Pre-tax net ROA for the credit card industry for 2009 and 2010 were at the lowest point since 1983, 2009 saw pre-tax ROA at 1.50% (down from a 4.25% average for the last decade), while last year’s 2010 net pre-tax ROA rose slightly to 2.10%.
This is the lowest since R.K. Hammer began tracking card profit metrics, which discloses given card companies only earned 2.1 cents pre-tax after expenses on every dollar of unsecured outstanding card loans on their books in 2010, and only 1.25 cents after-tax. Also, the average credit card account in the R.K. Hammer model earned only $45.46 pre-tax profit per year per consumer account for the bank card businesses issuing those cards; with the average “active” consumer account earning $83.33 per year pre-tax profit, both cut 40% for even smaller after-tax net results.
The onslaught of new rules will cost the card industry over $26 Billion per year, including “Goodwill Impairment,” primarily on intangible assets of subjective value which often have to be written down, to match a lowered balance sheet value with more accurate reduced current market value; loan losses on unsecured card debt still remain stubbornly and historically high; Net Charge Offs, which averaged around 5.00% for the last ten years, jumped to over 10% during the past two years; restructuring charges cost higher associated expenses and more red ink; and the proposed “Interchange Fee Limits.”
However, businesses will begin to hire again (when given incentives to do so), IT investment for the future will resume, financial institution capital will be replenished, shareholder dividends will be restored, banks will resume sensible lending to creditworthy consumers and businesses by providing the services and value they want (new account solicitations have doubled in the past year), loan losses will stabilize and normalize…and the business cycle will once again move ahead.