Credit Card Issuers Looking to Grow Loans Across the Credit Spectrum

March 6, 2017

An analysis of 10-K SEC filings by EMI Strategic Marketing has found that leading credit card issuers are looking to grow outstandings across a wider range of FICO Score segments.

In the aftermath of the Financial Crisis and Great Recession, issuers narrowed their focus, moving away from lower FICO Score segment, and concentrating their efforts on prime and superprime consumers. In recent years, issuers have reduced charge-off rates to very low levels. With the steady growth in the economy and rising consumer confidence, issuers see an opportunity to grow their credit card outstandings and many are willing to take on more risk in order to achieve the desired growth.

The four largest credit card issuers—Chase, Bank of America, Citibank and Capital One—all reported growth in each of their FICO Score categories in 2016. Three of these issuers (the exception was Citi) had strongest growth in their lowest credit score segment. Citibank had double-digit growth in large part due to the acquisition of the Costco portfolio from American Express, and this acquisition influenced the relative growth rate of different credit score segments. Note that 36% of Capital One’s outstandings are held by consumers with credit scores below 660, compared to only 14% of Chase’s and 15% of Citibank’s (Citi-Branded Cards unit) outstandings.

Leading monoline credit card issuer Discover followed a similar pattern, with stronger growth for the <660 FICO Score segment, which accounted for 18% of total outstandings at the end of 2016.

Among the regional bank card issuers, Wells Fargo reported very strong growth (+19%) in the <600 segment, and consistent growth across most other segments. However, it had a 7% decline in the 800+ segment, as it does not appear to have an affluent credit card that can compete effectively with American Express, Chase (which launched Sapphire Reserve in 2016) and Citibank.

Other regional bank card issuers are also looking to drive growth across the credit spectrum. SunTrust, KeyBank and Regions have some of the strongest credit card loan growth rates in the industry, with very strong growth at the lower end of the spectrum. In contrast, PNC had strongest growth in the 650+ FICO Score segments.

The following are some key considerations for issuers looking to grow outstandings across the credit spectrum:

Compare the FICO composition of the issuer’s credit card portfolio to its peers. Assess the organization’s appetite to expand into new credit score segments.
Understand the financial needs, characteristics and behaviors of different credit score segments
Have products, offers and pricing in place for a range of consumer segments.
Invest in new marketing channels (and develop messaging) to reach different segments
Partner with other bank units that have strong connections with particular segments (e.g., wealth management and consumer financing units) in order to drive cross-sell to underserved segments
Ensure that company underwriting reflecting company objectives (while maintaining underwriting discipline).

Banks ramp up advertising and marketing spend in 2016

March 1, 2017

According to EMI Strategic Marketing’s analysis of data from the Federal Financial Institutions Examination Council (FFIEC), U.S. banks spent $17.1 billion on advertising and marketing in 2016. This expenditure represented 2.4% of bank revenues. Five banks (JPMorgan Chase, American Express, Citigroup, Capital One and Bank of America) each spent more than $1 billion, and together accounted for more than half of the industry’s total expenditure. The following chart looks at 2016 marketing-to-revenue ratios for 20 leading U.S. banks (note that for JPMorgan Chase and Capital One, marketing spend data is provided for both their retail bank charters and card-issuing units).

Most banks grew their marketing spending in 2016, as they looked to drive revenue growth in an improving economy. 10 banks reported double-digit percentage rises in their advertising and marketing budgets. In some cases (e.g., KeyBank and Huntington), the strong increases were in part the result of significant bank acquisitions.

13 banks grew their marketing-to-revenue ratios in 2016.

Half of the banks in the chart (mostly branch-based banks) have marketing-to-revenue ratios of between 1.5% and 3%.
Several banks have been ramping up their marketing spend in recent years. Between 2014 and 2016, Santander Bank’s spend nearly doubled between 2014 and 2016, and its 2016 marketing-to-revenue ratio of 4.0% was the highest among branch-based banks.
At the other end of the scale, both Wells Fargo and BB&T have ratios consistently below 1%.

