Credit cards have long been a high profit product for credit unions. Even with their lower-than-bank interest rates and fees, credit unions were able to count on average Return on Assets (ROA) of 3-6% on their card programs. A recent combination of economic forces and regulatory changes, however, has created the perfect storm for credit card issuers, resulting in seriously impaired profitability. In 2009 nearly one-in-eight credit unions had an unprofitable program, and more are expected to move into negative territory in 2010. No credit union has the capital or earnings levels to support a money-losing card program.
To understand credit card profitability it helps to look at overall trends, such as top line growth. Since approximately 2006 credit unions have been adding substantial new card balances to their balance sheets. Impressively, since 2008 overall credit union card balances grew by almost 15% in an industry that suffered overall declines of more than 10%. Current credit union card balances stand at more than $35 billion with no signs of slowing growth.
Many factors have fueled this growth, not least among them credit unions’ growing comfort level with unsecured credit. As the following table shows, the average credit line offered by credit unions has increased since 2000, with average lines increasing from $5,100 to $8,200 today.
It should come as no surprise, then, that balances per account grew as well. When credit is provided, credit is used. Since 2000, average balance per account increased from approximately $1,600 to almost $2,700 today. Unused credit lines are larger than ever (in dollar terms), and the average utilization rate for card accounts is at an all-time high of nearly 33%.
Balance growth can have important positive impacts on profitability (not to mention member satisfaction). Most immediately: More interest income is earned and expenses are leveraged over a larger balance denominator.
However, increasing card balances also bring additional credit exposure. Credit card delinquency and credit loss levels have increased over the past two years. How much of that was the result of general economic conditions and how much was the result of the growth of riskier balances (in part because more credit unions moved to community charters) is speculation that seldom leads to precise answers. What can be agreed upon, though, are the specific outcomes.
For decades the credit card charge-off rate hovered around 2%, but that rate has consistently increased over the past two years to its current level of 4.2%. Although it is the envy of banks across the country, this increase in credit losses is sure to stress the bottom lines of most credit union issuers.
Overlaying increasing credit loss is another revenue-eroding trend: reductions in the average interest rate charged by credit unions. Lower funding costs have offset the expense of declining interest rates over the past two years, but the overall picture shows substantial downward pressure on overall card program profits.