Credit Card Loan Performance; PeerIQ’s Modeling Archive

By Vy Phan

May 12, 2019

Greetings,

US consumer credit grew by $10.3 Bn in March, at a 3.1% annualized rate, the slowest in nine months. Revolving credit outstanding decreased by $2.18 Bn indicating that consumers ended the quarter more cautious about borrowing. US GDP growth has been propelled by rising consumer spending and a slowdown could put a dampener on growth.

Source: Bloomberg, PeerIQ

In this week’s newsletter we dig into credit card earnings and mastertrust data.

FinTech lenders reported earnings this week. LendingClub’s revenue increased by 15% YoY to $174 Mn and net loss came in better than expected at $11.25 Mn. Originations increased by 18% YoY to $2.73 Bn. We will look at FinTech issuers earnings in detail next week.

Citi is launching credit-card like perks for its checking accounts. The bank has lagged in gathering deposits as other competitors have launched digital banking programs. Citi is also rolling out its digital bank and has gathered nearly $1 Bn in deposits in the first quarter.

In regulatory news, Bernie Sanders and Alexandria Ocasio-Cortez have unveiled a proposal to cap the interest rates on credit cards at 15%. The proposal also would let more than 30,000 post offices provide banking services for low-income Americans who currently don’t have ready access to banks. The proposal has little chance of becoming law as Republicans control the Senate.

The U.S. Court of Appeals for the Ninth Circuit has upheld the constitutional structure of the CFPB. The CFPB has come under repeated challenges to its constitutionality from various banks and even the Supreme Court had refused to hear one of the constitutional challenges.

Strong Credit Card Earnings

Earnings season continues with credit card issuers reporting last week. Credit card master trust data shows that delinquencies have picked up from their lows but remain significantly below their peaks. AmEx and Synchrony have increased loan loss reserves at a rate higher than loan growth as credit renormalization continues. ROE has jumped significantly YoY driven by loan growth and improved NII. We will look at credit-card issuers’ earnings in detail below.

30 and 90-day delinquency rates from credit card master trust data

Source: Bloomberg, Bank Credit Card Trust Data, PeerIQ

Credit card issuers had a good quarter with strong revenue and NII growth. AmEx and Discover delivered the highest loan growth. AmEx, Discover and Synchrony showed double-digit growth in NII. Stock price performance post earnings has also been good with Capital One up by 6.5%. We look at issuers’ earnings individually below.

Source: Bloomberg, PeerIQ

(All changes below are YoY unless mentioned otherwise)

Revenues at American Express grew by 7% to $10.4 Bn.

Earnings were down by 5% to $1.6 Bn.
NII grew by 12% to $2.1 Bn.
AmEx’s loan book grew by 11% to $81 Bn.
Provision for credit losses increased by 4% to $0.8 Bn, while total loss reserves increased by 19% to $2.1 Bn. This is the first quarter in recent history when the growth in both provisions and reserves has lagged loan growth.
The reserve build was lower reflecting increased stability in the lending portfolio. The higher reserve build in 1Q18 was driven by an acceleration in loan growth and by the seasoning of the lending book.
Loss reserves as a percentage of loans increased by 0.1% points to 2.6%.
Net charge-offs increased by 28% to $0.5 Bn. The net charge-off rate increased by 0.3% points to 2.3%.
AmEx expanded its partnership with PayPal and will allow AmEx cardholders to use PayPal’s and Venmo’s features for P2P money transfers and for shopping at merchants who accept PayPal.
ROE at AXP increased by 17.8% points to 33.7%.

Capital One’s revenues rose by 1% to $7.1 Bn.

Earnings were up by 5% to $1.4 Bn.
NII increased by 1% to $5.8 Bn.
Loans fell by 3% to $240 Bn. Capital One’s was the only issuer to have seen a drop in loans outstanding driven by consumer loans.
Provision for credit losses increased by 1% to $1.7 Bn, while total loss reserves decreased by 3% to $7.3 Bn.
Loss reserves as a percentage of loans was flat at 3%.
Net charge-offs decreased by 1% to $1.6 Bn. COF was the only issuer who saw a drop in the net charge-offs. The net charge-off rate increased by 0.1% points to 2.6%.
COF’s ROE dropped slightly to 11.1% and is the lowest in its peer group.

