Sweeping new regulations and spiking loan losses have set off a flurry of maneuvers and countermaneuvers in the multidimensional battlefield of credit card pricing.
Pushing too hard with rate increases can topple strained borrowers into default. Moving first can drive customers to defect to other lenders.
Data on yields for securitized accounts suggests that some issuers have been more successful in boosting revenues than others (see chart).
Overall, income from interest, fees and other sources as a percentage of receivables has accomplished a substantial, though jagged, climb since the beginning of last year. (The prime rate was stable across that time frame at 3.3%, indicating that much of the increase reflects changes in pricing policies, instead of resetting interest rates.)
From January 2009 to May 2010, yields at JPMorgan Chase & Co. and Citigroup Inc. increased the most among the six largest issuers — more than 300 basis points, or 20% — while the yield at Bank of America Corp. barely moved at all.
From May 2009 to May 2010, a period that eliminates seasonal distortions but not necessarily differences in the timing of lender decisions to hike prices, yields among the group increased from 94 basis points, or 5.2%, to 231 basis points, or 15.3%. JPMorgan Chase still led the pack but was closely followed by American Express Co., whose yield jumped 199 basis points, or 10.8%, and was frequently higher than the others in absolute terms.
A different picture emerges from quarterly data on companywide portfolios (including balances that do not back bonds), with several lenders predicting that the impacts of recent price increases and new price restrictions under the Credit Card Accountability, Responsibility and Disclosure Act will ultimately neutralize each other, and returns will revert to the status quo ante.
The net interest yield on Amex's domestic credit cards declined 0.5 percentage point from the year prior, to 10.3% in the first quarter, which the company blamed in part on cuts in interest rates for customers in a borrower relief program. It has forecast that the ratio will fall to about 9% — the level that prevailed in 2008 — this year, as the full impact of the new regulations offsets price increases implemented last year. (It "repriced" more than half the portfolio in the first quarter of 2009 and additional batches in the fourth quarter.)
Meanwhile, revenues as a percentage of receivables at Capital One Financial Corp. beat executives' expectations and jumped 3.29 percentage points, to 17.1%, which the company attributed in part to improved credit performance and a greater ability to collect billed amounts. CEO Richard Fairbank has said that the margin is subject to "considerable uncertainty" from period to period, in part because of "consumer and competitive responses to the CARD Act." But the company still expects it to drift down to near 15% over the next few quarters, or about where it was "before all this excitement and change happened in the industry."
Likewise, at a presentation in May, Roy Guthrie, Discover Financial Services' chief financial officer, said, "It's a little bit back to the future."