Tag Archives: Discover

U.S. Credit Card Issuer Emphasis on More Affluent Consumers Reflected in Latest Outstandings

The latest quarterly regulatory filings from some of the leading U.S. credit card issuers reveal that outstandings held by cardholders with higher FICO scores are accounting for an increasing share of total credit card portfolios. Over the past year, there has been ample evidence of issuers targeting more affluent consumers with new products and aggressive offers, while continuing to maintain high underwriting standards.

Although these issuers do not use the same FICO-score categories, the following charts show that all issuers reported continued declines in outstandings held by cardholders with lower FICOs (below 660), while oustandings for cardholders with higher FICOs either had smaller declines or in fact grew over the past year.

  • Chase: Overall, there was no change in Chase end-of-period (EOP) credit card outstandings between 1Q11 and 1Q12. However, cardholders with FICOs of 660+ (which accounted for 82% of total outstandings in 1Q12) rose 4%, while outstandings with FICOs below 660 fell by 15%.

  • Discover uses the same FICO categorization as Chase. It reported a 4% total rise in EOP card outstandings between 1Q11 and 1Q12. FICOs of 660+ rose 10%, while FICOs <660 fell 18%. FICOs of 660+ accounted for 81% of total Discover credit card outstandings at the end of 1Q12, just below the rate for Chase.

  • Bank of America uses different FICO categories, with a cut-off point at 620. Total outstandings fell 10% y/y to the end of 1Q12, but the decline in FICOs below 620 (-41%) was much higher than that for FICOs of 620+ (-6%). FICOs of 620+ now account for 92% of total outstandings, compared to 88% in 1Q11.

  • Like Bank of America, Citibank’s total EOP U.S. credit card outstandings fell y/y (by 4%), and there were declines in all FICO categories, but again higher FICOs reported lower declines. At Citi, FICOs of 620+ now represent 91% of total outstandings, up from 85% at the end of 1Q11.

  • Unlike other issuers, Wells Fargo provides a wide range of FICO categories, which have been summarized into three categories below. Total Wells Fargo credit card outstandings rose 4% y/y, but there was an 11% decline among sub-prime FICOs below 600. For FICOs of 760+, outstandings rose 16% and now represent 25% of outstandings, up from 23% in 1Q11.

Card Networks Report Robust Purchase Volume Growth

With MasterCard and Visa reporting quarterly financials in recent days, we now have a fuller picture of purchase volume trends for the main U.S. card networks.  Each reported relatively strong year-on-year growth in U.S. card spending, led by MasterCard (+13%) and American Express (+12%).

It is notable that Visa and MasterCard are following different paths in growing purchase volume.  Visa, which has been the dominant debit card issuer, is reporting continued slower growth in debit card purchase volume.  This is due to some debit card portfolios switching to MasterCard, as well as the impact of the Durbin Amendment, and has resulted in Visa’s credit card growth outstripping its debit card growth for the past three quarters.

In contrast, MasterCard has reported accelerating U.S. debit card purchase volume growth.  Credit card volume growth has also accelerated, but continues to trail debit card volume.

American Express has consistently recorded double-digit volume growth as it follows its spend-centric approach.  Discover also reported strong growth in 2011, but this has trailed off in recent quarters.

During this period of strong purchase volume growth for both credit cards and debit cards, credit card outstandings have continued to decline, emphasizing the transition in the credit card sector from a lend-centric to spend-centric orientation.  Many leading U.S. credit card issuers are expecting outstandings to grow slightly in the coming quarters, but it is probable that purchase volume growth will continue to outstrip loan growth for the foreseeable future.

Card volume growth should continue to be significantly higher than overall U.S. consumer spending growth, as consumers switch from cash and checks, with particular growth opportunities for cards in categories where they have traditionally had small shares of payment volumes.

In the longer term, card networks and issuers need to plan for new opportunities and challenges created by a changed payments landscape, characterized by demographic shifts, new payments technologies and changing shopping behavior.

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.