5 takeaways from leading credit card issuer 1Q15 financials

April 28, 2015

An analysis by EMI of the latest quarterly financials from the leading U.S. credit card issuers revealed the following trends:

Growth in average outstandings. Of the 13 leading issuers studied, 11 reported y/y increases in average outstandings.
- The two exceptions were Bank of America and Citi, two of the top four issuers and this continues a longstanding pattern
- Capital One—another top four issuer— reported a strong growth rate of 7%, driven by origination programs and line increases. However, it should be noted that Capital One retains some of the credit card monoline heritage, with card loans accounting for 40% of its total loan book.
- Strongest growth was reported by SunTrust, although it should be noted that this comes from a low base, with average card loans accounting for just 0.7% of SunTrust’s total loans, a percentage that is significantly lower than its regional bank peers. It is also worth noting that SunTrust’s credit card yield was below 10% in 1Q15, lower than regional bank peers like Fifth Third (10.22%) and Regions (11.73%), as well as larger issuers like U.S. Bank (10.81%) and Wells Fargo (11.78%).
- Wells Fargo also reported very strong y/y loan growth of 16%, although this included the acquisition of the Dillard’s private-label portfolio. Its credit card penetration of retail bank households rose nearly four percentage points y/y to 41.8%, although the rise in penetration slowed sharply in the most recent quarter, increasing just 28 percentage points.

Outstandings starting to come into line with volume. Since the 2008 financial crisis, the card industry has focused more on increasing cardholder purchase volume rather than outstandings. As you see in the following chart, volume growth continues to outstrip outstandings growth.
- Of the 7 issuers below reporting y/y changes in both volume and outstandings, only American Express and Discover reported higher growth rates for outstandings than volume.
- Ideally, issuers would like outstandings and volume to grow at similar rates; American Express and Wells Fargo were most effective at achieving this in the most recent quarter.
- Some issuers reported that lower gas prices had a depressing effect on volume growth.

Charge-offs remain at historic lows. 12 of 13 issuers reported credit card net charge-off rates below 4% in 1Q15, with 5 issuers below 3%. In addition, 10 of the 13 issuers reported y/y declines in charge-off rates. Although most issuers reported growth in charge-off rates between 4Q14 and 1Q15, this is a normal seasonal pattern, and there is little sign of significant upward movement in charge-off rates. Some issuers are revising downward their future charge-off rate expectations: Capital One reported that its rate may fall to the low 3% range in 3Q15 (although it does expect rates to rise in 4Q15 and 2016). And Chase expects that its full-year 2015 net charge-off rate will be less than 2.5%.

Delinquency rates continue to fall. Of the 8 issuers who reported 30+ day delinquency rates, all reported y/y declines. This indicates that there is little upward pressure on charge-off rates, as delinquencies tend to be leading indicators of future charge-offs.
Signs of revenue growth. in recent years, issuers have reported low/no revenue growth and have instead generated profits from low provisions for loan losses. As issuers have now begun to target outstandings growth, revenues have started to increase. Of the 6 leading issuers providing credit card revenue data in 1Q15, 5 reported y/y growth. In addition, 4 of these 5 issuers reported growth in both net interest and noninterest income.

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10 Credit Card Trends to Watch in 2015

January 9, 2015

As the credit card industry moves into 2015, economic growth and improved consumer confidence are fueling credit card industry optimism. Here are ten trends that we believe will significantly shape the industry in the coming year.

