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Credit Card Business Becoming Less Profitable Thanks To Costs, Loan Losses

Credit cards

Credit card companies, faced with an increase in costs associated with rewards and rising loan losses, have become less attractive after years of being one of the most profitable aspects of lending.

According to a report in the Wall Street Journal, while credit cards are still very lucrative for banks, the benefits they get from an environment in which the Federal Reserve is raising interest rates haven’t been huge so far, with it being offset by competition from other lenders that try to steal customers with lower interest rates. While the credit card business was seen as a good place to play in the wake of the recession of 2008 and 2009, in recent years the balances on credit cards have grown at a fast pace, with the growth rate at 7% year-0ver-year in the early part of 2017. Balances of the industry surpassed $1.03 trillion in January of 2018, setting a new record, reported the Wall Street Journal, citing data from the Federal Reserve.  At the same time, loan losses increased, requiring banks to set more money aside for any write-offs in the future. The banks also got more strict with their lending requirements, which resulted in a slowdown in credit card balance growth.  The paper noted that American Express, Capital One, Citigroup, Discover Financial and Synchrony Financial had a median return on their assets of 2.1 percent in the first quarter, which is higher than the 2 percent in the year-earlier first quarter, but lower than the two years prior when it was 2.6 percent. The paper cited an analysis by Autonomous Research. At the peak, the median return on assets was 3.7 percent, noted the report.

The increase in the first quarter of 2018 was due in large part to tighter underwriting, which played a role in slowing down loan losses growth. The change to the corporate tax rate, thanks to President Donald Trump’s tax reform bill, also contributed during the first quarter. But compared to two and a half years ago, returns are flat or down in certain instances.  “Rising rates [are] a mixed blessing for the card issuers at this point,” said Brian Foran, an analyst at Autonomous Research.  The paper noted that some analysts think profitability will continue to decline even though profitability will remain much higher than with other banking products.

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