Key takeaways from leading credit card issuer 3Q15 financials

October 30, 2015

The following is a list of several trends that EMI Strategic Marketing identified in leading credit card issuers’ 3Q15 financials:

Regional bank card issuers continue to lead in receivables growth. A key factor: regional banks, such as SunTrust and Wells Fargo, are focused on cross-selling credit cards to their bank customers.

Many national issuers not (yet) growing loans, but are ramping up new account generation. National credit card issuers like Citi and Bank of America reported y/y loan declines in 3Q15, due to continued run-off of legacy portfolios. However, both of these issuers are confident that their portfolios will grow in the near future. Citi reported that it is ramping up card acquisition for its core products, and this is starting to pay off with 6% y/y rise in active accounts. Credit card “monolines” are also investing in new account generation. Discover new account generation in 3Q15 was at its highest level since 3Q07. And American Express reported an 8% y/y rise in marketing and promotion spending, with a focus on attracting new card members. As a result of this investment, American Express generated 2.3 million new accounts in 3Q15, compared to a quarterly average of 1.6 million in 2014.
Card volume grew…but was impacted by low fuel prices. Leading issuers continued to report growth in purchase volume, but the y/y rate of growth was lower than in recent quarters, in large part due to low fuel prices. Discover reported y/y sales volume growth of 2.6%. However, excluding gas, the growth rate was 7%. Issuers reporting very strong volume growth included Capital One (+19% y/y), which is benefitting from its focus on transactors, and Wells Fargo (+15%).
Issuers are growing revenues…and expenses. Six of the largest U.S. credit card issuers have dedicated payment units, which publish quarterly revenue and expense data. Since the financial crisis, revenue growth has been elusive for issuers, but in 3Q15 four of the six issuers reported y/y growth in revenue. Benefitting from loan growth, five of the six issuers reported growth in net interest income. And three of the six reported noninterest income growth. However, as issuers are looking to generate new accounts as well as loan and volume growth, they are increasing their noninterest expenses. Banks with the largest y/y increases in noninterest expense in 3Q15 included American Express (+11%), U.S. Bank (+9%) and Discover (+8%).
Credit card yield shows signs of growth. Of the seven leading issuers who reported yield data in their quarterly financials, four reported y/y growth. In addition, six of the seven reported q/q rises in yield. This indicates that in the post-CARD Act environment, issuers are not competing aggressively on price, but are instead concentrating on enhancing rewards, providing additional value-added features, and making large acquisition-and-activation bonus offers.

Charge-off rates continue to decline…and may fall even further. As we have mentioned in previous blogs, credit card net charge-off rates are well below historical averages. Reasons for this extended decline include tight underwriting on the part of issuers and an aversion to building up large credit card debt on the part of cardholders. In its earnings conference call, Discover characterized the credit loss environment as “remarkably benign.” With continued y/y declines in 30+ day delinquency rates (which have historically been a predictor of charge-off rates), issuers are not expecting the charge-off rate to spike in the near term, and in fact rates may continue to decline further.

Credit Card Issuers Increase Focus on the Subprime Market

September 28, 2015

The American Banker Association’s September 2015 Credit Card Market Monitor found a 28% y/y rise in new subprime accounts, indicating that issuers are expanding their focus as they seek to grow revenues. An analysis by EMI Strategic Marketing of the FICO composition of credit card outstandings at the end of 2Q15 finds that many leading card issuers are accelerating growth in sub-prime and low-prime outstandings.

In recent years, Wells Fargo has reported strong y/y growth in all FICO categories.
- In its <600 FICO category, growth has accelerated to double-digit rates in the past three quarters.
- Its 600-639 FICO category has grown by double-digit rates in six of the past seven quarters.

Among national credit card issuers, Bank of America’s subprime outstandings declined 9% y/y in 2Q15, but the rate of subprime loan decline has been steadily slowing in recent quarters. However, Citi’s subprime outstandings growth performance is less consistent, with y/y growth from 4Q13 to 2Q14 followed by declines for the past four quarters.

BofA_subprime_outstandings

There are also mixed trends when analyzing subprime outstandings performance of regional bank card issuers. PNC reported a 6% y/y decline in <620 FICO outstandings in 2Q15, compared to a rise of 1% in 1Q15. Regions reported strong growth in <620 FICO in recent quarters (double-digit y/y rises between 2Q14 and 1Q15), but this fell to just 2% in 2Q15. However, it should be noted that Regions’ total subprime outstandings were just $49 million, so variations in growth rates are not unexpected. SunTrust reported double-digit y/y increases in subprime outstandings for three of the past four quarters.

