Pre-tax bank credit card profits hit a high of 4.25% ROA in 2009, and then fell precipitously during the recession years which followed to as low as 1.50%; then making the long slow climb back up to 2016 at 4.00%.
R.K. Hammer projects ROA earnings for prime and super prime card portfolios will hit 4.30%.Even though the ROA % is flat YOY, EBITDA dollar earnings can and do go up or down, based on portfolio growth or decline during the same measurement period.
Hammer notes there are lots of macro and micro moving parts to whether or not we experience another economic downturn: corporate earnings, Fed policy, jobs and “true” unemployment, real GDP declining for 2 quarters (admittedly a rear view mirror event), business and consumer confidence trends, manufacturing and retail sales trends, real income growth or decline, a bear stock market, falling real estate prices (which is already beginning to occur in some major markets), higher interest rates and a liquidity squeeze, asset bubbles, Middle East events, and China and Russia issues, among others.
R.K. HAMMER CARD ROA PERFORMANCE RANKING INDEX FOR 2016
Total Card Issuing Income Yield: 17.0%
Less: Operating Expense 7.0%
Charge offs, net 4.0%
Cost of Funds, Blended 2.0%
Pre-tax Net Income 4.00% ROA
Weak Performers: <1.99% Pre-tax ROA
Moderate Performers: 2.00% – 3.99% ROA
Top performers: >4.00% ROA
Credit Card Segments in the R.K. Hammer Model
Super Prime: >760
Prime: 700 – 760
Near Prime: 670 – 699
Prepaid: 650 – 669
Private Label: 640 – 649
R.K. Hammer is a veteran card industry advisor, for over three decades specializing in card portfolio valuation and sales, expert witness work for issuers in litigation, interim management services, and general card consulting, domestic and international; clients from 50 countries.
R.K. Hammer has been a professor of card profitability for MasterCard’s educational university, with workshops conducted for card issuers at 32 international locations. He has also been a guest lecturer at the American Bankers Association (ABA) Graduate School of Card Management and served on the editorial advisory board for an international financial publishing company based in Dublin, Ireland. He helped author the book on starting credit card banks for the ABA.