the April 2016 launch of the Premier Travelers Visa Signature® card.

credit_card_FICO_trends_3Q16_SunTrust_Regions_PNC

As issuers seek to continue to increase overall credit card loan growth, it is likely that they will continue to focus on multiple FICO Score segments.  They will also be looking to identify underperforming segments, diagnose reasons for this underperformance (e.g., deficiencies in cards, offers or communications targeting these segments), and develop initiatives to improve performance.  Similarly, issuers will want to identify if they are overly dependent on certain segments for outstandings growth or share, and whether this dependence leaves them vulnerable to changes in the macroeconomic or competitive environments.