Tag Archives: Discover

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.

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.)