Positive Signs in Leading Credit Card Issuers’ 2Q14 Financials

August 5, 2014

The 2Q14 financials for leading U.S. credit card issuers had a number of positive elements, notably a return to outstandings growth, along with continued strong performance in volume and credit quality metrics.

Outstandings

In a recent EMI blog post, we suggested that the extended series of declines in credit card outstandings had bottomed out. The latest quarterly performance metrics for the leading U.S. credit card issuers provides more evidence of this turnaround: EMI’s analysis of 13 leading U.S. card issuers found a 1% year-on-year (y/y) growth rate in average outstandings in 2Q14.

Growth was led by SunTrust, which grew outstandings 19% y/y, albeit from a low base. Wells Fargo continued its strong outstandings growth rate, with a 10% y/y increase as Wells Fargo credit card penetration of retail banking households reached 39% (from 35% in 2Q13). The top four issuers—Chase, Bank of America, Capital One and Citi—once again acted as a brake on overall industry growth. However, even these four issuers are seeing positive signs. Chase’s new account production rose 40%. Capital One reported a 1% rise in end-of-period outstandings, as it returned to growth earlier than anticipated, driven by a combination of rewards, non-high-balance revolvers, and credit line increases. Even though Citi reported a 3% y/y decline, it attributed this to continued run-off in promotional rate balances, whereas full-rate balances have grown for five consecutive quarters.

Volume

In the absence of credit card outstandings growth in recent years, issuers have focused on volume growth. This growth continued and even accelerated in the most recent quarter (for the eight leading issuers reporting card volume, y/y volume growth rose from 7% in 1Q14 to 9% in 2Q14). Issuers attributed this growth to a combination of new account growth and increases in average cardholder spending.

Six of the eight issuers in the above chart had stronger y/y volume growth in 2Q14 compared to 1Q14. As in previous quarters, Wells Fargo and Chase led the industry. Wells Fargo benefited from both account growth as well as a 14% rise in average spending per account, as more cardholders moved their Wells Fargo card to top of wallet. Capital One reported an 11% growth rate, but claimed that if private-label cards were excluded, its growth rate was 16%, driven by continued marketing and customer experience initiatives.

Credit Quality

With charge-off and delinquency rates below historic norms for many issuers, one would expect that a push for outstandings growth would lead to upward pressure on these rates. However, this has not been the case, and issuers continued to report significant y/y and q/q declines in charge-off rates in 2Q14.

Of the 12 leading issuers reporting credit-card charge-off data, 10 reported double-digit y/y declines. The two main “monolines”—American Express and Discover—continued to have the lowest rates, but SunTrust and Chase now also have charge-off rates below 3%.

Implications

These positive metrics are clear signs that the credit card industry’s recovery from the 2008 financial crisis and resulting Great Recession, is gaining momentum. For issuers looking to capture a share of this growth, the following are some areas they should consider:

Cross-sell and upsell existing customers. There has been much coverage in the industry of Wells Fargo’s continued growth in its credit card penetration rate, which has fueled strong outstandings and volume growth. Regional bank card issuers also tend to follow this cross-sell model, although most of these lack Wells Fargo’s cross-sell expertise and experience. However, leading issuers are now taking a growing interest in cross-selling existing customers; for example, Bank of America reported that 65% of its new credit cards issued in 2Q14 were to existing bank clients. Issuers should also commit to regularly assessing existing cardholder qualification for card “upgrades”, and then make appropriate upsell offers.
Invest in multiple credit card sales channels. For many years, direct mail was the overwhelmingly dominant channel for new account generation. However, a number of factors are leading to a change in the credit card sales channel mix, including:
- A general decline in direct mail as a marketing channel, driven by both lower response and the emergence of lower-cost channels.
- Increased customer usage of online and mobile banking channels, and increased bank industry recognition of the sales potential of these channels. 54% of new Chase credit card accounts in 2Q14 were acquired online.
- The reduced usage of bank branches for everyday transaction processing has led to a redefinition of their role, with banks now looking to realize branches’ potential as sales channels. Wells Fargo recently reported that 83% of its general-purpose credit cards were sold in its Community Banking stores.
Develop offers to drive desired cardholder behavior. Issuers need to have a series of offers available to drive specific cardholder actions at different stages of the customer life cycle (e.g., activation within 90 days of acquisition; retention during the card expiration period; card usage and referrals on an ongoing basis), which ultimately help optimize customer lifetime value.
Continue to focus on rewards. Issuers are increasingly aware that rewards products and programs are integral to achieving retention and growth objectives, so there is a need to continually assess how key program elements—such as earn rates (basic and bonus) and user experience—stack up against competitors.
Invest in credit card brands. It is notable in recent years that many credit card issuers are creating and supporting card brands, both to generate build stronger customer awareness, as well as acting as a point of differentiation from competitors. These new brands apply to both:
- Individual cards (e.g., Santander Bank’s Bravo and Sphere cards, and Huntington’s Voice card)
- Card portfolios; this is especially prevalent in the small business sector, with issuers like Chase (Ink), Capital One (Spark Business) and U.S. Bank (Business Edge) all branding their small business card portfolios.

Four Takeaways from Credit Card Issuer 1Q14 Financials

April 23, 2014

The following are four key takeaways from the 1Q14 financials for 13 U.S. banks with significant credit card operations.

Some improvement in outstandings performance
Continued volume growth
Charge-off rates at or below historic norms
Little change in industry profitability

Average outstandings for the 13 issuers in 1Q14 were unchanged y/y, an improvement from a 2% y/y decline in 4Q13.

