Title: Card Profits: How Far Will They Slide? Bank Cards Are Still Profitable, but Bankruptcy Filings and Competition Are Changing the Rules of the Game
Abstract: The most sought-after bankers in coming years may be those with a formula keeping bank card profitability from slipping below a 15% return on equity (ROE) by the end of the decade. By some estimates, bank card profitability fell by more than 10% in 1991. Propping up bank card profits in the days ahead won't be easy, despite the fact that bank-issued credit cards, combined with a burgeoning demand debit cards, currently are one of banks' most valuable assets. To put profit picture in perspective, the banking industry in general earned an average ROE of 8% over the past five years. Bank card products, by comparison, earned an average ROE of 25% to 30% during that time, attracting the competition so familiar to today. (AT&T's Universal card products became profitable the telecommunications giant in June, 27 months after they were launched.) A survey called Vision 2000, conducted by Andersen Consulting last year, revealed that bank executives anticipate their card products will earn 14.4% on equity in the year 2000--half the level they're accustomed to. The survey also indicated that 23% of issuing banks that have more than $5 billion in assets anticipate exiting the bank card business by the end of the decade. Some banks will sell the business line to raise much needed capital (as several have already done), and others will sell while the business is making money rather than waiting until margins are even thinner. Bankruptcy blues. Chief among the threats to bank card profitability--more so even than nonbank competition--is the tide of personal bankruptcy filings, which shows no sign of ebbing without legislative reform. (In late July, ABA-backed bankruptcy reform legislation had passed the Senate unanimously, and a House version of the legislation, H.R. 5321, was making its way through a subcommittee hearing process.) What really hurt [bank] income statements in 1991 was their provision loan losses driven by actual bankruptcies and those who simply don't pay their debts, says Stuart Feldstein, president of SMR Research Corp., a financial services research firm based in Budd Lake, N.J. May, SMR published its annual bank card industry report. Its title this year: Credit Cards, 1992: Entering an Era of Uncertainty. The most significant cost to credit card operations traditionally has been interest expense, or the cost of funds. But in 1991, says Feldstein, for the first time, the provision loan loss in actual gross dollars the industry approached the level of interest expense--that's very scary. It's likely, notes Feldstein, that this year the loan loss provision could replace interest expense as the most significant cost in offering bank card products. Just three years ago, the loan loss provision was less than half the interest expense. Are banks over-reserving loan loss? Hardly, according to SMR's report. Bad debts increased 34% in dollars from 1990 to 1991, and even regions with relatively low unemployment levels show relatively high rates of bankruptcy filings. Feldstein estimates that bankruptcy accounts about half of card issuers' loan loss reserves. In order to beat this profit decline, warns Feldstein, issuers must figure out what to do about reducing bad loans. That remains an inexact science at best. Bank of Mississippi, Tupelo, Miss., works hard at keeping credit risk manageable. My bank has never been interested in a lot of risk, so we don't have losses of 5% or 6% of outstanding debt, like a lot of the industry has, says Richard Caldwell, Jr., senior vice-president at the $1.6 billion-assets bank. order to maintain credit quality, Caldwell's bank does no mass mailings that advertise card-based products. Of the applications that do come in, Caldwell estimates that 60% are rejected. If there's negative information on a credit report, we just don't open an account, he says. …
Publication Year: 1992
Publication Date: 1992-09-01
Language: en
Type: article
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