Key Takeaways from Leading U.S. Credit Card Issuer Quarterly Financials

November 4, 2016

EMI’s review of 3Q 2016 financials for the largest U.S. bank and credit card issuers revealed several trends:

Acceleration in outstandings growth. Average outstandings rose 6% y/y in 3Q16 for the 13 issuers in the study; this growth rate marks an increase from previous quarters (3% in 2Q16 and 2% in 1Q16).

American Express reported a 14% y/y decline, due to the loss of the Costco and JetBlue portfolios; excluding these portfolios, it grew loans by 11%.
Bank of America reported no change in average outstandings, ending a protracted period of loan declines due in large part to divestitures.
Regional bank card issuers continue to focus their attention on cross-selling credit cards to existing clients. Regions grew outstandings by 11% and reported that its credit card penetration rate rose 130 basis points (bps) y/y to 18.2%.

Continued volume growth. EMI analyzed volume data for 8 leading issuers, and found cumulative y/y growth of 9% in 3Q16.

American Express’s sale of the Costco card portfolio to Citi led to a 15% decline in its card volume, while Citi’s volume rose by 57%.
Issuers are launching new rewards cards and enhancing existing rewards programs to drive additional volume. Discover reported that its rewards costs rose 13% y/y to $368 million in 3Q16, and its rewards rate rose by 13 basis points to 1.20%. However, Discover has been struggling to grow volumes in recent quarter, with y/y growth of just 2% in 3Q16, down from 4% in 1Q16 and 3% in 2Q16.

Ramp up of card account production. Related to—and encouraged by—the growth in outstandings, issuers are ramping up new card acquisition.

Bank of America issued 1.32 million new U.S. consumer credit cards in 3Q16, the strongest quarterly performance since 2008.
Chase benefited from the launch new cards (Sapphire Reserve and Freedom Preferred) to grow new card production 35% y/y to 2.7 million. Chase reported at the BancAnalysts Association of Boston Conference this week that it opened more than 1 million new Freedom Unlimited accounts in the five months following its launch.
Issuers are investing more in marketing in order to drive growth. American Express grew its marketing and promotion spend 10% y/y for the first 9 months of the year, to $2.4 billion.

Charge-off rates remain very low. For many issuers, net charge-off rates continue to operate at or near historic lows, with seven issuers reporting rates below 3%.

There is some evidence of upward movement in charge-off rates as issuers chase growth. 8 of the 12 issuers in the chart below reported y/y rises. And most issuers are reporting y/y rises in 30+ day delinquency rate (which have traditionally been an indicator of future charge-offs).
However, issuers expect that rates will not rise significantly in the coming quarters. For example, Chase reported a charge-off rate of 2.51% in 3Q16, and projects that this rate will rise to about 2.75% in 2017.
Capital One did report a 66 bps y/y rise in its charge-off rate; this is related to the fact that it is continuing to target low-FICO segments; the <660 FICO score segment accounted for 36% of Capital One’s outstandings at the end of 3Q16, up from 34% at the end of 3Q15.

Credit Card Issuers Focusing Growth on Different FICO Score Segments

May 24, 2016

The Wall Street Journal recently reported that credit card outstandings may reach the $1 trillion threshold in 2016, for the first time since before the 2008 Financial Crisis. This is mainly due to overall economic growth and the rise in employment. Issuers are now increasing their focus on growing outstandings by making aggressive acquisition-and-activation offers (American Express is currently offering a bonus of up to $300 on its Blue Cash Everyday Card), promoting lengthy introductory offers, and increasing credit lines for existing cardholders.

A big question for issuers is, should they concentrate efforts on particular FICO score segments, or seek to drive growth across the FICO score spectrum? In the aftermath of the Financial Crisis and the resulting huge spike in charge-off rates, many leading issuers narrowed their focus, concentrating on the high-FICO score affluent segments, and ignoring subprime and low-prime consumers. However, as the economy has continued to recover, at appears that some issuers have renewed interest in the lower-FICO score categories.

