Category Archives: Payments

Credit card issuer quarterly scorecard: improved credit quality; volume growth; lending declines

In the latest quarterly financials, the leading U.S. credit card issuers displayed consistent trends in credit quality, purchase volumes and card loans.

  • Credit quality: issuers continued to report strong yearly and quarterly declines in charge-off rates.  The current rate of decline, as well as the high rates of decline in delinquency rates, indicate that charge-off rates will fall further in the next few quarters.

  • Purchase volume: All leading credit card issuers are growing purchase volumes year-on-year, with four issuers reporting double-digit volume growth. In addition, issuers like Chase and Capital One have accelerated volume growth in recent quarters.  In 1Q11, Citi reported a small y/y rise of 0.3%, which followed a protracted period of volume decline.  The 7 issuers listed in the chart had a combined $321 billion in purchase volume, up 9% y/y.

 

  • Average Outstandings: Although issuers have been effective in growing purchase volume, average outstandings for all leading issuers continued to decline year-on-year in 1Q11.  The 8 issuers combined for $515 billion in average outstandings in the quarter, down 18% from 1Q10.  The rate of decline slowed in 1Q11, with combined outstandings for the 8 issuers down 1.4% from 4Q10.  And Discover reported 1.7% quarterly growth in average outstandings.  Many issuers have reported that they expected outstandings to grow in the second half of 2010.

Internet is now Bank of America’s largest credit card account production channel

Bank of America’s Full Year 2010 Investor Factbook revealed some interesting trends in various channel’s share of credit card account production

  • eCommerce channel accounted for 36% of the bank’s credit card account production in 2010, up significantly from 15% in 2008
  • Bank branch network share fell from 25% to 21% (note that Bank of America was at the forefront in the mid 2000’s in driving credit card sales through branches)
  • Direct mail share rose from 20% to 21%, stemming steady declines in its share of account production in recent years

The findings underscore the growing importance of the Internet as a sales channel.  However, what the Bank of America data does not reflect is the fact that consumers now tend to use multiple channels before making an acquisition.  For example, a consumer could receive a credit card offer in the mail, but submit their application via the Internet.  Therefore, bank credit card issuers need to ensure that these key channels (Internet, branch and DM) are all in synch to optimize sales effectiveness.

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.