Tag Archives: Bank of America

Quarterly Card Issuer Financials Reveal Positive (and some Negative) Trends

All of the main U.S. credit card issuers have now reported second quarter 2011 financials, which reveal some interesting trends:

Volumes: In recent quarters, card purchase volumes have grown significantly as issuers have focused attention on positioning cards as spending rather than lending tools. Most issuers continued to grow volumes in 2Q12, although in some cases, the rate of growth was lower than in recent quarters. Wells Fargo (+15%), U.S. Bank (+13%), Chase (+12%) and Capital One (+11%, excluding the impact of the HSBC portfolio acquisition) all reported double-digit year-on-year spending increases. American Express, which has typically led the industry in volume growth, reported a y/y rise in spending of 9%, down from 12% in 1Q12. And both Bank of America and Citibank reported no growth in purchase volumes. Issuers will continue to push volume growth in the coming quarters, as they continue to seek to take payments share from cash and checks.

Outstandings: In recent years, issuers reacted to the financial crisis by significantly deleveraging their credit card portfolios. Now there are signs that this process has bottomed out and a number of issuers are growing outstandings. The largest portfolios continue to decline, with Bank of America (-10%), Citibank (-3%) and Chase (-1%) all reporting year-on-year declines in end-of-period outstandings. On the other hand, banks with smaller portfolios reported y/y growth, including SunTrust (+39%), PNC (+10%), Wells Fargo (+7%), U.S. Bank and Fifth Third (both +5%). In addition, American Express (+5%) and Discover (+4%) both grew outstandings. The prospects for outstandings growth in the industry in general in the quarters will be dependent on general economic conditions, as well as the extent to which issuers want to push loan growth in order to grow revenues.

Charge-Off and Delinquency Rates: As issuers reduced outstandings following the financial crisis in 2008, they also set about tackling charge-offs, which spiked spectacularly in 2008 and 2009. Charge-off rates have declined significantly over the past two years, and in many cases are now below normalized levels. There has been a widespread expectation in recent quarters that the sharp declines in charge-off rates would bottom out; however, the most recent quarter continued the pattern of charge-off rate declines. All of the main issuers reduced charge-off rates by more than 100 bps y/y, and only one main issuer (U.S. Bank) reported a q/q increase in its charge-off rate. American Express, Discover and Capital One reported charge-off rates below 3% in 2Q12. Bank of America remains the issuer with the highest charge-off rate (at 5.27% in 2Q12), but it is notable that this rate is down from levels of more than 14% in 2009. There is an expectation that charge-offs will continue to decline in the coming quarter, given that delinquency rates (which are an indicator of future charge-offs) are also continuing to decline. Some issuers are anticipating that credit quality indices will bottom out or even grow, in particular if the issuers relax underwriting standards to grow outstandings. So, a number of leading issuers are increasing their provision for loan losses.

Revenue: This remains the big negative for issuers, with downward pressure on both net interest income (for those issuers who are continuing to experience outstandings declines) and noninterest income (from the ongoing impact of the CARD Act, which makes it more difficult to generate fee income). Issuers with lower outstandings (Bank of America, Citibank and Chase) reported revenue declines, but issuers who grew outstandings in 2Q12 managed to grow revenues. American Express increased revenue 5%, with net interest income rising 6%. Discover grew total revenues 6%, with a 4% decline in noninterest income more than offset by a 10% growth in net interest income. Prospects for revenue growth in the coming quarters will be very much dependent on the ability to grow outstandings, given the limited scope for generating fee income.

Banks Marketing Mobile Services to Commercial Banking Clients

Bank of America recently announced that it now has more than 10 million active mobile banking users.  Other leading banks, such as Chase and Wells Fargo, are also reporting very strong growth in mobile banking usage.  We expect the strong growth in mobile banking usage to continue, given the increased penetration of smartphones and tablets, the growing sophistication and power of these devices, as well as people’s increased comfort with using mobile channels for everyday financial management needs.

Much of the focus in mobile banking to date has been on the consumer market, but some of the leading U.S. banks are now directing their attention to the commercial banking market.  In recent weeks:

  • Financial technology vendor Jack Henry launched a commercial banking app for the Apple iPad.
  • Citibank incorporated elements of its TradeAdvisor online banking tool (which enables companies to conduct cross-border trade transactions) into its CitiDirect BE Mobile banking suite.
  • Wells Fargo integrated its TradeXchange service into the bank’s CEO Mobile app.
  • Bank of America Merrill Lynch developed an iPad app for its Paymode-X online payment and invoicing system.
  • JPMorgan Treasury Services introduced remote check deposit.

The examples above show that, not surprisingly, the largest banks have led the charge into new mobile commercial banking apps.  Small regional and community banks now need to follow suit, in order to meet commercial clients’ needs and remain competitive.

The objectives behind the development and marketing of mobile banking functionality in the commercial space are very similar to that in the consumer banking environment:

  • Lowering customer service costs
  • Enhancing the customer experience
  • Differentiating services from competitors, or reducing a competitive disadvantage
  • Reducing churn through the provision of “sticky” services
  • Providing additional customer touchpoints for cross-sell and upsell

Differentiation through commercial mobile banking (and in other service areas) can be fleeting, as other banks will aim to imitate certain value-added service and close the competitive gap. To maintain a competitive advance in the provision of mobile banking services, banks need to:

  • Continually research customer desire for and usage of new mobile apps
  • Effectively market these apps to new and existing customers
  • Communicate the value of these apps to bank personnel who deal directly with commercial clients
  • Integrate the emerging mobile banking channel with other customer sales and service channels to provide a seamless and consistent user experience.

Credit Card Lines for Leading Issuers Highlights Continued Deleveraging

Recent regulatory filings from some of the leading U.S. credit card issuers reveal ongoing declines in available credit card lines.

Although the three issuers in the above table all reported credit card line reductions between March 31, 2011 and March 31, 2012, there are some variations among these issuers.

  • Chase’s credit card lines fell 6% during this period, but rose in the two most recent quarters, increasing 1% between the end of 2011 and the end of 1Q12.
  • Citigroup is the only issuer among the three to report U.S.-only credit card lines, which fell 8% between 1Q11 and 1Q12.  However, like Chase, this decline appears to have bottomed out, with virtually no change in the most recent quarter.
  • Bank of America reported the strongest decline among the leading issuers, falling 11% between 1Q11 and 1Q12.  This represents a continuation of a process of retrenchment that has been in place since the start of the financial crisis.  Between end-2008 and end-2011, Bank of America’s credit cards lines fell by 46%.  There are some signs that this decline is tailing off, with a fall of only 1.7% in the most recent quarter.

Indications that the significant reductions in credit card lines are bottoming out provide evidence to support industry expectations that card outstandings will grow slightly in 2012.