EMI’s analysis also shows that subprime outstandings growth continues to trail prime and superprime outstandings growth for several reasons:

The large national issuers continue to deal with legacy issues following the financial crisis.
For issuers in general, underwriting standards continue to favor superprime consumers.
And even though many issuers are ramping up subprime account production, it will take some time before it translates into strong growth in subprime outstandings.

Meanwhile, an analysis of FDIC data for the 2Q15 shows strong outstandings growth for subprime credit card specialists, including Comenity (+23% y/y) and Merrick Bank (+16%). As the card industry in general increase its focus on the subprime market, it will be interesting to see if the acceleration in subprime outstandings growth among some regional bank card issuers is replicated by the large national issuers. In addition, growth in subprime credit card outstandings should result in delinquency and charge-off rates rising from their current historically low levels.

10 takeaways from leading credit card issuer 2Q15 financials

July 27, 2015

The major U.S. credit card issuers have now published their quarterly financials. A review of these reports by EMI revealed the following 10 trends:

Outstandings are growing. Credit card loan growth is once again being led by regional bank card issuers (such as SunTrust and Wells Fargo who tend to cross-sell cards to existing bank customers), as well as card “monolines” (such as Capital One and American Express). Banks with national credit card operations report lower growth (or even declines) as a result of the lingering effects from the financial crisis, runoff of promotional rate balances, as well as high payment rates. But even here we are seeing signs of growth: although Bank of America reported a 1% y/y decline in average outstandings, it also reported its largest quarter for new account origination since the fourth quarter of 2008.
Volume continues to grow, but with some slowdown. Some leading issuers continue to grow volume at double-digit rates (Wells Fargo grew loans and volume by 15%, boosted in part by the bank’s acquisition of the Dillard’s portfolio). Other issuers had lower volume growth, and many pointed to the impact of lower gas prices. For example, Discover reported volume growth of just 2%, but absent gas prices, this growth was 5%.
Net charge-off rates continue to decline to historic lows. For many leading issuers, net charge-off rates are well below historic norms. In addition, the rates continue to decline; of the 13 issuers studied, 12 reported year-on-year charge-off rate declines.
30+ day delinquency rates are also declining. Delinquency rates tend to be a leading indicator of future charge-offs, so it is notable that 30+ day delinquency rates continue to decline.
The profit picture is mixed for issuers. Six leading issuers provide credit card profitability data, as they operate standalone payment units. Four of the six issuers reported y/y declines in profitability as growing expenses exceeded revenues. However, Chase increased net income for its Card Services unit by 33%, driven by lower costs (9% decline in noninterest expense, and 10% fall in provision for loan losses). American Express grew its U.S. Cards net income by 15%, as revenue growth of 6% and a 4% decline in provisions exceeded a 4% increase in noninterest expense.
Growth in lending and volume are driving revenue growth. In the wake of the 2008 Financial Crisis and subsequent industry retrenchment, credit card industry revenues fell significantly. As the economy stabilized and then grew, leading issuers continued to struggle to attain revenue growth. Now the return to outstandings growth, as well as continued loan growth, is finally enabling issuers to increase revenues.
To support this revenue growth, card issuers’ noninterest expenses are increasing. The rise in revenues is driving growth in expense areas like marketing and rewards costs. Of the five issuers providing noninterest expense data, four reported y/y increases, led by Discover (+18%) and U.S. Bank (+13%).
Provisions for loan losses are (mainly) decreasing. As net charge-off and delinquency rates continue to decline, three issuers reported y/y declines in their provisions for loan losses. However, Capital One and U.S. Bank increased provisions, with Capital One growing provisions by 69%.
Issuers are increasing credit card yield. Of the seven leading issuers who reported card yield in their financials, six reported y/y growth. The exception was Wells Fargo, which had the highest yield in 2Q15. However, five of the seven reported q/q declines; the exceptions were Fifth Third and SunTrust, which had the lowest yield among reporting issuers.
Issuers are using a range of channels for new account acquisition. In general, cards issuers are continuing to reduce their dependence on direct mail for new card acquisition, and are focusing more investment on digital and branch channels. Chase reported that its online channel accounted for 62% of new card accounts in 2Q15. Even though Citi is continuing to cut its U.S. branch network, it reported that credit card acquisition via branches was up 10% on a same-store basis.