(New York, NY): Auriemma Group, a nationally recognized credit card valuation agent, has identified several factors which it believes will cause credit card valuations to decline. The drivers of this anticipated reduction in market value are both changes in card business models as well as regulatory and accounting rule changes. While Auriemma remains bullish on the credit card business over the short – intermediate timeframe, we expect to see the value reductions appearing in earnest by 2017.
Of the threats to the business model for traditional card issuers, Auriemma is focused on the following:
- The inevitable increase in delinquency and bad debt expense as the business reverts to the long term mean for consumer credit performance
- The gradual erosion in underwriting discipline which we are anticipating based upon the entrance of new issuers into the subprime arena
- The change in “lifetime” value of a customer brought about in part by the change in perception about use of credit cards versus debit cards among millennials
- The proliferation of alternative payment channels which will exert pressure on traditional card income as newer players enter the market and demand revenue participation.
Several of these are long term trends which we have been watching/anticipating and see signs of acceleration. With regard to the impending regulatory and accounting changes and the anticipated change in market value, Auriemma is focused on the following:
- FASB’s new methodology for loan loss allocation which we believe will have an exaggerated impact on credit card issuers versus other consumer lenders
- The changes in both the composition of common equity tier 1 (CET1) capital and in the specific new capital treatment of purchased credit card relationships (PCCR) intangible assets.
Both the anticipated changes to the loan loss reserving methodology and to the new capital treatment for PCCR will result in very significant pressure on regulatory capital for the industry and will likely slow down future portfolio consolidation. Auriemma’s expectation that market values will decline does not mean the card industry will become unprofitable; rather, the increase in the amount of capital necessary will result in a significantly lower return on equity.
There are multiple strategies that an issuer may pursue to position itself for these challenges. Such strategies can allow for both aggressive and defensive postures. Similarly, investors in credit card equities need to understand how their portfolio companies will address these issues. Auriemma is prepared to assist our clients both in developing strategies and implementing plans to align their goals with the changing environment.
About Auriemma Consulting Group
Auriemma is a boutique management consulting firm with specialized focus on the Payments and Lending space. We deliver actionable solutions and insights that add value to our clients’ business activities across a broad set of industry topics and disciplines. Auriemma has been providing credit card portfolio valuations for over two decades and is a nationally recognized valuation agent. For more information, please contact John Costa at (212) 323-7000.