Which issuers will drive credit card growth?

Although banks are reporting overall loan growth, credit card outstandings have continued to decline, with the FDIC reporting that card loans fell 1% y/y to $664 billion at the end of June 2012.  EMI analysis of FDIC bank data reveals a number of insights into the dynamics of the U.S. credit card industry.

  • Relatively few U.S. banks have credit card loans:
    • 1,265 banks had outstanding card loans at the end of 2Q12 (19% of total banks)
    • 375 banks had more than $1 million in card loans (6% of total banks).  Of these banks, 53 had more than $100 million in card loans, and only 23 have have more than $1 billion in outstandings
    • Of the 1,265 banks with card loans,  643 reported y/y growth at end-2Q12, while 622 reported declines.
    • Only 4% of the 6,009 U.S. banks with less than $1 billion in total assets have card loans of more than $1 million.  Typically, banks need critical mass in order to justify the investment to create and maintain an in-house card operation.
  • The three largest credit card issuers are deleveraging:
    • Although card loans overall declined 1% in the year to end-2Q12, when the three largest issuers (Chase, Bank of America and Citi) are excluded, U.S. credit card loans rose 9%.
    • Bank of America credit cards loans fell 17% y/y, and Citi was down 5%.  As charge-off rates for both banks are high relative to other leading issuers, and as they are looking to sell off some non-core card assets, we expect card loans for these banks to continue to decline.
    • Chase bucked the trend among the top three issuers, with no change y/y.  It reported a net charge-off rate of 4.03% in 1Q12 (excluding the effect of a change in charge-off policy), and it expects the rate to fall to approx. 3.75% in 3Q12.  This puts Chase in a good position to grow card loans as the economy recovers.
  • Outside of the top three card issuers, there are signs of growth in credit card lending.  The following three issuer categories are expected to drive credit card loan growth in the coming quarters:
    • Other national banks: Wells Fargo (grew card loans 7% y/y to end-2Q12) and U.S. Bank (+5%) have extensive retail banking footprints, and are looking to grow outstandings by cross-selling cards to existing customers.
    • Large regional banks: Banks such as PNC (+10% in card loans), SunTrust (+39%), Fifth Third(+5%) and TD Bank (+21%) are looking for card loan growth through customer cross-sell.  Many of these banks recently reacquired their card portfolios, in order to diversify revenue streams and provide a broader in-house set of financial solutions to their customers.  The ability of these banks to bring card-issuing in house may also encourage other regional banks to follow suit.
    • Current/former monolines: Capital One (card loans up 51%, although this is mainly due to the acquisition of the HSBC card portfolio), American Express (+8%) and Discover (+4%) have the operational infrastructure as well as the sales and marketing know-how to ramp up card lending as the economy recovers.