EMI’s analysis of leading issuers’ 1Q16 SEC filings reveals that issuers are following different approaches:

1. Growing outstandings across all FICO score segments. Regional bank card issuers like Wells Fargo and Regions have relatively strong growth across all FICO score segments. It is notable that the <600 subprime segment accounts for 9% of Wells Fargo’s outstandings, a higher percentage than for other issuers. Wells Fargo issues a subprime card and recently incorporated a free FICO score into its mobile banking app.

2. Generating stronger outstandings growth in low-FICO score segments. Capital One, Discover and SunTrust all have markedly strong growth rates in outstandings for low-FICO segments. 35% of Capital One’s outstandings come from the <660 FICO segment, whereas this segment accounts for only 18% of Discover’s outstandings. Discover grew <660 outstandings by 12% (to $10.0 billion), and it is worth noting that Discover launched the Discover it Secured Card in January 2016. SunTrust grew its <620 FICO portfolio by 39%, although this was coming from a low base of just $45 million.

3. Continuing to focus outstandings growth on higher FICO score segments. The three largest issuers—Chase, Citi and Bank of America—all continue to experience declines in outstandings in their lower FICO score segments, which is offset by growth in higher FICO score categories. Regional bank card issuer PNC also follows this pattern.

As issuers look to continue to grow outstandings (and appear to be willing to let charge-off rates rise from their current low levels), they will need to develop approaches to target the different FICO score segments, including:

Ensuring they have products in place to target different FICO score—and demographic—segments.
Developing messaging, pricing, acquisition/activation offers and ongoing incentives to both attract new cardholders and encourage existing cardholders to increase their spending and borrowing
Creating tools (such as free FICO scores) to educate consumers on understanding how their credit scores are determined and how they can practice good credit management

5 channel takeaways from 1Q15 U.S. bank financials

April 29, 2015

The quarterly reports of the leading U.S. banks revealed a number of important channel trends:

Mobile banking is continuing its strong growth. Three of the leading U.S. banks provided quarterly updates on active mobile banking users, and each reported double-digit y/y growth in 1Q15: Chase +22% to 20.0 million; Bank of America +13% to 16.9 million; and Wells Fargo +19% to 14.9 million. According to eMarketer, more than half of adult mobile phone users are expected to use mobile banking in 2015.
Consumers are transitioning to self-service channels for a growing range of transactions. PNC reported that 50% of its consumer customers used non-branch channels for a majority of their banking transactions in the first quarter of 2015, up 7 percentage points y/y. PNC also reported that the non-branch (ATM and mobile) channel share of deposit transactions doubled from 20% in 1Q13 to 40% in 1Q15.
Many banks are slowly shrinking their branch networks. Leading banks who reported significant branch reductions in the most recent quarter include: Citibank (down 61 during the quarter, as its pursued its strategy of consolidating its presence in 7 U.S. markets), PNC (-37 branches), Regions (-33) and Chase (-31 ). Although Bank of America has closed more than 800 branches over the past three years, the net branch decline fell to 20 in the first quarter of 2015.
Some banks are growing branch numbers…and in-branch sales staff. In spite of the general perception that the branch channel is in the process of terminal decline, some banks are in fact acquiring or opening branches in order to capture growth opportunities. Huntington Bank reported the addition of 43 new in-store branches in Michigan. And even though Bank of America reduced branch numbers by 260 over the past year, it grew sales specialists by 5%.
Banks remain committed to the branch network as consumers use multiple banking channels. While electronic self-service channels have a dominant share of everyday banking transactions, branches still play a key role in areas like new account generation, customer relationship management (including cross-sell), and branding. Wells Fargo claims that its most loyal customers are not those who have the most products, but rather those who use the most channels most often. It reported that mobile banking sessions rose 38% in 2014, while branch visits remained steady.