The US economy grew by 3.5% in Q3, the strongest consecutive quarter growth streak since 2014. Economic growth was driven by consumer spending, which grew by 4% QoQ. Consumer spending has been boosted by record low unemployment and greater supply of consumer credit, which reached nearly $4 Tn in August.

In this week’s newsletter we will look at the earnings of major credit issuers and analyze their credit trends.

In regulatory news, the FDIC will open an Innovation Office to help banks compete with FinTech companies. FDIC has been one of the last regulatory agencies to open an innovation office, and this initiative is expected to help the FDIC take a holistic approach to innovation. The FDIC currently looks at innovation in 3 ways: (i) ILCs, (ii) third-party vendor relationships; and (iii) working with “technology companies to get better processing, service and efficiency at banks.” We recommend our prior newsletter where we describe how PeerIQ Risk Analytics can help lenders satisfy supervisory obligations.

This week, the WSJ profiles John Mack (an investor in PeerIQ) who is bringing his experience and coaching to FinTech startups like LendingClub.

Expanding Bank-Technology Partnerships

Small business lending continues to grow. Amazon announced a partnership with AmEx to offer a no-fee small-business credit card. The co-branded card features either a 90-day interest free loan or 5% back on purchases at Amazon. Earlier this year, Amazon launched Amazon Lending in partnership with Bank of America to offer business loans up to $750 k to its merchants.  Amazon has originated almost $3 Bn loans to merchants that seek financing.

Credit card issuers and unsecured personal loan lenders have started sharing their underwriting models with the Credit Karma. Lenders sharing their credit guidelines is designed to lower customer acquisition costs and improve approval rates.

Bank and FinTech partnerships continue. After Barclays announcement last week, it is now HSBC’s turn to launch an unsecured personal loan product in the US. HSBC is partnering with Avant to offer personal loans to complement its credit card offerings. Meanwhile, Goldman’s Marcus has been expanding rapidly in the UK, and announced this week that Marcus would move into the bank’s investment management division. The move will allow Marcus to tap into a new pool of clients and offer products beyond just deposits and personal loans, while expanding the client base of the bank’s wealth management business.

PNC Bank will offer digital-only small business loans using OnDeck’s lending-as-a-service platform “ODX”. PNC will offer loans up to $100k for existing as well as new customers, and disburse funds within 3 days. Funding speeds are a key driver of customer satisfaction and credit performance – the 3-day turnaround time is a significant improvement.

Credit Card Earnings – Strong Loan Growth and Charge-Offs Under Control

In this week’s deep dive, we look at the Q3 earnings of American Express (AXP), Capital One (COF), Synchrony (SYF), and Discover (DFS). All issuers had earnings growth of over 20% YoY with earnings at COF growing at a 36% YoY. COF did not see any growth in revenue or its loan book YoY. Other issuers saw high single-digit revenue growth YoY and near-teens growth in their loan portfolios. Although provisions for losses grew modestly this quarter and net charge-offs remained low, the growth in total allowances for losses far outpaced loan growth, in a clear sign of continuing credit renormalization.

American Express Q3 Earnings

Revenues at AXP grew by 9% YoY to $10.1 Bn to achieve record levels. Earnings grew by 22% YoY to $1.7 Bn. NII also grew 17% YoY to $2 Bn. AXP’s premium customer base saw record-low delinquency rates while the net charge-off rate increased slightly YoY to 1.7%.

AXP is focused on growing its small business lending and recently launched a co-branded credit card with Amazon. Amex is expanding its partnership with PayPal. AmEx cardholders can use PayPal’s and Venmo’s features for P2P money transfers and shopping at merchants who accept PayPal.

Source: American Express

Capital One Q3 Earnings

COF’s revenues were flat YoY at $7 Bn, but earnings grew by 36% YoY to $1.5 Bn. Growth in NII was modest at 2% YoY to $5.8 Bn. COF was the only issuer who saw a drop in the net charge-off rate by 20 bps YoY to 2.4%. COF also saw its provisions for loan losses decrease by 31% YoY driven by improving credit quality of the credit card and auto loan portfolios. This release in provisions consequently led to a 3% YoY drop in allowance for loan losses to $7.2 Bn on loan growth of 1% YoY.

COF won Wal-Mart’s store card partnership from Synchrony earlier this year, and is in talks to acquire the existing portfolio of Wal-Mart’s receivables.

Source: Capital One

Synchrony Q3 Earnings

SYF’s revenues grew by 9% YoY to $3.3 Bn. Earnings grew by 21% YoY to $0.7 Bn. NII grew by 9% YoY to $4.2 Bn. SYF had the highest net charge-off rate of 5% among all issuers, which stayed flat YoY. Loans grew by 14% YoY to $88 Bn. Provision for loan losses grew by 11% YoY and the total allowance for loan losses increased by 16% YoY to $2.9 Bn, slightly outpacing loan growth.

SYF is trying to move forward from the loss of its partnership with Wal-Mart and has renewed its partnerships with JC Penney and Lowe’s. The company has invested in developing its mobile application SyPi, which allows retailers to use Synchrony’s platform in their mobile apps to process payments. Nineteen retailers use SyPi with over $1 Bn in payments processed.

Source: Synchrony

Discover Q3 Earnings

DFS’s revenues grew by 8% YoY to $3.3 Bn. Earnings grew by 20% YoY to $0.7 Bn. NII grew by 8% YoY to $2.2 Bn. Discover saw loan growth of 8% YoY driven by 9% YoY in credit cards, and 12% YoY increase in student loans. Discover continues to stay away from the unsecured personal lending business and believes that the new originations in this space do not meet its return objectives.

The net charge-off rate increased by 30 bps YoY to 3%. The growth in the allowance for loan losses at 16% YoY was significantly higher than loan growth of 8%. Delinquencies remain manageable at 2.2%, only slightly higher YoY.

Source: Discover

You can track the performance of the credit card universe including delinquencies, charge-offs and losses using PeerIQ’s platform. Reach out to learn more!

Stock price performance post-earnings was poor due to equity market volatility with only AXP bucking the recent downdrafts.


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