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.

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.

Credit Card Issuers Increase Focus on the Subprime Market

The American Banker Association’s September 2015 Credit Card Market Monitor found a 28% y/y rise in new subprime accounts, indicating that issuers are expanding their focus as they seek to grow revenues. An analysis by EMI Strategic Marketing of the FICO composition of credit card outstandings at the end of 2Q15 finds that many leading card issuers are accelerating growth in sub-prime and low-prime outstandings.

  • In recent years, Wells Fargo has reported strong y/y growth in all FICO categories.
    • In its <600 FICO category, growth has accelerated to double-digit rates in the past three quarters.
    • Its 600-639 FICO category has grown by double-digit rates in six of the past seven quarters.

wells_fargo_subprime_outstandings

  • Among national credit card issuers, Bank of America’s subprime outstandings declined 9% y/y in 2Q15, but the rate of subprime loan decline has been steadily slowing in recent quarters.  However, Citi’s subprime outstandings growth performance is less consistent, with y/y growth from 4Q13 to 2Q14 followed by declines for the past four quarters.

BofA_subprime_outstandings

  • There are also mixed trends when analyzing subprime outstandings performance of regional bank card issuersPNC reported a 6% y/y decline in <620 FICO outstandings in 2Q15, compared to a rise of 1% in 1Q15.  Regions reported strong growth in <620 FICO in recent quarters (double-digit y/y rises between 2Q14 and 1Q15), but this fell to just 2% in 2Q15.  However, it should be noted that Regions’ total subprime outstandings were just $49 million, so variations in growth rates are not unexpected.  SunTrust reported double-digit y/y increases in subprime outstandings for three of the past four quarters.

regional_bank_card_subprime_outstandings

EMI’s analysis also shows that subprime outstandings growth continues to trail prime and superprime outstandings growth for several reasons:

  • The large national issuers continue to deal with legacy issues following the financial crisis.
  • For issuers in general, underwriting standards continue to favor superprime consumers.
  • And even though many issuers are ramping up subprime account production, it will take some time before it translates into strong growth in subprime outstandings.

BofA_citi_credit_score_2Q15

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Meanwhile, an analysis of FDIC data for the 2Q15 shows strong outstandings growth for subprime credit card specialists, including Comenity (+23% y/y) and Merrick Bank (+16%). As the card industry in general increase its focus on the subprime market, it will be interesting to see if the acceleration in subprime outstandings growth among some regional bank card issuers is replicated by the large national issuers.  In addition, growth in subprime credit card outstandings should result in delinquency and charge-off rates rising from their current historically low levels.