Bank credit card profitability suffered in 1997, according to an annual data compilation by R.K. Hammer Investment Bankers.
Credit card portfolios, with an aggregate return on assets of 2.6% in 1997, remained highly profitable in comparison with other lines of banking business.
But that figure was down from 3.3% in 1996, and 3.6% in 1995.
Last year's performance was the worst in the 15 years that the Thousand Oaks, Calif., investment banking firm has been keeping track. The peak was 5.4% in the first year, 1983.
Robert K. Hammer, the company's chairman and chief executive officer, attributed the decline to increased competition among card issuers that are "pushing the margin" to keep growing.
The good news, Mr. Hammer said, is that though unsecured credit card loans represent 4.5% of the banking industry's total assets-$223 billion out of $5 trillion-they deliver about 9% of profits.
Chargeoffs rose in 1997 to 4.6%, from 4.2% in 1996 and 4.1% in 1995, Mr. Hammer said. But they have not equaled the 4.9% record of 1992.
"In a strong economy, the earnings can take these kinds of hits," he said. "Banks have invested in scorecard technology to reduce loan losses and have strengthened their collection efforts."
Platinum cards, which burst on the banking scene last year, were a bright spot, outperforming their gold and standard counterparts by as much as 20%, Mr. Hammer said.
The return on assets for platinum cards was 3%, versus 2.7% for gold cards and 2.5% for standard cards.
Platinum cards also had the lowest average chargeoff rate, 4%, versus 4.4% for gold and 4.8% for standard.
"The vast majority of solicitations coming out seem to be diverted toward platinum, and now we know why," Mr. Hammer said.
Banks recognize that "the better performing customers, those with better credit histories, have proven they can take on extra credit without necessarily increasing the risk," Mr. Hammer said.
In 1998, Mr. Hammer said, banks could boost credit card profits by investing in technology and using better data-mining techniques.
They could also take a lesson from the banks with the highest-performing card portfolios, which tend to be those with strong branch network sales cultures. The cream of the crop, Mr. Hammer said, are able to produce 15 to 20 new credit card accounts per month per branch.
"The top earners have aggressive marketing, strong support from the corporate side of the business, and an understanding that the business is one where the life cycle is eight to 10 years, not one," Mr. Hammer said.
Gary Schlossberg, senior economist at San Francisco-based Wells Fargo & Co., agreed that chargeoffs had become less worrisome as banks took steps to mitigate them.
"Most lenders have become a bit more cautious," he said.
"The chargeoffs are a combination of the seasoning of loans-bad apples falling out of the trees-and the slower growth in lending, which means the denominator in those chargeoff rates is not expanding rapidly," the economist added.
Mr. Hammer said squeezing more fee income from credit card programs might be one way to augment profits in 1998. Slapping on fees "seemed terribly risky a year ago, but it has become far more fashionable to do so."
"The better-performing banks have on average a higher fee income than the other banks," Mr. Hammer said, "and there is less dependency on interest revenue as the key determinant of income."
Jeffrey Baxter, principal of S.J. Baxter & Associates in Forest Hill, Md., also said banks will rely more on fee income, but he cautioned that they are walking a fine line.
"If you start to charge fees to your better customers, you will end up losing them," Mr. Baxter said.
