Measuring Beta for Credit Card Programs


Navigator Edition: June 2012
By: Frank Martien

On a quarterly basis, the FDIC measures various P&L statistics, including ROEs of “Credit Card Banks” in the U.S. (referred to herein as “credit card ROEs”) via the Quarterly Banking Profiles. A point of comparison for credit card ROEs is return on the U.S. equity capital markets as measured by the S&P 500 index. If one were to graph these side by side, as shown in Figure 1, it is clear that S&P 500 stock returns have been more volatile than credit card ROEs in recent years.

Figure 1: Credit Card ROE vs. Stock Market – Time Series Analysis

Consumer-Credit-Beta_-Figure-1_12Jun26_v1

Note: “Credit Card Banks” means institutions whose credit-card loans plus securitized receivables exceed 50 percent of total assets plus securitized receivables.
Source: FDIC Quarterly Banking Profiles found at http://www2.fdic.gov/qbp/qbpSelect.asp?menuItem=QBP and www.econstats.com.

By taking the same data in a scatterplot chart, one can see the relatively low level of correlation between credit card ROE and stock market returns over the past seven years. By adding a trend line to these data points, one can calculate a beta. As shown in Figure 2, the beta, or slope of the trend line that cuts through S&P 500 return and credit card ROEs observations, approximates zero with a very low R2 coefficient of determination. Consequently, stock market returns and credit card ROEs initially appear relatively uncorrelated.

Figure 2: Credit Card ROE vs. Stock Market – Scatterplot Analysis

Consumer-Credit-Beta_-Figure-2_12Jun26_v1

Note: “Credit Card Banks” means institutions whose credit-card loans plus securitized receivables exceed 50 percent of total assets plus securitized receivables.
Source: FDIC Quarterly Banking Profiles found at http://www2.fdic.gov/qbp/qbpSelect.asp?menuItem=QBP and www.econstats.com.

It is quite interesting to start to lag timing of stock market returns to see if any correlations can be revealed. For example, in Figure 3, S&P 500 return data points on the vertical axis are from one quarter prior to the labeled quarters in which credit card ROEs are measured. On a one quarter lagged basis, one sees the slope and R2 begin to creep up.

Figure 3: Credit Card ROE vs. Stock Market Analysis
(Stock Market Lagged 1 Quarter)

Consumer-Credit-Beta_-Figure-3_12Jun26_v1

Note: “Credit Card Banks” means institutions whose credit-card loans plus securitized receivables exceed 50 percent of total assets plus securitized receivables.
Source: FDIC Quarterly Banking Profiles found at http://www2.fdic.gov/qbp/qbpSelect.asp?menuItem=QBP and www.econstats.com.

In fact, when one lags the S&P 500 return data by two quarters as shown in Figure 4 or by a full year in Figure 5, one sees slope and correlation continuing to rise – suggesting these two variables: credit card ROEs and stock market performance may be more closely related that initially depicted in Figure 2.

Figure 4: Credit Card ROE vs. Stock Market Analysis
(Stock Market Lagged 2 Quarters)

Consumer-Credit-Beta_-Figure-4_12Jun26_v1

Note: “Credit Card Banks” means institutions whose credit-card loans plus securitized receivables exceed 50 percent of total assets plus securitized receivables.
Source: FDIC Quarterly Banking Profiles found at http://www2.fdic.gov/qbp/qbpSelect.asp?menuItem=QBP and www.econstats.com.

 

Figure 5: Credit Card ROE vs. Stock Market Scatterplot
(Stock Market Lagged 4 Quarters)

Consumer-Credit-Beta_-Figure-5_12Jun26_v1
Note: “Credit Card Banks” means institutions whose credit-card loans plus securitized receivables exceed 50 percent of total assets plus securitized receivables.
Source: FDIC Quarterly Banking Profiles found at http://www2.fdic.gov/qbp/qbpSelect.asp?menuItem=QBP and www.econstats.com.

Based upon this rudimentary analysis, we believe an argument could be made that credit card and stock market returns are correlated and, in particular, that performance of the stock market, if far more volatile quarter to quarter, maybe a leading indicator for credit card ROE performance 12 months down the road.

How can credit card issuers use this information? Perhaps by enhancing confidence in the credit card program investment decisioning and planning process with greater knowledge that good times for stocks may sometimes be good times to invest in credit cards.

For more information, please contact Frank Martien, Partner, frank.martien@firstannapolis.com

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