New analysis reveals Prime and Super Prime card accounts need greater than 13.0% in “Risk-Adjusted” Revenue (RAR), as a percentage of managed outstandings. Moderate results fall into the 12% -13% range. Worst case results fall into less than 12% for “Risk-Adjusted” Revenue.
In his latest report R.K. Hammer shows the variance between “Total” card industry income for 2016 vs. the “Risk-Adjusted” card revenue (adjusted for loan default risk), during three unique 3-year economic periods in the U.S. , shown below, two of which were during economic downturns.
As examined, substantial loan losses during economic downturns impacted “Risk-Adjusted” card revenue, demonstrated somewhat during the 2000 dot-com bubble collapse, and again, even deeper in the Great Recession due to dramatic card industry net charge off levels, and cautious card issuers and consumers, curtailing card usage during the downturn. Hammer then compared those with the near normal current era. The outcomes are instructive. Note: this is for Prime and Super Prime card accounts.
Total Card Revenue vs Risk-Adjusted Revenue
2000-2002 Dotcom Crash
2000: 18.4% 14.1%
2001: 18.8% 13.7%
2002: 18.5% 13.1%
2008-2010 Great Recession
2008: 18.1% 12.1%
2009: 18.6% 8.5%
2010: 19.6% 8.7%
2014-2016 Current Era
2014: 17.3% 12.0%
2015: 17.2% 12.8%
2016: 17.0% 13.0%
Of the two metrics, “Total” vs. “Risk-Adjusted” card revenue, Risk-Adjusted is always seen as the more meaningful measurement to us; the amount of credit default risk one is willing to accept and the income yield that strategy produces.
Hammer says looking forward, it will be interesting to see how severely the next economic downturn in the U.S. impacts the card industry and its “Risk-Adjusted” revenue as a result, compared to what is shown above. The post-recession “bubble” is still growing, and will inevitably burst, as bubbles always do.
R.K. Hammer is a veteran card industry advisory group, for over two decades specializing in card portfolio valuation and sales, expert witness projects for issuers in litigation, interim card management, and general card consulting including best practices; domestic and international, clients from 50 countries. Company Founder and CEO Bob Hammer has dealt with over 1,100 card issuers (banks, credit unions, and retailers), and whose research and opinions have been cited by most relevant government agencies and both Houses of Congress.