A perfect storm is brewing for the banking and payments business as the impact of the coronavirus-driven spending collapse and the sharp rise in unemployment pushes consumer loan defaults to new heights. Adding to these two components is the unprecedented decline in oil prices, likely producing massive defaults on oil-related loans and the layoffs it produces.
As the U.S. stock market declined nearly 8% today, bank and payment stocks declined as much as 25% at the market opened, according to CardTrak.
The nation’s two largest payment networks fell with the overall stock market, as Visa declined 7.18% and Mastercard slipped 8.71% at closing. Both have no exposure to consumer lending and little direct exposure to oil prices, except for lower consumer spending volume.
The nation’s two largest hybrids with dual roles of payment network and card issuer, declined above stock market levels, closing higher with American Express down 9.19% and Discover Financial Services down 12.50% at the closing bell. Both companies have combined exposure to consumer/business lending and issuing.
Perfect Storm Hits Banks Hard
Chase, the nation’s largest issuer of payment cards, with exposure across all three components of the “perfect storm” declined 13.55% at market closing.
The nation’s second largest bank credit card issuer, Capital One, with it’s highest exposure to sub-prime consumer lending and issuing, dived 11.20% at market closing.
Senior Analyst Robert McKinley of CardFlash noted the “perfect storm” is even worse for banks in general who are now dealing with declining interest rates, essentially creating a fourth component of the storm. Overlaid on these factors are investor concerns regarding future bank profits.
Credit Card Yield to be Slammed
Card yield, as an average for the nation’s Top 4 credit card issuers, reversed course in the fourth-quarter after posting new records throughout 2019 All of the issuers, except Chase, posted significantly lower yields in the fourth-quarter from the prior quarter. However, this is fifth consecutive quarter wherein all of the Top 4 exceeded 10%, according to Bankcenter and CardBuzz.
The U.S. Top 4 Issuers (Chase [JPM], Capital One [COF], Bank of America [BAC], Citibank [C]) credit card yield dipped 28 basis points (bps) sequentially at 12.02% and down 8 bps year-on-year (YOY) for the fourth-quarter (4Q/19), compared to 12.30% for the prior quarter, and 12.10% for 4Q/18, according to CardData and PYRPTS.
For 4Q/19 the sequential decrease ranged from 23 bps for Citibank and Bank of America to 83 bps for Capital One. Nonetheless sub-prime card specialist, COF, with 32% of its U.S. credit card portfolio carrying FICO scores of 660 or below, leads the peer group with a yield of 14.91%. BAC reported the lowest yield ratio of 10.69% for 4Q/19, based on current analysis of RAM Research and CardWeb.
RAM Research credit card yields for the top four U.S. issuers will likely decline by more than 100 bps over the next four months.
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