Period Est.ROA Pre-tax Events Occurring During Period
2008 - 4.25% - Pre-recession, steady 4-5% returns; about to end abruptly though
2009 - 1.50% - Impact of economic downdraft, credit curtailed; ROA nose-dives
2010 - 2.10% - Some slight improvement, but economic turmoil continues
2011 - 3.00% - Beginning to see charge-off moderation; economy up slowly
2012 - 3.30% - Loan defaults stabilizing again; new marketing dollars being invested
2013 Forecast - 3.65% (est.) - Economy improving, charge offs normalized, more marketing gains
Source: R.K. Hammer/Card Knowledge Factory®
In this their sixth of nine 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 four 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 ROA return in two decades), then up to 2.10% ROA in 2010, up to 3.00% in 2011 last year, and 3.30% for 2012.”
Hammer adds, “Looking back on these past four years results, you would have to go back decades 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.”
A number of key factors contributed to the recent card ROA earnings trend.
“First, the great recession just experienced made for very cautious consumers who cut back their spending and especially credit card use. Even with a modest recovery, many card members turned more to cash, checks and debit card use, impacting card ROA’s.”
“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 credit risks/higher FICO’s. The upshot: with fewer accounts and less credit being extended (or used by consumers) outstanding loans fell sharply (by $200 Billion). Earnings and purchase transactions predictably dropped, but have now begun to make a comeback.”
“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. 2013 will be better, we think, with greater M&A deal flow, too.”
“Fourth, net charge offs, the highest line item expense at many organizations, soared to as high as 10-15% during the recession, and have now been normalized to more reasonable, manageable levels. This direct hit to the bottom line was especially noteworthy 2009-2011. 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, 7%+.”
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 670 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. R.K. Hammer has a menu of reports and historic data metrics available at cardknowledgefactory.com