Profitability in the credit card industry continued to edge upward in 2000, the second year of recovery after a steady decline that began in the 1980s.

Net income on credit card loans rose to 18.4%, from 17.9% in 1999 and 17.4% in 1998, when card industry returns hit a low, according to an annual survey by R.K. Hammer Investment Bankers of Thousand Oaks, Calif. The highest income yield ever recorded by the card portfolio brokerage firm was 24.4% in 1983, the year it began tracking such figures.

Chargeoffs abated slightly last year for the second year in a row, and operating expenses remained steady, at 4.5% of outstandings for the second year in a row, Hammer found.

Platinum cards continued to outearn other products, and fee-based income rose at the expense of interest income. Seventy-two percent of card industry revenue came from interest and 28% from fees last year; the split was 76% to 24% in 1999.

The survey placed the industry’s average return on assets before taxes at 3.6%, up from 3.1% in 1999 and matching the industry average in 1995. Returns on regular, gold, and platinum cards all increased, and platinum fared the best, with a 4.0% return on assets before taxes, up 0.6% from 1999. Return on assets for gold cards was 3.4% in 2000, just under the overall industry average of 3.6%, but higher than the 2.9% yield from 1999. Standard cards produced a 2.6% return on assets last year, up from 2.1% in 1999.

Total income yield among private-label retail cards was 18.7% in 2000, 0.3% higher than on MasterCard and Visa cards.

Robert Hammer, chairman and chief executive officer of R.K. Hammer, said the performance of card portfolios in 2000 was unusually strong. “Very few times have we seen a 50 to 60 basis point jump,” he said. He tied the gains to the waning of teaser rates, a robust economy, rising fee-based income, flat operating expenses, and the easing of chargeoffs.

But Mr. Hammer warned that conditions might be different in 2001, and that next year’s report might look far less rosy. The numbers so far are encouraging, he said, but they also show that the fluctuations are tied to economic cycles. “Our industry is not immune to the laws of the economy,” he said.

“Unsecured loans are the riskiest,” Mr. Hammer added. “They always were, they always will be, but they’re manageable. That’s nothing new. The new thing is that we might have a downturn, and the only question is how steep it will be.”

Though chargeoffs shrank to 4.3% in 2000 from 4.4% in 1999, there were vast differences in chargeoff rates among issuers, Mr. Hammer said. In his survey, one issuer’s chargeoff rate was as low as 0.75%, while another posted chargeoffs of 15%.

This broad range was not exceptional, Mr. Hammer said. “Swings have always been the case,” he said. “It has to do with things going on regionally or within the company, such as collection practices or the credit quality that year. There’s no pure average.”

Moshe Orenbuch, a card industry analyst at Credit Suisse First Boston, said that though his research corroborated lower chargeoffs last year, “my sense is that 1999 ROA was probably higher than 2000.”

Late last month Mr. Orenbuch’s research team released a quarterly report that depicts a three-month moving average in card industry earnings. The study’s profitability model, while not “a perfect proxy” for industrywide ROA, is still a good indicator, he said.

According to its November proxy ROA figures, profitability was down 45 basis points from one year earlier. The report still shows steady recovery since its reported all-time lows of 1997, and states that the numbers “should improve again in the coming months, as we expect margins to widen and credit quality to continue to remain stable.”

Mr. Hammer said card issuers must be “prepared with a recovery plan” in case of an economic slowdown. “That means tightening credit quality, watching overlimits, enhancing collection effectiveness, all those things designed to offset lower usage by cardholders, which would reduce your earnings otherwise,” he said.

Mr. Hammer said he was concerned about overall preparedness in the industry for dealing with economic decline. “I have never seen any empirical evidence that shows how various banks are prepared for this,” he said. “My guess is that two-thirds or so would say they were ready, but there are always some unknowns out there.”

Even if the Federal Reserve continues to lower interest rates, Mr. Hammer said, rising bankruptcy filings and losses due to chargeoffs would mitigate any benefits. “If the cost of money goes down one point and chargeoffs go up one point, then profitability remains the same,” he said.

Michael D. Cohen, director of business development at InfiCorp Holdings Inc., the Atlanta credit card portfolio management subsidiary of First National of Nebraska Inc., said the profitability figures that his company compiles about the credit card monolines produced similar findings.

“We observed higher earnings than in 1999, and fees have been one of the largest factors,” Mr. Cohen said. He said that card companies have grown “incredibly opportunistic,” and as a result, fee-based products like travel and purchase insurance have proliferated.

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