Tag Archives: Bank of America

U.S. Banks Maintain Commercial Lending Momentum in 1Q13

EMI analysis of recently-published financial results for 14 leading U.S. banks revealed that that strong growth in commercial and industrial (C&I) loan portfolios continued in the most recent quarter. These banks grew their C&I loan portfolios by an average of 12% y/y, which was the same growth rate as in 4Q12, and up from an 11% portfolio growth rate in 1Q12.

Strongest growth was reported by regional banks like PNC (boosted by the acquisition of RBC Bank), KeyBank, Fifth Third and Huntington, as well as Capital One. However, it is worth noting that 9 of the 14 banks reported lower C&I loan y/y growth rates in 1Q13 vs. 1Q12. The overall growth rate increased from 11% to 12% during this period, as Bank of America (which has the largest C&I loan portfolio) increased its C&I loan y/y growth from a paltry 2% in 1Q12 to a more robust 8% in 1Q13.

The bar chart below shows that gap between C&I and overall average loan portfolio growth rates, with 12 of the 14 banks reporting higher C&I loan growth. The bank with the largest gap was Chase, which grew average commercial banking loans by 13.7% y/y, while its overall loan portfolio only grew by 1.3%. The two exceptions were Capital One (whose non-C&I growth was boosted by some recent acquisitions) and BB&T. In fact, three banks (Regions, SunTrust and Bank of America) reported declines in their total loan portfolios between 1Q12 and 1Q13, even though C&I loan portfolios rose by high single-digit rates.

C&I loan charge-off rates continue to improve, with an average rate of 0.22% in 1Q13, down 19 basis points (bps) y/y and a reduction of 7 bps from the previous quarter. However, there is evidence that competition for C&I loans continues to increase, with an average yield of 3.63% in 1Q13, which represents declines of 40 bps y/y and 9 bps q/q. A recent EMI blog identified a number of banks that are leveraging innovative marketing approaches to differentiate from competitors in this increasingly competitive space.

How Did U.S. Credit Card Issuers Perform in 4Q12?

Over the past week, leading U.S. credit card issuers have been publishing their 4Q12 and full-year 2012 results.  After we reviewed these financials, we detected the following trends, which are largely consistent with our recent blog on top credit card trends for 2013.

  • Outstandings: The top three issuers continue to report y/y declines in average outstandings, while traditional monolines and regional banks are driving growth. Both Wells Fargo and regional banks focus on cross-selling credit cards to their existing customer base. Wells Fargo reported that credit card penetration of retail banking households rose from 27% in 1Q11 to 33% to 4Q12. Bank of America indicated in its 4Q12 earnings call that it would be focusing on marketing credit cards through the franchise.

  • Volume: Most leading issuers reported strong y/y growth in volume in 4Q12. However, there is evidence that this growth rate is slowing down. American Express‘ 8% y/y growth in 4Q12 was down from 12% in 1Q12. And during the same period, Chase y/y volume growth fell from 12% to 9%.

  • Charge-off and delinquency rates: Charge-off and delinquency rates continue to trend downwards. Of the 11 issuers studied by EMI,
    • Only Capital One reported a y/y rise in its charge-off rate, and this was due to the acquisition of the HSBC card portfolio.
    • 6 of the 11 reported linked-quarter declines in the charge-off rate. 9 of the 11 have rates below 4%, with two issuers (American Express and Discover) reporting 4Q12 charge-off rates of below 3%. Even Bank of America (which is one of the two issuers with a rate above 4%) reported that its charge-off rate is at its lowest level since 2006. In many cases, charge-off rates are now below historic norms, which points to a fundamental change in consumer attitudes to carrying credit card debt.
    • Delinquency rates also declined y/y, although some issuers did reported linked-quarter increases, driven perhaps by both seasonality, as well as some upward movement as issuers start to pursue loan growth.

