Credit quality continues to improve for leading U.S. card issuers

October 24, 2011

The leading U.S. credit card issuers continue to report strong improvements in their net charge-off rates.

Of the 11 issuers analyzed, eight had 3Q11 net charge-off rates below 5%. Four had rates below 4%, with American Express leading the industry, at 2.6%
Over the past 12 months, eight issuers reduced rates by more than three percentage points (300 basis points)
Seven issuers reported rate declines of more than 100 bps between 2Q11 and 3Q11

Issuers also reported strong year-on-year improvements in 30+ day delinquency rates, although the quarterly trend indicates that these declines may be bottoming out.

Five of the seven issuers analyzed had 30+ day delinquency rates below 3%
Six of the seven issuers reported triple-digit y/y declines in delinquency rates. The largest decline was reported by Bank of America (178 bps), which still has the highest delinquency rate among these seven issuers
Between 2Q11 and 3Q11, delinquency rates for two issuers (American Express U.S. Card and U.S. Bank) were unchanged. Capital One’s 30+ day delinquency rate rose 32 bps in the most recent quarter

The strong declines in charge-off and delinquency rates have enabled issuers to significantly reduce their provisions for credit losses, which have boosted profitability. However, with delinquency rate declines leveling off, it is expected that reductions in charge-off rates and loss provisions will also abate in the coming quarter.

Therefore, issuers will increasingly look towards revenue growth drivers to maintain and grow profitability. On the one hand, they will seek to continue to encourage cardholders to increase spending on their cards, which drives up noninterest income. In addition, with charge-off rates now at relatively low levels, and with revenue growth remaining anemic, credit card issuers may be more inclined in the coming quarters to seek to build card outstandings and drive net interest income, perhaps through a combination of easing underwriting standards, offering strong introductory offers on balance transfers, and even reducing APRs.

U.S. Card Issuers: 3Q11 Spending and Lending Trends

October 21, 2011

An analysis of 3Q11 outstanding and volume data for leading U.S. credit card issuers reveals:

Signs of growth in outstandings. For the 11 issuers in the study
- Four reported both year-on-year (y/y) and linked-quarter (q/q) growth in average credit card outstandings.
- Five reported y/y declines, but q/q increases, indicating a recent transition to growth.
- Two issuers had both y/y and q/q declines in outstandings. One is Bank of America, whose high rates of decline are indicative of its particular challenges. The other is Capital One, but it is worth noting that its Domestic Card portfolio includes a run-off installment loan portfolio; excluding this portfolio, Capital One’s credit card outstandings are growing.

Continued strong volume growth (in this case, we just look at y/y growth for comparison purposes, due to the seasonal nature of spending):
- Capital One has the strongest y/y growth, but this is part due to its acquisition of the Kohl’s private-label card portfolio. Excluding this acquisition, Capital One still recorded double-digit volume growth.
- American Express continues to report very strong volume growth in both consumer and small business spending (growth rate for the latter was 15%).

Volume growth rates continue to outstrip outstandings growth, and is indicative of a fundamental shift in the industry following the financial crisis, away from a lend-centric and towards a spend-centric model. This is seen in the persistently high APRs and relative scarcity of balance transfer introductory offers, but also in the very large bonus points/miles offers to drive both initial and ongoing card purchases.

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

June 23, 2011

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).