Bank’s vertical industry focus bears fruit

Over the past three years, the commercial sector has been the primary focus for bank loan growth efforts. In 2010 and 2011, strong commercial loan growth rates were generated as the economy recovered from the 2008-2009 financial crisis and subsequent recession. The commercial lending market started to get more competitive (as evident in declining yields), so many banks have turned to vertical industries to maintain and even accelerate commercial loan growth rates.

The following table summarizes vertical industry performance for some of the leading U.S. banks:

The following are 10 quick steps for banks to market effectively to specific vertical industries:

  1. Size the opportunity (industry size and growth rate)
  2. Profile the industry, covering growth prospects, key opportunities and threats, financial usage and needs, as well as the typical financial decision-making process
  3. Identify high-potential sub-sectors (with strong growth potential and unmet financial services needs)
  4. Identify industry clusters in particular geographies within in the bank’s footprint
  5. Analyze competitor industry-targeting initiatives
  6. Assess the bank’s current ability to meet customer’s financial needs; develop and implement strategies to fill product/service gaps in-house or via partnerships
  7. Develop a marketing plan around industry-specific media, such as trade publications, associations, events, and social media channels
  8. Deploy dedicated industry banking teams
  9. Create customized collateral and sales tools to support these teams
  10. Publish industry-specific content (videos, webinars, case studies, articles, newsletters, reports)

Trends and Implications from Credit Card Issuers’ 2Q13 Results

After analyzing the 2Q13 financial results for the leading U.S. credit card issuers, EMI has identified some common themes and emerging trends.

  • Outstandings: At first glance, the continued decline in outstandings for the top issuers is consistent with trends we have seen in recent years. However, some of these issuers stated their belief that this extended sequence of declines is coming to an end. Chase claimed that its credit card outstandings have reach an inflection point and it expects growth in the coming quarters. Bank of America also emphasized signs of recent outstandings growth, and claimed that card issuance was at its highest level since 2008. During the quarter, strongest growth rates were reported by monolines and regional banks, but these smaller issuers may face renewed competition from the top issuers in the coming quarters. Some issuers reported yield declines in 2Q13, with Discover attributing a 24 basis point yield decline over the past year to an increase in promotional rate balances and a decline in higher rate balances.

  • Volume: Many of the leading issuers improved their card volume growth rates in the second quarter, as the economy continued to recovery, and as consumers responded to rewards-based promotions. In the coming quarters, expect issuers to continue to promote their rewards programs (in particular to attract more affluent cardholders), while increasing their focus on introductory offers and APRs as they seek to grow loans.

  • Revenue: In recent years, credit card revenue growth has been anemic, as issuers have struggled with loan growth, and have had to adjust to new fee structures following the CARD Act. However, the latest financials provided some encouraging news. American Express grew net interest income 6% y/y (benefitting from a 4% rise in outstandings) while its noninterest income rose 5% (driven by an 8% rise in volume). Discover generated even stronger growth in both net interest income (+9%) and noninterest income (+14%). Given the fundamental changes to the card industry in recent years, expect issuers to continue to seek balanced overall revenue growth between net interest income and noninterest income, and avoid an over-dependence on either aggressive lending or fees to meet their revenue targets.
  • Charge-Off and Delinquency Rates: Issuers continue to benefit from declines in charge-off rates. Of the 11 leading issuers who reported charge-off rates, 8 reported y/y declines, while one issuer was unchanged. Two issuers (American Express and Discover) had charge-off rates below 3%, while 5 other issuers (Chase, Citi, Fifth Third, PNC and Wells Fargo) had rates below 4%. In addition, 30+ day delinquency rates also continue to decline, with 8 of 9 issuers reporting y/y declines (the exception was Capital One, due to its acquisition of the HSBC portfolio).

Looking ahead, to the extent that issuers focus on outstandings growth (with more aggressive introductory offers on balance transfers, lower APRs and more relaxed underwriting standards), both charge-off and delinquency rates should rise from their current low levels. However, recent trends in outstandings and volume indicate that consumers increasingly see their credit cards as an efficient, convenient and more rewarding payment method, and less simply as an easy source of credit. Whether this is a temporary phenomenon in the aftermath of the financial crisis or a long-term change has profound consequences for how credit cards are positioned, promoted and priced.

Tentative Recovery in U.S. Credit Card Lending Continues in 1Q13

EMI’s analysis of recently-published U.S. bank data by the FDIC reveals that credit card outstandings rose 1.6% y/y to the end of 1Q13.  Outstandings have been recovering in recent quarters, following a protracted period of declines as a result of the 2008 financial crisis.  In addition, net credit card charge-offs continue to decline, falling 12% y/y in 1Q13.

Our analysis also finds that:

  • 1,238 U.S. banks (19% of the total) have card assets, with 6% of banks having more than $1 million in card assets.  55 banks have more than $100 million in outstandings, with just 23 banks holding more than $1 billion in credit card loans.
    • Of the 55% with more than $100 million in assets, 31(56%) reported increases in their credit card loan portfolios between end-1Q12 and end-1Q13
  • The three largest credit card issuers–Citibank, Chase and Bank of America–all continued to report credit card loan declines, as they continue to deleverage.  The cumulative decline for these three issuers was 5%.
  • The former “monolines”–American Express, Discover and Capital One–all increased outstandings.  Capital One reported a 44% increase, largely due to the acquisition of the HSBC card portfolio.  American Express grew credit card loans 6%, with Discover’s outstandings rising by 7%.
  • Many regional banks continued to increase credit card lending, albeit from significantly lower bases than their national bank counterparts.

These trends in credit card outstandings–slow overall growth, declines among the big three issuers, growth for monolines and regional banks–are consistent with industry predictions that EMI published in a blog earlier this year.