Credit Card Issuers Continue to Pursue Spend-Centric Model

April 23, 2012

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.)

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.