Although growth for the six major U.S. credit card issuers remains stable, forecasters see promising signs of substantial profit growth to come.
“Together with expected balance growth of about 5%, continued improvement in asset quality should lead to a significant increase in profitability this year, with pre-tax profits likely to go up about 31%,” says Curt Beaudouin of Moody’s. 
The landscape for card issuers is changing, from adjustments needed accommodate the Durbin Amendment and the CARD Act, to merchant litigation, and to new competitive forces entering the marketplace due to technology for digitalization of payments. Despite that, growth prospects in the industry look much better than a year ago.
Who are the players?
Asset quality varies among the Big Six. Moody’s shows the leaders in portfolio growth as Capital One, American Express and Discover, while Citigroup, Bank of America, and JP Morgan Chase lag in this area.
Charge offs are a major criteria for rating asset quality. Projections are that charge offs will decline 15-20% this year, to about 4.5%. The long-term average for charge offs is 4.7%, so this is a return to normalcy.
Other factors of asset quality include a stronger employment outlook, higher monthly payments by cardholders, and “portfolio cleansing” by the banks.
- Capital One as a “worst performer” since its charge offs will likely average about 5.7% due to a $2.6 billion deal to acquire HSBC Holdings PLC’s U.S. card operations.
- However, this deal propels Capital One into being one of the largest issuers of private label credit cards in the U.S., improving outlook for future gains.
- American Express is the top contender in performance, with expected charge offs averaging only about 2.1%.
- Discover expects 10-15% annual growth in earnings.
- Discover CFO Mark Graft says this will allow the credit card and consumer lending company to increase its dividends and make major acquisitions.  Discover’s first-quarter’s earnings per share was $1.18, up 40% from a year ago, due to a large release of loan reserves, increased spending with credit cards, and higher loan balances.
- Citigroup, Bank of America and JPMorgan Stanley rank lower on the “asset-quality” scale, they have experienced double digit growth in stock prices for the first quarter, making up for the drop in stock prices of 2010.
Unless there is a slowdown in defaults, fewer asset sales, and other signs of continued solvency, stock price climbs may slow.
What about the long term?
Long term projections are still dependent on the global economy. Fitch Ratings, a global rating agency, believes growth in personal spending and the ongoing shift from paper to electronic forms of payment, particularly outside the U.S., will spark long-term growth.
As purchase volumes grow and loan balances drop, growth opportunities will expand.
American Express, Capital One, and Discover all posted modest portfolio growth at the end of 2011 and Fitch believes most portfolios will expand in 2012.