Increase In Card Usage Is Good News For Banks

The card businesses at the country’s largest banks have seen a considerable reduction in profitability since the economic downturn after a series of regulatory changes imposed restrictions on the fees banks could charge on credit and debit cards. Credit cards came under scrutiny first when the Credit CARD Act of 2009 and other Federal Reserve rules capped interest rates and fees while abolishing several practices seen as onerous to card users. Limits to debit card fees soon followed as a part of the Durbin Amendment. Coupled with a slowdown in economic conditions, which saw shrinking net interest margins as well as a reduction in discretionary spending, this led to a marked decline in card-related revenues at the big banks.

Things have been improving for the banks since mid-2013, however. After showing a largely downward trend since early 2011, outstanding credit card loans at the four banks with the largest card portfolios – Citigroup (NYSE:C), JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC) and Capital One (NYSE:COF) – reported positive growth for the last two quarters. This bodes well for banks’ revenues, as the easing interest rate environment will help net interest margins on credit card loans – boosting revenues over coming quarters. We also expect the banks to continue to cash in on the steady growth in card payment volumes that has been witnessed over the last three years to improve their non-interest card income in the future.

See the full Trefis analysis for Capital One | JPMorgan | Bank of America| Citigroup

Card Loan Portfolios Finally Recover

The table below summarizes the average volume of credit card loans that each of the banks had outstanding over the last eleven quarters. The data has been compiled using figures reported by individual banks as a part of their quarterly announcements.

The largely declining trend in the size of credit card loan portfolio for the country’s largest banks is evidenced by the table above. The trend largely mirrors the sentiments of customers over the period, many of whom have been clearing debt their overhangs and saving up in view of the uncertainty in the U.S. economy. As the economic outlook began to appear more stable in 2013, with key economic indicators like the consumption index and unemployment figures improving considerably, credit card loan volumes began to rise once again.

Some trends related to individual banks need to be highlighted here, though. With the largest card portfolio, Citigroup figures at the top in the list as its geographical diversification helps it add customers in more countries than any of its competitors. It is also because of this diversification that Citigroup’s credit card portfolio size fluctuates considerably, as changes in foreign exchange rates affect the dollar value of the loans handed out in different countries. In comparison, JPMorgan Chase has a smaller total portfolio, but is the leader in the U.S. market as it has more focused operations in the country.

The marked decline in Bank of America’s loan portfolio in 2011 is a result of its long-term reorganization plan, which saw the banking group divest its card business in Canada (see Bank of America Sharpens Focus on US Cards, Raises Cash Reserves with Sale). As for the credit card-lender-turned-bank Capital One, the acquisition of HSBC’s card business boosted card loans from around $60 billion to almost $90 billion in early 2012 (see Capital One Rejigs Recently Acquired HSBC Card Unit). This was followed by a dramatic decline in loans in 2013 as it did away with several co-branded and private label card portfolios (see Citi Snaps Up Capital One’s Best Buy Credit Card Portfolio), and also because the bank has consciously decided to run-off some card loans which are not relevant to its long term growth plan.

The graph below captures the trend in these banks’ loan portfolios over the last three years in a manner that is more easy to compare between quarters.

Customers Are Also Swiping Their Cards More Freely

Another welcome trend for these banks is the notable improvement in card purchase volumes for each of them over the last three years. As banks earn a fee equal to a percentage of the transaction value each time a customer swipes his or her card, the only avenue of growth in card fees for banks following the regulatory clampdown is growth in purchase volumes.

The table below summarizes the purchase volumes for these four banks in each of the last three years.

Notably, cards issued by Bank of America have a higher purchase volume in each of these years despite the bank ranking third in terms of outstanding loans. This points to a much higher usage of Bank of America’s debit cards relative to its competitors. The considerably lower figure for Capital One compared to the other three banks can be explained by the fact that the bank does not have many debit cards in circulation due to its credit card-focused business model.

We currently forecast a 5-6% annual increase in purchase volumes for each of the banks over coming years – largely in line with the trend seen here. But a faster-than-expected improvement in economic conditions could boost card usage at a faster rate. In such a scenario, the impact on the share value of Capital One can be understood by making changes to the chart below.

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