Outstandings growth will gain momentum. As EMI reported in a recent blog, end-of-period outstandings at the end of 3Q14 were up 0.9% y/y. Up to now, the strong growth by “monolines” and regional bank card issuers has been offset by the low growth or even declines among the top four issuers: Chase, Bank of America, Capital One and Citi. However, even among this top-four segment, there are now signs of growth; Capital One grew average outstandings 2.6% y/y in 3Q14, while Chase reported growth of 1.8%.
Focus on volume growth will continue. Even as issuers shift their focus somewhat to outstandings growth, recent results from the main card networks—Visa, MasterCard, American Express and Discover—show that card volume growth remains robust. This should continue in next few years; according to a recent issue of The Nilson Report, credit card’s share of consumer payment volume is expected to grow from 28% in 2013 to 36% in 2018.
Card rates will rise. Given issuers’ overwhelming dependence on variable-rate pricing, APRs should rise in 2015 in line with changes to the federal funds rate. Other factors that may create upward pressure on APRs include the targeting of lower-FICO segments as well as ongoing enriching of rewards programs. Issuers will continue to promote wide APR ranges rather than a single rate; this gives maximum flexibility is assigning the optimal price to match the perceived risk of default. Given issuer focus on growing outstandings, expect to see growth in 0% introductory rates on both purchases and balance transfers.
Charge-off rates may rise modestly…from historic lows. Leading credit card issuers have expressed surprise at the scale and duration of the decline in charge-off rates in recent years. The expectation is that, as issuers relax underwriting standards and grow credit lines, charge-off rates will rise towards more normal levels. However, it is worth noting that 30+ day delinquency rates also remain very low, so it is also likely that charge-off rates will continue to bounce along the bottom for the first half of 2015. Some leading issuers reported strong y/y growth in provision for loan losses in 3Q14 (e.g., American Express +16%, Capital One +17% and Discover +17%), but this appears to be mostly driven by anticipated growth in outstandings rather than an expectation that charge-off rates will rise significantly.
Rewards will remain a key competitive battleground. In 2014, Issuers once again upped the competitive ante among rewards cards, with a spate of new launches (e.g., Citi Double Cash, American Express EveryDay, Wells Fargo Propel). And issuers’ twin objectives of growing card volume and reducing churn mean that rewards programs should continue to be a key focus for issuers in 2015. Issuers will need to look beyond the earn rate in order to build or maintain a competitive advantage in this area; Discover recently eased restrictions on CashBack redemptions, informed by research that found that consumers value redemption experience and flexibility as much as a higher earn rate.
New payment form factors will gain traction. Two new payment methods will be followed with great interest in 2015: EMV cards and Apple Pay. In advance of the October 2015 shift in liability for fraudulent transactions, issuers are rolling out EMV cards (70% of U.S. credit cards are expected to have chips by the end of the year) and merchants are upgrading terminals to handle EMV transactions (47% of terminals expected to be EMV-enabled by the end of 2015). In addition, most issuers have entered into partnerships with Apple to offer ApplePay to their customers. As with EMV, consumer and merchant acceptance will be key to Apple Pay’s growth prospects. Issuers willingness to embrace these new forms of payment is encapsulated in a recent statement by American Express CEO Ken Chenault at a recent financial services conference: “..credit cards could be displaced…I really don’t care from a form factor standpoint because we’re agnostic. So plastic could go away. I could care less, could go away tomorrow.”
Issuers will ramp up online and mobile marketing and sales. As online (and mobile) banking has now achieved critical mass, issuers are increasingly incorporating cross-sell offers into consumers’ online banking sessions to benefit from fact that online average acquisition costs are significantly lower than traditional channels, such as direct mail. Some leading issuers (e.g., Chase, American Express and Capital One) have also made significant investments in digital marketing, driven by both the lower acquisition costs as well as the ability to measure ROI. The shift to online channels for new account production is being led by Chase, which reported that 54% of new card accounts were generated online in the first 9 months of 2014.
Bank card issuers will increase focus on selling cards through their branch channel. Regional banks are focused on increasing credit card penetration of existing clients. They are also looking for products to focus on to realize branches’ potential as sales channels. For inspiration they look to Wells Fargo, which has reported steady growth in credit card penetration of retail banking households (40% in 3Q14 vs. 27% in 1Q11). The bank also reported that its branches accounted for 83% of card production in 2013.
Issuers will continue to push bonus offers. A number of factors that we have already discussed should ensure that bonus offers will remain high in 2015:
1. The continued importance of rewards programs, with bonus offers playing a key role in driving new customer acquisition and activation
2. Issuers are very unlikely to lower APRs in 2015, so bonus offers will be the main way to attract new cardholder awareness and interest
3. The decline in average acquisition costs from using online and branch channels means that issuers can afford to offer strong bonus offers while maintaining profitability.
Near-prime and sub-prime market will grow. In 2014, Wells Fargo and U.S. Bank both introduced American Express-branded cards with strong rewards and high annual fees, targeting superprime FICO segments. However, there is a growing sense that this market is now saturated. As issuers look for growth, they will be tempted to relax underwriting standards to reach prime and near-prime FICOs. Issuers are less likely to target the sub-prime card market; this market is more likely to be targeted by newly-launched specialist sub-prime issuers, such as Fenway Summer’s FS Card Inc.

