Credit cards remain far more profitable than other types of banking, a new Federal Reserve report says.
The average return on assets for big card-issuing banks in 2015 was fractionally down from 2014, but still more than triple the returns for all commercial banks.
“Although profitability for the large credit card banks has risen and fallen over the years, credit card earnings have been almost always higher than returns on all commercial bank activities,” says the report issued this week. “Earnings patterns for 2015 were consistent with historical experience: For all commercial banks, the average return on all assets, before taxes and extraordinary items, was 1.30 percent in 2015 compared to 4.36 percent for the large credit card banks.”
This year’s report is the 26th version of the “Report to Congress on the Profitability of Credit Card Operations of Depository Institutions.” The Fed is required under the Fair Credit and Charge Card Disclosure Act of 1988 to prepare the report annually.
The report found that while credit card banking earnings in 2015 remain by far the industry’s highest, they slipped in 2015 to the lowest since 2010, when the industry was still recovering from the recession.
Rewards sap profits a bit
“I think it reflects the reward programs that cards have had to turn to in order to keep customers – and keep them using their cards,” said Dan Werner, a card industry analyst at Morningstar Inc. in Chicago. “It’s very competitive out there.”
Measured in another way, however, card banks are doing better than before. Card banks saw their net interest income – the interest they earn minus their cost of funds – rise to 8.73 percent of assets in 2015, a jump from 8.18 percent in 2014. For comparison, the banking industry in general earned 2.25 percent interest on assets in 2015.
But card banks’ income from fees and other noninterest sources fell, the report said. Net noninterest income was down 1.9 percent, on top of a 1.5 percent decline in 2014.
Why is noninterest income falling? The trend fits with the growing practice of waiving fees – chiefly annual fees – to keep customers from switching cards, Werner said. At the same time, rewards that cards pay drive up their noninterest expenses.
Card banks’ loan losses nudged up, the Fed report said, another factor in their lower profits. However, the credit card business across the entire banking industry saw loan losses little changed from 2014, the report said, with charge-off rates remaining below historical averages.
The Federal Reserve bases the figures in its report on financials from 13 unidentified banks, which together make up 50 percent of the U.S. credit card business. The report looks at banks that have 90 percent of their consumer loans in credit cards or related plans. The profitability of these card banks serves as a barometer for the broader credit card business.
Banks say that the higher risk of credit card loans, which are unsecured, means they carry a higher price tag. Unlike mortgages and car loans, credit card balances are rarely backed up by assets.
Still, card banks profit handsomely despite the risks, the report shows. Since 2001 they had just one money-losing year, in 2009, during the recession.
Card-issuing banks minimize their risks by keeping loan limits in check for less creditworthy borrowers, and charging them higher interest rates, Werner said. “Through their underwriting, they’re able to manage the risk,” he said.