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February 2, 2018

Media headlines overplay US credit card losses

By Briony Richter

Another blinding quarter from JPMorgan Chase, Bank of America continues to go from strength to strength, and a strong quarter at Citi would be a quick summary of the main US banks’ full-year results.

The fourth-quarter earnings headlines come with a crucial health warning in the form of US tax reform. In brief: short-term bad, as banks had to write down expected deferred tax credits.  Once these time hits are out of the way, however, the new tax regime is a huge positive for future earnings.

Not all of the consumer press seemed to quite understand that the changes mean the banks are big winners as a result, and will become more profitable, preferring to dwell on the short-term negative of tax write-downs. Nor do parts of the consumer press quite understand the current dynamics of the credit card sector. “US banks suffer 20% jump in credit card losses,” screamed a number of headlines. Others pointed to sector-wide credit card balances increasing to close to the all-time record of $870bn at the end of 2008.

The US credit card sector remains in rude health and hugely profitable. Headline increases in losses may look troubling at first glance, but they come from a relatively low base. Take Chase, for example: card sales and merchant processing volumes were each up 13%, driven by continued strength from new card products. In particular, Chase has scored a phenomenal hit with its Sapphire Reserve credit card range. Chase’s card net charge-off rate inched up in the fourth quarter by 10 basis points to 2.97%, in line with market expectations and guidance from Chase earlier in the year.

At Citigroup, its branded cards unit posted revenue for 2017 of $2.2bn, up slightly on the year with average loans growing by 6% and purchase sales up 10% year over year. Citi’s NCL rate in branded cards was 2.89% for the full fiscal – not anything to scare investors, and it remains confident the rate will be in the 3.0-3.25% range in the medium term – again nothing to alarm investors or justify alarmist headlines in the business sections of the consumer press.

At Bank of America, its consumer credit card net charge-off ratio increased slightly to 2.78% – again not cause for alarm. Spending levels on Bank of America’s debit and credit cards were up 7% year over year, and it issued

1.1 million new credit cards in the fourth quarter, in line with the previous year. In total, the US’s four biggest retail banks wrote off just over $3bn in credit card debts in the fourth quarter, up just over 15% on the year ago period. With the major banks’ credit card arms earning a return on assets of around 4%, three times the rate of return for retail banking, the overly negative headlines about credit card performance are wide of the mark.

Transfer window first

It is just possible that Virgin Money, financial services partner of Manchester United Football Club, can claim a marketing first by tying in a card promotion with the football transfer window. Virgin Money’s new Manchester United card (see image) was designed by artist Stanley Chow and launched at a Manchester United event within Virgin’s Manchester lounge.

To celebrate the fact the January Transfer Window is open, Virgin Money kicked off its own transfer offer just for fans. New people signing up for the card before the transfer window closes – as every football fan knows, on 31 January – can win special matchday experiences at the club’s Old Trafford stadium,  as well as one of 25 limited edition United Trinity prints signed by Stanley Chow.

As most football fans will recognise, the United Trinity refers to Manchester United’s attacking trio of the 1960s: Bobby Charlton, George Best and Denis Law.

 

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