Credit card-focused banks/bank charters have the highest marketing-to-revenue ratios.

Chase Bank USA (JPMorgan Chase’s card-issuing bank) had a ratio of almost 20% in 2016. The sharp rise in the ratio from 2014 and 2015 was due to both a 6% rise in advertising and marketing spend (to support the launches of Freedom Unlimited and Sapphire Reserve), as well as a sharp decline in noninterest income.
American Express increased in its advertising and marketing spend by 15% in 2016, and its ratio rose to nearly 12%.

As banks look to scale back their branch networks both to save costs and adapt to changing bank channel usage (in particular for everyday banking transactions), they are also cognizant of the potential loss of the branch’s role as a branding beacon in local markets. Therefore, it’s likely that a portion of the cost savings from branch network reductions will be diverted to advertising and marketing budgets. As a result, we may expect banks’ marketing-to-revenue ratios to gradually increase in the coming years.

Key Takeaways from Leading U.S. Credit Card Issuer Quarterly Financials

November 4, 2016

EMI’s review of 3Q 2016 financials for the largest U.S. bank and credit card issuers revealed several trends:

Acceleration in outstandings growth. Average outstandings rose 6% y/y in 3Q16 for the 13 issuers in the study; this growth rate marks an increase from previous quarters (3% in 2Q16 and 2% in 1Q16).

American Express reported a 14% y/y decline, due to the loss of the Costco and JetBlue portfolios; excluding these portfolios, it grew loans by 11%.
Bank of America reported no change in average outstandings, ending a protracted period of loan declines due in large part to divestitures.
Regional bank card issuers continue to focus their attention on cross-selling credit cards to existing clients. Regions grew outstandings by 11% and reported that its credit card penetration rate rose 130 basis points (bps) y/y to 18.2%.

Continued volume growth. EMI analyzed volume data for 8 leading issuers, and found cumulative y/y growth of 9% in 3Q16.

American Express’s sale of the Costco card portfolio to Citi led to a 15% decline in its card volume, while Citi’s volume rose by 57%.
Issuers are launching new rewards cards and enhancing existing rewards programs to drive additional volume. Discover reported that its rewards costs rose 13% y/y to $368 million in 3Q16, and its rewards rate rose by 13 basis points to 1.20%. However, Discover has been struggling to grow volumes in recent quarter, with y/y growth of just 2% in 3Q16, down from 4% in 1Q16 and 3% in 2Q16.

Ramp up of card account production. Related to—and encouraged by—the growth in outstandings, issuers are ramping up new card acquisition.

Bank of America issued 1.32 million new U.S. consumer credit cards in 3Q16, the strongest quarterly performance since 2008.
Chase benefited from the launch new cards (Sapphire Reserve and Freedom Preferred) to grow new card production 35% y/y to 2.7 million. Chase reported at the BancAnalysts Association of Boston Conference this week that it opened more than 1 million new Freedom Unlimited accounts in the five months following its launch.
Issuers are investing more in marketing in order to drive growth. American Express grew its marketing and promotion spend 10% y/y for the first 9 months of the year, to $2.4 billion.

Charge-off rates remain very low. For many issuers, net charge-off rates continue to operate at or near historic lows, with seven issuers reporting rates below 3%.

There is some evidence of upward movement in charge-off rates as issuers chase growth. 8 of the 12 issuers in the chart below reported y/y rises. And most issuers are reporting y/y rises in 30+ day delinquency rate (which have traditionally been an indicator of future charge-offs).
However, issuers expect that rates will not rise significantly in the coming quarters. For example, Chase reported a charge-off rate of 2.51% in 3Q16, and projects that this rate will rise to about 2.75% in 2017.
Capital One did report a 66 bps y/y rise in its charge-off rate; this is related to the fact that it is continuing to target low-FICO segments; the <660 FICO score segment accounted for 36% of Capital One’s outstandings at the end of 3Q16, up from 34% at the end of 3Q15.