Credit Card Yields Waver, But Hold: Interactive Graphic

Credit card revenue margins have dipped at some major issuers in recent months as executives have cited intense competition for the most desirable customers and ongoing pressure from a sea change in regulation.

Broadly, however, the thesis that emerged after the enactment of the CARD Act in 2009 has held up: price increases rolled out ahead of the implementation of the law’s major provisions preempted restrictions on penalty fees and jumps in interest rates. Data on securitized loans shows that the Big Six have had varying success in lifting revenues (see the interactive chart below), but, overall, portfolio yields have climbed to their highest range in two decades and stayed there (text continues after the graphic).

“We’ve just had a lot of strength on the revenue side,” Capital One (COF) Chief Executive Richard Fairbank said in April, advising investors to take his guidance with a grain of salt because, “I kept predicting this revenue margin to come down and it stubbornly kind of refused to do that.”

The ascent in interest, fees, interchange and other income as a percentage of loans has been particularly sharp at Fairbank’s company, increasing 2.8 percentage points from the three months through March 2009 to 20.1% on average during the three months through June this year.

Capital One has attributed the results in part to less attrition in high-yielding accounts than it anticipated, and the fact that the company has largely steered clear of the balance transfer business, where teaser rates tend to bring down portfoliowide margins.

Now the company’s revenue margin, including loans that do not back bonds, is being weakened by the onboarding of about $28 billion of receivables it bought from HSBC in May. Fairbank said Capital One planned to take “a little bit of the air out with respect to some of HSBC’s” customer practices that were not consonant with its own. Still, the company’s forecast of a negative-30-to-35-basis-point impact is relatively light.

The yield on Citigroup’s (NYSE:C) securitized receivables ended the period considered here even with where it started, and fell 1.5 percentage points at Bank of America (BAC) to average 15.7% during the three months through June.

This month, Citi Chief Financial Officer John Gerspach said spreads were under pressure from the CARD Act’s “look-back” provision, which requires issuers to review rate increases after six months and determine if they should be reversed, and more promotional balances.

B of A experienced the sharpest increase in bad loans during the downturn among its largest credit card competitors, and has worked to transform a portfolio that it has said was characterized by both revenue and chargeoffs that “were excessive.”

Nevertheless, trust data for both companies shows a shared pattern of yield increases that came under pressure as the major elements of the CARD Act were phased in beginning in early 2010.

One factor that has helped prop up revenue margins has been a growing contribution of swipe fees as issuers have gravitated toward higher-credit-quality customers who tend to pay off their bills each month, resulting in portfolios characterized by higher transaction volume for each borrowed dollar.

A temporary, 10-basis-point reduction in interchange fees under the proposed settlement of the antitrust lawsuit against MasterCard (MA) and Visa (NYSE: V) would eat into this stream, but probably not by much.