Despite rising delinquency rates and other reasons for skittishness, credit card lending still has profitability on its side.

Card issuers registered a 3.60% return on their average outstandings in 1995, investment banker Robert K. Hammer estimated.

Although that was a drop of 30 basis points from 1994, Mr. Hammer said credit cards remained "the perennial favorite - the top-performing banking segment again in 1995."

Mr. Hammer, who is based in Thousand Oaks, Calif., noted that the range of profitability varied widely among the issuers he surveyed, from 1% to more than 7%.

His estimate comes at a time when there is concern among industry observers about rising consumer debt and delinquency. "Regardless of the mixed forecasts," he said, "the card business continues to be the strongest performer in the banking sector."

Comprising about 5% of banking assets and 10% of earnings, MasterCard and Visa operations far outperform other banking activities, which helps explain the growing competition among bank and nonbank issuers alike.

A sizable, high-performing bank might have a 1.5% to 2% return on average assets, Mr. Hammer pointed out. All federally insured commercial banks had an annualized 1.19% ROA through the first nine months of last year.

Credit card loans generated 12.2% of U.S. banks' total loan income in the first three quarters of 1995, the FDIC reported, even though they accounted for only 7.8% of banks' total loans.

Mr. Hammer, chairman and chief executive of R.K. Hammer Investment Bankers, attributed the dip in bank card ROA to price competition. The card industry mailed an estimated 2.7 billion solicitations last year, typically touting single-digit teaser interest rates and balance transfer offers.

"Pricing is likely to remain a competitive weapon in the credit card issuing business," said Bear, Stearns & Co. analyst Susan L. Roth. "Combined with higher account acquisition and retention costs and rising credit expenses, industry profitability is likely to decline further."

Price competition accounted for much of the drop in total income in 1995, Mr. Hammer said. The top-line figure fell 50 basis points, to 18% of average outstandings.

The investment banker expects the trend to continue this year "as issuers hungry for growth look for ways to offset the negative effects of an average 13% attrition rate among their customers."

In fact, Mr. Hammer said, "The most wicked aspect of the business right now is attrition," which breaks down to 9% of cardholders closing accounts and 4% of issuers closing accounts.

Cynthia A. Graham, president of Barnett Banks Inc.'s card services unit in Jacksonville, Fla., agreed that competition has put downward pressure on the interest rate charged to customers, which in turn has put pressure on the bottom line.

"You try to make that up by being more efficient, making sure you get the most competitive funding, and managing your losses to optimize your bottom line," Ms. Graham said. "I think that the margins will be under pressure, but even after all that pressure works its way through the whole income statement, we're talking about a pretty profitable product."

Operating expenses and chargeoffs fell 30 basis points in 1995, to 4.2% and 4.1%, respectively.

Card issuers are getting more efficient with their operations, said Kenneth R. Keck, executive vice president of Harris Bankcorp's Harris Bank Card in Buffalo Grove, Ill. And the low chargeoff levels of 1994 and 1995 helped card lenders prepare for an anticipated rise this year.

Higher credit losses will put pressure on margins, which have already narrowed because of the intense competition, Mr. Keck said. "Certainly, the margins are under stress."

Depending on how any given issuer funds its program, its cost of funds could have gone up or down last year, Mr. Hammer said. His survey's blended cost of funds, incorporating a variety of maturities and financial instruments, rose 40 basis points, to 6.1%

"We have to be mindful that not everybody funds short term, and just because the Fed announces a downturn in interest rates, it doesn't necessarily translate into an across-the-board cut in banks' cost of funds," he added.

Generally, banks divide funding in three parts, Mr. Hammer said: short- term investments of less than six months, intermediate-term investments of six to 18 months, and long-term investments of one to three or more years.

"Unless the long bond rate falls, it doesn't hit (the industry) across the board," he said. "An uptick of 40 basis points seems like an aberration to the Fed's dropping rates, but that's only short-term rates and we're funding with four- and five-year CDs."

Mr. Hammer's survey examines total income, operating expenses, chargeoffs, and cost of funds, and pretax net income. He measures return on average outstandings for national brands, private-label cards, and standard and gold cards.

As was the case in 1994, Mr. Hammer found the pretax net income for private-label programs was 0.5%, well below the 3.6% of banks' Visa and MasterCard programs.

Retail store cards carry higher interest rates than national brands - but also higher delinquency rates, chargeoffs, and operating expenses. Total income for private-label programs was 16% of outstandings, operating expenses 5.5%, net chargeoffs 6.5%, and blended cost of funds at 6%.

The net yield for standard and gold cards dipped 40 basis points, to 3.4% and 3.6%, respectively.

Mr. Hammer has been estimating aggregate card profitability since 1983, when the pretax net income was at its peak of 5.4%. Net income in dollars would be considerably higher today, because of the growth in outstandings.

The Hammer surveys are based upon discussions with, and information from, card issuers, processors, analysts, and suppliers to the industry. It is not limited to any one product sector, geographic location, or asset size of issuer.

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