C&P's 2006 Bank Card Profitability Study and Annual Report

  Bank card issuers last year faced numerous obstacles challenging their profitability potential. Chargeoff growth late in the year driven by a new bankruptcy reform law, increases in minimum payments and transfers of credit card debt to home equity lines of credit all created the likelihood that issuer profits would take a hit in 2005.
  The bank card industry, however, persevered. Cards&Payments research shows that issuers of Visa and MasterCard credit cards posted a collective after-tax return on assets of 1.99%, up from 1.59% in 2004. (The 2004 data are revised to include commercial cards and updated information.)
  "It certainly reflects and will continue to reflect that the credit card industry is a profitable market," says Katie O'Flanagan, an Auriemma Consulting associate who tracks bank card profitability.
  Total revenue among Visa and MasterCard credit card issuers last year reached $109 billion, up 5% from $103.4 billion in 2004, C&P data show. Issuers held expenses in check, as costs rose just 1%, to $90.5 billion from $89.3 billion.
  U.S. bank card purchase volume reached $1.18 trillion, up 10.3% from $1.07 trillion in 2004. Total charge volume, including cash advances, reached $1.41 trillion, up 8.5% from $1.3 trillion. Visa and MasterCard credit card issuers at the end of 2005 had $612.3 billion in combined receivables, up 2.8% from $595.7 billion in 2004.
  Though chargeoffs were up late in the year as consumers flooded the market with bankruptcy filings in anticipation of the Oct. 17 effective date for the new, stricter bankruptcy reform law, they were offset with considerable reductions in chargeoffs during the first three quarters of the year as issuers focused less on riskier sub-prime markets, O'Flanagan says.
  Paul Grill, a partner with First Annapolis Consulting of Linthicum, Md., agrees. "Issuers were cautious about the types of cardholders they wanted to acquire, so the [chargeoff] rates have been kept in check, which is a good thing," he says. "It was a pretty stable year. Now issuers will have to look at figuring their next new source of revenue."
  Indeed, O'Flanagan predicts issuers will face problems this year with rising consumer debt and home-heating expenses, all of which will create difficulties for many cardholders to meet higher minimum payments on their card loans. "There will be more stress to meet payment obligations," she says.
  As the Federal Reserve Board continued to increase the federal funds rate, which is the interest rate banks may charge each other for overnight loans, one might expect that issuers' cost of funds would rise dramatically. But most issuers, anticipating the rate increases, split funding between short, intermediate and long-term funds availability, thereby locking themselves in at lower rates, says Robert K. Hammer, chairman and CEO of RK Hammer, a Thousand Oaks, Calif.-based consultancy.
  Issuers' cost of funds last year reached a combined $27.25 billion, up 7% from $25.49 billion the previous year, C&P data show.
  Hammer also notes that issuers are getting better at getting inactive accounts active. "They're getting aggressive with cash-advance checks and general activation marketing programs." he says. "It's found money-pure profit."
  Issuers also continue to try to go after new customers as well. Consumers last year received a record-setting 6.05 billion credit card solicitations, up 16.3% from 5.2 billion the previous year, according to Synovate, the Chicago-based market research arm of communications specialist Aegis Group plc. This number has been on the increase consistently for quite some time now, says Anuj Shahani, Synovate research analyst.
  "There are a few factors involved for the increased mailings, but the biggest one is the increase in reward/rebate offers," he says.
  Issuers combined cost for operations and marketing reached $27.25 billion in 2005, up 2% from $26.65 billion the previous year, C&P data show.
  C&P developed its profitability report from annual reports, government agencies, Visa and MasterCard figures, and interviews with financial analysts and industry consultants. As for revenues:
  * Receivables grew 2.8% in 2005 based on earnings reports filed by major bank card issuers, and data from Visa and MasterCard.
  * Interest income assumes an average APR on revolving balances of 14.5%, up from 14% in 2004, and that 79% of balances revolved.
  * Interchange income applies a 1.75% blended interchange rate, up from 1.73% in 2004.
  * Penalty fee income was down 10.5% in 2005, as accounts assessed late fees fell 14.2%. The average late fee for 2005 is estimated at $34.42, up from $33 in 2004.
  * Annual fee revenues assume that 15% of bank card accounts paid a fee, down from 16% in 2004. The average annual fee on an open account was $46.21 in 2005, down from $46.73 in 2004, according to Synovate's Inside Track.
  * Revenues from enhancements such as credit insurance and other marketing programs are estimated to have increased proportionately with charge volume, which grew by 9%.
  ON THE EXPENSE SIDE:
  * Cost of funds rose to 4.5% of average receivables, up from 4.4% in 2004.
  * Operations and marketing costs rose 2.3% as issuers increased direct-mail solicitations and built campaigns around rewards and rebates.
  * Fraud is estimated at 6 basis points of charge volume for 2005, up from 5 basis points in 2004.
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