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.

credit_card_revenue_1Q14-1Q15

Banks Grew Marketing Budgets and Marketing Ratios Modestly in 2014

February 26, 2015

EMI analysis of recently-published FDIC data on 2014 marketing spending for 17 leading banks found that banks are beginning to grow their marketing budgets in order to drive revenue growth in a growing economy. The scale of the increase was relatively modest, a trend that we expect to continue in 2015, as banks look to marry their desire for revenue generation with a continued need to exercise a tight rein on costs.

Specific findings from our analysis:

Total marketing spending for these 17 banks rose 4% between 2013 and 2014. 10 of the 17 banks increased their marketing budgets, 6 cut their budgets, while SunTrust’s marketing expenditure was unchanged.
Net revenues for the 17 banks fell 2%; as a result, their marketing-to-revenue ratios rose by 16 basis points to 2.84%.
Chase had by far the largest marketing budget at nearly $2.8 billion, up 2% from 2013. Four other leading banks (American Express, Citigroup, Capital One and Bank of America) had marketing budgets of more than $1 billion.
Of the 10 banks that grew their marketing budgets in 2014, 5 also showed increased revenues. The 4 banks with the lowest marketing-to-revenue ratios reported revenue declines between 2013 and 2014.
The variation in marketing-to-revenue ratios among these banks is huge. American Express and Discover are primarily credit card issuers and lack branch networks; they tend to have marketing-to-revenue ratios of 8-10%, in line with fast-moving consumer goods (FMCG) companies. National bank marketing ratios tend to be around 3%, while regional bank ratios are generally between 1% and 2%.
Even within these bank categories, there are significant variations. Capital One is a regional bank with a very significant credit card portfolio, so its marketing-to-revenue ratio (6.1%) falls between a monoline and a regional bank. Wells Fargo trailed its national bank peers in marketing spend. Although it grew its 2014 marketing budget by 8% to $613 million, its marketing-to-revenue ratio remains below 1%.

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.