For the four largest issuers—Chase, Bank of America, Citi and Capital One—the rate of decline in average outstandings improved from 5% in 4Q13 to 3% in 1Q14. Capital One highlighted progress made in working through run-off portions of the acquired HSBC portfolio, and it expects outstandings growth in the second half of 2014. Other issuers are ramping up new account production: Bank of America originated more than 1 million new accounts for the third consecutive quarter, while Chase opened 2.1 million new accounts in 1Q14, 24% higher than 1Q13.
For Tier 2 bank card issuers—Wells Fargo and U.S. Bank—the rate of outstandings growth rose from 7% in 4Q13 to 8% in 1Q14. Wells Fargo benefitted from the continued growth in credit card penetration of its retail banking households, which rose from 34% in 1Q13 to 38% in 1Q14.
Similarly, regional bank card issuers grew average loans 6% in 1Q14, compared to 5% in 4Q13.
Credit card loan growth rates for the former ‘monolines’—American Express and Discover—were unchanged at 4%.

Eight leading issuers reported 7% y/y growth in credit card volume in 1Q14, slightly lower than the 4Q13 increase. Three issuers—Wells Fargo, Chase and U.S. Bank—reported double-digit percentage growth in 1Q14. In general, issuers appear committed to continuing to push volume growth, as evidenced by the launch of new rewards cards with strong earnings potential (e.g., American Express Everyday), as well as enhancements to existing rewards programs.

12 of the 13 issuers reported y/y declines in net charge-off rates in 1Q14.

12 issuers now have charge-off rates below 4%. The only major issuer with a charge-off rate above 4% is Capital One, who reported that the acquired HSBC card portfolio added about 25 basis points to its charge-off rate in 1Q14. It expects that the impact of this portfolio would be mostly gone by the end of the second quarter.
10 reported charge-off rate increases between 4Q13 and 1Q14. This were attributed to seasonality, as well as indications that rates are starting to move back towards normalized levels as issuers seek to build outstandings growth.
However, it is worth noting that delinquency rates—which have traditionally been a leading indicator of future directions in charge-off rates—continue to decline on both a y/y and q/q basis for most issuers.

The six issuers who provide card-related revenue and cost information, reported that card profitability was virtually unchanged between 1Q13 and 1Q14. Revenue growth remains elusive, declining 1%, as net interest income fell 2%. The relatively strong rise in card volume did not translate into similar growth in noninterest income, as issuers are enhancing their rewards programs, which eats into interchange income (e.g., Discover reported that its rewards rate 11 bps y/y to 1.03% in 1Q14). Noninterest expenses (reported by five issuers) were unchanged y/y, while provisions for loan losses rose 6%, as issuers anticipate future charge-off increases.

Top Credit Card Issuers’ 4Q13 Financials: Takeaways and Implications

January 24, 2014

A scan of 4Q13 and full-year 2013 financials for 13 leading U.S. credit card issuers revealed the following trends in outstandings, volume and credit quality:

Outstandings

Average outstandings continued to decline y/y for the top 4 issuers, but rose in other issuer categories:

Although outstandings for the largest issuers continue to decline, there is evidence that these issuers are now at a inflection point, where growth in new vintages is starting to exceed declines in run-off portfolios. Chase claimed that it reached this inflection point in the second quarter of 2013, and expects to generate moderate outstandings growth this year. Bank of America is pointing to strong growth in account production, with 1 million new accounts opened in each of the past two quarters.
Discover and American Express both increased outstandings by 4% y/y; this led to net interest income growth, of 10% and 8%, respectively.
Wells Fargo grew average outstandings 8%, as it grew new accounts by 29% y/y . Credit card penetration of Wells Fargo retail banking households rose from 27% in 1Q11 to 37% in 4Q13.

As there is growing consensus that the economy will grow robustly in 2014, improved consumer confidence should translate into increased credit appetite, which issuers will look to meet with targeted campaigns and pricing (on introductory rates rather than go-to APRs). In addition, in recent years, issuers have focused on higher FICOs (which we discussed in a recent blog), but now may look to develop campaigns, product and pricing for other segments.

Volume

The 7 issuers reporting annual volume data generated an increase of 8% between 2012 and 2013. Growth in volume continues to outstrip outstandings, as debt-wary consumers continue to see the credit card as more of a payment than a borrowing tool.

In general, issuers grew volume from a combination of new account production and increased existing cardholder spending.
American Express’ 9% growth was boosted by a 12% increase in small business spending, marking the fourth consecutive quarter of double-digit growth.

In 2014, issuers will be looking to benefit from growth in consumer spending as the economic recovery takes shape, so we should expect a continuation of tiered earnings in rewards programs, as well as communications and offers targeted at key stages of the cardholder life cycle (card acquisition, activation, retention and ongoing card usage).

Credit Quality

Charge-off rates for many issuers are at or below historic lows, with all issuers reporting 4Q13 rates below 4%.

In the aftermath of the financial crisis, some of the leading issuers experienced huge spikes in their charge-off rates. The charge-off rate for Bank of America’s U.S. Card unit rose to more than 14% in the third quarter of 2009, while the rate for Citigroup’s Citi-Branded Cards-North America unit peaked at 10.78% in 2Q10. The chart above shows that charge-off rates for these issuers have returned to normal levels.
Low charge-off rates—and the expectation that these rates will remain low—enable issuers to maintain reduced loan loss provisions. This in turn boosts profitability even as issuers struggle to grow revenues. Some of the leading issuers reported strong y/y declines in provisions in 4Q13, including Chase (-46%) and American Express (-27%).

As issuers push for outstandings growth in 2014, the expectation is that charge-off rates will rise. However, there are indications that rises in charge-off rates will be moderate. 30+ day delinquency rates (leading indicator for charge-off rates) continue to fall. In addition, the credit card sector has changed fundamentally in recent years; neither consumers nor issuers see credit cards want to return to the borrowing/lending culture that pertained prior to the financial crisis.