After a protracted decline beginning in mid-2009*, weighted average industry loss rates experienced a plateau in the fourth quarter of 2012. Purchase volumes increased compared to both the prior year and, for the seventh consecutive period, the prior quarter. Credit card issuers continue to struggle with receivables growth as year-over-year totals were down for the fourth consecutive time in the last quarter of the year (since 4Q ’09).
Receivable Levels Showing Initial Signs of Improvement: Consistent with seasonality trends from years past, industry receivables were up 3.0% quarter-over-quarter, but down 2.1% year-over-year. A few major issuers, such as Wells Fargo, Discover, and American Express posted year-over-year receivable growth rates in excess of 4.0%. Conversely, Chase, Citi, and Bank of America have now posted receivable declines for every year-over-year period since the second quarter of 2009; however, the declines appear to be flattening as 2012 was the first year since the credit crisis that none of the aforementioned issuers experienced double-digit year-over-year growth declines.
Stable Returns: Issuer returns declined on both a quarterly and annual basis by 52 basis points and 19 basis points respectively. As measured by our composite, the industry posted an after-tax return on assets of 3.05% for the quarter (annualized). A large portion of the annual decline was driven by American Express, which incurred quarterly charges for restructuring its Business Travel segment, modifying its cardholder rewards reserve, and settling litigation with Visa. Excluding American Express, issuer returns would have been nearly flat on a year over year basis.
Purchase Volume Growth: Although purchase volume growth appeared to be normalizing as of the end of the third quarter of 2012, the industry posted quarter-over-quarter growth of 5.6% and, more importantly for seasonality reasons, year-over-year growth of 5.5%. While purchase volume trends are nearly always driven by the largest issuers, in this case Chase and American Express, growth on an annual basis was nearly ubiquitous in the fourth quarter. Both Chase and American Express consistently discuss strategies, including rewards and new product innovation, which have driven outperformance of the industry over the last five years.
Flattening Loss Rates: Industry messaging suggesting that loan loss provision releases are nearing an end proved to be the case as loss rates were nearly flat on a quarter-over-quarter basis. The trend of 2012 loss rates proving more favorable than 2011 continues as annual totals were down by 105 basis points. As mentioned in our last report, 2013 will be an interesting year to monitor from a loss rate perspective as loan growth may require new account underwriting further down the credit risk spectrum.
* Note: General trend; many loss rates temporarily spiked in early 2010.
Source: Issuer quarterly reports and First Annapolis analysis.
Note:1Includes income from acquiring business and private label receivables and volume. Restated from previous quarter which included income from auto and student lending.2 Restated splitting between Citibranded North American and Citi Retail Services beginning 1Q 2012. Purchase volume includes cash advances.3 Receivables, purchase volume, and net loss rates are for U.S. consumer cards. After-tax ROA restated to include ‘Card Services” only; U.S. consumer and business services. Period amounts have been reclassified to conform to current period presentation.4 U.S. card business, small business, installment loans only. Purchase volume excludes cash advances. 2Q12 Results include the impact of May 1, 2012 closing of HSBC transaction resulting in approx $28.2 billion in receivables at closing.5 Receivables and charge-offs are for U.S. Cardmember Lending business only. Purchase volume is for U.S. Card Services segment, consumer and small business. * Restated: Average earning assets is defined as all cardmember receivables (charge) and loans (revolving credit).6 Includes US domestic receivables and purchase volumes only. ROA includes merchant services and implied U.S. Cards tax rate of ~40%.7 Wells Fargo began reporting purchase volume in 4Q 2013.8 After Tax ROA reflects Payment Services line of business income and average loans.9 After Tax ROA excludea Wells Fargo. Credit specific income not reported. Reflects any previous quarter restatements and includes addition of US Bank.10 Excludes Capital One. Capital One experienced year-over-year purchase volume growth of 9.4% (excluding the HSBC portfolio), while ending loans were flat (year-over-year, excluding HSBC and run-off Installment Loans).
