“Risk Adjusted” Card Revenue During Three Unique Periods

                                                                                                Bob Hammer, Founder and CEO

NEWS RELEASE                                             Rkhammer01@roadrunner.com

We presented our findings on “Risk-Adjusted” card revenue (“RAR”) last week.  In this year-end 2016 card metric report R.K. Hammer shows the variance between “Total” card industry income for 2016 vs. the “Risk-Adjusted” card revenue (adjusted for loan default risk), during three unique 3-year economic periods in the U.S. , shown below, two of which were during economic downturns.

As examined, substantial loan losses during economic downturns impacted “Risk-Adjusted” card revenue, demonstrated somewhat during the 2000 dot-com bubble collapse, and again, even deeper in the Great Recession due to dramatic card industry net charge off levels, and cautious card issuers and consumers, curtailing card usage during the downturn.  We then compared those with the near normal current era.  The outcomes are instructive.  Note:  this is for Prime and Super Prime card accounts.

3-Yr.PERIOD     EVENT       “TOTAL” CARD REVENUE     “RISK-ADJUSTED” REVENUE (adj. for defaults)

2000-2002  Dotcom Crash      18.4%  18.8%  18.5%                    14.1%   13.7%   13.1%

2008-2010  Gr. Recession       18.1%   18.6%  19.6%                 12.1%     8.5%     8.7%

2014-2016   Current Era          17.3%   17.2%  17.0%                    12.0%    12.8%  13.0%

Of the two metrics, “Total” vs. “Risk-Adjusted” card revenue, Risk-Adjusted is always seen as the more meaningful measurement to us; the amount of credit default risk one is willing to accept and the income yield that strategy produces. 

As reported earlier, best practices in the experience of R.K. Hammer with Prime and Super Prime card accounts suggest that you need greater than 13.0% in “Risk-Adjusted” Revenue, as a percentage of managed outstandings.  Moderate results fall into the 12% -13% range.  Worst case results fall into less than 12% for “Risk-Adjusted” Revenue.    

Looking forward, it will be interesting to see how severely the next economic downturn in the U.S. impacts the card industry and its “Risk-Adjusted” revenue  as a result, compared to what is shown above.  The post-recession “bubble” is still growing, and will inevitably burst, as bubbles always do.

R.K. Hammer is a veteran card industry advisory group, for over two decades specializing in card portfolio valuation and sales, expert witness projects for issuers in litigation, interim card management, and general card consulting including best practices; domestic and international, clients from 50 countries. Company Founder and CEO Bob Hammer has dealt with over 1,100 card issuers (banks, credit unions, and retailers), and whose research and opinions have been cited by most relevant government agencies and both Houses of Congress.