Profitability of Credit Card Banks

ASince 1988 the Federal Reserve Board has been required by Congress to report on the profitability of credit card operations of depository institutions. In late June of this year, the Fed issued its 12th annual report, derived from Call Report data that all commercial banks are required to submit.

Over 6,000 financial institutions issue general-purpose credit cards, but for most of these the Call Report does not allocate expenses or revenues specifically to the card issuing unit of the institution. In order to focus on those institutions for which data are available, the Fed report includes only credit card banks, i.e., institutions created primarily for the purpose of issuing credit cards. This would include the card issuing divisions of some of the largest banks, for example, those that charter a credit card bank in a state that has favorable laws governing finance charges and fees. To be specific, in the Fed's report a credit card bank is defined as an institution for which (1) the bulk of its assets are loans to individuals, and (2) 90% or more of these consumer loans involve credit cards or related plans. Additionally, the Fed report looks only at such institutions that have at least $200 million in assets.

As of December 31, 2001 there were 29 banks with portfolio size and asset composition meeting the criteria listed above. These banks accounted for about 74 percent of outstanding credit card balances on the books of commercial banks or in pools underlying securities backed by the card accounts. The dollar volume of credit card outstandings held by credit card banks increased by 14 percent from 2000, and the total market share of credit card debt rose by 3 percent.

Net earnings before taxes for credit card banks were about 3.24 percent of outstanding balances, up 10 basis points from 2000. Generally, net earnings for credit card banks have remained stable since 1999, up substantially from the 1995-1998 period, but still 50-60 basis points below the historical high-point obtained during the 1993-94 period. By comparison, the average net return on assets (before taxes) across commercial banks was 1.79 percent in 2001. The return to credit card lending remains well above average across all banking product lines.

Two offsetting factors contributed to stable net earnings. Earnings continued to be squeezed by rising losses, as charge-offs rose about 50 basis points (26 percent) from their 2000 level. Provisions for future losses rose by 23 percent. But, falling interest rates cushioned the negative impact of credit quality on earnings. Interest expenses (cost of funds) fell by 14 percent from 2000. Non-interest expenses fell by 4 percent. Interest income (as a percent of assets) rose by 2 percent, and non-interest income (fees, merchant discounts) fell by 2 percent.