Leading credit card issuer 3Q14 performance: key takeaways

December 4, 2014

EMI analysis of the leading U.S. credit card issuers’ latest quarterly financials—as well as FDIC call reports—revealed the following trends in outstandings, volume and charge-off rates. According to the latest call report data from the FDIC, end-of-period outstandings rose 0.9% between 3Q13 and 3Q14. Three of the four issuer segments grew card loans, with the Big Four issuers continuing to act as a brake on stronger overall growth.

End-of-period card loans for the Big Four issuers (Chase, Bank of America, Citi and Capital One, which account for 66% market share) fell 1%. Chase and Capital One reported loan growth (+3% and +4% respectively), while Citi (-6%) and Bank of America (-1%) continued to decline.
The four main card “monolines” had the strongest loan growth, led by Barclaycard (+32%) and Synchrony (+24%). American Express and Discover each reported 7% growth.
The super-regionals maintained their strong loan growth rate, with Wells Fargo rising 11% (maintaining its strong recent momentum) and U.S. Bank up 5%.
Other regional bank card issuers* had steady card growth. Within this segment, SunTrust was the standout performer, up 22% y/y. Other regionals banks with relatively strong credit card loan growth included PNC (up 5% to $3.9 billion), Fifth Third (rise of 7% to $2.1 billion) and Regions (+8%, to $0.9 billion).

Bank cards issuers are ramping up efforts to cross-sell credit cards to existing banking customers.

Wells Fargo is leading this push, with its credit card penetration of retail banking households reaching 40% in 3Q14 (up from 28% in 3Q11). To target its affluent clients, Wells Fargo recently launched American Express-branded credit cards.
Regional banks are seeking to replicate the approach of the super-regionals; Regions reported that credit card penetration was 15% in 3Q14, up two percentage points y/y.
Even the top issuers are looking to tap into cross-sell opportunities: Bank of America reported that 64% of new cards issued in 3Q14 were to existing bank clients.

In recent years, issuers have focused much more on growing volumes rather than loans. Even as issuers are now refocusing on growing outstandings, they continue to seek to grow card volume, through tiered rewards programs and acquisition/activation offers. Issuers leading the way include Capital One (17% y/y rise in general-purpose card volume), Wells Fargo (+16%), Chase (+12%) and American Express (+9%). Credit card charge-offs rates continue to decline, with the scale and duration of the decline surprising the issuers themselves. Of the 13 issuers in the table below, seven had 3Q14 charge-off rates below 3%, and eight of the issuers reported y/y declines.

Issuers continue to focus outstandings growth on higher-FICO segments, with some exceptions.

Big Four Issuers: For Bank of America, outstandings for the 740+ FICO segment rose 5%, but outstandings fell 6% for the <740 segment. However, Chase bucked the general trend with stronger growth for the <660 FICO segment.

Monolines and super regionals: both Discover and Wells Fargo reported strong outstandings growth between end-3Q13 and end-3Q14, with stronger growth performance for higher FICOs.

Other regional bank card issuers: PNC and SunTrust following the general pattern, with stronger outstandings growth for higher FICOs. However, Regions’ <620 segment outstandings rose 22% (albeit from a low base).

* Other Regional issuer segment comprised of the following banks: TD Bank; PNC; Fifth Third; BB&T; Citizens Bank; Regions; SunTrust; Commerce Bank; KeyBank; and BBVA Compass.