Leading credit card issuer 3Q14 performance: key takeaways

December 4, 2014

EMI analysis of the leading U.S. credit card issuers’ latest quarterly financials—as well as FDIC call reports—revealed the following trends in outstandings, volume and charge-off rates. According to the latest call report data from the FDIC, end-of-period outstandings rose 0.9% between 3Q13 and 3Q14. Three of the four issuer segments grew card loans, with the Big Four issuers continuing to act as a brake on stronger overall growth.

End-of-period card loans for the Big Four issuers (Chase, Bank of America, Citi and Capital One, which account for 66% market share) fell 1%. Chase and Capital One reported loan growth (+3% and +4% respectively), while Citi (-6%) and Bank of America (-1%) continued to decline.
The four main card “monolines” had the strongest loan growth, led by Barclaycard (+32%) and Synchrony (+24%). American Express and Discover each reported 7% growth.
The super-regionals maintained their strong loan growth rate, with Wells Fargo rising 11% (maintaining its strong recent momentum) and U.S. Bank up 5%.
Other regional bank card issuers* had steady card growth. Within this segment, SunTrust was the standout performer, up 22% y/y. Other regionals banks with relatively strong credit card loan growth included PNC (up 5% to $3.9 billion), Fifth Third (rise of 7% to $2.1 billion) and Regions (+8%, to $0.9 billion).

Bank cards issuers are ramping up efforts to cross-sell credit cards to existing banking customers.

Wells Fargo is leading this push, with its credit card penetration of retail banking households reaching 40% in 3Q14 (up from 28% in 3Q11). To target its affluent clients, Wells Fargo recently launched American Express-branded credit cards.
Regional banks are seeking to replicate the approach of the super-regionals; Regions reported that credit card penetration was 15% in 3Q14, up two percentage points y/y.
Even the top issuers are looking to tap into cross-sell opportunities: Bank of America reported that 64% of new cards issued in 3Q14 were to existing bank clients.

In recent years, issuers have focused much more on growing volumes rather than loans. Even as issuers are now refocusing on growing outstandings, they continue to seek to grow card volume, through tiered rewards programs and acquisition/activation offers. Issuers leading the way include Capital One (17% y/y rise in general-purpose card volume), Wells Fargo (+16%), Chase (+12%) and American Express (+9%). Credit card charge-offs rates continue to decline, with the scale and duration of the decline surprising the issuers themselves. Of the 13 issuers in the table below, seven had 3Q14 charge-off rates below 3%, and eight of the issuers reported y/y declines.

Issuers continue to focus outstandings growth on higher-FICO segments, with some exceptions.

Big Four Issuers: For Bank of America, outstandings for the 740+ FICO segment rose 5%, but outstandings fell 6% for the <740 segment. However, Chase bucked the general trend with stronger growth for the <660 FICO segment.

Monolines and super regionals: both Discover and Wells Fargo reported strong outstandings growth between end-3Q13 and end-3Q14, with stronger growth performance for higher FICOs.

Other regional bank card issuers: PNC and SunTrust following the general pattern, with stronger outstandings growth for higher FICOs. However, Regions’ <620 segment outstandings rose 22% (albeit from a low base).

* Other Regional issuer segment comprised of the following banks: TD Bank; PNC; Fifth Third; BB&T; Citizens Bank; Regions; SunTrust; Commerce Bank; KeyBank; and BBVA Compass.

Time for U.S. Credit Card Issuers To Shift Focus to Lower FICOs?

September 5, 2014

One of the themes in leading credit card issuers’ 2Q14 financials was the expectation of a return to steady outstandings growth. Even those top issuers who continued to report y/y outstandings declines—such as Bank of America and Capital One—indicated that growth is on the way. In the aftermath of the financial crisis, issuers pulled back from the prime and sub-prime FICO segments and concentrated their business growth initiatives on the superprime segment. As issuers now look to generate outstandings growth, one of the strategies open to them is to target the lower FICO segments. However, EMI analysis shows that issuers continue to focus on the higher FICO categories. The chart below shows that, for most issuers, lower FICO segments’ share of total consumer credit card outstandings continues to decline.

