A Standard & Poor's report on credit card issuers concluded that price incentives haven't affected profitability so far.

Alison Emmerich, associate director of S&P's Financial Institutions Group, said that industry pressures, such as lower profit margins and competition make the environment unfavorable to ratings upgrades, but S&P is not anticipating downgrades at this time.

"The structure of the Credit card industry has been changing rapidly," said Ms. Emmerich. -- "The dominance of commercial banks has been reduced with the arrival of nonbank companies, and new strategies have taken hold."

In a telephone conference last week, Ms. Emmerich and colleagues Tonya Azarchs, director and money-center analyst, and Dick Schmidt, managing director of finance companies, expanded on the report's findings.

While price incentives are narrowing margins in the industry, the tow-rate strategy has not significantly hampered card profitability, the report said. Issuers have mitigated the margin shrinkage by targeting low-risk customers who are likely to revolve balances and by lowering expenses.

Balance transfer programs have further enhanced the profitability of low-rate portfolios.

"Although S&P does not expect price incentives will seriously erode profits over the long term, returns are expected to decline," said Ms. Emmerich.

The report highlights issuers, such as First USA Inc., Advanta Corp., and Signet Banking Corp's credit card operation as the more successful price slashers.

But, while those companies experienced 1993 increases in card receivables that were five times the industry average, their net interest margins are below the industry average.

"The widespread use of introductory rates is one of the primary factors behind declining margins," said Ms. Emmerich.

Although some introductory rates may be marginally profitable to start, long-term profitability depends on an issuer's ability to reset accounts to a higher rate without major attrition, said Ms. Emmerich.

Some companies estimate attrition rates will range from 15% to 35%.

Given shrinking margins, the report said, profits among those offering price incentives will be sustained by reducing chargeoffs and operating costs through credit scoring models and other technological advances.

S&P analysts questioned the sustainability of lower chargeoff ratios as the pool of the most creditworthy applicants shrinks and drives issuers to lower cutoff scores. Also, recent increases in consumer spending have been outpacing increases in income, which may result in higher delinquencies in the future, they found.

Increasing operating efficiency is a key factor in the profitability of low-rate cards, said Mr. Schmidt. The industry average is 4% to 6% of receivables, but more efficient issuers, such as First USA, have been able to lower costs to about 2.5%.

Mr. Schmidt said that economies of scale have traditionally lowered production costs, but outsourcing is a way for smaller issuers to reduce staff and equipment expenses.

Ms. Azarchs said attrition has become a big problem for the money-center banks, as their competitors maintain low pricing and balance transfer strategies. "We believe they've come back into the ring swinging at this point."

The money-center banks have developed counterattack strategies that address some of the innovations in the industry, including cobranded gasoline and airline cards, no annual fee, and tiered pricing, and they are participating in the balance transfer wars, said Ms. Azarchs.

Their strategies are more diversified, which means more stability and a broader client base than the issuers identified with one strategy, such as price or rebate.

Attrition rates for the money-center banks have begun to reverse, said Ms. Azarchs.

The analysts said that increased consumer shopping was likely for the short term, but as players use similar strategies to attract the same customers, incentives to switch companies will decrease.

Although there is growth potential in the card market, in terms of increased usage and new accounts, the report said it is less likely for highly profitable accounts.

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