Author Archives: mronan

Card Networks Report Robust Purchase Volume Growth

With MasterCard and Visa reporting quarterly financials in recent days, we now have a fuller picture of purchase volume trends for the main U.S. card networks.  Each reported relatively strong year-on-year growth in U.S. card spending, led by MasterCard (+13%) and American Express (+12%).

It is notable that Visa and MasterCard are following different paths in growing purchase volume.  Visa, which has been the dominant debit card issuer, is reporting continued slower growth in debit card purchase volume.  This is due to some debit card portfolios switching to MasterCard, as well as the impact of the Durbin Amendment, and has resulted in Visa’s credit card growth outstripping its debit card growth for the past three quarters.

In contrast, MasterCard has reported accelerating U.S. debit card purchase volume growth.  Credit card volume growth has also accelerated, but continues to trail debit card volume.

American Express has consistently recorded double-digit volume growth as it follows its spend-centric approach.  Discover also reported strong growth in 2011, but this has trailed off in recent quarters.

During this period of strong purchase volume growth for both credit cards and debit cards, credit card outstandings have continued to decline, emphasizing the transition in the credit card sector from a lend-centric to spend-centric orientation.  Many leading U.S. credit card issuers are expecting outstandings to grow slightly in the coming quarters, but it is probable that purchase volume growth will continue to outstrip loan growth for the foreseeable future.

Card volume growth should continue to be significantly higher than overall U.S. consumer spending growth, as consumers switch from cash and checks, with particular growth opportunities for cards in categories where they have traditionally had small shares of payment volumes.

In the longer term, card networks and issuers need to plan for new opportunities and challenges created by a changed payments landscape, characterized by demographic shifts, new payments technologies and changing shopping behavior.

Stellar Commercial Lending Growth for U.S. Banks

An analysis of leading U.S. banks’ first quarter 2012 financial results reveals strong growth across the board in average commercial loan balances. This growth is largely due to the economic recovery following the Great Recession. Of the 14 banks studied, 11 recorded double-digit year-on-year increases in their portfolios.

This growth momentum has been maintained in recent quarters, with all banks reporting growth in average commercial loans between 4Q11 and 1Q12, and five having quarterly growth rates of more than 5%. As with the y/y growth, quarterly growth rates were strongest for PNC (+11%, boosted by the acquisition of RBC Bank) and Key (+7%).

Bank are further boosted by the fact that most reported commercial loan charge-off rates declines over the past year. However, increased competition for commercial loans has led to most banks reporting declines in loan yields over the past year.  PNC’s yield on its commercial, financial industrial loans fell 53 basis points (bps) between 1Q11 and 1Q12.  Other banks with substantial declines in commercial loan yields during this period include SunTrust (-47 bps), U.S. Bank (-42 bps), KeyBank (-55 bps) and BB&T (-31 bps).

Banks expect that commercial loans will continue to grow over the next few quarter (barring an unexpected economic crisis) and are pursuing a number of approaches to grow their commercial franchises.

  • Targeting high-potential segments: A number of banks are focusing on particular industry segments. PNC’s overall commercial growth was driven by strong performance in lending to health care and financial services firms. Comerica’s energy portfolio grew by 62%, and its tech and life sciences portfolio increased by 38%. Banks are also targeting different business-size segments, such as middle markets (Chase grew its middle market loan portfolio 19% y/y).
  • Building commercial deposits and cross-selling commercial clients:  Capital One grew commercial deposits 15% y/y. And when banks bring in these new commercial deposit relationships, they then need to develop effective cross-sell programs. Huntington reported a 33% annualized increase in commercial deposits in 1Q12. It also claimed that 33% of commercial clients had 4+ products in 1Q12, up from 25% in 1Q11.
  • Encouraging commercial clients to increase line utilization. Line utilization declined significantly following the financial crisis, as businesses retrenched. Many banks reported that utilization rates remained relatively low in the most recent quarter, but some banks are seeing some improvement. Regions reported a 45 basis point increase in utilization.

Credit Metrics for U.S. Card Issuers Continue to Improve

A study of recently-published financials for the leading U.S. credit card issuers reveals that their charge-off rates continue to decline, and that this trend looks set to continue in the coming quarters.

The following table summarizes 1Q12 managed credit card charge-off rates for 11 of the leading U.S. card issuers.  Ten of the eleven issuers reported year-on-year charge-off rate declines of more than 200 bps. The exception was American Express, which had the lowest rate.  The largest decline came from SunTrust, whose rate fell from 8.68% in 1Q11 to 4.83% in 1Q12. Seven of the eleven reported quarterly declines in their charge-off rates.

Of course, many industry observers are questioning when and at what level charge-off rate declines will bottom out.  Trends in 30+ day delinquency rates typically are a predictor of trends in charge-offs, and it is notable that of the seven issuers who published 30+ day delinquency rate data in the most recent quarter, all reported both year-on-year and quarterly declines.

Therefore, we should expect charge-off rates to continue to decline in the coming quarters. However, some issuers are now at or below historic averages (for example, Discover claimed that its charge-off and delinquency rates are at 25-year lows), so will have less scope for further declines.  In addition, these low charge-off rates may encourage some issuers to loosen underwriting criteria in order to grow loans, which can generate some upward pressure on charge-off rates.  Card portfolio acquisitions and disposals can also have an impact on charge-off rates; Capital One reported in its quarterly financials that it expects the acquisition of the HSBC card portfolio to raise charge-off rates by 75 bps.