Report to the Congress on the Profitability of Credit
Card Operations of Depository Institutions
Call Report Data
Every insured commercial bank files a Call Report each quarter with its federal supervisory agency. The Call Report provides a comprehensive balance sheet and income statement for each bank; however, it does not allocate all expenses or attribute all revenues to specific product lines, such as credit cards. Nevertheless, the data may be used to assess the profitability of credit card activities by analyzing the earnings of those banks established primarily to issue and service credit card accounts. These specialized or mono-lined banks are referred to here as "credit card banks."
For purposes of this report, credit card banks are defined by two criteria: (1) the bulk of their assets are loans to individuals (consumer lending), and (2) 90 percent or more of their consumer lending involves credit cards or related plans. Given this definition, it can reasonably be assumed that the profitability of these banks primarily reflects returns from their credit card operations.
The first credit card banks were chartered in the early 1980s; few were in operation prior to the mid 1980s. To provide a more reliable picture of the year to year changes in the profitability of the credit card operations of card issuers, this report limits its focus to credit card banks having at least $200 million in assets. Most of these institutions have been in continuous operation for several years, particularly those with assets exceeding $1 billion, and are well beyond the initial phase of their operations.
As of December 31, 2011, 14 banks with assets exceeding $200 million met the definition of a credit card bank. At that time, these banks accounted for approximately 66 percent of outstanding credit card balances on the books of commercial banks or in pools underlying securities backed by credit card balances. Taken as a group, the average credit card related assets for the 14 credit card banks over the course of 2011 was down about 25 percent from 2010 primarily due to the merger of one large credit card bank with its more general purpose sister entity.1
Due to accounting rule changes regarding the treatment of securitized assets implemented at the beginning of 2010, profitability measures based on Call Report data for 2010 and 2011 are not perfectly comparable to years before 2010. Prior to 2010, this Report included off-balance-sheet securitized credit card receivables as part of total assets under the assumption that the Call Report income and expense items reflected some income and expenses related to these securitized assets. Analysis of quarterly Call Report data on income and expenses just before and after implementation of the accounting changes suggests that, in fact, the Call Reports prior to 2010 missed a substantial portion of the net income from securitized assets. Thus, profitability measures in Reports prior to 2010, while consistent over time, are understated relative to measures in 2010 and after.
To help provide a more consistent historic series, the profitability estimates since 2001 have been reestimated excluding credit card securities from total assets. Although the reestimated profit figures shown in this Report may overstate to some degree profitability from 2000-2009, they are likely to be more consistent with profitability measures in 2010 and 2011 than profitability estimates provided in previous Reports.
In 2011, credit card banks with assets in excess of $200 million reported net earnings before taxes and extraordinary items of 5.37 percent of assets excluding securities (Table 1, column 2) 2. This level of returns is quite similar to the level of profitability measured after including securitized assets (shown in column 1 of Table 1) reflecting the change in accounting standards. The level of earnings in 2011 is substantially higher than in 2010 when credit card banks as a group experienced net earnings of 2.41 percent. The 2011 rate of return is also higher than the average rate of return over the 2001-2011 timeframe which is estimated to be 4.19 percent, although not as high as levels reached in years prior to the recent recession.
Table 1. Return on assets, large U.S. credit card banks, 2001-2011
|Year||Return including securitized assets||Return excluding securitized assets|
Note: Credit card banks are commercial banks with average managed assets (loans to individuals including securitizations) greater than or equal to 200 million dollars with minimum 50 percent of assets in consumer lending and 90 percent of consumer lending in the form of revolving credit. Profitability of credit card banks is measured as net pre-tax income as a percentage of average quarterly outstanding balances. SOURCE: Reports of Condition and Income, 2001-2011.
Earnings for credit card issuers in 2011 reflect, in part, continuing improvement in credit quality. Delinquency rates on credit cards increased from nearly 4 percent at the beginning of 2007, to a peak of 6.8 percent in mid-2009, before falling back to about 4.2 percent at the end of 2010 and 3.3 percent at the end of 2011.3 Charge-offs increased sharply in 2009 and into the first portion of 2010 in response to mounting delinquencies and defaults, but receded sharply in the second half of 2010 and continued to fall in 2011. As defaults mounted during the recent recession, credit card issuers set aside a large amount of reserves to cover anticipated losses. By the end of 2011, the charge-off rate on credit cards at 4.93 percent was less than half the rate experienced at the end of 2009.4 As a consequence of sharply improved credit quality, credit card issuers in 2011 were able to substantially reduce their provisioning for future losses relative to 2010, lifting earnings in 2011.
Although profitability for the large credit card banks has risen and fallen over the years, credit card earnings have been almost always higher than returns on all commercial bank activities.5 Earnings patterns for 2011 were consistent with historical experience: For all commercial banks, the average return on all assets, before taxes and extraordinary items was 1.18 percent in 2011 compared to 5.37 percent for the large credit card banks.6
One difficulty that arises in assessing changes in the profitability of credit card activities over time is that the sample of credit card banks changes somewhat from one year to the next primarily because of mergers and acquisitions. Thus, overall changes in profit rates from year to year reflect both real changes in activity and changes in the sample. To evaluate the effects of sample changes, the profitability of the specific banks included in the sample each year was also examined for the prior year. Reestimating 2010 profitability, excluding the one credit card bank that fell out of the ongoing sample, results in an increase (about 50 basis points) in estimated profitability for the group as a whole that year. Thus, it may be that the loss of this institution from the sample of credit card banks used to estimate industry profitability has the effect of increasing somewhat the 2011 profitability level presented here.
1. Citibank South Dakota merged with Citibank N.A. The surviving bank does not satisfy the criteria used in this report to identify credit card banks. Return to text
2. Calculations are adjusted for credit card backed securitizations because earnings as reported on the Call Report reflect revenues and expenses from outstandings both on the books of the institutions and in off-balance-sheet pools backing securities. Since the beginning of 2010 most credit card securitized assets have been included in outstanding on the Call Report. Return to text
3. Refer to Federal Reserve Statistical Release, "Charge-Off and Delinquency Rates on Loans and Leases at Commercial Banks." Return to text
5. This report focuses on the profitability of large credit card banks, although many other banks engage in credit card lending without specializing in this activity. The profitability of the credit card activities of these other banks is difficult to discern. The cost structures, pricing behavior and cardholder profiles, and consequently the profitability of these diversified institutions may differ from that of the large, specialized card issuers considered in this report.
In preparing many of the older annual reports on credit card profitability, information from the Federal Reserve's Functional Cost Analysis (FCA) Program was used to measure the profitability of the credit card activities of smaller credit card issuers. These data tended to show credit card activities were less profitable for smaller issuers than for larger ones. The FCA program was discontinued in the year 2000. For further discussion, see Glenn B. Canner and Charles A. Luckett, "Developments in the Pricing of Credit Card Services," Federal Reserve Bulletin, vol. 78, no. 9 (September 1992), pp. 652-666. Return to text
6. Returns for all commercial banks are derived from the Reports of Condition and Income. Return to text