Tag Archives: American Express

Growth Remains Elusive For Leading U.S. Credit Card Issuers

EMI analysis of the largest credit card issuer financial results for 1Q13 reveals the following trends:

  • Outstandings (11 issuers reporting, analysis excludes Capital One, which acquired the HSBC card portfolio in 2012, so its growth rate would skew the data): A weighted average of 11 leading credit cards issuers shows that average credit card outstandings fell 2% year-over-year (y/y) in 1Q13. The three largest issuers – Chase, Bank of America and Citi – all reported y/y declines.  However, outstandings growth came from Wells Fargo (who reported that credit card penetration of retail banking households rose from 30% in 1Q12 to 34% in 1Q13), regional banks with relatively small portfolios (e.g., PNC, SunTrust and Fifth Third), as well as “monolines” (American Express and Discover). These outstandings trends bear out the industry predictions we made in a blog at the start of 2013.

  • Volumes (8 issuers reporting): leading issuers grew credit card volume 6% y/y in 1Q13, which is relatively consistent with recent quarters. However, growth rates have moderated from the 2010-2011 levels, when issuers were overwhelming focused on building volumes. Wells Fargo led the way with a 14% volume growth rate, driven by an 18% rise in new consumer credit card accounts.
  • Revenues and expenses (5 issuers reporting): Revenues rose 2% y/y, led by Discover (+11%) and American Express (+5%). The lack of outstandings growth means that net interest income remains relatively anemic, with a rise of 1% y/y.  Noninterest income grew 5%, with relatively healthy growth rates from American Express, Discover and Bank of America. Noninterest expenses fell 1%, with both Chase and Bank of America reporting significant declines (reductions of 8% and 7%, respectively). Provisions for loan losses rose 5%, albeit from very low levels in 1Q12.
  • Charge-off rates (11 issuers reporting): The weighted average charge-off rate for these 11 issuers was 3.62%, down 65 basis points (bps) y/y, but up 5 bps q/q. 10 issuers reported charge-off rate y/y declines.  The exception was Capital One, which acquired the HSBC credit card portfolio (with a higher charge-off rate) in 2012.  Compared to 4Q12, 10 issuers reported charge-off rate increases and the other two were unchanged, indicating that the era of charge-off rate declines may be coming to an end.
  • 30+ day delinquency rates (8 issuers reporting): 7 of the 8 issuers providing 30+ day delinquency rate data reported y/y declines. As with the charge-off rate, the exception is Capital One. Interestingly, 7 of the 8 issuers reported q/q declines.  The exception was American Express, whose 30+ day delinquency rate was unchanged.  So, while the period of charge-off rate declines may be ending, the continued decline in delinquency rates will moderate charge-off rate increases.

Leading U.S. banks cut marketing spend in 1Q13

A study of the financial reports for 13 leading U.S. financial institutions reveals that 10 of these FIs reported y/y decreases in their advertising/marketing spending in the first quarter of 2013, with 7 of these banks reporting double-digit percentage decreases.

Much of this is driven by bank-wide cost-cutting initiatives, with marketing typically one of the expense line items that is most susceptible to cuts.  However, it is important not to take one quarter’s worth of data as a trend.  This is particularly true for bank marketing spending, which fell significantly following the financial crisis in 2008, but recovered somewhat from 2010. A recent EMI blog showed that 7 of 11 leading U.S. banks increased their marketing spend between 2007 and 2012. For example, PNC reported a strong decline in marketing spending between 1Q12 and 1Q13, but this followed a very strong rise in spending from 2007 to 2012.

Another way to study bank marketing spend is to look at marketing spend intensity, which we define as marketing spend as a percentage of revenues.

The chart above reveals that in terms of marketing spend intensity, there are three distinct segments:

  • Current (Discover and American Express) and former (Capital One) credit card monolines. In particular, Discover and American Express have limited banking operations, so remain quite dependent on their credit card business, which tends to have higher marketing spending than other financial services. In addition, Discover and American Express lack branch networks, so they need to have higher levels of advertising spend to maintain strong brand awareness.
  • National banks (Citibank, Chase, and Bank of America), which typically devote 2-3% of revenues on marketing. These banks tend to have higher advertising to support their brands nationwide. In addition, these banks have large credit card operations. An exception is Wells Fargo, which spends only 0.5% of revenues on marketing. Wells Fargo has a national branch presence, but has a limited credit card business (unlike the other banks, it only markets credit cards to existing bank customers).
  • Regional banks, who spend 1-2% of revenues on marketing.

Finally, it is difficult to prove a correlation between marketing spending and bank growth, as many factors influence customer acquisition and revenue growth.  It is worth noting that banks continue to struggle to generaterevenue growth (7% of the 13 banks reported revenue declines between 1Q12 and 1Q13).  However, the three banks with the highest marketing intensity (Discover, American Express and Capital One) were among the 6 banks that did generate y/y revenue growth.

Slowdown in U.S. Payment Volume Growth for Leading Card Networks

With Visa and MasterCard reporting their quarterly financials this week, we now have a picture of U.S. payment volume for the four main card networks (Visa, MasterCard, American Express and Discover) in 2012.  These four networks grew volume 5.3% in 2012.  This represented a significant decline from the 10.3% growth rate between 2010 and 2011.

  • Visa reported the largest decline in its volume growth rate, from 9% in 2011 to just 2% in 2012.  While U.S. credit card volume growth remained stable at 10% in both 2011 and 2012, debit card volume fell from a growth rate of 9% in 2011 to a volume decline of 2% in 2012.  This was largely due to new regulations that impacted Visa’s exclusive debit card network relationships with banks.  Visa did report significant improvements in y/y growth rates for both credit and debit volume between 3Q12 and 4Q12.
  • MasterCard credit and charge volume growth fell from 6% in 2011 to 3% in 2012 (although the y/y growth rate improved from 1% in 3Q12 to 3% in 4Q12).  Debit volume rose from 12% in 2011 to 15% in 2012.
  • American Express reported its U.S. consumer payment volume fell from 11% in 2011 to 8% in 2012.  During this period, small business volume slipped from 14% to 12%, while corporate services volume declined from 14% to 11%.
  • Discover reported declines in growth rates for its two main payment volume categories: proprietary Discover Network (from 8% to 5%); and PULSE Network (from 19% to 14%).

According to the U.S. Bureau of Economic Analysis, personal consumption expenditure rose 3.6% between 2011 and 2012, down from 5.0% between 2010 and 2011.  This means that even though card networks’ volume growth slowed between 2011 and 2012, it was still stronger than consumer spending, and so the networks’ share of consumer spending continued to rise.  We expect that volumes will continue to rise at moderate levels in 2013, as the leading U.S. issuers seek to balance volume and lending growth.