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Top Credit Card Issuers’ 4Q13 Financials: Takeaways and Implications

A scan of 4Q13 and full-year 2013 financials for 13 leading U.S. credit card issuers revealed the following trends in outstandings, volume and credit quality:

Outstandings

Average outstandings continued to decline y/y for the top 4 issuers, but rose in other issuer categories:

  • Although outstandings for the largest issuers continue to decline, there is evidence that these issuers are now at a inflection point, where growth in new vintages is starting to exceed declines in run-off portfolios.  Chase claimed that it reached this inflection point in the second quarter of 2013, and expects to generate moderate outstandings growth this year.  Bank of America is pointing to strong growth in account production, with 1 million new accounts opened in each of the past two quarters.
  • Discover and American Express both increased outstandings by 4% y/y; this led to net interest income growth, of 10% and 8%, respectively.
  • Wells Fargo grew average outstandings 8%, as it grew new accounts by 29% y/y .  Credit card penetration of Wells Fargo retail banking households rose from 27% in 1Q11 to 37% in 4Q13.

As there is growing consensus that the economy will grow robustly in 2014, improved consumer confidence should translate into increased credit appetite, which issuers will look to meet with targeted campaigns and pricing (on introductory rates rather than go-to APRs).  In addition, in recent years, issuers have focused on higher FICOs (which we discussed in a recent blog), but now may look to develop campaigns, product and pricing for other segments.

Volume

The 7 issuers reporting annual volume data generated an increase of 8% between 2012 and 2013.  Growth in volume continues to outstrip outstandings, as debt-wary consumers continue to see the credit card as more of a payment than a borrowing tool.

  • In general, issuers grew volume from a combination of new account production and increased existing cardholder spending.
  • American Express’ 9% growth was boosted by a 12% increase in small business spending, marking the fourth consecutive quarter of double-digit growth.

In 2014, issuers will be looking to benefit from growth in consumer spending as the economic recovery takes shape, so we should expect a continuation of tiered earnings in rewards programs, as well as communications and offers targeted at key stages of the cardholder life cycle (card acquisition, activation, retention and ongoing card usage).

Credit Quality

Charge-off rates for many issuers are at or below historic lows, with all issuers reporting 4Q13 rates below 4%.

  • In the aftermath of the financial crisis, some of the leading issuers experienced huge spikes in their charge-off rates.  The charge-off rate for Bank of America’s U.S. Card unit rose to more than 14% in the third quarter of 2009, while the rate for Citigroup’s Citi-Branded Cards-North America unit peaked at 10.78% in 2Q10.  The chart above shows that charge-off rates for these issuers have returned to normal levels.
  • Low charge-off rates—and the expectation that these rates will remain low—enable issuers to maintain reduced loan loss provisions.  This in turn boosts profitability even as issuers struggle to grow revenues.  Some of the leading issuers reported strong y/y declines in provisions in 4Q13, including Chase (-46%) and American Express (-27%).

As issuers push for outstandings growth in 2014, the expectation is that charge-off rates will rise.  However, there are indications that rises in charge-off rates will be moderate.  30+ day delinquency rates (leading indicator for charge-off rates) continue to fall.  In addition, the credit card sector has changed fundamentally in recent years; neither consumers nor issuers see credit cards want to return to the borrowing/lending culture that pertained prior to the financial crisis.

Leading U.S. Credit Card Issuers Continue to Shy Away from Lower FICO Segments

The leading U.S. credit card issuers continue to benefit from historically low charge-off rates, but they have struggled to shift the needle in terms of revenue growth.  This is mainly due to anemic outstandings growth, as consumers remain reluctant to borrow, and issuers continue to have strict underwriting criteria.

There are now signs that issuers are looking to build their credit card loan portfolios.  Issuers like Discover, Wells Fargo and SunTrust reported strong y/y growth in end-of-period credit card loans.  And although outstandings for the three leading issuers—Chase, Bank of America and Citi—continued to decline, they have indicated that they expect their portfolios to grow in the coming quarters.

As issuers look to drive outstandings growth, they will need to change underwriting criteria that has resulted in the composition of portfolios switching significantly towards higher FICOs.  And our analysis of the most recent issuer data shows a continuation of this trend.

