It’s been about a year since Canada’s biggest banks involved in what can accurately be described as a credit card war.
It all started with a $3.5-billion deal whereby Toronto-Dominion Bank replaced CIBC because the primary issuer of Aeroplan Visa credit cards for the next Ten years. The other banks took notice, and made their own push in to the mass affluent travel rewards category.
For the most part, it appears to be paying off. Credit card (Visa/Mastercard) purchase volumes still rise in a healthy clip, up more than eight percent in 2014, and development in new issues has additionally remained strong.
The quantity of credit cards issued in Canada rose seven per cent to 95 million in 2014, or almost three cards for each Canadian – a trend Canaccord Genuity analyst Gabriel Dechaine called an “explosion” within the level of plastic.
Yet growth in outstanding balances has always been flat or lower since 2011, an indication that consumers are utilizing their cards as transaction tools, less a source of credit.
Banks are successfully convincing consumers to sign up, although not all of them are having as much luck converting new cardholders to new card users.
Dechaine noted that Bank of Quebec, Royal Bank and TD Bank had the best growth metrics in 2014, because they flooded the market with new cards and got customers to actually use them. Bank of Montreal, CIBC and National Bank had weaker purchase volume growth.
Scotiabank led the way in which with 16-per-cent development in the number of cards in circulation during 2014. More to the point, it had the greatest compound annual growth rate in purchase volumes since 2008 and exceeded the average in 2014.
“For any bank that has historically operated a sub-scale cards business, we feel the convergence of those trends is really a clear indication of their improving market presence,” Dechaine said.
But the banks are already shifting downmarket to another battleground for growth: TD renewed efforts to push its MBNA portfolio, CIBC co-branded a Tim Hortons’ card, Scotiabank purchased a 20% stake in Canadian Tire’s charge card business, and Royal Bank has a balance transfer marketing campaign.
These moves make sense given just how much profit will come in the category. Credit-card spreads have widened recently due to cheaper funding costs and powerful credit quality, and also the banks wish to bolster development in loans and receivables as lower-end charge card customers are more prone to keep balances.
Dechaine noted that a downmarket push would drive net interest income growth at a time when banks are facing slowing domestic loan growth.
Yet investors might want to be cautious on these moves, due to weaker Canadian economic growth and the potential for a considerable pullback in employment.
The banks’ strategies warrant a close look, but it’s difficult to argue against a source of growth for the Canadian banking sector – specifically in a business that has proven to be so profitable previously.