Credit card revenue for 2018, based on the all-important “Risk-Adjusted” Revenue calculation (RAR), defined as top line revenue for credit cards (all interest and fee income) adjusted for net card loan default risk, needs to fall between 13% and 15%.
International card industry and payments expert, R.K Hammer, finds some of its clients have a RAR as high as 20%+. Moderate performers fall in the 11 – 12.9% RAR category. Weak performers are in the less than 11% RAR level.
Great Recession & Credit Cards
Hammer notes during the “Great Recession,” 2009-2010, best practices average RAR was not achieved in either year. In the post-recession current era, 2014-2018, best practices average RAR occurred in three out of four years, as expected in recovering good times.
The card industry always walks a delicate balance between booking as many (quality) accounts and balances as possible in good times, and reserving sufficient funds for the inevitable charge offs and economic downturns. During downturns loan defaults spike.
During the 2009-2010 Recession, for example, RAR was between 8.5% and 8.7%, making it difficult to meet card portfolio earnings hurdle rates during such volatile times. That unusual period was about as bad as the Great Depression.
The average time between recessionary periods in the R.K. Hammer models in the U.S. has been 48 months. It has now been 10 years and counting since the last recession. The asset bubbles present today – equity markets, real estate, and crypto currency – represent a potential risk to issuers performance when they do burst. Issuers who exercise best practices now and who have updated Economic Downturn Contingency Plans in place, however, will fare far better than those who do not.
R.K. Hammer is a premier provider of card industry solutions for issuers wanting to survive the next downturn, including: Card Portfolio Valuations, Card Portfolio Sales, Economic Downturn Contingency Planning, Expert Witness Projects, and their Information analysis division, Card Knowledge Factory.
Credit Card Yields
Meanwhile, credit card yields average jumped among the nations’s Top 4 bank card issuers by 64 basis points (bps) sequentially at 11.94% and up 46 bps year-on-year (YOY) for the third quarter (3Q/18), compared to 11.31% for the prior quarter, and 11.94% for 3Q/17 according to CardData.
According to RAM Research this is first quarter ever wherein all top four U.S. issuers posted double-digit yields for their respective U.S. credit card portfolios.
Capital One (COF), continues to lead the Top 4 with a 15.73% 3Q/18 credit card yield while BofA was at the bottom with a 10.20% yield.