Positive 4Q15 Performance for Leading Credit Card Issuers

February 5, 2016

In recent weeks, the leading U.S. credit card issuers reported relatively robust 4Q15 financials. The following are some key trends that EMI identified in these results:

Most leading issuers increased net income in the recent quarter, as increases in revenues (both net interest income and noninterest income) more than offset rises in both noninterest expenses and provisions for loan losses.

Growth in average outstandings was led by regional bank card issuers, as well as Capital One and Wells Fargo.

SunTrust led all leading issuers with an increase of 20% to pass the $1 billion threshold, and it recently launched a new consumer card suite in order to continue this momentum.
Wells Fargo’s 11% growth represented a decline from a 14% y/y rise in 3Q15. Although it continued to grow its credit penetration rate (to 43.4% of retail bank households) the rate of increase has slowed over the past year.
The largest issuers (Chase, Bank of America, Citi) continue to report anemic loan growth or declines as they continue to deal with legacy issues.
American Express had the largest decline (-4% y/y), but this was due to the loss of the Costco portfolio.

In spite of their lack of outstandings growth, the leading issuers reported strong new account generation.

Citi is ramping up new account acquisition for its core products (which account for 80% of its U.S.-branded card portfolio), with active accounts growing 13% y/y.
Like Citi, American Express has ramped up new card acquisition, and its 2.1 million new accounts in the fourth quarter were well above its historic average.
Bank of America grew new accounts 6% y/y to 1.26 billion in 4Q15.

Issuers are focusing on new channels to drive new account acquisition, in order to reduce acquisition costs, as well as reflect changing consumer behavior.

72% of new Chase card accounts in the fourth quarter came through the online channel.
Synchrony reported a 73% y/y rise in applications through the mobile channel.

Although adversely impacted by sharply lower fuel prices, issuers continued to report steady growth in volume in 4Q15. It was notable that, for most issuers, the growth rate was virtually unchanged between 3Q15 and 4Q15. One of the factors driving continued volume growth is the rise in active accounts. Citi reported a 13% rise in active accounts for its core products, Synchrony grew active accounts 5%

Charge-off rates remain at historic lows, with continued y/y declines. However, most issuers reported rises in the charge-off rate from 3Q15. 30+ day delinquency rates also remain very low with little sign of upward movement. Therefore, we expect charge-off rates to remain at or near these very low levels in the coming quarters. Chase expects its charge-off rate to be around 2.5% in 2016, close to its current level of 2.42%. However, it is notable that all of the leading issuers increased their provision for loan losses, led by Capital One (+24% y/y) and American Express (+10%).

In the coming year, we expect that issuers will be looking to new card launches to fill gaps in their product portfolios and drive growth in underpenetrated and/or high-growth segments. The following recent card launches are indicative of this trend:

Wells Fargo Propel American Express Card
Barclaycard CashForward World MasterCard
TD Bank Cash Visa Signature Card
Discover it Secured Card
American Express SimplyCash Plus Business
U.S. Bank Business Edge Cash Rewards World Elite MasterCard

In addition, the top issuers will try to translate the recent rise in new account generation into steady loan growth. Issuers in general will be looking to drive both volume and loan growth through initiatives targeting various stages of the cardholder life cycle: acquisition and activation, retention and ongoing usage. At the same time, they will continue to hope that charge-off and delinquency rates remain close to historic lows.

Key takeaways from leading credit card issuer 3Q15 financials

October 30, 2015

The following is a list of several trends that EMI Strategic Marketing identified in leading credit card issuers’ 3Q15 financials:

Regional bank card issuers continue to lead in receivables growth. A key factor: regional banks, such as SunTrust and Wells Fargo, are focused on cross-selling credit cards to their bank customers.

Many national issuers not (yet) growing loans, but are ramping up new account generation. National credit card issuers like Citi and Bank of America reported y/y loan declines in 3Q15, due to continued run-off of legacy portfolios. However, both of these issuers are confident that their portfolios will grow in the near future. Citi reported that it is ramping up card acquisition for its core products, and this is starting to pay off with 6% y/y rise in active accounts. Credit card “monolines” are also investing in new account generation. Discover new account generation in 3Q15 was at its highest level since 3Q07. And American Express reported an 8% y/y rise in marketing and promotion spending, with a focus on attracting new card members. As a result of this investment, American Express generated 2.3 million new accounts in 3Q15, compared to a quarterly average of 1.6 million in 2014.
Card volume grew…but was impacted by low fuel prices. Leading issuers continued to report growth in purchase volume, but the y/y rate of growth was lower than in recent quarters, in large part due to low fuel prices. Discover reported y/y sales volume growth of 2.6%. However, excluding gas, the growth rate was 7%. Issuers reporting very strong volume growth included Capital One (+19% y/y), which is benefitting from its focus on transactors, and Wells Fargo (+15%).
Issuers are growing revenues…and expenses. Six of the largest U.S. credit card issuers have dedicated payment units, which publish quarterly revenue and expense data. Since the financial crisis, revenue growth has been elusive for issuers, but in 3Q15 four of the six issuers reported y/y growth in revenue. Benefitting from loan growth, five of the six issuers reported growth in net interest income. And three of the six reported noninterest income growth. However, as issuers are looking to generate new accounts as well as loan and volume growth, they are increasing their noninterest expenses. Banks with the largest y/y increases in noninterest expense in 3Q15 included American Express (+11%), U.S. Bank (+9%) and Discover (+8%).
Credit card yield shows signs of growth. Of the seven leading issuers who reported yield data in their quarterly financials, four reported y/y growth. In addition, six of the seven reported q/q rises in yield. This indicates that in the post-CARD Act environment, issuers are not competing aggressively on price, but are instead concentrating on enhancing rewards, providing additional value-added features, and making large acquisition-and-activation bonus offers.

