Evaluating The Value Of Credit Cards

What effects does a robust credit card portfolio have on a credit union's financial performance?

 
 

A total of 5,799 credit unions, representing 90% of the industry’s assets, are currently reporting third quarter data in Callahan & Associates’ FirstLook program. Credit card lending at credit unions has increased in recent years, and FirstLook credit unions held more than 15.2 million credit card accounts and nearly $37.7 billion in outstanding balances as of September 30. Credit card balances increased 8.1% annually, and 57.3% of FirstLook credit unions participate in credit card lending.

The average credit card penetration, which is the number of credit card accounts divided by the number of current members, for third quarter FirstLook credit unions was 17.4%. A look at two credit card penetration peer groups helps highlight the impact of credit card lending on financial performance.

The first peer group of credit unions with at least 25% credit card penetration includes 335 credit unions with an average asset size of $613 million. The second peer group of credit unions with at least one credit card account outstanding but less than 10% overall credit card penetration includes 265 credit unions with an average asset size of $463 million. Note, to make this peer group comparable in asset size to the first peer group, it includes only FirstLook credit unions with more $100 million.

Positive balance sheet growth indicates the credit union is serving existing members and attracting new members through competitive products. Credit unions with higher credit card penetration posted higher loan, share, asset, and member growth compared to their lower penetration FirstLook peers. The loan-to-share ratio was nearly seven percentage points higher at credit unions with at least 25% credit card penetration. This is significant, as making loans in the low-rate environment is critical to bottom line success. The capital ratio is also higher at these credit unions, with 11.4% of assets backed by capital versus 10.6% at their peers.

BALANCE SHEET METRICS
Data for 5,800 FirstLook Credit Unions as of September 30, 2013
© Callahan & Associates | creditunions.com

 

CUs with >25% Penetration

CUs with <10% Penetration

12-Mo. Loan Growth

9.11%

7.37%

12-Mo. Share Growth

5.84%

4.72%

12-Mo. Asset Growth

6.33%

4.84%

12-Mo. Member Growth

6.71%

3.43%

Loans/Shares

78.53%

71.74%

Capital/Assets

11.43%

10.62%

 

 

Member Relationships

Holding a credit card with a financial institution can have a significant impact on how a member interacts with that institution. A credit card is a critical part of building a solid financial foundation, and much of the data in this section shows that credit unions that participate in credit card lending have deeper, more profitable relationships with their members.

One of the best metrics to gauge member relationships is share draft penetration. Where a member holds their checking account is likely to be their primary financial institution. That is also likely where they will park their savings and go for their lending needs. Credit unions with higher credit card penetration had a share draft penetration rate of slightly less than 60.0% while credit unions with lower penetration had a 48.3% share draft penetration rate.

Higher share draft penetration typically leads to more profitable members, as the number of accounts per member illustrates. Credit unions with higher credit card penetration had 0.70 loans per member versus 0.55 at credit unions with lower penetration. The average number of share accounts, at 2.06 per member, was also higher for the first peer group.

ACCOUNTS PER MEMBER
Data for 5,800 FirstLook Credit Unions as of September 30, 2013
© Callahan & Associates | creditunions.com

accounts_per_member

Source: Callahan & Associates’ Peer-to-Peer Analytics

The overall annual member relationship for a credit union is the sum of the total dollar amount of loans, excluding business loans, and the total dollar amount of shares divided by the number of current members. Credit unions with a credit card penetration rate higher than 25% had an average member relationship of $19,046, that’s more than $4,800 higher than their peers. Average share balance was also higher.

Average loan balance, however, is one area in which credit unions with lower penetration come out on top. This is due in part to the revolving nature of credit card balances. Credit card balances are typically smaller than other types of loans, and credit card holders often pay off balances at the end of each month to avoid interest and other charges. The higher percentage of credit cards in the loan portfolio drove down the average balance at the credit unions with higher credit card penetration.

AVERAGE MEMBER RELATIONSHIPS
Data for 5,800 FirstLook Credit Unions as of September 30, 2013
© Callahan & Associates | creditunions.com

avg_member_relationship

Source: Callahan & Associates’ Peer-to-Peer Analytics

Asset Quality

Having a large credit card portfolio is not beneficial to the credit union if delinquency and charge-offs are high. Delinquency within the credit card portfolio was similar across both penetration peer groups —  with the credit unions with lower penetration having a seven-basis-point advantage. Both peer groups are in line with the national average of 90 basis points. Credit card charge-offs were lower at credit unions with less than 10% penetration, 1.69% versus 2.12%.

DELINQUENCY & NET CHARGE-OFFS
Data for 5,800 FirstLook Credit Unions as of September 30, 2013
© Callahan & Associates | creditunions.com

asset_quality

Source: Callahan & Associates’ Peer-to-Peer Analytics

Income And Expense Metrics

Credit card lending affects many income and expense metrics, including multiple non-interest income and efficiency metrics. The credit unions that had higher levels of credit card penetration outperformed their lower penetration peers in most of these metrics.

When compared to their peers, credit unions in the 25% penetration peer group brought in more interest income and comparable non-interest. Interest income was 3.74% of average assets at credit unions with high credit card penetration rates; that’s 44 basis points above their lower penetration peers. Part of this is because average loan yields are higher at credit unions with more credit cards. Credit cards typically have a higher interest rate due to their unsecured nature and provide high interest income despite their lower average balance compared to auto and mortgage loans.

Non-interest income accounted for 1.40% of average assets versus 1.42% at credit unions with less than 10% penetration. Fee income, a component of non-interest income, comprised 44.3% of total non-interest income at credit unions with higher penetration and 59.7% of non-interest income at credit unions with less penetration. Despite the fact credit unions with higher penetration are deriving similar levels of non-interest income, they are relying less on fees.

BUSINESS MODEL
Data for 5,800 FirstLook Credit Unions as of September 30, 2013
© Callahan & Associates | creditunions.com

business_model

Source: Callahan & Associates’ Peer-to-Peer Analytics

The operating expense ratio at credit unions with higher penetration rates was 2.92%, 30 basis points below the operating expense ratio of their peers. Higher income and lower expenses means credit unions with high penetration rates are reporting a higher return on assets —  103 basis points at the higher penetration peer group versus 76 basis points for the second peer group.

Along with increased ROA, the credit unions with more active credit card portfolios were operating more efficiently. The efficiency ratio is a measure of how much it takes a credit union to earn $1 of revenue. As of September 30, the efficiency ratio was 72.9% at credit unions with greater than 25% penetration, which means it was taking them less than 73 cents to earn a dollar of income. Credit unions with less than 10% penetration had a 79.9% efficiency ratio.

EFFICIENCY RATIO AFTER PROVISIONS
Data for 5,800 FirstLook Credit Unions as of September 30, 2013
© Callahan & Associates | creditunions.com

efficiency_ratio

Source: Callahan & Associates’ Peer-to-Peer Analytics

As with any analysis, looking at one metric by itself is not enough to prove the value of a robust and active credit card portfolio. After evaluating various balance sheet, member relationship, asset quality, and income and expense metrics, the effects of credit card lending become clearer. And although credit cards are not solely responsible for the improved performance of the credit unions included in this analysis, the impact of credit cards cannot be discounted.

 

 

 

Nov. 11, 2013


Comments

 
 
 
  • I have found the same average penetration rate for credit cards among our client base also.
    Tommy Loo