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5 takeaways from leading credit card issuer 1Q15 financials

An analysis by EMI of the latest quarterly financials from the leading U.S. credit card issuers revealed the following trends:

  • Growth in average outstandings.  Of the 13 leading issuers studied, 11 reported y/y increases in average outstandings.
    • The two exceptions were Bank of America and Citi, two of the top four issuers and this continues a longstanding pattern
    • Capital One—another top four issuer— reported a strong growth rate of 7%, driven by origination programs and line increases.  However, it should be noted that Capital One retains some of the credit card monoline heritage, with card loans accounting for 40% of its total loan book.
    • Strongest growth was reported by SunTrust, although it should be noted that this comes from a low base, with average card loans accounting for just 0.7% of SunTrust’s total loans, a percentage that is significantly lower than its regional bank peers.  It is also worth noting that SunTrust’s credit card yield was below 10% in 1Q15, lower than regional bank peers like Fifth Third (10.22%) and Regions (11.73%), as well as larger issuers like U.S. Bank (10.81%) and Wells Fargo (11.78%).
    • Wells Fargo also reported very strong y/y loan growth of 16%, although this included the acquisition of the Dillard’s private-label portfolio.  Its credit card penetration of retail bank households rose nearly four percentage points y/y to 41.8%, although the rise in penetration slowed sharply in the most recent quarter, increasing just 28 percentage points.

average_card_loans_1Q15

  • Outstandings starting to come into line with volume.  Since the 2008 financial crisis, the card industry has focused more on increasing cardholder purchase volume rather than outstandings.  As you see in the following chart, volume growth continues to outstrip outstandings growth.
    • Of the 7 issuers below reporting y/y changes in both volume and outstandings, only American Express and Discover reported higher growth rates for outstandings than volume.
    • Ideally, issuers would like outstandings and volume to grow at similar rates; American Express and Wells Fargo were most effective at achieving this in the most recent quarter.
    • Some issuers reported that lower gas prices had a depressing effect on volume growth.

card_volume_card_growth_1Q14-1Q15

  • Charge-offs remain at historic lows. 12 of 13 issuers reported credit card net charge-off rates below 4% in 1Q15, with 5 issuers below 3%.  In addition, 10 of the 13 issuers reported y/y declines in charge-off rates.  Although most issuers reported growth in charge-off rates between 4Q14 and 1Q15, this is a normal seasonal pattern, and there is little sign of significant upward movement in charge-off rates.  Some issuers are revising downward their future charge-off rate expectations: Capital One reported that its rate may fall to the low 3% range in 3Q15 (although it does expect rates to rise in 4Q15 and 2016). And Chase expects that its full-year 2015 net charge-off rate will be less than 2.5%.

credit_card_charge-off_rates_1Q15

  • Delinquency rates continue to fall.  Of the 8 issuers who reported 30+ day delinquency rates, all reported y/y declines.  This indicates that there is little upward pressure on charge-off rates, as delinquencies tend to be leading indicators of future charge-offs.
  • Signs of revenue growth. in recent years, issuers have reported low/no revenue growth and have instead generated profits from low provisions for loan losses.  As issuers have now begun to target outstandings growth, revenues have started to increase.  Of the 6 leading issuers providing credit card revenue data in 1Q15, 5 reported y/y growth.  In addition, 4 of these 5 issuers reported growth in both net interest and noninterest income.

credit_card_revenue_1Q14-1Q15

Five Strategies to Adapt Bank Branches to The New Normal

There is a wealth of evidence that consumers are using online and mobile channels as the primary channels for their everyday banking needs:

  • Having reached critical mass in online banking penetration, the largest U.S. banks continue to report strong growth in active mobile banking customers (Chase +23% y/y to 17.2 million; Bank of America up 17% to 15.5 million; and Wells Fargo +22% to 13.1 million)
  • Regional bank customers are also growing their usage of non-branch channels.  45% of PNC customers use non-branch channels for a majority of banking transactions.  Fifth Third reports that ATM and mobile channels’ share of deposit volume rose from 12% to 31% over the past two years. KeyBank claims that online and mobile transactions are growing by 9% annually, while branch transactions are declining by 3%.

