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.

10 Credit Card Trends to Watch in 2015

January 9, 2015

As the credit card industry moves into 2015, economic growth and improved consumer confidence are fueling credit card industry optimism. Here are ten trends that we believe will significantly shape the industry in the coming year.

Outstandings growth will gain momentum. As EMI reported in a recent blog, end-of-period outstandings at the end of 3Q14 were up 0.9% y/y. Up to now, the strong growth by “monolines” and regional bank card issuers has been offset by the low growth or even declines among the top four issuers: Chase, Bank of America, Capital One and Citi. However, even among this top-four segment, there are now signs of growth; Capital One grew average outstandings 2.6% y/y in 3Q14, while Chase reported growth of 1.8%.
Focus on volume growth will continue. Even as issuers shift their focus somewhat to outstandings growth, recent results from the main card networks—Visa, MasterCard, American Express and Discover—show that card volume growth remains robust. This should continue in next few years; according to a recent issue of The Nilson Report, credit card’s share of consumer payment volume is expected to grow from 28% in 2013 to 36% in 2018.
Card rates will rise. Given issuers’ overwhelming dependence on variable-rate pricing, APRs should rise in 2015 in line with changes to the federal funds rate. Other factors that may create upward pressure on APRs include the targeting of lower-FICO segments as well as ongoing enriching of rewards programs. Issuers will continue to promote wide APR ranges rather than a single rate; this gives maximum flexibility is assigning the optimal price to match the perceived risk of default. Given issuer focus on growing outstandings, expect to see growth in 0% introductory rates on both purchases and balance transfers.
Charge-off rates may rise modestly…from historic lows. Leading credit card issuers have expressed surprise at the scale and duration of the decline in charge-off rates in recent years. The expectation is that, as issuers relax underwriting standards and grow credit lines, charge-off rates will rise towards more normal levels. However, it is worth noting that 30+ day delinquency rates also remain very low, so it is also likely that charge-off rates will continue to bounce along the bottom for the first half of 2015. Some leading issuers reported strong y/y growth in provision for loan losses in 3Q14 (e.g., American Express +16%, Capital One +17% and Discover +17%), but this appears to be mostly driven by anticipated growth in outstandings rather than an expectation that charge-off rates will rise significantly.
Rewards will remain a key competitive battleground. In 2014, Issuers once again upped the competitive ante among rewards cards, with a spate of new launches (e.g., Citi Double Cash, American Express EveryDay, Wells Fargo Propel). And issuers’ twin objectives of growing card volume and reducing churn mean that rewards programs should continue to be a key focus for issuers in 2015. Issuers will need to look beyond the earn rate in order to build or maintain a competitive advantage in this area; Discover recently eased restrictions on CashBack redemptions, informed by research that found that consumers value redemption experience and flexibility as much as a higher earn rate.
New payment form factors will gain traction. Two new payment methods will be followed with great interest in 2015: EMV cards and Apple Pay. In advance of the October 2015 shift in liability for fraudulent transactions, issuers are rolling out EMV cards (70% of U.S. credit cards are expected to have chips by the end of the year) and merchants are upgrading terminals to handle EMV transactions (47% of terminals expected to be EMV-enabled by the end of 2015). In addition, most issuers have entered into partnerships with Apple to offer ApplePay to their customers. As with EMV, consumer and merchant acceptance will be key to Apple Pay’s growth prospects. Issuers willingness to embrace these new forms of payment is encapsulated in a recent statement by American Express CEO Ken Chenault at a recent financial services conference: “..credit cards could be displaced…I really don’t care from a form factor standpoint because we’re agnostic. So plastic could go away. I could care less, could go away tomorrow.”
Issuers will ramp up online and mobile marketing and sales. As online (and mobile) banking has now achieved critical mass, issuers are increasingly incorporating cross-sell offers into consumers’ online banking sessions to benefit from fact that online average acquisition costs are significantly lower than traditional channels, such as direct mail. Some leading issuers (e.g., Chase, American Express and Capital One) have also made significant investments in digital marketing, driven by both the lower acquisition costs as well as the ability to measure ROI. The shift to online channels for new account production is being led by Chase, which reported that 54% of new card accounts were generated online in the first 9 months of 2014.
Bank card issuers will increase focus on selling cards through their branch channel. Regional banks are focused on increasing credit card penetration of existing clients. They are also looking for products to focus on to realize branches’ potential as sales channels. For inspiration they look to Wells Fargo, which has reported steady growth in credit card penetration of retail banking households (40% in 3Q14 vs. 27% in 1Q11). The bank also reported that its branches accounted for 83% of card production in 2013.
Issuers will continue to push bonus offers. A number of factors that we have already discussed should ensure that bonus offers will remain high in 2015:
1. The continued importance of rewards programs, with bonus offers playing a key role in driving new customer acquisition and activation
2. Issuers are very unlikely to lower APRs in 2015, so bonus offers will be the main way to attract new cardholder awareness and interest
3. The decline in average acquisition costs from using online and branch channels means that issuers can afford to offer strong bonus offers while maintaining profitability.
Near-prime and sub-prime market will grow. In 2014, Wells Fargo and U.S. Bank both introduced American Express-branded cards with strong rewards and high annual fees, targeting superprime FICO segments. However, there is a growing sense that this market is now saturated. As issuers look for growth, they will be tempted to relax underwriting standards to reach prime and near-prime FICOs. Issuers are less likely to target the sub-prime card market; this market is more likely to be targeted by newly-launched specialist sub-prime issuers, such as Fenway Summer’s FS Card Inc.

