Bank of America Corp's credit card unit did something surprising in the third quarter: it grew.
The second largest U.S. bank has been cleaning up and shrinking its credit card portfolio since 2009, after getting burned by bad loans. Now that the bank has shed its worst accounts and cut its total loans by 62 percent, it is ready to dial up its lending.
The bank is focused on selling credit cards to its existing customers. This will insure the bank knows more about the customers it is lending to and save money on marketing.
"That was our biggest strategic choice," said Titi Cole, a senior executive for retail products, referring to the bank's decision to focus on existing customers. "The card business will be smaller, but less volatile and more profitable."
So far, its efforts seem to be paying off. Average U.S. credit card balances at the Charlotte, North Carolina bank rose 0.32 percent, from $89.7 billion to $90.0 billion, between the end of June and the end of September. That's a small increase, but it's the first in at least three years. (An accounting change starting in 2010 makes it difficult to compare quarterly balances from recent years to 2009 and earlier periods.)
The bank also issued 1 million new cards in the quarter, the highest number since 2008, and new card issuance in the fourth quarter should continue to be strong, chief executive Brian Moynihan said at an investor conference on Dec. 10.
Banks in general are looking to boost their credit card portfolios now - they mailed out 45 percent more credit card offers in November than they did a year earlier, according to Credit Suisse and Mintel Comperemedia data-and some, most notably Wells Fargo & Co are focusing on marketing to existing customers.
The benefits of offering cards to current customers is clear - Bank of America executives have calculated that if clients who already have a checking account sign up for a credit card or other loan from the bank, it will take in over $1,000 in additional revenue per household. It calls this strategy the "stairstep approach". The bank has broadly been struggling to boost revenue.
Cole said in an interview that while competition in the credit card space is heating up, the size of the bank's current customer base will set it apart. Bank of America has relationships with one out of every two American households, giving the bank more relationships to use to gain new accounts, she said.
"The opportunity ahead of us is tens of millions of customers still. It is not a small little opportunity," Moynihan said at a November investor conference.
The bank does not disclose how much of its quarterly revenues or income come from credit cards.
IMPORTANT SOURCE OF REVENUE
Bank of America invented the credit card in the late 1950s, building both a credit card network that turned into what is now Visa Inc. and a portfolio of loans as well.
In 2006, the bank bought MBNA, which had been the world's largest independent credit card issuer, a step that swelled Bank of America's credit card portfolio just before the financial crisis. Losses from cards jumped in 2008 and 2009, which prompted the bank to sell most of its foreign portfolios and write off many billions of dollars in loans, known as "charging off" in the credit card industry.
Since then, the unit's credit quality has improved - Bank of America's credit card charge-offs have fallen by 80 percent since 2010, and loss rates have fallen from 12.8 percent to 3.5 percent. With a smaller portfolio, even if losses double from current rates, "that is not a life-threatening event at all," Moynihan said at a news event in November.
U.S. consumers are in the best position to pay their bills and increase their borrowing in years. Household debt payments as a share of disposable income are the lowest level they have been since the Federal Reserve began keeping track in 1980.
Banks make money from credit cards in two ways: from the interest payments borrowers make on their loans, and from fees they receive from merchants and cardholders.
Fee income has been falling across the industry. Lawmakers and regulators, spurred by lending practices that consumer advocates and merchants viewed as abusive, have limited many of the kinds of fees that banks can charge through the 2009 CARD Act and the 2010 Dodd-Frank Act.
At Bank of America, non-interest income from cards, a measure of fee income, fell 12 percent in the third quarter from the same period a year earlier.
Banks now have less fee income to rely on, so they are hoping to increase their interest income, which can be relatively high on a loan. The average interest rate the bank earned on credit card loans in the third quarter was 9.81 percent, over 2.5 times higher than other consumer loans like mortgages or home equity.
As other businesses like mortgage refinancing slow down, credit cards could prove to be an important source of revenue for the bank, said David Robertson, the publisher of The Nilson Report.
"What they've decided to do as a company is invest in the card business. Looking at the disaster that is the mortgage business, it's a good call," Robertson said.