Credit Card Issuers Looking to Grow Loans Across the Credit Spectrum

An analysis of 10-K SEC filings by EMI Strategic Marketing has found that leading credit card issuers are looking to grow outstandings across a wider range of FICO Score segments.

In the aftermath of the Financial Crisis and Great Recession, issuers narrowed their focus, moving away from lower FICO Score segment, and concentrating their efforts on prime and superprime consumers.  In recent years, issuers have reduced charge-off rates to very low levels.  With the steady growth in the economy and rising consumer confidence, issuers see an opportunity to grow their credit card outstandings and many are willing to take on more risk in order to achieve the desired growth.

The four largest credit card issuers—Chase, Bank of America, Citibank and Capital One—all reported growth in each of their FICO Score categories in 2016.  Three of these issuers (the exception was Citi) had strongest growth in their lowest credit score segment.  Citibank had double-digit growth in large part due to the acquisition of the Costco portfolio from American Express, and this acquisition influenced the relative growth rate of different credit score segments.  Note that 36% of Capital One’s outstandings are held by consumers with credit scores below 660, compared to only 14% of Chase’s and 15% of Citibank’s (Citi-Branded Cards unit) outstandings.

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Leading monoline credit card issuer Discover followed a similar pattern, with stronger growth for the <660 FICO Score segment, which accounted for 18% of total outstandings at the end of 2016.

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Among the regional bank card issuers, Wells Fargo reported very strong growth (+19%) in the <600 segment, and consistent growth across most other segments.  However, it had a 7% decline in the 800+ segment, as it does not appear to have an affluent credit card that can compete effectively with American Express, Chase (which launched Sapphire Reserve in 2016) and Citibank.

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Other regional bank card issuers are also looking to drive growth across the credit spectrum.  SunTrust, KeyBank and Regions have some of the strongest credit card loan growth rates in the industry, with very strong growth at the lower end of the spectrum.  In contrast, PNC had strongest growth in the 650+ FICO Score segments.

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The following are some key considerations for issuers looking to grow outstandings across the credit spectrum:

  • Compare the FICO composition of the issuer’s credit card portfolio to its peers.  Assess the organization’s appetite to expand into new credit score segments.
  • Understand the financial needs, characteristics and behaviors of different credit score segments
  • Have products, offers and pricing in place for a range of consumer segments.
  • Invest in new marketing channels (and develop messaging) to reach different segments
  • Partner with other bank units that have strong connections with particular segments (e.g., wealth management and consumer financing units) in order to drive cross-sell to underserved segments
  • Ensure that company underwriting reflecting company objectives (while maintaining underwriting discipline).

Key Takeaways from Leading U.S. Credit Card Issuer Quarterly Financials

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%.average_credit_card_outstandings_3Q15-3Q16

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.

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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.

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Credit Card Issuers Focusing Growth on Different FICO Score Segments

The Wall Street Journal recently reported that credit card outstandings may reach the $1 trillion threshold in 2016, for the first time since before the 2008 Financial Crisis.  This is mainly due to overall economic growth and the rise in employment.  Issuers are now increasing their focus on growing outstandings by making aggressive acquisition-and-activation offers (American Express is currently offering a bonus of up to $300 on its Blue Cash Everyday Card), promoting lengthy introductory offers, and increasing credit lines for existing cardholders.

A big question for issuers is, should they concentrate efforts on particular FICO score segments, or seek to drive growth across the FICO score spectrum?  In the aftermath of the Financial Crisis and the resulting huge spike in charge-off rates, many leading issuers narrowed their focus, concentrating on the high-FICO score affluent segments, and ignoring subprime and low-prime consumers.  However, as the economy has continued to recover, at appears that some issuers have renewed interest in the lower-FICO score categories.

EMI’s analysis of leading issuers’ 1Q16 SEC filings reveals that issuers are following different approaches:

1. Growing outstandings across all FICO score segments.  Regional bank card issuers like Wells Fargo and Regions have relatively strong growth across all FICO score segments.  It is notable that the <600 subprime segment accounts for 9% of Wells Fargo’s outstandings, a higher percentage than for other issuers.  Wells Fargo issues a subprime card and recently incorporated a free FICO score into its mobile banking app.

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2. Generating stronger outstandings growth in low-FICO score segments.  Capital One, Discover and SunTrust all have markedly strong growth rates in outstandings for low-FICO segments.  35% of Capital One’s outstandings come from the <660 FICO segment, whereas this segment accounts for only 18% of Discover’s outstandings.  Discover grew <660 outstandings by 12% (to $10.0 billion), and it is worth noting that Discover launched the Discover it Secured Card in January 2016.  SunTrust grew its <620 FICO portfolio by 39%, although this was coming from a low base of just $45 million.

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3. Continuing to focus outstandings growth on higher FICO score segments.  The three largest issuers—Chase, Citi and Bank of America—all continue to experience declines in outstandings in their lower FICO score segments, which is offset by growth in higher FICO score categories.  Regional bank card issuer PNC also follows this pattern.

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As issuers look to continue to grow outstandings (and appear to be willing to let charge-off rates rise from their current low levels), they will need to develop approaches to target the different FICO score segments, including:

  • Ensuring they have products in place to target different FICO score—and demographic—segments.
  • Developing messaging, pricing, acquisition/activation offers and ongoing incentives to both attract new cardholders and encourage existing cardholders to increase their spending and borrowing
  • Creating tools (such as free FICO scores) to educate consumers on understanding how their credit scores are determined and how they can practice good credit management