Q3 2013: U.S. Credit Card Issuer Performance Snapshot
The nation’s largest credit card issuers once again reported strong profitability driven by historically low loss rates despite nearly flat receivables growth on both a year-over-year and quarter-over-quarter basis. Consistent with seasonal trends, purchase volume increased by nearly 8% year-over-year; however, purchase volume was nearly flat on a quarter-over-quarter basis. Although there were only nominal changes in key performance indicators, there are several trends worth noting:
1. New Products: Several issuers have launched new credit card products in an attempt to steal share in a challenging growth environment. Examples include Capital One’s QUICKSILVER product, which offers a flat 1.5% cash earn rate on purchases, and Bank of America’s Better Balance Rewards, which rewards customers for responsibly managing their credit balances. These two new products illustrate two key trends coming out of the credit crisis: (1) a focus on simple and rich value propositions – a trend that is likely to continue in light of the CFPB’s intent to focus on the terms associated with rewards programs, and (2) a focus on high-balance revolvers by some financial institutions, evidenced by the fact that overall teaser-based mail volume continues to increase. Although this trend is not necessarily surprising given the low loan growth environment, we do not expect all issuers to pursue a revolver strategy over the coming quarters. This hypothesis is supported by recent statements from Capital One and American Express expressing plans to continue to focus on transactors.
There have also been a several other notable product enhancements in the co-brand space, including the GM card from Capital One, which offers customers enhanced utility for rewards redemption, and the new AARP card issued by Chase, which offers cardholders the ability to earn cash back rewards for everyday spend.
2. Charge Offs Near Historic Lows: Industry loss rates have only been below current levels three times in recent history: in 2005, after a protracted decline driven by the early 2000s recession (dot-com bubble and September 11th attacks); in 1994, triggered by modification in consumer borrowing behavior after a brief recession in the early 1990s followed by the longest period of economic growth in American history, and, in 1985, following a protracted decline driven by the early 1980s recession. In each of these three instances, write-offs normalized to above 4% industry-wide within five years. We would expect banks to forecast similar trends over the next five years as protracted declines in industry charge-off rates begin to flatten.
3. Conservatism Continues: Both cardholders and lenders have been relatively conservative coming out of the Great Recession; however, many industry experts question whether that trend will persist. The most recent Federal Reserve Senior Loan Officer Opinion Survey suggests that standards on credit card loans eased nominally since the beginning of 2013, but remained relatively unchanged in the third quarter. There have been only nominal reported changes in demand for credit card loans, and, consistent with post-recession trends, the majority of bankcard origination volume is driven by prime and super prime consumers.1 Balance transfer promotions are typically an indicator that some financial institutions are marketing to the lower ends of the risk spectrum; however, to date we have seen very little evidence to suggest that banks are increasing their underwriting to lower credit quality customers.
1 Experian-Oliver Wyman Market Intelligence Report.
1 Includes income from acquiring business and private label receivables and volume.
2 Earnings restated in 1Q 2013, historical figures adjusted to conform to new reporting methodology. Purchase volume includes cash advances.
3 Receivables, purchase volume, and net loss rates are for U.S. consumer cards. After-tax ROA restated to reflect “Consumer Lending” only.
4 U.S. card business, small business, and installment loans only. Purchase volume excludes cash advances. Results include the impact of May 1, 2012 closing of HSBC transaction resulting in approx $28.2 billion in receivables at closing.
5 Receivables and charge-offs are for U.S. Cardmember Lending business only. Purchase volume is for U.S. Card Services segment, consumer and small business. Average earning assets is defined as all cardmember receivables (charge) and loans (revolving credit).
6 Includes U.S. domestic receivables and purchase volumes only. ROA includes merchant services and implied U.S. Cards tax rate of ~40%. Numbers will not tie to previous publications in light of a change in the Discover’s fiscal calendar, with the fiscal year now ending on Dec. 31 (vs. Nov. 30 in previous reporting).
7 After Tax ROA reflects Payment Services line of business income and average loans.
8 After Tax ROA excludes Wells Fargo as credit specific income not reported. Reflects any previous quarter restatements and includes addition of U.S. Bank.
For more information, please contact James Watts, Senior Consultant specializing in Credit Card Issuing,firstname.lastname@example.org.
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