The rise of self-service channels for everyday banking transactions is leading banks to re-assess their investment in their branch networks.  For example, banks are changing traditional assumptions as to what constitutes optimal branch density within markets.  In a recent presentation, KeyBank claimed that branch density is now less relevant as long as a bank can pair branches with a good mobile offering. In addition, in a low-revenue-growth environment, banks are under pressure to cut costs in order to meet earnings expectations. As a result of these factors, banks are cutting branch numbers.

  • Bank of America is expected to cut branches to below 5,000 by the end of 2014, compared to more than 5,700 in the second quarter of 2011.  It recently announced the sale of branch clusters in North Carolina and Michigan.
  • Over the past six months Citibank sold all of its branches in Texas, as it focuses its energies on a select number of large metro markets.
  • KeyBank has closed or sold 8% of its branches over the past two years, and plans to cut its network further, by about 2-3% per year.

However, banks remain strongly committed to their branch networks.  This is largely due to the fact that consumers continue to value the branch channel, even if usage has declined.  A recent ABA survey found that 21% of consumers named the branch as their preferred banking channel, up from 18% in 2013. In addition, banks recognize the benefits in encouraging customers to use multiple channels.  Wells Fargo found that customers using its stores as well as online and mobile channels have a 70% higher purchase rate than customers who only use online and mobile. With in this mind, the following are five branch strategies that banks should follow, with examples of banks that have already implemented these approaches:

  1. Deploy new branch formats.  Given lower traffic and transaction volumes in branches, banks should launch branch prototypes with smaller footprints, so that they can maintain their physical presence, but at a lower cost.
    • PNC has converted 200 of its branches to a smaller format, with 100 more to follow by the end of 2014.
  2. Launch flagship branches in selected markets.  With changing ideas around branch density, bank can consolidate multiple branches into a large flagship store.  These flagship stores act as a brand beacon for the bank in specific markets, as well as providing space for the bank to showcase new innovations
  3. Reconfigure branch staff.  As branch activity is switching from transaction processing to sales and advice, and branches switch to smaller format, bank can reduce the average number of staff per branch, but should also change the functional balance, with fewer tellers and more sales specialists.
    • In the 18 months to June 2014, Fifth Third cut 22% of its branch service staff, but increased sales staff by 6%.
    • Over the past year, PNC has grown its number of investment professionals in branches by 4%.
  4. Incorporate technology into branches. As consumers become more accustomed with using technology for their everyday financial needs, banks should showcase customer-facing technology in branches.  This can enhance the user experience and capture sales opportunities
    • Regions is installing two-way video to enable customers communicate directly with bankers via an ATM.
  5. Open branches outside of footprint.  As having a critical mass of branches in a market is no longer a prerequisite for success, banks can open branches beyond their traditional retail footprint, to target specific consumer or business clusters.
    • City National has established branches in New York City, Atlanta and Nashville, dedicated to targeting entertainment firms that are clustered within these markets.

Positive Signs in Leading Credit Card Issuers’ 2Q14 Financials

The 2Q14 financials for leading U.S. credit card issuers had a number of positive elements, notably a return to outstandings growth, along with continued strong performance in volume and credit quality metrics.

Outstandings

In a recent EMI blog post, we suggested that the extended series of declines in credit card outstandings had bottomed out.  The latest quarterly performance metrics for the leading U.S. credit card issuers provides more evidence of this turnaround: EMI’s analysis of 13 leading U.S. card issuers found a 1% year-on-year (y/y) growth rate in average outstandings in 2Q14.

average_outstandings_2Q14

Growth was led by SunTrust, which grew outstandings 19% y/y, albeit from a low base.  Wells Fargo continued its strong outstandings growth rate, with a 10% y/y increase as Wells Fargo credit card penetration of retail banking households reached 39% (from 35% in 2Q13).  The top four issuers—Chase, Bank of America, Capital One and Citi—once again acted as a brake on overall industry growth.  However, even these four issuers are seeing positive signs.  Chase’s new account production rose 40%.  Capital One reported a 1% rise in end-of-period outstandings, as it returned to growth earlier than anticipated, driven by a combination of rewards, non-high-balance revolvers, and credit line increases.  Even though Citi reported a 3% y/y decline, it attributed this to continued run-off in promotional rate balances, whereas full-rate balances have grown for five consecutive quarters.

