2019 Study on Credit Card Profitability in the United States - Interest Spreads and Credit Quality Set the Course for 2020

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Jan 07, 2020, 07:30 ET

DUBLIN, Jan. 7, 2020 /PRNewswire/ -- The "Credit Card Profitability: Interest Spreads and Credit Quality Set the Course for 2020" report has been added to ResearchAndMarkets.com's offering.

New research indicates credit card Return on Assets metric is on the upswing and positive movement will continue in 2020.

Credit cards remain one of the most profitable offerings by retail banks in the United States. Still, margins began to slip between 2014 and 2017 as credit card issuers rebuilt their portfolios after the recession and normalized strategies in response to the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act). Return on Assets (ROA) for credit card banks fell from 4.94% to 3.37% during that period.

The tides turned in 2018, when the ROA metric improved 42 basis points to 3.79%. Credit card issuers increased their lending margins and benefited by improved credit quality.

The analysis presented in this research report illustrates which components affect the results, and describes why momentum should keep top credit card issuers profitable in the coming decade.

Credit card issuers began to increase credit card interest margins in 2017 when the prime rate was 3.75%, and they continued to improve their margins in 2018. Indications are that the interest spread, or margin, will rise slightly into 2020. The momentum will likely continue through 2020 as almost 200 million cards were issued since 2017. The author also notes that the increased margin protects the credit card Return on Assets metric and helps shield against credit losses if the U.S. market should experience a downturn.

Highlights of the research report include:

An explanation of how credit card interest rates increased at a time when the prime rate has been low
A detailed explanation of the Return on Assets model in the credit card industry
Reasons why credit card profitability will be strong through the beginning of the new decade, and where risk exists
A comparison of credit card ROA to all commercial bank ROA
Suggestions of ways for credit card issuers to protect their Return on Assets
A working model to compare any financial institution results to the Federal Reserve's Report to Congress on the Profitability of Credit Card Operations of Depository Institutions

Key Topics Covered

Executive Summary

ROA Recovers from a Four-Year Slide

Credit Card Report to Congress on Profitability:
ROA Measures the Efficiency of Income and Expenses to Assets
Net Interest Income Shows the Cost and Result of Funding Credit
Net Non-Interest Income Depicts Operational Revenue and
Comparing Net Revenue to Portfolio Value

The Stars Aligned in 2018 and the ROA Metric Improved

Net Interest Income Continued to Rise, and Non-Interest Income Rebounded
Revolving Debt Generates the Interest Income
Portfolio Growth Is One Thing, Risk Management Is Another

Try the Challenge: How Does Your ROA Compare?

Gather Information
Compare the Data
Look for Opportunities
Devise a Strategy

Illustrative Ideas to Improve Your Metrics

Protect Net Interest Revenue
Increase Net Interest Income
Decrease Net Interest Expense
Control Net Non-Interest Revenue
Increase Net Non-Interest Income
Decrease Net Non-Interest Expense

Consider the ROA and Where Your Issuing Business Stands

Companies Mentioned

American Express
Barclaycard
BMO
Capital One
Chase
Citi
Discover
Equifax
Experian
Scotiabank
TD
TransUnion
U.S. Bank
Wells Fargo

List of Figures & Tables

Figure 1: Credit card return on assets fell between 2014 and 2017 but rebounded in 2018
Figure 2: The ROA metric summarizes the costs of running a card business versus the portfolio value
Figure 3: Net interest margins widen as the prime rate stays low and consumer interest rates rise
Figure 4: Revolving credit card debt is at historically high levels
Figure 5: Large issuers' credit losses remain low, although stress exists for lenders below the top 100
Figure 6: The ROA Challenge: Benchmark your firm's ROA
Figure 7: Credit card issuing banks will find the data at the FFIEC website; smaller issuers must use

Table 1: ROA increased 42 basis points for credit card banks in the United States from 2017 to 2018
Table 2: Credit card managers can help improve ROA with business strategies

For more information about this report visit https://www.researchandmarkets.com/r/9sskv2

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