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Card issuers' profits slip, Fed report says

Expecting more delinquencies, banks raise reserves

By  |  Published: July 7, 2017

Fred O. Williams
Senior Reporter
Expert on consumer credit laws and regulations

 

Profits on credit cards are slipping – down for the third year in a row, according to the Federal Reserve – but that doesn’t mean card issuers will boost fees or cut rewards as a result, an industry analyst said.

Banks are socking away more money to cushion against expected future losses  on delinquent card payments, causing much of the drop in profits. However, “There’s a lot of new accounts being created, so it is not a surprise,” said Brian Riley, director of credit advisory services at Mercator Group. “The quick read is, this is a healthy sign.”

And since rewards are funded through interchange fees on retailers, which go up in step with card spending, they are not under pressure unless courts or regulators move to cut the interchange fees, he added. As for sign-up bonuses, banks can often spread the costs over several years, easing the hit to profits.

Also hitting card banks’ profits was falling noninterest income, such as fees. Noninterest expenses, which include operating costs, outweighed noninterest income, the report said.

Credit card banking remains highly profitable
The Fed’s 27th annual report on credit card profitability for 2016, released Friday, said that profits at specialty card banks slipped to 4.05 percent as a return on assets in 2016, compared to 4.36 percent in 2015. Profits are down from 5.20 percent of assets in 2013.

That’s still about triple the profits at commercial banks overall, which earned 1.32 percent of assets in 2016. Unlike most commercial bank loans, credit card balances are generally unsecured, putting the issuer at greater risk of losses.

Indeed, provisions for loan losses were up last year at credit card banks, rising to 2.96 percent of assets from 2.39 percent, a significant jump. Delinquent payments cause banks to increase their provision for loan losses.

By comparison, provisions for loan losses at commercial banks overall were only 0.24 percent.

The expectation of rising losses for cards come as the volume of card loans has climbed as well, about reaching pre-recession levels, Riley said. Consumers carried a bit more than $1 trillion in card balances at the end of 2016, the report said, up 6.5 percent from the end of 2015.

The annual Fed study looks at the profits of banks that specialize in issuing credit cards, and uses them as a proxy for the card industry as a whole. The 14 large, unidentified issuers examined in 2016 account for nearly 50 percent of U.S. card balances.

“Although profitability for the large credit card banks has risen and fallen over the years, credit card earnings have almost always been higher than returns on all commercial bank activities,” the report said.

Delinquency rates remained below their historical averages, the report said, despite a modest uptick in 2016.

Charges and cash advances using bank cards reached 34.3 billion transactions, the Fed report said, worth $3.1 trillion.

Mailings of card offers are tapering off, even while card issuers try to outdo each other with perks and sign-up bonuses. Mailings fell to 3.8 billion in 2016, compared to 4.2 billion in 2011. Back in 2006 they peaked at 7 billion, the Fed report said, citing Mintel Comperemedia data.

When the cost of rewards outpaces spending, cards will tweak their programs to manage costs or drive more spending to keep the program profitable, said Tiffani Montez, senior analyst at Aite Group. But cards continue to innovate with different types of rewards incentives, such as American Express’ Uber credit, she said.

Earlier coverage: Credit card banking remains highly profitable

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Updated: 08-20-2017

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