The following graphic presents changes in outstandings by FICO segment for leading issuers between end-3Q12 and end-3Q13, separated into three issuer categories: big three; fast-growth second-tied issuers; and regional bank card issuers.  We see that most issuers continue to focus growth efforts on the higher FICO segments.

As issuers look to catalyze credit card portfolio growth, they need to focus marketing investments on a broad range of consumer segments.  Issuers must continue to optimize relationships with affluent consumers, through cross-sell campaigns, loyalty programs, as well as targeted offers to drive acquisition, retention and ongoing usage.  They also need to re-engage with lower FICO segments, with new products and pricing, more flexible underwriting, information and advice to help cardholder manage debt, as well as programs to enable secured cardholders qualify over time to be upgraded to an unsecured credit card.  And for all consumer segments, issuers need to develop a balanced positioning of credit cards as effective tools for both making payments and accessing credit.

Reasons for Optimism in Credit Card Issuer 3Q13 Financials; What are the Marketing Implications?

The leading U.S. credit card issuers continued to exhibit trends that have become established in recent quarters, but there were also some signs of change:

  • Outstandings: Average credit card outstandings continued to decline y/y, with the big four issuers (Chase, Bank of America, Citibank and Capital One) reporting portfolio decreases.  However, both credit card “monolines” (American Express and Discover) and some regional bank card issuers reported relatively strong growth.  Even among the big three issuers, there were indications of growth: Chase reported a 6% y/y rise in new accounts (1.7 million); and Bank of America new accounts rose from 850,000 in 3Q12 to more than 1 million in 3Q13.

  • Volume: Reflecting the change in the industry in recent years from a lend-centric to a spend-centric model, most issuers reported strong y/y volume growth.  Wells Fargo volume rose 14%, as new accounts grew 11% and  credit card penetration of its retail bank households increased to 35%.  And it is looking to further propel volume growth with its recently-launched rewards program.  Bank of America and Chase also translated strong new account generation into double-digit volume growth.  Discover had relatively low volume growth of 3%, but is aiming to increase volume and outstandings at the same rate.

  • Credit quality: charge-off rates continue to decline for most issuers.  Of the 12 issuers who provided charge-off rate data, 10 have rates below 4%, and three issuers (American Express, Chase and Discover) have rates below 3%.  As a result, provisions for loan losses continued to fall for most issuers, which boosted profitability.  For 30+ day delinquency rates, issuers reported y/y declines, but q/q increases.

We expect that, as the economic recovery continues, consumer confidence will grow, as will their willingness to take on credit card debt.  This may lead to increases in charge-off rates from these historically low levels, but issuers will feel that the resulting growth in noninterest and net interest income will more than offset any rises in provisions for loan losses and noninterest expenses, such as marketing costs.

However, as issuers look to ramp up credit card marketing, they need to factor in the fundamental changes in consumer perceptions and usage of their credit cards.  These changes impact various elements of the marketing mix, including:

  • Positioning: Following the financial crisis, issuers shifted away from positioning credit cards as easy ways to access credit, and towards credit cards as an efficient payments method.  As consumer demand for credit recovers, issuers may need to adapt positioning once again to have a balance between a lend-centric and spend-centric focus.
  • Product: Issuers continue to target more affluent cardholders, so they will need to have a card portfolio that is appropriate for this market.  This explains why both Wells Fargo and U.S. Bank recently entered into card-issuing deals with American Express.
  • Pricing: As the CARD Act places many restrictions on issuers’ ability to change APRs, we expect that there will not be huge price competition in APRs, but rather the focus will be on lengthy zero-rate introductory offers, in particular on balance transfers.
  • Loyalty: Issuers will continue to enhance rewards programs (and accompanying offers) to drive activation, retention and ongoing spending.  To maintain control over costs, issuers are looking to develop more merchant-funded programs, and this trend may gain traction as issuers develop mobile wallets that will enable consumers to manage loyalty programs on their smartphones as well as receive specific merchant offers at the point of sale.
  • Channel: There has been much coverage of the fact that branches are rapidly losing share for everyday banking transactions.  Many banks are looking to redefine the role of the branch, in particular to leverage its potential as a key sales channel.  Wells Fargo recently reported that 80% of new card accounts are opened in its branches.  The online channel has also become a key credit card sales channel: Chase reported that 53% of new credit card accounts were acquired online in 3Q13.