Q3 2014: U.S. Credit Card Issuer Performance Snapshot

Navigator Edition: November 2014
By: James Watts

At the end of last year most industry observers forecasted marginally improved receivables growth in 2014. These predictions are proving to be correct as the nation’s largest issuers have experienced positive receivables growth trends for the second consecutive quarter – an increase of 2.4% on a year-over-year basis and of 0.8% on a quarter-over-quarter basis. Although the industry continues to signal that credit card losses will increase eventually, loss rates once again declined by 43 bps on a year-over-year basis and 32 bps on a quarter-over-quarter basis. Other notable credit card trends include:

NAV-3Q-20141 Includes income from acquiring business and private label receivables and volume.
2 Earnings restated in 1Q 2014, 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 include “Consumer Lending” only; which now includes Dealer Financial Services.
4 U.S. card business, small business, installment loans only. Purchase volume excludes cash advances.
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.
6 Includes U.S. domestic receivables and purchase volumes only. Restated: ROA reflective of Direct Banking segment (80+% credit card) and implied U.S. Cards tax rate of ~40%. ROA denominator estimated from total loans ended totals.
7 Wells Fargo began reporting purchase volume in 4Q 2013.
8 After Tax ROA reflects Payment Services line of business income and average loans. Earnings restated in 1Q 2014, historical figures adjusted to conform to new reporting methodology.
9 After Tax ROA excludes Wells Fargo. Credit specific income not reported. Reflects any previous quarter restatements.

1.  Differing Perspectives on Future of Loss Rates:  Charge-off rates are at historic lows. For example, Chase citied that its third quarter loss rate of 2.52% is an all-time low. Many issuers have openly discussed the expectation for loan growth to drive higher charge-offs and as a result have increased loss provisions compared to last year. Charge-off guidance is not ubiquitous; however, and some industry experts are predicting that the low loss rate environment will persist, a perspective which is partially supported by favorable third quarter delinquency trends.1

“Moving on to credit, the environment remains benign. We continue to see improvements in card early delinquencies, and the card net charge-off rate was 252 basis points, an all-time low.” – Jamie Dimon, Chairman and CEO, JPMorganChase

“While the impact on the charge-off rate will be modest at first, we expect that the impact will grow throughout 2015 and beyond” – Richard Fairbank, Chief Executive Officer, Founder and Chairman

2.  Rewards Are a Key Battleground: Receivables growth appears to be being driven by (i) an easing in credit card lending standards by a few large banks and (ii) a general broad-based pickup in loan demand.2 Many large issuers are seeking to capitalize on forecasted growth by bolstering product value propositions in what is already an intensely competitive environment. For example, Citi launched its Double Cash Card at the end of August, which offers up to 2% cash back: 1% as purchases are made and 1% as the balance is paid. Other more dated examples include Wells Fargo’s Propel card, American Express’ EveryDay cards, and Sam’s Club’s 5-3-1 MasterCard products, all of which offer attractive everyday spend-based value propositions.

“This has been intense — specifically rewards and cash back has been intensely competitive for many years and this is not the first time that we’ve seen issuers come out with what might look to some of us to be unsustainable.” – David Nelms, Chairman & CEO, Discover Financial Services

3.  Standards on Subprime Lending Remain Tight: Many issuers have noted a very slow and prudent return to subprime lending. According to Moody’s Analytics and Equifax,3 the volume of card loans originated to applicants under 620 remains well below, less than half, pre-recession levels. Furthermore, credit card mail data suggests that the percentage of offers promoting credit building and non-fee / non-rewards cards has remained relatively constant year-over-year since 2011.

“So being subprime, not kind of fitting the Citi model, in spite of the fact that that it’s a terrific business, it’s not a business that in the long term we’ll be in.” – Mike Corbat, CEO, Citigroup [on the sale of OneMain Financial]

“With very rare exceptions, I’m not seeing people get back into subprime credit cards.” – David Nelms, Chairman & CEO, Discover Financial Services

1 Based on information published by the American Banker via the American Banker Association.
2 According the Federal Reserve Senior Loan Officer Survey in 2014.
3 As published in the American Banker.

For more information, please contact James Watts, Manager, specializing in Credit Card Issuing, james.watts@firstannapolis.com.

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