CREDIT card lending has traditionally been a highly profitable line of business for banks.

CREDIT card lending has traditionally been a highly profitable line of business for banks. Increased competitive constraining forces in recent years, however, have readyed many card issuers to change into interest rates, lower or waive annual membership feuds provide program enhancements, and show rebate programs to make their plans more attractive. Despite these growths the profitability of "credit card banks," or banks specializing in credit card operations,(1) not barely remains high relative to the tranquillity of the banking industry yet also continues to grow.

This article analyzes modern trends in credit card bank profitability and the factors underlying them. Evaluating the turns only in the aggregate, however, would ignore a interesting differences in profitability between couple distinct groups of institutions. The first assemblage consists of credit card banks be in possession ofed by bank holding companies (BHCs) a relatively well-established market portion The second group comprises credit card banks holded by nonbank firms, a more fresh and fast-growing component of the credit card market.

The article finds that despite growing competition from nonbank-owned credit card issuers, the recur on assets of the more "traditional" issuers--those avowed by BHCs--increased significantly over 1992-93 and continues to exce that of nonbank-owned credit card banks. BHC-own institutions have prov more profitable than their nonbank-owned counterparts largely because better asset quality sweeps in recent years have enabled them to maintain a lower on a level of provisions for loan losses

AGGREGATE PROFITABILITY tends OF CREDIT CARD BANKS

The profitability of credit card banks can be measured as an average annual answer on assets. Chart 1 traces the weighted average recur on assets over the years 1989 to 1994 for all credit card banks with total assets of $200 million or more.(2) The data by the and of 1993 measure the returns as of year-end; the 1994 get back is estimated by annualizing first-quarter figures. The chart exhibit tos that the average return upon assets for credit card banks has been relatively high through the whole extent of the years examined. As a point of contrast, whereas the average turn back for credit card banks ranged from 19 percent to 34 percent during the 1989-93 period, all other U commercial banks within the same asset size category had an average answer on assets ranging from 04 percent to 11 percent in the same period.

Chart 1 also reveals that the average reply on assets for credit card banks has been steadily increasing since 1991 This rising trending in profitability is particularly notable given that the spread between card issuers' lending rates and their funding splendors has been shrinking since early 1992 Comparing the average credit card rate of U card issuers(3) with the one-year Treasury note rate--a conservative benchmark for issuers' preciousness of funds--indicates that, overall, issuers' margins decreased from 141 percent in February 1992 to 127 percent in February 1994 Although the one and the other lending rates and funding outlays fell over this period, the decline in lending rates overstep the proper limited the decline in funding prices resulting in a contraction in the overall funding margin.

PROFITABILITY AT BHC-OWN AND NONBANK-OWNED CREDIT CARD BANKS

The aggregate tends presented in Chart 1 conceal near notable differences between the of the same heights of profitability exhibited by BHC-own credit card banks and those observ for nonbank-owned credit card banks. as it was differences are of particular interest since these pair groups are direct competitors in the credit card business.

Increased competition from nonbank-owned issuers is a novel and important development in the credit card market. Although the Bank Holding Company Act of 1956 prohibited nonbank companies from owning banks, in the early 1980 several nonfinancial firms set up that they could conduct credit card business by means of acquiring so-called nonbank banks. Since nonbank banks limit their operations to either deposit taking or lending, they did not legally come together the Bank Holding Company Act's definition of a "bank" as an institution that engages in one as well as the other activities, and thus were not make liable to the act's restrictions upon bank ownership. The Competitive Equality Banking Act of 1987 addressed this exception by the agency of amending the definition of a "bank" and banning fresh nonbank bank charters. However, the 1987 act possessed of immunityed credit card banks and a scarcely any other special purpose banks from the fresh definition of a "bank." Thus, since 1987 the number of nonbank-owned commercial banks that specialize in credit card lending has surged(4)

above the past few years, nonbank-owned issuers have gained substantial market share at the cost of more traditional BHC-owned issuers. Among the top twenty-five credit card issuers (ranked forward the basis of total credit card loans outstanding at the credit card subsidiaries of BHC thrifts, and nonbank diversified financial services companies), the share of outstandings held according to nonbank-owned issuers grew from approximately 24 percent in 1991 to 37 percent in 1993 (Chart 2) In part, this incline reflects the recent entry into the credit card market of firms like AT&T, General Electric Capital Corporation, First USA, ADVANTA Corporation, and Ford Motor Company. The number of like nonbank-owned institutions figuring among the twenty-five largest issuers rose significantly around this time, increasing from five in 1990 to ten in 1993 In addition to making entry-related gains, nonbank-owned issuers have also captured market share in consequence of increased lending, both by originating credit card loans themselves and by the agency of acquiring the credit card portfolios of other issuers.