Leading credit card issuer 3Q14 performance: key takeaways

December 4, 2014

EMI analysis of the leading U.S. credit card issuers’ latest quarterly financials—as well as FDIC call reports—revealed the following trends in outstandings, volume and charge-off rates. According to the latest call report data from the FDIC, end-of-period outstandings rose 0.9% between 3Q13 and 3Q14. Three of the four issuer segments grew card loans, with the Big Four issuers continuing to act as a brake on stronger overall growth.

End-of-period card loans for the Big Four issuers (Chase, Bank of America, Citi and Capital One, which account for 66% market share) fell 1%. Chase and Capital One reported loan growth (+3% and +4% respectively), while Citi (-6%) and Bank of America (-1%) continued to decline.
The four main card “monolines” had the strongest loan growth, led by Barclaycard (+32%) and Synchrony (+24%). American Express and Discover each reported 7% growth.
The super-regionals maintained their strong loan growth rate, with Wells Fargo rising 11% (maintaining its strong recent momentum) and U.S. Bank up 5%.
Other regional bank card issuers* had steady card growth. Within this segment, SunTrust was the standout performer, up 22% y/y. Other regionals banks with relatively strong credit card loan growth included PNC (up 5% to $3.9 billion), Fifth Third (rise of 7% to $2.1 billion) and Regions (+8%, to $0.9 billion).

Bank cards issuers are ramping up efforts to cross-sell credit cards to existing banking customers.

Wells Fargo is leading this push, with its credit card penetration of retail banking households reaching 40% in 3Q14 (up from 28% in 3Q11). To target its affluent clients, Wells Fargo recently launched American Express-branded credit cards.
Regional banks are seeking to replicate the approach of the super-regionals; Regions reported that credit card penetration was 15% in 3Q14, up two percentage points y/y.
Even the top issuers are looking to tap into cross-sell opportunities: Bank of America reported that 64% of new cards issued in 3Q14 were to existing bank clients.

In recent years, issuers have focused much more on growing volumes rather than loans. Even as issuers are now refocusing on growing outstandings, they continue to seek to grow card volume, through tiered rewards programs and acquisition/activation offers. Issuers leading the way include Capital One (17% y/y rise in general-purpose card volume), Wells Fargo (+16%), Chase (+12%) and American Express (+9%). Credit card charge-offs rates continue to decline, with the scale and duration of the decline surprising the issuers themselves. Of the 13 issuers in the table below, seven had 3Q14 charge-off rates below 3%, and eight of the issuers reported y/y declines.

Issuers continue to focus outstandings growth on higher-FICO segments, with some exceptions.

Big Four Issuers: For Bank of America, outstandings for the 740+ FICO segment rose 5%, but outstandings fell 6% for the <740 segment. However, Chase bucked the general trend with stronger growth for the <660 FICO segment.

Monolines and super regionals: both Discover and Wells Fargo reported strong outstandings growth between end-3Q13 and end-3Q14, with stronger growth performance for higher FICOs.

Other regional bank card issuers: PNC and SunTrust following the general pattern, with stronger outstandings growth for higher FICOs. However, Regions’ <620 segment outstandings rose 22% (albeit from a low base).

* Other Regional issuer segment comprised of the following banks: TD Bank; PNC; Fifth Third; BB&T; Citizens Bank; Regions; SunTrust; Commerce Bank; KeyBank; and BBVA Compass.