ROAs of U.S. Credit Card Banks – Holding A Steady Course


Navigator Edition: May 2015
By: Jacob Armijo

First Annapolis has observed remarkable stability of returns on credit card assets since 2012. The FDIC Quarterly Banking Profile defines “Credit Card Banks” as institutions for which credit card loans plus securitized receivables exceed 50 percent of total assets plus securitized receivables. First Annapolis conducts a quarterly analysis of the P&L statement of these banks using the financial data obtained through quarterly FDIC call reports. As of Q1 2015, 15 banks representing a combined $489.9 billion in total assets fit this definition. Figure 1 shows the weighted average P&L for Credit Card Banks from 2010 through 2015 based on annualized Q1 data.

Figure 1: Weighted Average P&L for Credit Card Banks
Fig-1_-Weighted-Average-P&L-for-“Credit-Card-Banks”Source: First Annapolis Consulting analysis of the SNL Financial call report data for “Credit Card Banks” as defined in FDIC Quarterly Banking Profiles as banks and savings institutions for which credit card loans plus securitized receivables exceed 50 percent of total assets plus securitized receivables.

The analysis shows an increase in after-tax income as a percent of loans since 2010. Below is a more detailed discussion of some of the individual line items in this analysis.

Net interest margin – Despite a changing economic environment since 2010, interest revenue and interest expense have remained relatively stable. A gradual rise in interest rates; however, has been long anticipated.

Interchange & fees – Interchange and fees as a percent of loans have increased since 2010, which may be explained by increased consumer spend levels coupled with the rise of cash back and rewards-based credit cards.

The decrease from 2014 to the annualized 2015 data can most likely be explained by the assumption that spend levels peak in the fourth quarter of every year; thus an annualized Q1 figure might be lower than we’d expect from a full year’s data.

Net charge-offs – The most significant change is the sharp decrease in net charge-off rate since 2010.

Net charge-offs, while currently at historically low levels, are expected to rise in coming years, reaching upwards of 3%, according to the December 18, 2014 “Specialty Finance – 2015 Outlook” report published by Credit Suisse Equity Research. Perhaps relatedly, 2014 and 1Q 2015 have seen increases in loan loss reserves (LLR) after several years of reductions following the Great Recession.

Marketing & other non-interest expense – Marketing expense has increased steadily since 2010, indicative of the overall economic health of the Credit Card Banks as well as improved prospects and predictability of credit card returns post-recession. Meanwhile, non-interest expense as a percent of loans has also increased since 2010, potentially due in part to easing of recessionary cost containment measures.

Figure 2 takes a more detailed look at some of these P&L line items on an individual bank basis.

Figure 2: Program KPIs by FDIC Credit Card Banks
(% of avg. loans and leases, Q1 2015)

Fig-2_-Program-KPIs-by-FDIC-Credit-Card-BanksSource: First Annapolis Consulting analysis of the SNL Financial call report data for “Credit Card Banks” as defined in FDIC Quarterly Banking Profiles as banks and savings institutions for which credit card loans plus securitized receivables exceed 50 percent of total assets plus securitized receivables.

Net Interest Margin – Despite a few outliers at the high end of the spectrum, most Credit Card Banks fall in the 10% to 15% range, especially among the larger banks. Banks with a greater focus on store-branded private label credit cards may find themselves at the upper end of this range due to the higher APRs often associated with these cards. On the opposite end, banks with card products focused on transactors see lower interest margins, due primarily to a lower prevalence of revolving credit balances, often coupled with lower APRs.

Loss Rate – Almost all of the banks considered in this analysis show similar loss levels, at roughly 3%. Some of the exceptions include those banks with a larger presence in higher credit risk segments. These banks typically have higher net interest margins as a compensating factor. Conversely, banks with lower net charge-offs are typically those who that focus on the least risky segments, usually affluent customers with higher levels of annual spend. While net interest margin for these banks is often lower, they often achieve higher levels of interchange and fee yield as an offsetting factor.

Risk-Adjusted Yield – The highest level of dispersion among the analyzed banks is seen here, driven primarily by the interchange and fees line item, which varies significantly by bank. Some of the outliers on the high end include those banks that strategically focus on the prime to super prime segments, where losses are lower and spend levels are higher, leading to increased interchange and fee revenue.

After-Tax Income – Despite widely dispersed risk-adjusted yields, less deviation exists in the of ROAs of Credit Card Banks, driven by higher levels of marketing and other non-interest expenses, often among the issuers with the higher risk-adjusted yields.

Growth – An analysis of the credit card receivables for these same 15 Credit Card Banks shows a slow growth environment since 2010 (see Figure 3). From 2010 to Q1 2015, the total receivables for all 15 portfolios combined have increased by a 4.2% CAGR and 19% overall growth since 2010. Although the data for 2015 Q1 ostensibly indicates a decline in receivables, spend, and receivables typically peak in Q4 of each year; consequently, we would view the 2015 Q1 drop off as seasonality driven.

 Figure 3: Credit Card Receivables of the 15 Credit Card Banks
(in $ billions)

Fig-3_-Credit-Card-Receivables-of-the-15-“Credit-Card-Banks”-(in-$-billions)Source: First Annapolis Consulting analysis of the SNL Financial call report data for “Credit Card Banks” as defined in FDIC Quarterly Banking Profiles as banks and savings institutions for which credit card loans plus securitized receivables exceed 50 percent of total assets plus securitized receivables.

Many positive themes for the credit card industry can be taken away from this analysis of banks with large concentrations of credit card assets. Despite predicted increases in credit losses and interest expense, revenue-generating aspects of the credit card business have also trended upwards, leading to a return of pre-recession level profitability. The increase in ROA, coupled with growth in balances for the “Credit Card Banks,” marks credit cards as an attractive line of business for many banks.

For more information, please contact Jacob Armijo, Analyst, jacob.armijo@firstannapolis.com, specializing in Financial Institutions.

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