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In an era of mobile payments and point-of-sale loan apps, the round-cornered credit card can seem like a throwback. Yet banks are still very keen on those little slivers of plastic with the magnetic stripe.
During a generally bleak first-quarter earnings season for the big US banks, cards were a highlight. While executives lamented bad corporate loans to the oil patch and floundering investment banking units, for example, they brightened when talking about the US consumer — and about credit cards in particular.
Citigroup raved about its recent tie-up with Costco, the world’s number two retailer after Walmart, emphasising it was reshaping its consumer bank around cards and wealth management. Wells Fargo boosted credit-card balances over the year by 10 per cent, or $3.1bn, and said it would be open to an “opportunistic” acquisition to round out its portfolio. US Bancorp, the number five bank by assets, is looking to add another 6 or 7 per cent to its $20.2bn book this year.
The big banks are basically reaping what they sowed, post-crisis. After the 2009 Credit Card Accountability and Disclosure Act curbed abusive practices they all scrubbed their books, cutting off riskier borrowers. Now balances across the insured banking system have recovered, up about 7 per cent from the $622bn trough at the end of 2013, and issuers find themselves with portfolios stuffed with mostly prime customers. Many are ready to drift down market again.
Bank of America, which trimmed its range of cards from 18 to 6 in the years after the crisis, has opened more than 5m accounts over the past four quarters. Between January and March the newcomers’ average credit score on the commonly-used FICO range was 771 — a slight dip from 773 a year earlier.
“The last recession cleansed the industry,” says Sanjay Sakhrani, analyst at Keefe, Bruyette & Woods. “What you’re left with is a really pristine set of accounts.”
One good index of quality is the loans that the banks have bundled into securitisation programmes. These “seasoned” portfolios now have excess spreads — the earnings that flow back to the issuer, net of charge-offs, coupons and servicing fees — near record highs, notes Kayvan Darouian, a credit analyst at Deutsche Bank in New York. “This is about as good as it gets,” he says.
Loans retained on bank balance sheets are less transparent, but the broad trends look benign. At JPMorgan Chase, for example, net charge-off rates held steady at 2.62 per cent over the year to the end of March, even as the number of active cards jumped by half a million to 33m.
Even at Capital One, the kings of subprime, things seem solid. Richard Fairbank, the chairman and chief executive, told analysts this week that he “liked the earnings profile and the resilience of the business we’re booking”. Total loans were up 14 per cent over the year.
Losses will rise, as they always do. Even now, trouble is beginning to flicker in prime securitisations, where charge-off rates ticked up to 2.69pc in March. That is 22 basis points higher than the trough last October, according to Herman Poon, a senior director at Fitch Ratings in New York.
Bob Hammer of RK Hammer, a California-based payments consulting firm, cites more worrying signs — including surprise lay-offs at Nordstrom, the upscale retailer, reports of indifferent sales at Macy’s and JC Penney, and the rash of missed first-quarter earnings forecasts from the country’s biggest companies. “Stir all that up, and 2017 will be a question mark,” he says.
For now, though, charge-off rates are so far short of the double-digit levels of 2009 that many card issuers seem quite happy to drop standards to gain share. “If you’re going to grow faster than the industry, at about 5 per cent, you’re either leaning on terms or leaning on credit,” says Brennan Hawken, a banks analyst at UBS.
After all, margins this attractive are hard to get elsewhere. Once a card issuer has built the infrastructure and has signed a couple of partnerships with an airline or a hotel chain, adding new accounts can quickly flow through to the bottom line, notes Chris O’Connell, credit analyst at DBRS.
Discover Financial Services and Synchrony, two of the biggest credit-card specialists, have achieved average returns on equity of 21 per cent over the past five years. That is more than three times Citi’s group-wide ROE, and almost four times BofA’s.
At a time when the banks have been looking for stability to offset swings elsewhere, this is probably as good a bet as any.