Tag Archives: Capital One

Growth Remains Elusive For Leading U.S. Credit Card Issuers

EMI analysis of the largest credit card issuer financial results for 1Q13 reveals the following trends:

  • Outstandings (11 issuers reporting, analysis excludes Capital One, which acquired the HSBC card portfolio in 2012, so its growth rate would skew the data): A weighted average of 11 leading credit cards issuers shows that average credit card outstandings fell 2% year-over-year (y/y) in 1Q13. The three largest issuers – Chase, Bank of America and Citi – all reported y/y declines.  However, outstandings growth came from Wells Fargo (who reported that credit card penetration of retail banking households rose from 30% in 1Q12 to 34% in 1Q13), regional banks with relatively small portfolios (e.g., PNC, SunTrust and Fifth Third), as well as “monolines” (American Express and Discover). These outstandings trends bear out the industry predictions we made in a blog at the start of 2013.

  • Volumes (8 issuers reporting): leading issuers grew credit card volume 6% y/y in 1Q13, which is relatively consistent with recent quarters. However, growth rates have moderated from the 2010-2011 levels, when issuers were overwhelming focused on building volumes. Wells Fargo led the way with a 14% volume growth rate, driven by an 18% rise in new consumer credit card accounts.
  • Revenues and expenses (5 issuers reporting): Revenues rose 2% y/y, led by Discover (+11%) and American Express (+5%). The lack of outstandings growth means that net interest income remains relatively anemic, with a rise of 1% y/y.  Noninterest income grew 5%, with relatively healthy growth rates from American Express, Discover and Bank of America. Noninterest expenses fell 1%, with both Chase and Bank of America reporting significant declines (reductions of 8% and 7%, respectively). Provisions for loan losses rose 5%, albeit from very low levels in 1Q12.
  • Charge-off rates (11 issuers reporting): The weighted average charge-off rate for these 11 issuers was 3.62%, down 65 basis points (bps) y/y, but up 5 bps q/q. 10 issuers reported charge-off rate y/y declines.  The exception was Capital One, which acquired the HSBC credit card portfolio (with a higher charge-off rate) in 2012.  Compared to 4Q12, 10 issuers reported charge-off rate increases and the other two were unchanged, indicating that the era of charge-off rate declines may be coming to an end.
  • 30+ day delinquency rates (8 issuers reporting): 7 of the 8 issuers providing 30+ day delinquency rate data reported y/y declines. As with the charge-off rate, the exception is Capital One. Interestingly, 7 of the 8 issuers reported q/q declines.  The exception was American Express, whose 30+ day delinquency rate was unchanged.  So, while the period of charge-off rate declines may be ending, the continued decline in delinquency rates will moderate charge-off rate increases.

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.

Leading U.S. banks cut marketing spend in 1Q13

A study of the financial reports for 13 leading U.S. financial institutions reveals that 10 of these FIs reported y/y decreases in their advertising/marketing spending in the first quarter of 2013, with 7 of these banks reporting double-digit percentage decreases.

Much of this is driven by bank-wide cost-cutting initiatives, with marketing typically one of the expense line items that is most susceptible to cuts.  However, it is important not to take one quarter’s worth of data as a trend.  This is particularly true for bank marketing spending, which fell significantly following the financial crisis in 2008, but recovered somewhat from 2010. A recent EMI blog showed that 7 of 11 leading U.S. banks increased their marketing spend between 2007 and 2012. For example, PNC reported a strong decline in marketing spending between 1Q12 and 1Q13, but this followed a very strong rise in spending from 2007 to 2012.

Another way to study bank marketing spend is to look at marketing spend intensity, which we define as marketing spend as a percentage of revenues.

The chart above reveals that in terms of marketing spend intensity, there are three distinct segments:

  • Current (Discover and American Express) and former (Capital One) credit card monolines. In particular, Discover and American Express have limited banking operations, so remain quite dependent on their credit card business, which tends to have higher marketing spending than other financial services. In addition, Discover and American Express lack branch networks, so they need to have higher levels of advertising spend to maintain strong brand awareness.
  • National banks (Citibank, Chase, and Bank of America), which typically devote 2-3% of revenues on marketing. These banks tend to have higher advertising to support their brands nationwide. In addition, these banks have large credit card operations. An exception is Wells Fargo, which spends only 0.5% of revenues on marketing. Wells Fargo has a national branch presence, but has a limited credit card business (unlike the other banks, it only markets credit cards to existing bank customers).
  • Regional banks, who spend 1-2% of revenues on marketing.

Finally, it is difficult to prove a correlation between marketing spending and bank growth, as many factors influence customer acquisition and revenue growth.  It is worth noting that banks continue to struggle to generaterevenue growth (7% of the 13 banks reported revenue declines between 1Q12 and 1Q13).  However, the three banks with the highest marketing intensity (Discover, American Express and Capital One) were among the 6 banks that did generate y/y revenue growth.