Credit Card Issuers are Growing Outstandings…and Charge Offs

May 17, 2017

Most of the leading U.S. credit card issuers—portfolios of more than $500 million— reported y/y growth in their average credit card outstandings in the first quarter of 2017.

However, all of these issuers are also experiencing significant growth in credit card net charge-offs (gross charge-offs minus recoveries). Of the 19 issuers:

10 reported y/y charge-off increases of more than 20%.
For 17, charge-off rises outpaced outstandings growth.

These recent significant increases in charge offs follow an extended period of declining charge-off rates in the aftermath of the 2008-9 Financial Crisis. During the 2010-2015 period, issuers tightened up their credit card underwriting considerably, and consumers moved away from racking up high levels of credit card debt. According to the FDIC, the credit card net charge-off rate fell from a recessionary high of more than 13% in 1Q10 to less than 3% in 3Q15. Since then, the rate rose slightly—to 3.16% in 4Q16—but still well below levels seen prior to the Financial Crisis. And five of the issuers in the chart above (Chase, Bank of America, Discover, BB&T and SunTrust) still had net charge-off rates of less than 3% in 1Q17.

Even though current charge-off rates are low by historic averages, issuers must be careful not to allow charge-off momentum to grow to a problematic level. One area of potential concern: many leading credit card issuers are reporting strongest outstandings growth for their low FICO Score segments, which tend to have significantly higher credit risk profiles.

Of course, when focusing on growing credit card loans, issuers accept that charge offs will rise. However, they can help to ensure that these charge offs remain at a manageable level by:

Maintaining underwriting discipline
Avoiding a race to the bottom in credit card pricing; it’s notable that, according to CreditCards.com, the average credit card APR reached a record high of 15.80%)
Providing content and tools to educate consumers on how to use credit cards responsibly
Continuing to market credit cards as both payment tools and sources of credit

Credit Card Issuers Looking to Grow Loans Across the Credit Spectrum

March 6, 2017

An analysis of 10-K SEC filings by EMI Strategic Marketing has found that leading credit card issuers are looking to grow outstandings across a wider range of FICO Score segments.

In the aftermath of the Financial Crisis and Great Recession, issuers narrowed their focus, moving away from lower FICO Score segment, and concentrating their efforts on prime and superprime consumers. In recent years, issuers have reduced charge-off rates to very low levels. With the steady growth in the economy and rising consumer confidence, issuers see an opportunity to grow their credit card outstandings and many are willing to take on more risk in order to achieve the desired growth.

The four largest credit card issuers—Chase, Bank of America, Citibank and Capital One—all reported growth in each of their FICO Score categories in 2016. Three of these issuers (the exception was Citi) had strongest growth in their lowest credit score segment. Citibank had double-digit growth in large part due to the acquisition of the Costco portfolio from American Express, and this acquisition influenced the relative growth rate of different credit score segments. Note that 36% of Capital One’s outstandings are held by consumers with credit scores below 660, compared to only 14% of Chase’s and 15% of Citibank’s (Citi-Branded Cards unit) outstandings.

Leading monoline credit card issuer Discover followed a similar pattern, with stronger growth for the <660 FICO Score segment, which accounted for 18% of total outstandings at the end of 2016.

Among the regional bank card issuers, Wells Fargo reported very strong growth (+19%) in the <600 segment, and consistent growth across most other segments. However, it had a 7% decline in the 800+ segment, as it does not appear to have an affluent credit card that can compete effectively with American Express, Chase (which launched Sapphire Reserve in 2016) and Citibank.

Other regional bank card issuers are also looking to drive growth across the credit spectrum. SunTrust, KeyBank and Regions have some of the strongest credit card loan growth rates in the industry, with very strong growth at the lower end of the spectrum. In contrast, PNC had strongest growth in the 650+ FICO Score segments.

The following are some key considerations for issuers looking to grow outstandings across the credit spectrum:

Compare the FICO composition of the issuer’s credit card portfolio to its peers. Assess the organization’s appetite to expand into new credit score segments.
Understand the financial needs, characteristics and behaviors of different credit score segments
Have products, offers and pricing in place for a range of consumer segments.
Invest in new marketing channels (and develop messaging) to reach different segments
Partner with other bank units that have strong connections with particular segments (e.g., wealth management and consumer financing units) in order to drive cross-sell to underserved segments
Ensure that company underwriting reflecting company objectives (while maintaining underwriting discipline).

Leading Credit Card Issuers Focusing Growth on Multiple FICO® Score Segments

November 10, 2016

In a recent blog, EMI discussed some key takeaways from leading credit card issuers’ 3Q16 earnings, one of which was the relatively strong growth in credit card outstandings. In this blog, we look deeper into outstandings trends to identify what FICO Score segments issuers are focusing on to grow outstandings.

Firstly, it is notable that leading issuers reported y/y growth in credit card outstandings across multiple FICO Score segments. However, there were important variations among the issuer categories:

Largest issuers: The following chart looks at y/y changes in outstandings by FICO Score for both Bank of America and Chase. (Citibank also published data on the FICO Score composition of its credit card outstandings, but these were skewed by the acquisition of the Costco portfolio from American Express, so we did not include Citibank in the analysis.) Bank of America generated low growth across most segments, as it struggles to grow overall outstandings following a protracted period of declines. Chase’s growth was concentrated in the 660+ FICO Score segment, boosted by the recent launches of both Sapphire Preferred and Freedom Unlimited.

Monolines: Capital One and Discover both generated strong growth in the lower FICO Score (660 and under) segment. This segment now accounts for 36% of Capital One’s total credit card outstandings, significantly higher than Discover (18%) and Chase (14%).

Wells Fargo: in spite of the fallout from the recent fake-account scandal, Wells Fargo continued to growth credit card outstandings in 3Q16. It reported strong growth across most FICO Score segments, with particularly strong growth in the subprime segment. However, it continues to struggle to grow superprime outstandings, as it lacks a card that can truly compete against high-profile affluent cards like American Express Gold and Platinum, and Chase Sapphire Preferred.

Regional Bank Card Issuers: SunTrust, Regions and PNC all reported strong overall growth. SunTrust reported very strong growth across all segments. Regions’ outstandings growth was concentrated in the low-prime and subprime segments. However, PNC’s outstandings growth was concentrated in higher-FICO Score segments, driven by the April 2016 launch of the Premier Travelers Visa Signature® card.

As issuers seek to continue to increase overall credit card loan growth, it is likely that they will continue to focus on multiple FICO Score segments. They will also be looking to identify underperforming segments, diagnose reasons for this underperformance (e.g., deficiencies in cards, offers or communications targeting these segments), and develop initiatives to improve performance. Similarly, issuers will want to identify if they are overly dependent on certain segments for outstandings growth or share, and whether this dependence leaves them vulnerable to changes in the macroeconomic or competitive environments.