Tag Archives: volume

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.

Trends and Implications from Credit Card Issuers’ 2Q13 Results

After analyzing the 2Q13 financial results for the leading U.S. credit card issuers, EMI has identified some common themes and emerging trends.

  • Outstandings: At first glance, the continued decline in outstandings for the top issuers is consistent with trends we have seen in recent years. However, some of these issuers stated their belief that this extended sequence of declines is coming to an end. Chase claimed that its credit card outstandings have reach an inflection point and it expects growth in the coming quarters. Bank of America also emphasized signs of recent outstandings growth, and claimed that card issuance was at its highest level since 2008. During the quarter, strongest growth rates were reported by monolines and regional banks, but these smaller issuers may face renewed competition from the top issuers in the coming quarters. Some issuers reported yield declines in 2Q13, with Discover attributing a 24 basis point yield decline over the past year to an increase in promotional rate balances and a decline in higher rate balances.

  • Volume: Many of the leading issuers improved their card volume growth rates in the second quarter, as the economy continued to recovery, and as consumers responded to rewards-based promotions. In the coming quarters, expect issuers to continue to promote their rewards programs (in particular to attract more affluent cardholders), while increasing their focus on introductory offers and APRs as they seek to grow loans.

  • Revenue: In recent years, credit card revenue growth has been anemic, as issuers have struggled with loan growth, and have had to adjust to new fee structures following the CARD Act. However, the latest financials provided some encouraging news. American Express grew net interest income 6% y/y (benefitting from a 4% rise in outstandings) while its noninterest income rose 5% (driven by an 8% rise in volume). Discover generated even stronger growth in both net interest income (+9%) and noninterest income (+14%). Given the fundamental changes to the card industry in recent years, expect issuers to continue to seek balanced overall revenue growth between net interest income and noninterest income, and avoid an over-dependence on either aggressive lending or fees to meet their revenue targets.
  • Charge-Off and Delinquency Rates: Issuers continue to benefit from declines in charge-off rates. Of the 11 leading issuers who reported charge-off rates, 8 reported y/y declines, while one issuer was unchanged. Two issuers (American Express and Discover) had charge-off rates below 3%, while 5 other issuers (Chase, Citi, Fifth Third, PNC and Wells Fargo) had rates below 4%. In addition, 30+ day delinquency rates also continue to decline, with 8 of 9 issuers reporting y/y declines (the exception was Capital One, due to its acquisition of the HSBC portfolio).

Looking ahead, to the extent that issuers focus on outstandings growth (with more aggressive introductory offers on balance transfers, lower APRs and more relaxed underwriting standards), both charge-off and delinquency rates should rise from their current low levels. However, recent trends in outstandings and volume indicate that consumers increasingly see their credit cards as an efficient, convenient and more rewarding payment method, and less simply as an easy source of credit. Whether this is a temporary phenomenon in the aftermath of the financial crisis or a long-term change has profound consequences for how credit cards are positioned, promoted and priced.

Growth Remains Elusive For Leading U.S. Credit Card Issuers

EMI analysis of the largest credit card issuer financial results for 1Q13 reveals the following trends:

  • Outstandings (11 issuers reporting, analysis excludes Capital One, which acquired the HSBC card portfolio in 2012, so its growth rate would skew the data): A weighted average of 11 leading credit cards issuers shows that average credit card outstandings fell 2% year-over-year (y/y) in 1Q13. The three largest issuers – Chase, Bank of America and Citi – all reported y/y declines.  However, outstandings growth came from Wells Fargo (who reported that credit card penetration of retail banking households rose from 30% in 1Q12 to 34% in 1Q13), regional banks with relatively small portfolios (e.g., PNC, SunTrust and Fifth Third), as well as “monolines” (American Express and Discover). These outstandings trends bear out the industry predictions we made in a blog at the start of 2013.

  • Volumes (8 issuers reporting): leading issuers grew credit card volume 6% y/y in 1Q13, which is relatively consistent with recent quarters. However, growth rates have moderated from the 2010-2011 levels, when issuers were overwhelming focused on building volumes. Wells Fargo led the way with a 14% volume growth rate, driven by an 18% rise in new consumer credit card accounts.
  • Revenues and expenses (5 issuers reporting): Revenues rose 2% y/y, led by Discover (+11%) and American Express (+5%). The lack of outstandings growth means that net interest income remains relatively anemic, with a rise of 1% y/y.  Noninterest income grew 5%, with relatively healthy growth rates from American Express, Discover and Bank of America. Noninterest expenses fell 1%, with both Chase and Bank of America reporting significant declines (reductions of 8% and 7%, respectively). Provisions for loan losses rose 5%, albeit from very low levels in 1Q12.
  • Charge-off rates (11 issuers reporting): The weighted average charge-off rate for these 11 issuers was 3.62%, down 65 basis points (bps) y/y, but up 5 bps q/q. 10 issuers reported charge-off rate y/y declines.  The exception was Capital One, which acquired the HSBC credit card portfolio (with a higher charge-off rate) in 2012.  Compared to 4Q12, 10 issuers reported charge-off rate increases and the other two were unchanged, indicating that the era of charge-off rate declines may be coming to an end.
  • 30+ day delinquency rates (8 issuers reporting): 7 of the 8 issuers providing 30+ day delinquency rate data reported y/y declines. As with the charge-off rate, the exception is Capital One. Interestingly, 7 of the 8 issuers reported q/q declines.  The exception was American Express, whose 30+ day delinquency rate was unchanged.  So, while the period of charge-off rate declines may be ending, the continued decline in delinquency rates will moderate charge-off rate increases.