10 takeaways from leading credit card issuer 2Q15 financials

July 27, 2015

The major U.S. credit card issuers have now published their quarterly financials. A review of these reports by EMI revealed the following 10 trends:

Outstandings are growing. Credit card loan growth is once again being led by regional bank card issuers (such as SunTrust and Wells Fargo who tend to cross-sell cards to existing bank customers), as well as card “monolines” (such as Capital One and American Express). Banks with national credit card operations report lower growth (or even declines) as a result of the lingering effects from the financial crisis, runoff of promotional rate balances, as well as high payment rates. But even here we are seeing signs of growth: although Bank of America reported a 1% y/y decline in average outstandings, it also reported its largest quarter for new account origination since the fourth quarter of 2008.
Volume continues to grow, but with some slowdown. Some leading issuers continue to grow volume at double-digit rates (Wells Fargo grew loans and volume by 15%, boosted in part by the bank’s acquisition of the Dillard’s portfolio). Other issuers had lower volume growth, and many pointed to the impact of lower gas prices. For example, Discover reported volume growth of just 2%, but absent gas prices, this growth was 5%.
Net charge-off rates continue to decline to historic lows. For many leading issuers, net charge-off rates are well below historic norms. In addition, the rates continue to decline; of the 13 issuers studied, 12 reported year-on-year charge-off rate declines.
30+ day delinquency rates are also declining. Delinquency rates tend to be a leading indicator of future charge-offs, so it is notable that 30+ day delinquency rates continue to decline.
The profit picture is mixed for issuers. Six leading issuers provide credit card profitability data, as they operate standalone payment units. Four of the six issuers reported y/y declines in profitability as growing expenses exceeded revenues. However, Chase increased net income for its Card Services unit by 33%, driven by lower costs (9% decline in noninterest expense, and 10% fall in provision for loan losses). American Express grew its U.S. Cards net income by 15%, as revenue growth of 6% and a 4% decline in provisions exceeded a 4% increase in noninterest expense.
Growth in lending and volume are driving revenue growth. In the wake of the 2008 Financial Crisis and subsequent industry retrenchment, credit card industry revenues fell significantly. As the economy stabilized and then grew, leading issuers continued to struggle to attain revenue growth. Now the return to outstandings growth, as well as continued loan growth, is finally enabling issuers to increase revenues.
To support this revenue growth, card issuers’ noninterest expenses are increasing. The rise in revenues is driving growth in expense areas like marketing and rewards costs. Of the five issuers providing noninterest expense data, four reported y/y increases, led by Discover (+18%) and U.S. Bank (+13%).
Provisions for loan losses are (mainly) decreasing. As net charge-off and delinquency rates continue to decline, three issuers reported y/y declines in their provisions for loan losses. However, Capital One and U.S. Bank increased provisions, with Capital One growing provisions by 69%.
Issuers are increasing credit card yield. Of the seven leading issuers who reported card yield in their financials, six reported y/y growth. The exception was Wells Fargo, which had the highest yield in 2Q15. However, five of the seven reported q/q declines; the exceptions were Fifth Third and SunTrust, which had the lowest yield among reporting issuers.
Issuers are using a range of channels for new account acquisition. In general, cards issuers are continuing to reduce their dependence on direct mail for new card acquisition, and are focusing more investment on digital and branch channels. Chase reported that its online channel accounted for 62% of new card accounts in 2Q15. Even though Citi is continuing to cut its U.S. branch network, it reported that credit card acquisition via branches was up 10% on a same-store basis.

5 takeaways from leading credit card issuer 1Q15 financials

April 28, 2015

An analysis by EMI of the latest quarterly financials from the leading U.S. credit card issuers revealed the following trends:

Growth in average outstandings. Of the 13 leading issuers studied, 11 reported y/y increases in average outstandings.
- The two exceptions were Bank of America and Citi, two of the top four issuers and this continues a longstanding pattern
- Capital One—another top four issuer— reported a strong growth rate of 7%, driven by origination programs and line increases. However, it should be noted that Capital One retains some of the credit card monoline heritage, with card loans accounting for 40% of its total loan book.
- Strongest growth was reported by SunTrust, although it should be noted that this comes from a low base, with average card loans accounting for just 0.7% of SunTrust’s total loans, a percentage that is significantly lower than its regional bank peers. It is also worth noting that SunTrust’s credit card yield was below 10% in 1Q15, lower than regional bank peers like Fifth Third (10.22%) and Regions (11.73%), as well as larger issuers like U.S. Bank (10.81%) and Wells Fargo (11.78%).
- Wells Fargo also reported very strong y/y loan growth of 16%, although this included the acquisition of the Dillard’s private-label portfolio. Its credit card penetration of retail bank households rose nearly four percentage points y/y to 41.8%, although the rise in penetration slowed sharply in the most recent quarter, increasing just 28 percentage points.

