Tag Archives: Bank of America

FICO distribution of card issuer portfolios shows focus on prime segment

Over the past year, many leading U.S. credit card issuers have increased their focus on more affluent segments with new cards and offers.  At the same time, these issuers have continued to try to reduce their exposure to consumers with low credit scores. A study of SEC filings for some of these issuers highlights the extent to which these efforts have led to significant shifts in the FICO distribution of their card portfolios.

  • Although Citigroup’soverall U.S. credit card portfolio fell by 5%, its prime portfolio (660+ FICO) rose by 6%, while its subprime portfolio (<620) fell by a whopping 48%.
  • Mirroring Citigroup, Bank of America’ssubprime portfolio fell by more than 40% in 2011.
  • Unlike Citigroup and Bank of America, Chase does not publish outstandings data for different FICO segments, but it did report that its prime (600+ FICO) portfolio’s share of total U.S. credit card outstandings rose from 77.9% at the end of 2010 to 81.4% at the end of 2011.

Many issuers anticipate a return to credit card outstandings growth in 2012. Based on the evidence above, issuers will be focusing their efforts on the prime segment, with new products, bonus offers, attractive introductory offers, and perhaps even lower APRs. With recovery in both economic growth and consumer confidence, the decline in near-prime and subprime portfolios should also abate.

Credit card issuers focused on new customer acquisition; should not ignore portfolio management

Leading U.S. credit card issuers have been focused on growing cardholder spending volume in recent quarters (click here for our recent blog on strong growth in credit card volume for leading issuers), but there has yet to be an appreciable rise in outstandings. This is due to cardholders’ desire to reduce their debts, as well as residual reluctance on the part of issuers to open the lending spigot following the financial crisis.

However, we do note that several leading card issuers are ramping up their new customer acquisition efforts:

  • Bank of America grew new U.S. credit card accounts 17% between 2Q11 and 3Q11
  • Chase grew proprietary cards 20% y/y in first 9 months of 2011
  • Capital One card origination levels doubled between 3Q10 and 3Q11

Some of these issuers reduced their customer bases significantly in recent years, so this growth is in fact returning customer numbers to what the issuers would perceive to be normal levels.  The issuers have also focused customer acquisition efforts on certain segments of the market–such as affluents and small business–that they expect will be strong performers in the coming years.

Having concentrated on customer acquisition, it is vital that credit card issuers now also establish portfolio management strategies to maximize customer lifetime value. Effective portfolio management plans focus on three areas:

  • Activation (onboarding efforts, incentives to drive initial card usage)
  • Retention (communications and incentives around anniversaries, processes for handling cardholder complaints, and winback programs)
  • Relationship optimization (periodic special offers based on customer value and/or life events, targeted cross-sell/upsell offers, and consistent user experience across all customer touchpoints)

Credit quality continues to improve for leading U.S. card issuers

The leading U.S. credit card issuers continue to report strong improvements in their net charge-off rates.

  • Of the 11 issuers analyzed, eight had 3Q11 net charge-off rates below 5%.  Four had rates below 4%, with American Express leading the industry, at 2.6%
  • Over the past 12 months, eight issuers reduced rates by more than three percentage points (300 basis points)
  • Seven issuers reported rate declines of more than 100 bps between 2Q11 and 3Q11

Issuers also reported strong year-on-year improvements in 30+ day delinquency rates, although the quarterly trend indicates that these declines may be bottoming out. 

  • Five of the seven issuers analyzed had 30+ day delinquency rates below 3%
  • Six of the seven issuers reported triple-digit y/y declines in delinquency rates. The largest decline was reported by Bank of America (178 bps), which still has the highest delinquency rate among these seven issuers
  • Between 2Q11 and 3Q11, delinquency rates for two issuers (American Express U.S. Card and U.S. Bank) were unchanged.  Capital One’s 30+ day delinquency rate rose 32 bps in the most recent quarter

The strong declines in charge-off and delinquency rates have enabled issuers to significantly reduce their provisions for credit losses, which have boosted profitability.  However, with delinquency rate declines leveling off, it is expected that reductions in charge-off rates and loss provisions will also abate in the coming quarter.

Therefore, issuers will increasingly look towards revenue growth drivers to maintain and grow profitability.  On the one hand, they will seek to continue to encourage cardholders to increase spending on their cards, which drives up noninterest income.  In addition, with charge-off rates now at relatively low levels, and with revenue growth remaining anemic, credit card issuers may be more inclined in the coming quarters to seek to build card outstandings and drive net interest income, perhaps through a combination of easing underwriting standards, offering strong introductory offers on balance transfers, and even reducing APRs.