Key Drivers for JPMorgan’s Credit Card Services
JPMorgan (NYSE:JPM) is one of the leading financial services company in the world and derives almost a fifth of its value from credit card services. After the acquisition of Washington Mutual, JPMorgan become the largest issuers of Visa and MasterCards in the U.S. The company has seen a healthy rise in outstanding average card loans over the past couple of year together with declining provision for losses which has positively impacted the profits of the company. Its competitors include Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), Capital One (NYSE:COF), Citi (NYSE:C) and Morgan Stanley (NYSE:MS) among others in the credit card business.
We have a price estimate of $45.62 on JPMorgan’s stock which is close to the current stock price. Below we look at the key drivers of JPMorgan’s credit card services division.
Credit Card Services at a Glance
At the end of 2009, JPMorgan had more than 145 million cards in circulation meeting nearly $328 billion worth of spending needs. The company offers a wide variety of general purpose credit cards for individual consumers and small businesses. JPMorgan also issues cards with a number of partner organizations such as the America Association of Retired Persons (AARP), Continental Airlines, Marriott, Southwest Airlines, United Airlines and Walt Disney.
JPMorgan generates both net interest income and non-interest income based on the loans provided and service fees charged on the credit cards.
Card Loans Balance Outstanding
Credit card balance outstanding represents the average credit card balance on which JPMorgan is earning interest. It increased approximately 9% in 2006 and 2007, but then this pace declined to around 4% in 2008 and 2009. This was largely due to the economic recession where consumers started reducing debt and the bank had to write off delinquent loans. Significant increase in card loans in 2010 was due to a change in the company’s accounting guidelines as it no longer separates the securitized card loans from the total card loans.
We expect credit card loans outstanding to increase gradually over our forecast period.
Net Interest Yield
Net interest yield increased from 8.2% in 2008 to 10.9% in 2009 primarily due to wider loan spreads as borrowing costs decreased and the acquisition of Washington Mutual. Borrowing costs declined from 2.64% in 2008 to 1.02% in 2009. Net interest yield decreased to 9.6% in 2010, and we expect it to remain stable at its current level during our forecast period.