Over the last few days, some of America’s largest credit card issuers have released their Q4 earnings, providing insight into the health of their credit card portfolios. The data released shows growth in outstanding debts and a decrease in the number customers defaulting on their loans. This serves as a key metric in measuring how efficiently issuers are handling the growth of their loan portfolio. As of the most recent earnings call, JPMorgan Chase (NYSE:JPM) and Citibank (NYSE:C) - the nation's largest card issuers - show the strongest performance, relative to their competitors.
Citibank and Chase experienced the biggest improvement to their credit card charge-off rates - that is the percentage of total loans that are unlikely to be recovered. Both institutions saw a decrease of 10% year-over-year. Collectively, these two issuers held $245B in outstanding credit card debt, and the decrease prevented roughly $353M in losses for the banks. Bank of America (NYSE:BAC) was the other credit issuer to see a significant drop to charge-offs, reporting a 7% improvement. This decrease appears to have come at the cost of market share, as outstanding balances for the issuer dropped more than for any other card issuer.
Bank of America's result is, partly, due to a change in their approach to the card business as a whole. In a call with investor’s, BofA CEO Brian Moynihan explained that the issuer is looking at a more strategic growth to their card business – focusing on individuals with higher credit scores, over just sheer volume. While this resulted in a decrease in interest income, it has also significantly reduced the issuers credit costs. The increased effiency was partly what allowed Bank of America to report its highest earnings in nearly a decade.
One of the more interesting issuers in this space, as of late, has been U.S. Bancorp (NYSE:USB). The bank saw the biggest growth to their outstanding card balances, jumping nearly 17%, from $18B in Q4’14 to over $21B last quarter. Though U.S. Bank is a far smaller player in the credit card space, it has been making some big moves to increase their presence. Earlier this month, it was announced the bank would become the new issuer of the Fidelity Investment credit card, acquiring $1.6B in outstanding debts and over 500k new accounts from Bank of America. Even though it is growing its portfolio, U.S. Bank is not entirely forgoing its card portfolio quality either. The bank has had historically high charge-off rates of over 3.5%. However, despite the aquisition of new accounts, there hasn't been any increase to charge-off rates.
In competing for greater market share, credit card issuers have long been balancing the acquisition of new accounts with trying to maintain low charge-off rates. If an issuer hopes to aquire new accounts, they may need to re-think their underwriting policies to be more accepting. However, if they relax their standards too much, they run the risk of brining on too many bad credit accounts. On average, outstanding consumer balances in the U.S. are on the rise and fewer individuals are defaulting on their credit card loans. Among the 100 largest banks, credit card charge-off rates have been steadily decreasing since 2010, according to data collected by the Federal Reserve. This positive economic trend is partly due to an improving economy, as well as the improving ability of banks to determine creditworthiness.
The historical peak for credit card charge-off rates occurred during the Great Recession. At the time, the average credit card charge-off rate climbed over 10%, among America’s 100 largest banks. As millions of people defaulted on all their debts, banks suffered huge losses. Since then, however, things have been on a positive upswing, with charge-off rates reaching lows we haven’t seen since the 1980’s.
As we enter 2016, however, revenues are likely to improve significantly, so long as the current trends we’re seeing continue. Another key area of improvement for these issuers is happening on short-term delinquencies – those that are 90+ days past due. All 6 major credit-issuing banks that reported within the last week experienced a decrease in the number of card loans in this state of delinquency. As more individuals make payments, banks will be able to recover a greater number of the loans they give out – some of the most optimistic news for U.S. credit card issuers in the post-recession period.