Tag Archives: Credit card

Discover 2Q11 financials: leading indicators for other credit card issuers

Discover Financial posted second quarter 2011 financials this morning.  As Discover reports quarterly financials a month before other leading card issuers, we look to its financials to get an early read on broader trends in the credit card industry

The following summarizes some key credit card metrics in Discover 2Q11 financials:

  • Charge-off rate: continued to improve, with a decline of 95 bps in the quarter to 5.01%
  • Delinquency rate: the 30+ day delinquency rate fell 80 bps to 2.79% (Discover reported this as an all-time low)
  • End-of-period loans: fell 1% y/y, but this decline is tailing  off (y/y was was 3% in 1Q11)
  • Volume: Discover Card sales volume rose 9% y/y, while total Discover Card volume grew 11%

Discover does not break out revenue and provision for loan loss figures for its credit card operations, but rather reports them for the total company.

  • Net interest income: rose 4% y/y, with a 1% rise in interest income, and a 6% fall in interest expense
  • Other income: increased 6% y/y, driven in part by a 16% rise in loan fee income
  • Provision for loan losses: fell 76% y/y to $176MM

In summary, we are seeing a continuation of recent trends: improvement in credit quality metrics; spending but no loan growth; and profitability driven by lower provisions for loan losses, rather than revenue growth.

However, with charge-off rates now close to 5% and 30+ day delinquency rates at an all-time low, Discover is shifting its focus to growing outstandings.  It reported that the decline in outstandings is bottoming out, and it anticipates growth in the coming quarters. And to push this growth, Discover grew marketing spend 27% y/y in 2Q11.

However, issuers’ interest in growing outstandings is limited by continued weak consumer demand.  This is leading to some issuers to looking to acquire card portfolios (e.g., Capital One’s recent private-label portfolio acquisitions, and its bid for HSBC’s U.S. card portfolio), or refocusing attention on acquiring non-card loan portfolios (note Discover’s own recent acquisitions of Tree.com’s Home Loan Center, as well as its earlier acquisition of The Student Loan Corporation from Citigroup).

Credit card issuer quarterly scorecard: improved credit quality; volume growth; lending declines

In the latest quarterly financials, the leading U.S. credit card issuers displayed consistent trends in credit quality, purchase volumes and card loans.

  • Credit quality: issuers continued to report strong yearly and quarterly declines in charge-off rates.  The current rate of decline, as well as the high rates of decline in delinquency rates, indicate that charge-off rates will fall further in the next few quarters.

  • Purchase volume: All leading credit card issuers are growing purchase volumes year-on-year, with four issuers reporting double-digit volume growth. In addition, issuers like Chase and Capital One have accelerated volume growth in recent quarters.  In 1Q11, Citi reported a small y/y rise of 0.3%, which followed a protracted period of volume decline.  The 7 issuers listed in the chart had a combined $321 billion in purchase volume, up 9% y/y.

 

  • Average Outstandings: Although issuers have been effective in growing purchase volume, average outstandings for all leading issuers continued to decline year-on-year in 1Q11.  The 8 issuers combined for $515 billion in average outstandings in the quarter, down 18% from 1Q10.  The rate of decline slowed in 1Q11, with combined outstandings for the 8 issuers down 1.4% from 4Q10.  And Discover reported 1.7% quarterly growth in average outstandings.  Many issuers have reported that they expected outstandings to grow in the second half of 2010.

Internet is now Bank of America’s largest credit card account production channel

Bank of America’s Full Year 2010 Investor Factbook revealed some interesting trends in various channel’s share of credit card account production

  • eCommerce channel accounted for 36% of the bank’s credit card account production in 2010, up significantly from 15% in 2008
  • Bank branch network share fell from 25% to 21% (note that Bank of America was at the forefront in the mid 2000’s in driving credit card sales through branches)
  • Direct mail share rose from 20% to 21%, stemming steady declines in its share of account production in recent years

The findings underscore the growing importance of the Internet as a sales channel.  However, what the Bank of America data does not reflect is the fact that consumers now tend to use multiple channels before making an acquisition.  For example, a consumer could receive a credit card offer in the mail, but submit their application via the Internet.  Therefore, bank credit card issuers need to ensure that these key channels (Internet, branch and DM) are all in synch to optimize sales effectiveness.