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Data for today’s episode is provided by Mercator Advisory Group’s report – Credit Card Profitability: Interest Spreads and Credit Quality Set the Course for 2020.
Credit card banks’ ROA is about 2.5 times that of commercial banks:
- Credit card profitability (ROA) trended down from 2014 to 2017
- But credit card profitability rebounded in 2018 by 42 basis points
- The ratio of profitability between credit card banks and commercial banks in 2017 was 2.55 to 1
- Two factors contributed to 2018’s rebound in credit card profitability:
- Improved interest rate margins, raising net interest income
- Stronger collection results, which decreased net non-income expenses
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 Mercator Advisory Group’s latest research report, Credit Card Profitability: Interest Spreads and Credit Quality Set the Course for 2020, explains the Return on Assets metric, 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,” Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group. “The momentum will likely continue through 2020 as almost 200 million cards were issued since 2017.” Riley 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.
This research report contains 20 pages and 9 exhibits.
Companies and other organizations mentioned in this research report include: American Express, Barclaycard, BMO, Capital One, Chase, Citi, Discover, Equifax, Experian, Scotiabank, TD, TransUnion, U.S. Bank, and Wells Fargo