Outstandings starting to come into line with volume. Since the 2008 financial crisis, the card industry has focused more on increasing cardholder purchase volume rather than outstandings. As you see in the following chart, volume growth continues to outstrip outstandings growth.
- Of the 7 issuers below reporting y/y changes in both volume and outstandings, only American Express and Discover reported higher growth rates for outstandings than volume.
- Ideally, issuers would like outstandings and volume to grow at similar rates; American Express and Wells Fargo were most effective at achieving this in the most recent quarter.
- Some issuers reported that lower gas prices had a depressing effect on volume growth.

Charge-offs remain at historic lows. 12 of 13 issuers reported credit card net charge-off rates below 4% in 1Q15, with 5 issuers below 3%. In addition, 10 of the 13 issuers reported y/y declines in charge-off rates. Although most issuers reported growth in charge-off rates between 4Q14 and 1Q15, this is a normal seasonal pattern, and there is little sign of significant upward movement in charge-off rates. Some issuers are revising downward their future charge-off rate expectations: Capital One reported that its rate may fall to the low 3% range in 3Q15 (although it does expect rates to rise in 4Q15 and 2016). And Chase expects that its full-year 2015 net charge-off rate will be less than 2.5%.

Delinquency rates continue to fall. Of the 8 issuers who reported 30+ day delinquency rates, all reported y/y declines. This indicates that there is little upward pressure on charge-off rates, as delinquencies tend to be leading indicators of future charge-offs.
Signs of revenue growth. in recent years, issuers have reported low/no revenue growth and have instead generated profits from low provisions for loan losses. As issuers have now begun to target outstandings growth, revenues have started to increase. Of the 6 leading issuers providing credit card revenue data in 1Q15, 5 reported y/y growth. In addition, 4 of these 5 issuers reported growth in both net interest and noninterest income.

credit_card_revenue_1Q14-1Q15

Banks Grew Marketing Budgets and Marketing Ratios Modestly in 2014

February 26, 2015

EMI analysis of recently-published FDIC data on 2014 marketing spending for 17 leading banks found that banks are beginning to grow their marketing budgets in order to drive revenue growth in a growing economy. The scale of the increase was relatively modest, a trend that we expect to continue in 2015, as banks look to marry their desire for revenue generation with a continued need to exercise a tight rein on costs.

Specific findings from our analysis:

Total marketing spending for these 17 banks rose 4% between 2013 and 2014. 10 of the 17 banks increased their marketing budgets, 6 cut their budgets, while SunTrust’s marketing expenditure was unchanged.
Net revenues for the 17 banks fell 2%; as a result, their marketing-to-revenue ratios rose by 16 basis points to 2.84%.
Chase had by far the largest marketing budget at nearly $2.8 billion, up 2% from 2013. Four other leading banks (American Express, Citigroup, Capital One and Bank of America) had marketing budgets of more than $1 billion.
Of the 10 banks that grew their marketing budgets in 2014, 5 also showed increased revenues. The 4 banks with the lowest marketing-to-revenue ratios reported revenue declines between 2013 and 2014.
The variation in marketing-to-revenue ratios among these banks is huge. American Express and Discover are primarily credit card issuers and lack branch networks; they tend to have marketing-to-revenue ratios of 8-10%, in line with fast-moving consumer goods (FMCG) companies. National bank marketing ratios tend to be around 3%, while regional bank ratios are generally between 1% and 2%.
Even within these bank categories, there are significant variations. Capital One is a regional bank with a very significant credit card portfolio, so its marketing-to-revenue ratio (6.1%) falls between a monoline and a regional bank. Wells Fargo trailed its national bank peers in marketing spend. Although it grew its 2014 marketing budget by 8% to $613 million, its marketing-to-revenue ratio remains below 1%.