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 issuers—Chase, 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.
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.
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.
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%).
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.
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.
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.