Navigating the U.S. Consumer Credit Card P&L
First Annapolis has compiled U.S. consumer credit card industry income statements for 20101 through 2013 by using the FDIC’s criteria for “Credit Card Banks” through SNL queries on call report data.2 Sixteen financial institutions qualified as “Credit Card Banks” in 2013 with a combined $432 billion in consumer credit card loans3 – about 62% of the $691 billion in credit card loans on the balance sheets of all FDIC-insured depository institutions.
As shown in Figure 1, the credit card industry has managed to improve profitability during a time of declining interest yields and increasing non-interest expense. For example:
- Declines in interest expense have directly offset lower interest yields;
- Interchange & fees have increased due to higher spend activity; and,
- Net charge-offs have declined remarkably, amplified by the tailwind of loan loss reserve recapturing.
On a combined basis, better industry performance and higher risk-adjusted yields have helped promote a resurgence of marketing, which has included a partial rebound in direct mail along with investments in more sophisticated and targeted means of originating accounts through digital channels.
Figure 1: Composite Income Statement for “Credit Card Banks” 2010-2013
Source: First Annapolis Consulting analysis of “Credit Card Banks” as defined in FDIC Quarterly Banking Profiles as banks and savings institutions for which managed credit card loans exceed 50% of total assets.
To analyze observed size impacts, these banks were also split into the eight with total assets under $10 billion versus the eight with assets over $10 billion. Of note, one finds for 2013 the under $10 billion segment exhibited higher interest expense (1.23% of average loans for <$10 billion versus 0.85% for >$10 billion); higher other non-interest expense (8.40% of average loans versus 6.17%); and, higher equity capital to assets (15.70% versus 14.95%).
Notwithstanding regulatory pressure and the possibility for interchange regulation, we anticipate a fairly stable environment for credit card key performance indicators over the next few years. Keys to success for most financial institutions will include focus on prospect pools connected by a bank or brand partner relationship and, in an effort to improve relevance and effectiveness, adoption / implementation of digital marketing and servicing strategies as they become increasingly main stream.
1 Prior to 2010, analyzing the credit card performance of major issuing banks based on call report data was complex in light of significant off-balance sheet securitization activity; however, accounting changes in 2010 brought many securitized assets back on balance sheets. Source: “Skin-in-the-Game: Risk Retention Lessons from Credit Card Securitization,” Adam J. Levitin, The George Washington Law Review, 29 April 2013.
2 The FDIC releases a Quarterly Banking Profile report depicting key performance indicators for FDIC-insured depository institutions overall along with segments of financial institutions based on several criteria. One such segment, “Credit Card Banks” is defined as banks and savings institutions for which managed credit card loans comprise at least 50% of assets.
3 2013 “Credit Card Banks” include: 1st Financial Bank USA; American Express Bank, FSB; American Express Centurion Bank; Barclays Bank Delaware; Capital One Bank (USA), National Association; Chase Bank USA, National Association; Comenity Bank (affiliated with Alliance Data); Comenity Capital Bank (affiliated with Alliance Data); Discover Bank; FIA Card Services, National Association (affiliated with Bank of America); GE Capital Retail Bank; Merrick Bank Corporation (affiliated with CardWorks); Nordstrom FSB; TCM Bank, National Association; Wells Fargo Financial National Bank; and World’s Foremost Bank (affiliated with Cabela’s).
For more information, please contact Frank Martien, Partner, specializing in Commercial Payments, firstname.lastname@example.org.
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