Discover’s revenues grew by 7% to $2.8 Bn. Earnings grew by 9% to $0.7 Bn.

NII grew by 10% to $2.3 Bn.
Discover’s loans grew by 7% to $89 Bn.
Provision for credit losses continued to outpace loan growth and increased by 8% to $0.8 Bn, while total loss reserves decreased by 15% to $3.1 Bn.
Loss reserves as a percentage of loans increased by 0.2% points to 3.5%.
Net charge-offs increased by 13% to $0.7 Bn. The net charge-off rate increased by 0.2% points to 3.3%.
Charge-offs were driven by personal loans, principally in earlier vintages. Newer vintages have been performing well as Discover revised their underwriting strategy.
Discover’s ROE increased by 1% points to 26%.

Synchrony’s revenues grew by 13% to $4.8 Bn. Earnings grew by 73% to $1.1 Bn.

SYF’s NII grew by 10% to $4.2 Bn.
Loans grew by 3% to $80 Bn. Excluding the impact of the sale of the Walmart portfolio, loans grew by 17% to $80 Bn.
Provision for credit losses fell by 37% to $0.9 Bn driven by the sale of the Walmart portfolio, while total loss reserves increased by 4% to $5.9 Bn.
Loss reserves as a percentage of loans were unchanged at 7.4%.
Net charge-offs increased by 12% to $1.3 Bn. The net charge-off rate decreased by 0.1% points to 6.1%. SYF had the highest net charge-off rate among all issuers.
Synchrony renewed its store card relationships with P.C. Richard & Son, Rheem, and Suzuki, and is expanding its CareCredit offering with an entry into the pet insurance segment.
ROE at SYF increased by 12% points to 30.4%.

PeerIQ’s Modeling Archive

PeerIQ’s Modeling Archive allows you to build your own pre-pay and default models to drive investment decisions. The archive is derived from TransUnion data across all asset classes and is available as a single time-series via a flat-file.

Do reach out to learn more about our Modeling Archive!

Industry Update:

Ninth Circuit Upholds CFPB Structure in Ordering Law Firm to Comply with Investigation (The Recorder, 5/6/19) The court ruled that a law firm under investigation for allegedly violating telemarketing rules must comply with the Consumer Financial Protection Bureau's demands.
Sanders, Ocasio-Cortez Propose 15% Cap on Credit Card Interest (Bloomberg, 5/9/19) Plan would let post offices offer basic banking services.
Program to Relieve Student Debt Proves Unforgiving (WSJ, 5/7/19) A federal system to erase loans for public-service jobs is in disarray.
Tech’s raid on the banks (The Economist, 5/2/19) Digital disruption is coming to banking at last.
Banks Waking Up to Fintech Threat Throw Billions into Digital (Bloomberg, 5/9/19) Big lenders are looking to beat FinTechs at their own game.
Citi Wants to Bring Credit Card Perks Like Miles to Bank Accounts (Bloomberg, 5/7/19) Citigroup will begin tying card rewards to checking accounts as the bank hasn’t kept pace with rivals in competition for deposits.
Amazon just launched a lending service in China while shuttering its local marketplace (CNBC, 5/8/19) The new Lending Referral Program connects prequalified sellers with a local lender in China offering short-term loans.
SoFi launches gig-focused ETF (TechCrunch, 5/8/19) SoFi has launched an ETF focused on the gig economy as it expands its product offerings.
Higher Fees Drive LendingClub’s Earnings Beat (PYMNTS.com, 5/8/19) Stronger-than-expected loan originations and increased transaction fees help LC beat expectations.
AmEx Climbs After Pledge That It Can Offset Higher Delta Costs (Bloomberg, 4/18/19) Shares rise as company keeps annual profit target unchanged.
Bad Credit Card Debt Is on the Rise (Bloomberg, 4/26/19) Capital One CEO sees ‘degradation’ in customer credit quality.

Lighter Fare:

“Magic: The Gathering” is officially the world’s most complex game (MIT Tech Review, 5/7/19) This is the first real-world game for which determining the winning strategy is non-computable.