Revenue earned by the card industry last year is roughly $165 billion. However, pre-tax net income after all expenses (charge offs, operating expense and cost of funds) falls to $121.0 billion.
According to R.K. Hammer there can be a large difference between these two metrics. Risk-Adjusted” is just that, the default risk (net charge offs) of carrying these unsecured lines of credit to earn the top line revenue number. What is important is the financial risk an issuer of cards has been willing to take, in order to achieve the higher total income stream.
Moreover, you can also clearly see the financial impact on the card industry during the Great Recession, when loan losses escalated to near historic highs, thus lowers the Risk-Adjusted revenue.
Hammer notes some clients whose marginal loan loss rates earlier were in the moderate 3-4% range, then went as high as an unsustainable 13-15% during the epic downturn.
The long slow slog coming back from the depths of that downturn can also be viewed, between 2009 and 2015.
Robert Hammer is Founder and CEO of international card advisor, R.K. Hammer and their research and analysis subsidiary, Card Knowledge Factory.
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