Rewards, credit availability could take a hit as credit card banks' profits fall

Higher delinquencies partly responsible for profit decrease fourth year in a row, Fed says

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

Card profits drop

Profits for credit card banks fell in 2017 for the fourth year in a row, according to the Federal Reserve, a trend that could put a squeeze on new accounts, credit limits and card rewards.

The annual report on profitability of credit card operations looks at banks with a high concentration of credit card business. It uses them as a measuring stick for the U.S. credit card business in general.

The return on assets for credit card banks was 3.37 percent in 2017, down from 4.04 percent the year before. The measure of profitability has been slipping since 2013, when it was 5.20 percent. The 2017 profits were the lowest since 2010.

“The decline in profitability in 2017 reflects a fall in net noninterest income and an increase in provisions for loan losses,” the Federal Reserve report on Profitability of Credit Card Operations said.

See related: Costs and bots lead card issuers to cut some benefits

Credit card bank profits fall – partly due to rewards cost

  • Return on assets was 3.37 percent in 2017, down from 4.04 percent.
  • Fed report points to higher delinquencies, lower noninterest income.
  • Chase reports $330 million hit from rewards costs.

 

Source: Federal Reserve.

Rewards cost hitting issuers’ profits

Net noninterest income includes fee income minus operations costs, one of which is the cost of rewards. Rewards are deducted from network interchange revenue.

The report doesn’t go into detail about the causes of declining profits. But more recent information shows that at least some card issuers are getting hit by rewards costs.

Chase Bank parent JPMorgan Chase said Friday it took a $330 million deduction to reflect “rewards liability adjustment,” as rewards costs were higher than expected in the period.

Chase chief financial officer Marianne Lake put a positive spin on the rewards cost, saying in a conference call that it reflects “strong customer engagement across our Ultimate Rewards offering.”

Higher delinquencies, fewer subprime card applicants

Delinquencies, the other check on card industry profits, have been rising although late payments remain below long-run normal levels, according to bank industry economists.

Bank loan officers indicate they are tightening their grip on new cards and higher credit limits, and fewer subprime borrowers are trying to get cards.

The Fed report on card profits looked at 12 banks that met the definition of “credit card bank” in 2017, down from 14 the year before. The banks in the study accounted for nearly 50 percent of credit card balances on the books of U.S. banking companies, the report said.

Squeeze on card profits

“Yes, profits are falling in credit cards,” said Brian Riley, director, Mercator Credit Advisory. “As a result, expect to see a tightening of credit card approvals, particularly below FICO scores of 720.” 

Some card issuers are already tightening ancillary benefits such as travel insurance, he said in an email interview, “but rewards will likely hold to current levels though year-end.”

Card rewards and sign-up bonuses remain potent tools in the competition between card issuers to attract high-spending consumers. Chase reported overall quarterly profits of $8.3 billion, exceeding expectations.

Credit card banks’ profits remain strong

As in past years, card banks continued to have higher profits than banking operations across the board. Banks’ overall return on assets averaged 1.32 percent in 2017, less than half the return at credit card banks.

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


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Updated: 12-10-2018