Stable U.S. Credit Card Margins – Navigating The Way To Future Growth

Navigator Edition: November 2015
By: Jacob Armijo

With attractive and stable levels of observed and forecasted performance, the U.S. consumer card industry continues to be at a strong point in the cycle. Figure 1 shows First Annapolis aggregated FDIC call report P&L data for the FDIC’s designated “Credit Card Banks.”1

Figure 1: Estimated P&L of Credit Card Banks1

Fig-1_-Estimated-P&L-of-Credit-Card-BanksNote: Quarterly 2015 figures are annualized based on year-to-date data as of that quarter.
Source: First Annapolis Consulting analysis, via SNL Financial, of FDIC call report data.

Since 2012, after-tax income has been remarkably stable within a range of 3.7% to 4.1% or 40 basis points. We believe issuers will seek to continue this stability in profitability. For instance, the possibility / eventuality of increased funding costs for banks or movement towards more normalized net charge-off rates could trigger a credit card strategy shift towards enhancing certain revenue line items or managing value propositions to maintain margin consistency.

Since the 14 banks represented in the cohort of Credit Card Banks comprise less than half of total U.S. credit card receivables, we also evaluated available call report data for an expanded sample of U.S. credit card issuers.

Figure 2 shows credit card yields and net charge-off rates of 300+ banks with greater than $1 million in U.S. consumer credit card receivables.

Figure 2: Net Charge-Off Rate & Yield for U.S. Consumer Credit Card Issuers
(Banks with $1M+ in Credit Card Receivables, annualized Q3 2015 data)

Fig-2_Net-Charge-Off-Rate-&-Yield-for-US.-ConsumerNote: Net Charge-off Rate is defined as ‘net charge-offs on credit card loans as a percent of average credit card loans. Yield is defined as interest and fee income on credit card plans as a percent of average credit card plans.
Source: First Annapolis Consulting analysis of SNL Financial FDIC call report data.

Although metrics for individual banks vary widely, these 300+ issuing banks average a 10% yield and a 2% net charge-off rate, both of which are lower than the averages for the Credit Card Banks shown in Figure 1. Since the majority of observations in this expanded sample are regional or community banks; lower yields and loss rates are consistent with the relationship customer-only strategies typically pursued by smaller issuers. Of note, First Annapolis has observed profitable performance across regional and community banks as well as the large, national issuers that comprise many of the Credit Card Banks.

Thinking for a moment of credit card assets in the terminology of investment securities, more recent stability and go-forward manageability of portfolio performance could imply a lower beta and a reduction or flexibility in the equity returns sought by issuers in making credit card program or acquisition investment decisions. In any case, in a period where most issuers are enjoying stable performance, we expect increased investment in program enhancements across channels, products, value propositions, credit risk management, and cardholder servicing.

1 “Credit Card Banks” are defined as institutions whose credit card loans plus securitized receivables exceed 50 percent of total assets plus securitized receivables per the FDIC’s Quarterly Banking Profile reports.

For more information, please contact Jacob Armijo, Analyst,, specializing in Bankcard Issuing and Commercial Payments.

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