What will happen in the U.S. credit card industry in 2013: 10 potential trends

As it enters 2013, the credit card sector is looking to continue its slow-but-steady recovery following the financial crisis in 2008-09. The following are a series of industry trends that we expect to see over the next 12 months:

  1. Outstandings growth, but not for top three issuers. Economic recovery and returning consumer confidence should result in consumers increasing their demand for credit. However, the lingering scars from the financial crisis for both banks and consumers will temper this demand.  The top three credit card issuers (Chase, Bank of America and Citi) have scaled back their portfolios dramatically in recent years. These issuers claim that this period of retrenchment is coming to an end, but they are highly unlikely to grow their portfolios significantly in 2013.  Instead, outstandings growth will come from issuers like:
    • Discover: recently reported 6% y/y growth in outstandings and plans to continue to push lending growth
    • Wells Fargo: grew average outstandings 9% y/y in 4Q12, as it continues to grow credit card penetration of its retail banking households (from 27% in 1Q11 to 33% in 4Q12)
    • Other regional banks, such as SunTrust, Fifth Third and PNC: who all reported strong y/y outstandings growth in 3Q12 (albeit from relatively low bases), and who (like Wells Fargo) are focused on cross-selling credit cards to existing customers
  2. Push for loan growth to lead to (some) price competition. In recent years, credit card APRs have been relatively high. Even as competition returned to the affluent card market in 2011 and 2012, there was little or no evidence of APRs moving downwards, with issuers competing instead with bonus points and tiered rewards programs. 2013 may bring some downward pressure on APRs, but issuers will continue to focus on both bonus offers and low introductory rates on purchases and/or balance transfers.
  3. Lower rate of volume growth. Over the past two years, in the absence of loan growth, issuers have been focusing on growing volume, but there are recent signs that the rate of growth is slowing down. American Express recently announced 8% volume growth in 4Q12, down from 11% in 4Q11 and 15% in 4Q10. Issuers will continue to target volume growth in 2013, but will be looking for volume and loan growth to be more in synch than in recent years.
  4. Return of revenue growth. With the expected return to some outstandings growth, net interest income should grow significantly in 2013, in particular with interest expense remaining low. Noninterest income will benefit from continued volume growth, but this will be partially offset by many issuers pulling back on marketing payment protection products, which featured prominently in a number of issuer settlements in the past year.
  5. Charge-offs and delinquency rates to return to a more “normalized” pattern. For many leading issuers, charge-off rates are below historic levels. As issuers begin to target outstandings growth, they will be willing to accept small increases in the charge-off rate. Some issuers are reporting q/q growth in delinquency rates, indicating a return to seasonal patterns that have been largely absent in recent years.
  6. Pressure to reduce rewards program costs. Issuers’ desire to grow purchase volume among more affluent cardholders in recent years has led to a significant focus on their rewards programs, with the development of tiered rewards, as well as aggressively positioned bonus offers. There are a number of factors that may lead issuers to scale back these rewards-based offers in 2013, including:
    • The continuing need to control costs;
    • The desire for a more even balance between outstandings and volume growth; and
    • The opportunity to develop more merchant-funded offers, in particular as merchants seek to capture consumer spend as it moves to online channels.
  7. Growth of personalized offers. Advances in data analytics create opportunities for issuers to develop targeted offers based on cardholder demographics, preferences and spending behavior. In addition, the emergence of mobile payments creates the potential to incorporate customer location into offer targeting.
  8. Emergence of mobile payments. Both mobile wallets and mobile payments have garnered a lot of attention over the past year, although there is a long way to go before they properly emerge as accepted payment methods. However, in 2013, there will be a number of critical steps taken in the continued evolution of mobile payments, including:
    • Launch of more mobile devices with more payment capabilities
    • Continued growth of mobile person-to-person payments and mobile Internet shopping
    • Deployment of more merchant terminals capable of accepting mobile transactions
    • Progress towards national rollout by Isis and Google Wallet consortia
    • Testing of standalone mobile payments apps by issuers (last week, U.S. Bank announced an iPhone payments pilot for new FlexPerks Travel Rewards Visa Signature cardholders)
  9. Fundamental shift in credit card positioning.  Prior to the financial crisis, credit cards were perceived by consumers (and positioned by issuers) as an easy way to access credit.  In recent years, as consumers cut card debt but continued to grow purchase volume, they have developed a more balanced perception of the credit card as both an efficient payments tool and flexible source of credit.
  10. Focus on nontraditional sales and service channels. Issuers will direct more of their marketing budgets to nontraditional customer acquisition channels, such as online and branch, which also have much lower cost-per-acquisition than direct mail. In addition, issuers will continue to develop new service functionality for both online and mobile channels.