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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.

Time for U.S. Credit Card Issuers To Shift Focus to Lower FICOs?

One of the themes in leading credit card issuers’ 2Q14 financials was the expectation of a return to steady outstandings growth. Even those top issuers who continued to report y/y outstandings declines—such as Bank of America and Capital One—indicated that growth is on the way. In the aftermath of the financial crisis, issuers pulled back from the prime and sub-prime FICO segments and concentrated their business growth initiatives on the superprime segment. As issuers now look to generate outstandings growth, one of the strategies open to them is to target the lower FICO segments. However, EMI analysis shows that issuers continue to focus on the higher FICO categories. The chart below shows that, for most issuers, lower FICO segments’ share of total consumer credit card outstandings continues to decline.

issuer_FICO_share_2Q14

Even though issuers use different FICO categories, the chart enables us to compare the FICO composition of credit card portfolios between different issuers.

  • Consumers with credit scores of less than 680 accounted for 32% of Wells Fargo’s outstandings at the end of 2Q14, compared to only 18% of Bank of America’s outstandings. This may help explain why Wells Fargo’s average credit card outstandings rose 10% y/y in 2Q14, compared to a 2% decline for Bank of America.
  • Similarly, 17% of Discover’s outstandings are held by consumers with FICOs of <660, compared to just 5% of Chase outstandings. Discover reported 6% y/y growth in outstandings in 2Q14, compared to just 1% growth for Chase.

Looking over a longer period (2Q11-2Q14), we see a consistent pattern of the lower FICO segments losing share of consumer credit card outstandings. For Chase, consumers with FICOs of less than 660 accounted for 14% of outstandings at the end of 2Q14, compared to 20% at the end of 2Q11. However, for some issuers, the share decline in lower FICO segments has not been very dramatic.  For example, FICOs of <640 accounted for 17% of outstandings at the end of 2Q14, a share loss of just two percentage points since 2Q11.

issuer_FICO_share_2Q11-2Q14

As consumer confidence returns, issuers expect to grow outstandings in the coming quarters.  However, to achieve their goals, they will need to develop strategies for a broader FICO range.  In addition to continuing to target more affluent consumers, issuers will need to develop strategies, products, pricing and messaging to reconnect with prime, lower-prime and sub-prime consumer segments.