Period ROA pre-tax Events Occurring
2008 4.25% Steady 4-5% returns; about to end abruptly
2009 1.50% Impact of economic downdraft, ROA nose-dives
2010 2.10% Some improvement, but economic turmoil continues
2011 3.00% Beginning to see charge-off moderation; economy up
2012 (est.) 3.25% Loan defaults stabilizing; new marketing dollars invested
Source: R.K. Hammer/Card Knowledge Factory™
In this their sixth of seven year-end weekly industry trend reports, R.K. Hammer cites the current card industry ROA, compared to prior periods. Company Founder and Chairman Bob Hammer notes, “It has been a difficult past three years since 2008, when average ROA was calculated at 4.25% pre-tax. Since then small changes have occurred, from 1.50% ROA in 2009 (the lowest return in two decades), then up to 2.10% ROA in 2010, and up again to 3.00% last year (although still 30% lower than pre-recession).”
Hammer adds, “Looking back on these past three years results, you would have to then go back to 1997/1998 to find a lower average card industry ROA percentage. In fact, 2009 and 2010 produced the lowest annual card ROA earnings since we began tracking this data metric beginning in 1983.”
A number of key factors contributed to the recent card ROA earnings down trend.
“First, the great recession just experienced put a real crimp on cautious consumers who cut back their spending and especially credit card use. Even with a modest recovery, at best, many turned to cash, checks and debit card use, forgoing the free-wheeling spending days of the past decade. Many use to say, “Look what we just bought…while today they often boast, “Look what we just saved.”
“Second, that recently legislation curtailed credit markets during prior periods is undeniable. In response the industry began a portfolio-wide purge of inactive accounts, closing many, cutting back new credit to all those except top credit risks/higher FICO’s. The upshot: with far fewer accounts and less credit being extended (or used by consumers) outstanding loans fell dramatically. Earnings predictably, dropped off a cliff, only now starting to make a modest comeback. All this created enormous strain on the financial system.”
“Third, the business models for card shifted dramatically. Laws were changed, new rules were implemented, and the cost to comply was raised. Tens of billions were lost in the ensuing debacle. It took nerves of steel just to remain steady and compete in an already highly competitive business. Many got out of the business, and but for the lower deal prices at the time, many more would have done so as well. This year will be better, we think, with greater M&A deal flow.”
“Fourth, net charge offs, the highest line item expense at many organizations, soared to 10-15%, and was well past any historical mark and exceeded the level of provisions set aside. This direct hit to the bottom line was especially noteworthy 2009-2011. While some have enjoyed current charge offs last year returning back to lower more normalized levels, i.e. 3-4%, others remain stubbornly high, still 8%+.”
The R.K. Hammer/Card Knowledge Factory™ forecast for 2012: Ave. Card ROA of 3.25%, up 25 bps.
The key question…will ave. card profits return to earlier levels (4.25%+)? Hammer concludes, ”We’re skeptical. Time will tell when and how the card industry will resume more ordinary ROA’s in the 4-5% P/T range, something we do not see in the R.K. Hammer card profit model for at least 2 more years.” For more information/data, go to: cardknowledgefactory.com or rkhammer.com
More about Card Knowledge Factory™
Card Knowledge Factory™ is a premier provider of card industry data metrics and trend reports, from the Research and Analysis division of R.K. Hammer. Their opinions and white papers have been published in the financial press 630 times in the U.S. and abroad, and are designed to provide card executives with timely insights into events and trends occurring in the business. Founder and CEO Bob Hammer serves as expert witness for issuers in litigation, conducts interim management for issuers in transition, has presented their 3-day card executive seminar “Managing for Improved Profitability” at 32 international locations over 22 years, and his presentations have been hosted by some of the industry’s leading players, issuers, acquirers, processors, Wall Street, and government agencies. He has trained over 1,000 card managers from 50 countries in best practices card management and OCC national examiners on card portfolio valuation techniques. R.K. Hammer has a growing menu of reports and historic data metrics, available at cardknowledgefacory.com
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