Charge-off rates continue to decline…and may fall even further. As we have mentioned in previous blogs, credit card net charge-off rates are well below historical averages. Reasons for this extended decline include tight underwriting on the part of issuers and an aversion to building up large credit card debt on the part of cardholders. In its earnings conference call, Discover characterized the credit loss environment as “remarkably benign.” With continued y/y declines in 30+ day delinquency rates (which have historically been a predictor of charge-off rates), issuers are not expecting the charge-off rate to spike in the near term, and in fact rates may continue to decline further.

10 takeaways from leading credit card issuer 2Q15 financials

July 27, 2015

The major U.S. credit card issuers have now published their quarterly financials. A review of these reports by EMI revealed the following 10 trends:

Outstandings are growing. Credit card loan growth is once again being led by regional bank card issuers (such as SunTrust and Wells Fargo who tend to cross-sell cards to existing bank customers), as well as card “monolines” (such as Capital One and American Express). Banks with national credit card operations report lower growth (or even declines) as a result of the lingering effects from the financial crisis, runoff of promotional rate balances, as well as high payment rates. But even here we are seeing signs of growth: although Bank of America reported a 1% y/y decline in average outstandings, it also reported its largest quarter for new account origination since the fourth quarter of 2008.
Volume continues to grow, but with some slowdown. Some leading issuers continue to grow volume at double-digit rates (Wells Fargo grew loans and volume by 15%, boosted in part by the bank’s acquisition of the Dillard’s portfolio). Other issuers had lower volume growth, and many pointed to the impact of lower gas prices. For example, Discover reported volume growth of just 2%, but absent gas prices, this growth was 5%.
Net charge-off rates continue to decline to historic lows. For many leading issuers, net charge-off rates are well below historic norms. In addition, the rates continue to decline; of the 13 issuers studied, 12 reported year-on-year charge-off rate declines.
30+ day delinquency rates are also declining. Delinquency rates tend to be a leading indicator of future charge-offs, so it is notable that 30+ day delinquency rates continue to decline.
The profit picture is mixed for issuers. Six leading issuers provide credit card profitability data, as they operate standalone payment units. Four of the six issuers reported y/y declines in profitability as growing expenses exceeded revenues. However, Chase increased net income for its Card Services unit by 33%, driven by lower costs (9% decline in noninterest expense, and 10% fall in provision for loan losses). American Express grew its U.S. Cards net income by 15%, as revenue growth of 6% and a 4% decline in provisions exceeded a 4% increase in noninterest expense.
Growth in lending and volume are driving revenue growth. In the wake of the 2008 Financial Crisis and subsequent industry retrenchment, credit card industry revenues fell significantly. As the economy stabilized and then grew, leading issuers continued to struggle to attain revenue growth. Now the return to outstandings growth, as well as continued loan growth, is finally enabling issuers to increase revenues.
To support this revenue growth, card issuers’ noninterest expenses are increasing. The rise in revenues is driving growth in expense areas like marketing and rewards costs. Of the five issuers providing noninterest expense data, four reported y/y increases, led by Discover (+18%) and U.S. Bank (+13%).
Provisions for loan losses are (mainly) decreasing. As net charge-off and delinquency rates continue to decline, three issuers reported y/y declines in their provisions for loan losses. However, Capital One and U.S. Bank increased provisions, with Capital One growing provisions by 69%.
Issuers are increasing credit card yield. Of the seven leading issuers who reported card yield in their financials, six reported y/y growth. The exception was Wells Fargo, which had the highest yield in 2Q15. However, five of the seven reported q/q declines; the exceptions were Fifth Third and SunTrust, which had the lowest yield among reporting issuers.
Issuers are using a range of channels for new account acquisition. In general, cards issuers are continuing to reduce their dependence on direct mail for new card acquisition, and are focusing more investment on digital and branch channels. Chase reported that its online channel accounted for 62% of new card accounts in 2Q15. Even though Citi is continuing to cut its U.S. branch network, it reported that credit card acquisition via branches was up 10% on a same-store basis.