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.

Five Strategies to Adapt Bank Branches to The New Normal

October 9, 2014

There is a wealth of evidence that consumers are using online and mobile channels as the primary channels for their everyday banking needs:

Having reached critical mass in online banking penetration, the largest U.S. banks continue to report strong growth in active mobile banking customers (Chase +23% y/y to 17.2 million; Bank of America up 17% to 15.5 million; and Wells Fargo +22% to 13.1 million)
Regional bank customers are also growing their usage of non-branch channels. 45% of PNC customers use non-branch channels for a majority of banking transactions. Fifth Third reports that ATM and mobile channels’ share of deposit volume rose from 12% to 31% over the past two years. KeyBank claims that online and mobile transactions are growing by 9% annually, while branch transactions are declining by 3%.

The rise of self-service channels for everyday banking transactions is leading banks to re-assess their investment in their branch networks. For example, banks are changing traditional assumptions as to what constitutes optimal branch density within markets. In a recent presentation, KeyBank claimed that branch density is now less relevant as long as a bank can pair branches with a good mobile offering. In addition, in a low-revenue-growth environment, banks are under pressure to cut costs in order to meet earnings expectations. As a result of these factors, banks are cutting branch numbers.

Bank of America is expected to cut branches to below 5,000 by the end of 2014, compared to more than 5,700 in the second quarter of 2011. It recently announced the sale of branch clusters in North Carolina and Michigan.
Over the past six months Citibank sold all of its branches in Texas, as it focuses its energies on a select number of large metro markets.
KeyBank has closed or sold 8% of its branches over the past two years, and plans to cut its network further, by about 2-3% per year.

However, banks remain strongly committed to their branch networks. This is largely due to the fact that consumers continue to value the branch channel, even if usage has declined. A recent ABA survey found that 21% of consumers named the branch as their preferred banking channel, up from 18% in 2013. In addition, banks recognize the benefits in encouraging customers to use multiple channels. Wells Fargo found that customers using its stores as well as online and mobile channels have a 70% higher purchase rate than customers who only use online and mobile. With in this mind, the following are five branch strategies that banks should follow, with examples of banks that have already implemented these approaches:

Deploy new branch formats. Given lower traffic and transaction volumes in branches, banks should launch branch prototypes with smaller footprints, so that they can maintain their physical presence, but at a lower cost.
- PNC has converted 200 of its branches to a smaller format, with 100 more to follow by the end of 2014.
Launch flagship branches in selected markets. With changing ideas around branch density, bank can consolidate multiple branches into a large flagship store. These flagship stores act as a brand beacon for the bank in specific markets, as well as providing space for the bank to showcase new innovations
- Citi recently opened a 6,400-square-foot branch in San Francisco, following the opening of similar stores in New York City, Los Angeles and Washington, D.C.
Reconfigure branch staff. As branch activity is switching from transaction processing to sales and advice, and branches switch to smaller format, bank can reduce the average number of staff per branch, but should also change the functional balance, with fewer tellers and more sales specialists.
- In the 18 months to June 2014, Fifth Third cut 22% of its branch service staff, but increased sales staff by 6%.
- Over the past year, PNC has grown its number of investment professionals in branches by 4%.
Incorporate technology into branches. As consumers become more accustomed with using technology for their everyday financial needs, banks should showcase customer-facing technology in branches. This can enhance the user experience and capture sales opportunities
- Regions is installing two-way video to enable customers communicate directly with bankers via an ATM.
Open branches outside of footprint. As having a critical mass of branches in a market is no longer a prerequisite for success, banks can open branches beyond their traditional retail footprint, to target specific consumer or business clusters.
- City National has established branches in New York City, Atlanta and Nashville, dedicated to targeting entertainment firms that are clustered within these markets.

Time for U.S. Credit Card Issuers To Shift Focus to Lower FICOs?

September 5, 2014

One of the themes in leading credit card issuers’ 2Q14 financials was the expectation of a return to steady outstandings growth. Even those top issuers who continued to report y/y outstandings declines—such as Bank of America and Capital One—indicated that growth is on the way. In the aftermath of the financial crisis, issuers pulled back from the prime and sub-prime FICO segments and concentrated their business growth initiatives on the superprime segment. As issuers now look to generate outstandings growth, one of the strategies open to them is to target the lower FICO segments. However, EMI analysis shows that issuers continue to focus on the higher FICO categories. The chart below shows that, for most issuers, lower FICO segments’ share of total consumer credit card outstandings continues to decline.

Even though issuers use different FICO categories, the chart enables us to compare the FICO composition of credit card portfolios between different issuers.

Consumers with credit scores of less than 680 accounted for 32% of Wells Fargo’s outstandings at the end of 2Q14, compared to only 18% of Bank of America’s outstandings. This may help explain why Wells Fargo’s average credit card outstandings rose 10% y/y in 2Q14, compared to a 2% decline for Bank of America.
Similarly, 17% of Discover’s outstandings are held by consumers with FICOs of <660, compared to just 5% of Chase outstandings. Discover reported 6% y/y growth in outstandings in 2Q14, compared to just 1% growth for Chase.

Looking over a longer period (2Q11-2Q14), we see a consistent pattern of the lower FICO segments losing share of consumer credit card outstandings. For Chase, consumers with FICOs of less than 660 accounted for 14% of outstandings at the end of 2Q14, compared to 20% at the end of 2Q11. However, for some issuers, the share decline in lower FICO segments has not been very dramatic. For example, FICOs of <640 accounted for 17% of outstandings at the end of 2Q14, a share loss of just two percentage points since 2Q11.

As consumer confidence returns, issuers expect to grow outstandings in the coming quarters. However, to achieve their goals, they will need to develop strategies for a broader FICO range. In addition to continuing to target more affluent consumers, issuers will need to develop strategies, products, pricing and messaging to reconnect with prime, lower-prime and sub-prime consumer segments.