Report to the Congress on the Profitability of Credit
Card Operations of Depository Institutions
- Introduction
- Call Report Data
Call Report Data
Every insured commercial bank files a Call Report each quarter with its federal supervisory agency. While the Call Report provides a comprehensive balance sheet and income statement for each bank, 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) over 50 percent 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.3
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, 2015, 13 banks with assets exceeding $200 million met the definition of a credit card bank. At that time, these banks accounted for nearly 50 percent of outstanding credit card balances on the books of depository institutions.
Tracking credit card profitability over time is complicated. Accounting rule changes implemented in 2010 require banking institutions to consolidate onto their Call Reports some previously off-balance sheet items (such as credit card-backed securities). To the extent that previously off-balance sheet assets have a different rate of return than on-balance sheet assets, profitability measures based on Call Report data in 2010 and after are not necessarily comparable to those prior to 2010.
Another 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.
In 2015, credit card banks with assets in excess of $200 million reported net earnings before taxes and extraordinary items of 4.36 percent of average quarterly assets (table 1). The level of earnings in 2015 is down somewhat from that reported in 2014.
| Year | Return (%) |
|---|---|
| 2001 | 4.83 |
| 2002 | 6.06 |
| 2003 | 6.73 |
| 2004 | 6.30 |
| 2005 | 4.40 |
| 2006 | 7.65 |
| 2007 | 5.08 |
| 2008 | 2.60 |
| 2009 | -5.33 |
| 2010 | 2.41 |
| 2011 | 5.37 |
| 2012 | 4.80 |
| 2013 | 5.20 |
| 2014 | 4.94 |
| 2015 | 4.36 |
Note: Credit card banks are commercial banks with average assets greater than or equal to $200 million 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 assets.
Source: Reports of Condition and Income, 2001-2015.
The decline in profitability in 2015 reflects a fall in net non-interest income and a slight increase in provisions for loans losses as a fraction of average assets, which more than offset increases in net interest income (table 2). Although provisions among the set of credit card banks rose slightly, delinquency rates and charge-off rates for credit card loans across all banks were little changed in 2015, and continued to remain below their historic averages.4
| Income or expense | Credit card banks in 2015 | Credit card banks in 2014 | All commercial banks in 2015 |
|---|---|---|---|
| Total Interest Income | 9.58 | 8.87 | 2.51 |
| Total Interest Expenses | 0.85 | 0.69 | 0.26 |
| Net Interest Income | 8.73 | 8.18 | 2.25 |
| Total Non-Interest Income | 4.41 | 4.54 | 1.49 |
| Total Non-Interest Expenses | 6.35 | 6.00 | 2.26 |
| Net Non-Interest Income | -1.94 | -1.46 | -0.77 |
| Provisions for Loan Losses | 2.43 | 2.17 | 0.19 |
| Return | 4.36 | 4.55 | 1.30 |
Note: Credit card banks are commercial banks with average assets greater than or equal to $200 million with minimum 50 percent of assets in consumer lending and 90 percent of consumer lending in the form of revolving credit.
Source: Reports of Condition and Income, 2001-2015.
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 2015 were consistent with historical experience: For all commercial banks, the average return on all assets, before taxes and extraordinary items was 1.30 percent in 2015 compared to 4.36 percent for the large credit card banks (table 2).
References
3. Two depository institutions (Discover and American Express) were included that did not quite meet these criteria, but can still be considered credit card banks. Return to text
4. Refer to Federal Reserve Statistical Release, "Charge-Off and Delinquency Rates on Loans and Leases at Commercial Banks,"www.federalreserve.gov/releases/chargeoff/. 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
