Author Archives: mronan

Discover 1Q11 financials illustrate continued recovery for card issuers

Discover Financial typically reports quarterly financials one month before other leading U.S. credit card issuers. As such, its results are seen as provider leading indicators of the overall health of the credit card industry.

Discover reported 1Q11 financials on March 22. The following highlights from its results show that leading credit card issuers continue to recover following the crisis that impacted the industry in the second half of 2008. Note the following trends for some key credit quality metrics:

  • The net principal charge-off rate fell 304 bps y/y and 99 bps q/q to 5.96% (crucially, the charge-off rate is below 6% for the first time since the fourth quarter of 2008)
  • The 30+ day delinquency rate fell 180 bps y/y and 47 bps q/q to 3.59% (this is the lowest rate since the fourth quarter of 2007)

With credit quality now returning to more normalized levels, is Discover shifting its focus towards growth?  The 1Q11 results provide some contradictory evidence:

  • End-of-period credit card loans were down 3% year-over-year (y/y), with Discover attributing the decline to a higher payment rate on the part of cardholders.  However, the rate of credit card loan decline is slowing (y/y decline of 6% in 3Q10 and 5% in 4Q10).  And Discover’s CEO said that he expects credit card loans to growth in the second half of 2011
  • Discover card sales volume rose 7% y/y to $24.0 billion
  • Marketing and business development spending rose 60% year-over-year to $136 million in 1Q11 (due to seasonality in marketing spend patterns, quarterly trends are typically not very useful

So, there is evidence that Discover is investing for growth, but that it will continue to be conservative with regard to lending, and will aim to have a balance of spending and lending growth.

Banks focusing attention on the mass affluent market

Recent news and presentations from leading banks show a widespread desire to grow the mass affluent segments. Some examples:

  • At its recent Investor Day, Bank of America highlighted mass affluent as a key customer segment as it aims to achieve its objective of leveraging the franchise–driving closer relationships between different business units in order to grow share of customer wallet.  Earlier this year, the bank launched Merrill Edge, a new integrated banking and investment platform, for mass affluent clients.
  • Citi reorganized its U.S. credit card and retail banking units, with each unit creating segments dedicated to affluent customers.  It also recently launched a range of premium cards (ThankYou Preferred, ThankYou Premium and ThankYou Prestige) for affluent cardholders.
  • At a recent Citigroup Financial Services Conference, SunTrust highlighted mass affluent as a targeted growth area.
  • This month, Capital One introduced the “Match My Miles Challenge” promotion to attract new customers to its high-end Venture Card.
  • Chase radically simplified its credit card product portfolio, with cards now dedicated to specific customer segments, including the Freedom card, which is targeted at the mass affluent segment.

To reach and serve this segment, banks first need to conduct comprehensive research into the characteristics, financial needs and behaviors of mass affluents, as well as into the competitive environment.  Insights from this research feed into: new products and services; advertising and branch merchandising; pricing decisions; level of online and offline service provision; as well as training and ongoing support for branch and call center personnel.  It is also imperative that the bank’s organizational structure, processes and systems to support, rather than inhibit, targeting efforts.

Huntington on track to meet small business lending commitment

At the start of 2010, Huntington Bank committed to lend $4 billion over three years to small businesses in its footprint, joining leading banks like Chase, Bank of America and Wells Fargo in making specific small business lending commitments.

Huntington reported yesterday in a press release that it lent $1.1 billion to small businesses in 2010, with an acceleration in this lending in the second half of the year, which the bank attributed to an improving economy as well as the completion of its hiring of 150 additional business bankers.  Huntington claims to be on track to meet its three-year goal.

This press release follows news in recent weeks that Chase and Bank of America both met their 2010 small business lending commitments.  Wells Fargo fell short of its target, although it still grew small business lending by 15% in 2010, and reported strong growth in loan demand from small businesses in the second half of the year.

It should be noted that small business loan balances for many large banks continue to decline year-over-year, as charge-offs and paydowns outstrip origination.  However, we may be on the cusp of an inflection point , with declining charge-offs and increasing originations leading to overall growth in small business loan portfolios in the coming quarters.

The sales and marketing challenges for banks aiming to capture a share of the small business market include:

  • Positioning themselves as a financial partner to small businesses, providing both financial products and advice
  • Revisiting the small business product portfolio to ensure that it addresses the changing financial needs of small businesses
  • Developing offers and bundles to reflect banks’ renewed focus on relationship optimization
  • Ensuring that all service channels (branch, call center, Internet, mobile, social media, etc.) deliver a consistent customer experience
  • Recruiting, training and developing support tools for dedicated business bankers
  • Implementing programs and process for other branch personnel to sell to small businesses and/or refer them to business bankers