Leading U.S. Banks Report Modest Increase in Marketing Budgets in 2017

Marketing spend by the top 40 banks reached nearly $14 billion in 2017, up 1.8% on average from the previous year–and once again, 5 banks spent over a billion dollars on marketing. EMI analysis of bank spending reveals:

  • 30 of the 40 largest banks grew marketing spend in 2017, with 17 reporting double-digit growth.
  • As in past years, banks with national credit card franchises lead all others, in both absolute terms and in their marketing intensity (marketing spend relative to revenues). In 2017, spending among these card leaders declined, as focus shifted from acquisition to portfolio marketing.
  • Two banks notable for substantial 2017 marketing increases are Goldman Sachs Bank focused on promotion of its online lending platform, Marcus by Goldman Sachs, and U.S. Bank capitalizing on brand-building around the Super Bowl, held last week at the Minneapolis stadium bearing the bank’s name.

EMI annual analysis of Federal Financial Institutions Examinations Council (FFIEC) call report data for 40 leading U.S. banks distills both absolute spending and marketing intensity ratios, as measured by spend percentage of net revenues (net interest income plus noninterest income).  Results are reported below.

Advertising and Marketing Spending Highlights

19 banks/bank charters had advertising and marketing budgets of more than $100 million.  5 had billion-dollar-plus budgets (JPMorgan Chase, American Express, Capital One, Citigroup and Bank of America).

Of the 17 banks reporting double-digit growth, the two with the largest absolute increases in their marketing budgets were:

  • U.S. Bank: +$107 million, with a focus on growing national profile behind the increased marketing spend, including heavy branding around the Super Bowl, which was held last Sunday at the U.S. Bank Stadium in Minneapolis.
  • Goldman Sachs Bank: +$80 million, driven by an advertising campaign to promote Marcus by Goldman Sachs, its online personal lending platform.
  • First Republic was also notable for its 46% increase–a strategy that seems to have paid off with 18%+ revenue growth reported by the San Francisco-based bank in 2017.

Other banks boosted marketing spend to support new campaigns in 2017.

  • Fifth Third (+10% to $115 million) launched a campaign in May 2017 that played on its “5/3” name, promoting “Banking that’s a Fifth Third Better”
  • BB&T (+10% to $89 million) introduced a new brand campaign and tagline (“All we see is you”) in September 2017.
  • SunTrust (+38% to $220 million) rolled out its ‘Confidence Starts Here’ ad campaign in March 2017, building on its onUp movement focused on building financial well-being.

Marketing spend declines were led by:

  • Capital One: decline of $139 million, with a strong drop in spending in its card unit partially offset by a $23 million rise in its retail banking unit.
  • American Express: down $111 million, although this follows a ramp up of marketing and promotion spending in recent years.  American Express is also increasing its focus on targeting existing clients, which typically involves lower marketing spend.

Marketing Intensity Highlights

Even though 30 banks increased their marketing budgets in 2017, only 14 increased their bank marketing ratios, meaning that growth in marketing spend did not match the rise in net revenues.  Banks with the strongest growth in their marketing ratios were Goldman Sachs Bank (+183 basis points), SunTrust (+61 bps) and U.S. Bank (+44 bps).

Most retail banks have marketing ratios of 1-3%. Those with the highest marketing ratios include Santander Bank (4.1%, due to continued growth in the bank’s U.S. marketing budgets in recent years) and BMO Harris (3.4%, following a 17% rise in marketing spend in 2017).  4 banks have marketing ratios of less than 1%.  Most notable in this category is Wells Fargo, which has traditionally–and infamously–focused on sales and required much lower advertising budgets than its peers.  Wells Fargo did launch a new integrated marketing campaign in April 2017, which it reported was focused on “rebuilding trust.”  This contributed to a 4% rise in its advertising and marketing budget in 2017, but its spend levels remain well below comparably-sized banks.

We expect that banks will maintain or even increase their marketing budgets in 2018 to build brand awareness and affinity, as well as to promote new products and services–in particular those focused on digital transformation.  However, many banks remain focused on improving efficiency ratios, and marketing budgets are often on the firing line when banks look cut costs.  However these cuts–when executed without a careful strategy for maximize marketing ROI–often sacrifice market share gain and longer-term growth.

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.

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