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.
The quarterly reports of the leading U.S. banks revealed a number of important channel trends:
Mobile banking is continuing its strong growth. Three of the leading U.S. banks provided quarterly updates on active mobile banking users, and each reported double-digit y/y growth in 1Q15: Chase +22% to 20.0 million; Bank of America +13% to 16.9 million; and Wells Fargo +19% to 14.9 million. According to eMarketer, more than half of adult mobile phone users are expected to use mobile banking in 2015.
Consumers are transitioning to self-service channels for a growing range of transactions. PNC reported that 50% of its consumer customers used non-branch channels for a majority of their banking transactions in the first quarter of 2015, up 7 percentage points y/y. PNC also reported that the non-branch (ATM and mobile) channel share of deposit transactions doubled from 20% in 1Q13 to 40% in 1Q15.
Many banks are slowly shrinking their branch networks. Leading banks who reported significant branch reductions in the most recent quarter include: Citibank (down 61 during the quarter, as its pursued its strategy of consolidating its presence in 7 U.S. markets), PNC (-37 branches), Regions (-33) and Chase (-31 ). Although Bank of America has closed more than 800 branches over the past three years, the net branch decline fell to 20 in the first quarter of 2015.
Some banks are growing branch numbers…and in-branch sales staff. In spite of the general perception that the branch channel is in the process of terminal decline, some banks are in fact acquiring or opening branches in order to capture growth opportunities. Huntington Bank reported the addition of 43 new in-store branches in Michigan. And even though Bank of America reduced branch numbers by 260 over the past year, it grew sales specialists by 5%.
Banks remain committed to the branch network as consumers use multiple banking channels. While electronic self-service channels have a dominant share of everyday banking transactions, branches still play a key role in areas like new account generation, customer relationship management (including cross-sell), and branding. Wells Fargo claims that its most loyal customers are not those who have the most products, but rather those who use the most channels most often. It reported that mobile banking sessions rose 38% in 2014, while branch visits remained steady.
There is a wealth of evidence that consumers are using online and mobile channels as the primary channels for their everyday banking needs:
Having reached critical mass in online banking penetration, the largest U.S. banks continue to report strong growth in active mobile banking customers (Chase +23% y/y to 17.2 million; Bank of America up 17% to 15.5 million; and Wells Fargo +22% to 13.1 million)
Regional bank customers are also growing their usage of non-branch channels. 45% of PNC customers use non-branch channels for a majority of banking transactions. Fifth Third reports that ATM and mobile channels’ share of deposit volume rose from 12% to 31% over the past two years. KeyBank claims that online and mobile transactions are growing by 9% annually, while branch transactions are declining by 3%.
The rise of self-service channels for everyday banking transactions is leading banks to re-assess their investment in their branch networks. For example, banks are changing traditional assumptions as to what constitutes optimal branch density within markets. In a recent presentation, KeyBank claimed that branch density is now less relevant as long as a bank can pair branches with a good mobile offering. In addition, in a low-revenue-growth environment, banks are under pressure to cut costs in order to meet earnings expectations. As a result of these factors, banks are cutting branch numbers.
Bank of America is expected to cut branches to below 5,000 by the end of 2014, compared to more than 5,700 in the second quarter of 2011. It recently announced the sale of branch clusters in North Carolina and Michigan.
Over the past six months Citibank sold all of its branches in Texas, as it focuses its energies on a select number of large metro markets.
KeyBank has closed or sold 8% of its branches over the past two years, and plans to cut its network further, by about 2-3% per year.
However, banks remain strongly committed to their branch networks. This is largely due to the fact that consumers continue to value the branch channel, even if usage has declined. A recent ABA survey found that 21% of consumers named the branch as their preferred banking channel, up from 18% in 2013. In addition, banks recognize the benefits in encouraging customers to use multiple channels. Wells Fargo found that customers using its stores as well as online and mobile channels have a 70% higher purchase rate than customers who only use online and mobile. With in this mind, the following are five branch strategies that banks should follow, with examples of banks that have already implemented these approaches:
Deploy new branch formats. Given lower traffic and transaction volumes in branches, banks should launch branch prototypes with smaller footprints, so that they can maintain their physical presence, but at a lower cost.
PNC has converted 200 of its branches to a smaller format, with 100 more to follow by the end of 2014.
Launch flagship branches in selected markets. With changing ideas around branch density, bank can consolidate multiple branches into a large flagship store. These flagship stores act as a brand beacon for the bank in specific markets, as well as providing space for the bank to showcase new innovations
Reconfigure branch staff. As branch activity is switching from transaction processing to sales and advice, and branches switch to smaller format, bank can reduce the average number of staff per branch, but should also change the functional balance, with fewer tellers and more sales specialists.
In the 18 months to June 2014, Fifth Third cut 22% of its branch service staff, but increased sales staff by 6%.
Over the past year, PNC has grown its number of investment professionals in branches by 4%.
Incorporate technology into branches. As consumers become more accustomed with using technology for their everyday financial needs, banks should showcase customer-facing technology in branches. This can enhance the user experience and capture sales opportunities
Regions is installing two-way video to enable customers communicate directly with bankers via an ATM.
Open branches outside of footprint. As having a critical mass of branches in a market is no longer a prerequisite for success, banks can open branches beyond their traditional retail footprint, to target specific consumer or business clusters.
City National has established branches in New York City, Atlanta and Nashville, dedicated to targeting entertainment firms that are clustered within these markets.