Tag Archives: Citi

Credit Metrics for U.S. Card Issuers Continue to Improve

A study of recently-published financials for the leading U.S. credit card issuers reveals that their charge-off rates continue to decline, and that this trend looks set to continue in the coming quarters.

The following table summarizes 1Q12 managed credit card charge-off rates for 11 of the leading U.S. card issuers.  Ten of the eleven issuers reported year-on-year charge-off rate declines of more than 200 bps. The exception was American Express, which had the lowest rate.  The largest decline came from SunTrust, whose rate fell from 8.68% in 1Q11 to 4.83% in 1Q12. Seven of the eleven reported quarterly declines in their charge-off rates.

Of course, many industry observers are questioning when and at what level charge-off rate declines will bottom out.  Trends in 30+ day delinquency rates typically are a predictor of trends in charge-offs, and it is notable that of the seven issuers who published 30+ day delinquency rate data in the most recent quarter, all reported both year-on-year and quarterly declines.

Therefore, we should expect charge-off rates to continue to decline in the coming quarters. However, some issuers are now at or below historic averages (for example, Discover claimed that its charge-off and delinquency rates are at 25-year lows), so will have less scope for further declines.  In addition, these low charge-off rates may encourage some issuers to loosen underwriting criteria in order to grow loans, which can generate some upward pressure on charge-off rates.  Card portfolio acquisitions and disposals can also have an impact on charge-off rates; Capital One reported in its quarterly financials that it expects the acquisition of the HSBC card portfolio to raise charge-off rates by 75 bps.

Credit Card Issuers Continue to Pursue Spend-Centric Model

First quarter 2012 results of the leading U.S. credit card issuers reveal that they are continuing to drive spending growth by cardholders. Four of the seven leading issuers reported double-digit year-on-year growth rates, led by Chase and Capital One at 15%, followed by U.S. Bank at 14% and American Express at 12% (American Express also reported that small business card volume rose 16% y/y, its highest growth rate since before the financial crisis.  In contrast, Bank of America and Citi had anemic – albeit positive – growth rates.

The situation with regard to lending growth is more mixed. With the return to economic growth, and the significant improvement in credit quality, issuers have been looking to increase outstandings. However, consumers still bear the scars of the financial crisis and remain reluctant to increase their card borrowing. In addition, many issuers have not yet significantly relaxed the stricter underwriting standards that came into place in 2008 and 2009. The three largest issuers (in terms of outstandings) all reported y/y declines, with Bank of America’s average loans falling 11%. Bank of America’s average U.S. credit card outstandings have declined almost 22% over the past two years, and fell below $100 billion in the most recent quarter.  (It should be noted that this decline is partly attributable to card portfolio sales, with the bank selling portfolios over the past year to Regions, Sovereign and Barclaycard.)  Bank of America and Citi were the two issuers with declines in both volumes and outstandings. Chase also reported a y/y decline in average outstandings, but this was due to the sale of the Kohl’s private label portfolio in the first quarter of 2011.

So, at first viewing, we see some credit card portfolio retrenchment among those banks like Bank of America and Citi that were hardest hit by the financial crisis, while other leading issuers are now growing their portfolios. However, at closer inspection, Bank of America and Citi are also positioning themselves for future card growth. Citi had credit card account growth for the fourth consecutive quarter. And Bank of America reported that new accounts in 1Q12 were up 19% y/y.

In addition, it is notable that Bank of America is changing the composition of its card portfolio by selling off some private-label card portfolios and changing how cards are originated. (It reported that half of the 800,000 cards originated in the first quarter came through its branch channel.)

Credit card issuers show renewed interest in private-label cards

In recent months, some leading credit card issuers have shown a growing interest in creating or growing private-label credit card portfolios:

  • Capital One announced the acquisition of HSBC’s $30 million card portfolio in August 2011.  This follows its April 2011 purchase of Kohl’s private-label portfolio.  In reporting 3Q11 financials, Capital One indicated that it would be interested in acquiring more private-label portfolios.
  • This week, the Wall Street Journal reported that Wells Fargo is actively exploring whether to issue private label cards
  • In reporting 3Q11 financials, Citigroup announced that it would be moving its private-label card portfolio from Citi Holdings (it asset-disposal unit) to Citicorp.  And it recent renewed its private-label card issuing deals with Shell, Sunoco and Sears.
  • TD Bank has recently entered into a number of deals to issue cards for: Cartier; Furniture First; and Bailey, Banks and Biddle.

There are a number of reasons for issuers’ renewed interest in this market:

  • Credit quality metrics have improved significantly in recent quarters, for both own-branded and private-label cards, with very strong declines in charge-off and delinquency rates.  For example, the net credit loss rate for Citi’s Retail Partner Cards portfolio fell from 12.24% in 3Q10 to 7.51% in 3Q11.  During the same period, the portfolio’s delinquency rate fell from 7.94% to 5.70%.
  • With loan-to-deposit ratios now well below 100% for many leading banks, and with continued pressure on net interest margins, banks are looking to grow loans in new categories
  • Given the recent growth in commercial and corporate lending, banks are also seeking to cement relationships with large corporate clients
  • The CARD Act has impacted revenues and profitability from issuers’ own-branded card operations.  As a result, some issuers are looking to build scale to their card operations by investing in various card categories

In building their private-label card portfolios, issuers need to understand how the marketing of credit card has changed in recent years.  Today, credit card marketing is more focused on encouraging cardholders to allocate a greater share of their everyday spending to cards, rather than cash or checks.   And even though outstandings are showing some tentative signs of growth, issuers are not aggressively chasing loan growth with aggressive interest rates and low underwriting standards.  In building their private-label portfolios, issuers need to apply these learnings and take the longer-term view, in order to avoid the mistakes of the past.