Even though issuers use different FICO categories, the chart enables us to compare the FICO composition of credit card portfolios between different issuers.

Consumers with credit scores of less than 680 accounted for 32% of Wells Fargo’s outstandings at the end of 2Q14, compared to only 18% of Bank of America’s outstandings. This may help explain why Wells Fargo’s average credit card outstandings rose 10% y/y in 2Q14, compared to a 2% decline for Bank of America.
Similarly, 17% of Discover’s outstandings are held by consumers with FICOs of <660, compared to just 5% of Chase outstandings. Discover reported 6% y/y growth in outstandings in 2Q14, compared to just 1% growth for Chase.

Looking over a longer period (2Q11-2Q14), we see a consistent pattern of the lower FICO segments losing share of consumer credit card outstandings. For Chase, consumers with FICOs of less than 660 accounted for 14% of outstandings at the end of 2Q14, compared to 20% at the end of 2Q11. However, for some issuers, the share decline in lower FICO segments has not been very dramatic. For example, FICOs of <640 accounted for 17% of outstandings at the end of 2Q14, a share loss of just two percentage points since 2Q11.

As consumer confidence returns, issuers expect to grow outstandings in the coming quarters. However, to achieve their goals, they will need to develop strategies for a broader FICO range. In addition to continuing to target more affluent consumers, issuers will need to develop strategies, products, pricing and messaging to reconnect with prime, lower-prime and sub-prime consumer segments.

Credit Card Issuers Focus on Affluent Segments

August 14, 2013

The recently-announced credit card issuing deal between Wells Fargo and American Express highlights issuers’ focus on targeting the affluent market. Over the past two years, Wells Fargo has been successful in increasing credit card penetration of its retail bank households from 27% to 35%. To grow penetration further, the bank has realized that its needs a broader credit card portfolio to meet the needs and usage patterns of customer segments. It has revamped some of its cards and offers, but still lacks a high-end card. The deal with American Express will serve to fill this gap.

The changes in credit card outstandings by FICO segment for different issuers in the two-year period between end-June 2011 and end-June 2013 clearly illustrate the growing importance of affluent consumers to issuers’ credit card portfolios:

Issuers are now turning their attention to outstandings growth (see our recent blog on 2Q13 credit card metrics), with even the three largest issuers (Chase, Bank of America and Citi) all reporting that the extended period of outstandings decline is coming to an end. However, the scars from the financial crisis will linger, and issuers remain reluctant to extent credit to consumers with low FICO scores (these consumers are increasing being offered alternative payment products, such as secured and prepaid cards).

So, EMI expects that most issuers will be looking to build outstandings from consumers with higher FICOs (generally above 680). In this increasingly competitive environment, the following are 5 ways that credit card issuers can effectively market to the affluent consumer segment:

Leverage market and competitive research to develop products and features that are tailored to affluent customer needs and behaviors, and that compete strongly against competitive offerings.
Build card positioning and acquisition offers around spending rather than borrowing. Given their spending patterns, more affluent customers are more likely to respond to spend-based incentives (e.g., bonus points, tiered rewards programs) rather than aggressive introductory or go-to interest rates.
Develop marketing for the entire customer lifecycle. The traditional focus in the card sector has been on new cardholder acquisition, which has frequently resulted in other stages of the lifecycle being neglected. Issuers should develop a series of communications and offers based on other key stages of the customer lifecycle, such as the first 90 days (activation opportunity) and card expirations (retention and upsell opportunities).
Analyze customer spending data to develop usage stimulation offers for cardholders with no/low usage.
Develop synergies with other bank units that also serve affluent clients. Traditionally, credit card operations were operations as a separate silo with a bank’s organization. More recently, bank have overhauled their structures and strategies with customers, rather than products, the central focus. And hitherto disparate units (such as credit card and wealth management) are starting to come together to develop synergies in areas like product bundle development, cross-sell campaigns, and two-way referral arrangements.