Volume

In the absence of credit card outstandings growth in recent years, issuers have focused on volume growth.  This growth continued and even accelerated in the most recent quarter (for the eight leading issuers reporting card volume, y/y volume growth rose from 7% in 1Q14 to 9% in 2Q14). Issuers attributed this growth to a combination of new account growth and increases in average cardholder spending.

card_volume_2Q14

Six of the eight issuers in the above chart had stronger y/y volume growth in 2Q14 compared to 1Q14.  As in previous quarters, Wells Fargo and Chase led the industry.  Wells Fargo benefited from both account growth as well as a 14% rise in average spending per account, as more cardholders moved their Wells Fargo card to top of wallet.  Capital One reported an 11% growth rate, but claimed that if private-label cards were excluded, its growth rate was 16%, driven by continued marketing and customer experience initiatives.

Credit Quality

With charge-off and delinquency rates below historic norms for many issuers, one would expect that a push for outstandings growth would lead to upward pressure on these rates.  However, this has not been the case, and issuers continued to report significant y/y and q/q declines in charge-off rates in 2Q14.

charge-off_rates_2Q14

Of the 12 leading issuers reporting credit-card charge-off data, 10 reported double-digit y/y declines.  The two main “monolines”—American Express and Discover—continued to have the lowest rates, but SunTrust and Chase now also have charge-off rates below 3%.

Implications

These positive metrics are clear signs that the credit card industry’s recovery from the 2008 financial crisis and resulting Great Recession, is gaining momentum.  For issuers looking to capture a share of this growth, the following are some areas they should consider:

  1. Cross-sell and upsell existing customers.  There has been much coverage in the industry of Wells Fargo’s continued growth in its credit card penetration rate, which has fueled strong outstandings and volume growth.  Regional bank card issuers also tend to follow this cross-sell model, although most of these lack Wells Fargo’s cross-sell expertise and experience.  However, leading issuers are now taking a growing interest in cross-selling existing customers; for example, Bank of America reported that 65% of its new credit cards issued in 2Q14 were to existing bank clients.  Issuers should also commit to regularly assessing existing cardholder qualification for card “upgrades”, and then make appropriate upsell offers.
  2. Invest in multiple credit card sales channels.  For many years, direct mail was the overwhelmingly dominant channel for new account generation.  However, a number of factors are leading to a change in the credit card sales channel mix, including:
    • A general decline in direct mail as a marketing channel, driven by both lower response and the emergence of lower-cost channels.
    • Increased customer usage of online and mobile banking channels, and increased bank industry recognition of the sales potential of these channels.  54% of new Chase credit card accounts in 2Q14 were acquired online.
    • The reduced usage of bank branches for everyday transaction processing has led to a redefinition of their role, with banks now looking to realize branches’ potential as sales channels.  Wells Fargo recently reported that 83% of its general-purpose credit cards were sold in its Community Banking stores.
  3. Develop offers to drive desired cardholder behavior.  Issuers need to have a series of offers available to drive specific cardholder actions at different stages of the customer life cycle (e.g., activation within 90 days of acquisition; retention during the card expiration period; card usage and referrals on an ongoing basis), which ultimately help optimize customer lifetime value.
  4. Continue to focus on rewards.  Issuers are increasingly aware that rewards products and programs are integral to achieving retention and growth objectives, so there is a need to continually assess how key program elements—such as earn rates (basic and bonus) and user experience—stack up against competitors.
  5. Invest in credit card brands.  It is notable in recent years that many credit card issuers are creating and supporting card brands, both to generate build stronger customer awareness, as well as acting as a point of differentiation from competitors.  These new brands apply to both:
    • Individual cards (e.g., Santander Bank’s Bravo and Sphere cards, and Huntington’s Voice card)
    • Card portfolios; this is especially prevalent in the small business sector, with issuers like Chase (Ink), Capital One (Spark Business) and U.S. Bank (Business Edge) all branding their small business card portfolios.