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Card P/T ROA earnings continue the long slow climb

(February 2, 2015) -- In this year-end card industry trend report, R.K. Hammer cites the current card industry Pre-tax ROA, compared to prior periods. Company Founder and Chairman Bob Hammer notes, “It has been a tough row to hoe the past six years since 2008, when average ROA was calculated at 4.25% pre-tax. Since then changes have occurred, from the dramatic drop to 1.50% ROA in 2009 (the lowest card ROA return in over three decades), then up to 2.10% ROA in 2010, to 3.00% in 2011, 3.30% for 2012, 3.50% for 2013, and now 3.90% for 2014. 2015 ROA is forecast by R.K. Hammer to be 4.20%.”

“The range of 2014 Pre-tax card ROA is very wide in the R.K. Hammer model, from 3.5 -8.0%, depending upon several income and expense factors: e.g., yield, credit quality and operating expense. The remaining ROA line item, cost of funds, has been minimal and flat for several years, due to downward Fed pressure, and not really a “moving part” in our ROA “range” calculations. That will change during 2015, as Fed easing and previous arbitrary lower interest rates are expected to be allowed to rise.”

Hammer adds, “Looking back on these past five or six years’ results in our model, you would have to go back 30 years to find a lower average card industry pre-tax ROA percentage. In fact, 2009 and 2010 produced the lowest annual card ROA earnings since we began tracking this data metric beginning in 1983. Going forward, we believe that card issuers can expect healthier balance sheets and better income statements for 2015 and beyond, not yet approaching the frothy days of pre-2008, but coming closer.”

A number of key factors contributed to the recent card Pre-Tax ROA earnings trend.

“First, the great recession just experienced made for very cautious consumers who sharply cut back their spending and especially credit card use.   Issuers, too, took dramatic measures to lower or eliminate riskier lines of credit. Even with a modest recovery, many card members turned more to cash, checks and debit card use, impacting card ROA’s. That is starting to turn now, though, with greater credit use.”

“Second, that recent 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 quality credit risks/higher FICO’s. The upshot: with fewer accounts and less credit being extended (or used by consumers) outstanding loans fell sharply (by some $200 Billion during the recession). Earnings and consumer purchase transactions predictably dropped, but have now begun to make a comeback.”

“Third, the business models for card shifted dramatically since 2008. Laws were changed, new rules were implemented, and the cost to comply was and is a stiff hurdle. 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. Some got out of the card business entirely, and but for the lower deal prices at the time, more would have done so as well. 2015 will be better, we think, with greater associated M&A deal flow, too.”

“Fourth, net charge offs, the highest expense line item at many card organizations, soared to as high as 10-15% during the depths of the recession, and have now been normalized to more reasonable, manageable levels. This direct hit to the bottom line was especially noteworthy 2009-2010. While some have now seen current charge offs last year returning back to lower more “normalized” levels, i.e. 3% - 4%, others remain stubbornly high, 5%+.”

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, white papers and card research findings have been published in the financial press 755 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, and values and brokers card deals. He has personally trained over 1,000 card managers from 50 countries in best practices card management and card portfolio valuations. R.K. Hammer has a menu of reports and historic data metrics available at cardknowledgefactory.com