Q4 2014 Bank Review: Outstanding Card Balances

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The holiday season helped boost card balances across the industry for the fourth quarter of the year, as card lenders benefited from an increase in card usage for the period. While the last quarter remains the most profitable quarter for card lenders due to the seasonal nature of the industry, there was a notable improvement in card activity over 2014 compared to 2013. In this article, we highlight the size of credit card loans outstanding for the eight largest U.S. credit card lenders – JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), U.S. Bancorp (NYSE:USB), American Express (NYSE:AXP), Discover (NYSE:DFS) and Capital One (NYSE:COF) – and how this portfolio has changed since early 2012.

See the full Trefis analysis for Capital OneJPMorganWells FargoU.S. BancorpBank of AmericaCitigroupAmerican ExpressDiscover

Over recent years, a steady improvement in the country’s economic condition has helped consumers ramp up their discretionary spending considerably from the lows seen in the wake of the economic downturn. The growing optimism about the economic outlook has provided the country’s largest credit card issuers an incentive to push their card offerings harder as they look for ways to nullify the negative impact of increased regulatory oversight on their outstanding loan balances. After all, credit card loans are among the most lucrative of the loans in a bank’s portfolio because of the high interest rates that they demand. Net interest margins on credit cards are normally two to three times those of other retail loans like auto or student loans. And while the unsecured nature of credit card loans makes them inherently risky, the high interest rates more than mitigate the impact of charge-offs on the overall portfolio.

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

(in $ bil) Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014
Citigroup 150.4 143.0 140.2 143.8 150.7 142.2 142.6 141.6 141.4
JPMorgan 124.7 123.6 122.9 123.9 124.1 123.3 123.7 126.1 127.4
Bank of America 105.9 102.7 100.3 100.6 101.2 101.1 99.8 100.7 100.3
Capital One 89.1 83.0 77.9 77.7 78.3 77.5 77.0 79.5 81.7
American Express 62.8 62.8 62.5 63.0 64.3 64.4 65.1 66.3 67.6
Discover 49.2 49.3 49.0 50.0 51.0 51.3 51.7 53.1 54.7
Wells Fargo 23.8 24.1 24.0 25.0 25.9 26.3 26.4 27.7 29.5
U.S. Bancorp 17.5 17.4 17.2 17.7 18.1 18.0 18.0 18.3 18.5
Total 623.5 605.9 594.0 601.7 613.5 604.1 604.3 613.3 620.6

The broad trend that emerges from the data here is that the credit card loan portfolios for these lenders were under pressure until mid-2012, after which there has been a slight improvement in outstanding balances. The trend mirrors the sentiment of customers at large, who had been clearing any debt overhangs and saving up over the 2010-2012 period in view of the uncertainty in the U.S. economy. Once the economic outlook appeared more stable, credit card loan volumes began to rise again. Also, the seasonal nature of the cards business stands out in the table. Card usage is highest during the holiday season, because of which the card portfolio swells in Q4 every year, and as customers use their bonuses and tax refunds to clear outstanding debt at the beginning of the year, card balances shrink over Q1.

That said, Citigroup remains at the top of the list, with its geographic diversification helping 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. The bank’s decision to sell off its unprofitable retail banking businesses in several countries over recent years has also been a factor behind the overall reduction in card loan volumes over the period, with negative currency movements being responsible for the slight decline in Q4 2014.

While JPMorgan Chase has the second-largest global portfolio of credit card loans among the banks mentioned here, the banking giant is the leader in the U.S. market as it has more focused operations in the country compared to Citigroup. The diversified banking group cemented its position at the #2 spot after surpassing Bank of America in late 2011, as the latter was forced to sell off a chunk of its card portfolio as a part of its long-term reorganization plan (see Bank of America Sharpens Focus on US Cards, Raises Cash Reserves with Sale).

Capital One reiterated its strong focus in the credit card market in early 2012 with its acquisition of HSBC’s card business. The deal boosted its card balances by almost 50% to almost $90 billion by the end of 2012 (see Capital One Rejigs Recently Acquired HSBC Card Unit). The portfolio shrank over 2013, however, as Capital One decided to do away with several co-branded and private label card portfolios (see Citi Snaps Up Capital One’s Best Buy Credit Card Portfolio), and also allowed some card loans which were not relevant to its long term growth plan to run off.

In terms of total outstanding card loans, American Express and Discover take the 5th and 6th spots in the list. Although one would expect both of them to be higher on the list given that they run their own global card payment systems, it must be remembered that a bulk of their cards are actually offered by other third-party lenders worldwide. Accordingly, their actual card portfolios as issuers are smaller than those for the banks which also issue the more prevalent Visa- and MasterCard-branded cards. However, it must be noted that both of these issuers have had an almost steady increase in card balances since 2010.

As for Wells Fargo and U.S. Bancorp, the credit card business has not been a high priority in the past, because of which the size of their outstanding credit card loans are a fraction of the others. However, both banks are looking to change this over the coming years, and have undertaken several steps to increase their share of the market in the future.

The chart below represents the total outstanding card balances for these banks for the last five quarter, and allows for an easier understanding of the trend in card loans over the period.

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