We are halfway through third quarter, and with four months
remaining in 2018, credit card managers know that potential write-offs sit in
the 60 days+ delinquency buckets. If you are among the top 100 U.S. card issuers, charge-offs
are up to 3.65%, from 3.48% in Q1, and heading toward 4% by year end.
Problems loom at smaller issuers. According to the Federal Reserve,
charge-offs skyrocketed in mid-2017, and have been north of 7% in 2018. In comparison
to the top 100 metric at 3.65%, performance at smaller issuers is more than
two times worse, at 7.57%. Now is an excellent time to read my last year’s
Mercator Advisory Group report on U.S. credit quality: U.S. Credit Card Debt: Circle the Wagons and
Fortify. A more recent report on the topic, Credit Card Acquisitions: Maximizing Results amid
Change, is timely because rising attrition and 60 million
new accounts a year means less account seasoning, an early indicator of risk.
Credit Card Profitability
When it comes to profitability in retail banking, credit cards rank highest.
Cards still generate almost three times as much return on assets as retail
banking as a whole. That metric is spiraling down, however, as discussed in
my update on credit card profitability titled In Search of a Profit: Falling ROA Sets the Stage
for 2019 and Beyond, a report released by Mercator
earlier this month. You will learn why and where the number is vulnerable and
what to expect through the end of the decade. If you’d like to dive deeper
into this topic, please contact me for a discussion.
Credit Card Accounting Change: 2019
2019 will be here before you know it. Chances are your financial group is
already preparing for CECL (pronounced “Cecil”). Hold on to your hats as the
metric for credit impairment changes. Some bond raters, such as Moody’s,
expect to see 50% increases. We are more conservative and see the number as
half as much, but when you consider increased write-offs mentioned above plus
more conservative projection tools, we may see some market compression in
2019. Read my Viewpoint, Current Expected Credit Loss (CECL) Accounting:
Radical Changes Ahead, released by Mercator Advisory
Group earlier this month.
The Never-Ending Saga of Credit Card Rewards
I continue to foresee problems with reward programs and recently pointed to
five market changes that will likely to have an impact on credit card rewards
programs. See the Mercator Viewpoint titled Five Reward Events That Will Alter the Credit Card
Value Proposition, released in June. Topics include
downgrading premium credit card reward programs, downgrading reward perks,
and retailer plays in the private-label card world.
Programs have become expensive and as you can see in the discussion of ROA,
issuers do not have the money to throw around as loss leaders. Expect some of
the rewards generosity to slow next year, as issuers begin to batten down the
hatches on non-interest expense items.
Keep your eyes on credit losses, one of the largest controllable expenses in
credit cards. Pressures are on small issuers right now but will likely move
upstream as we enter 2019. Take a few minutes to read the view on card
profitability, cited above, which is good but not great. Know more than other
people do about CECL and ask your business how it will affect both credit
card lending and collections.
The books close on 2018 in less than 140 days until year end and all the risk
is in your 60+ collection buckets. Pedal fast to contain credit losses!