Credit-card rewards war crimps bank profits

Bloomberg

A rewards war that’s helped U.S. credit-card customers amass points for perks or cash proved costly in the latest quarter for some of the nation’s biggest banks. That may signal fresh pain at American Express Co.
Issuers have sweetened rewards, cut fees and sought to improve services to lure customers, making it tougher to grow profits. In the past week, three of the biggest lenders — Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp. — said combined income from card operations dropped 15 percent to $3.1 billion in the third quarter from a year earlier. At the same time, expenses in their consumer-bank units rose 1 percent to $15.3 billion.
AmEx, the largest U.S. credit-card issuer by purchases, is set to report third-quarter results after the close of New York trading on Wednesday. Analysts estimate earnings per share fell 23 percent as revenue slipped to $7.7 billion from $8.2 billion a year earlier and expenses climbed.
The lender is also grappling with the loss of its largest co-brand partner, Costco Wholesale Corp., which once accounted for 20 percent of its worldwide loans and 8 percent of customer spending.
Credit-card results at major banks were probably “a negative for AmEx,” Moshe Orenbuch, an analyst at Credit Suisse Group AG, wrote in a note to clients. JPMorgan and Citigroup probably gained some market share, he said. And a popular new JPMorgan card likely helped partner Visa Inc., he said.
Bank of America said that it issued 1.3 million new consumer credit cards during the third quarter, the most since 2008.
The lender has stood by its rewards program because it helps drive deposit growth. At Citigroup, reward-hungry customers helped propel growth for some of its new cards.
JPMorgan saw a 35 percent jump in new card accounts, which was driven in part by its Sapphire Reserve Visa, Chief Financial Officer Marianne Lake said Friday. The card, which debuted in September, features a 100,000-point sign-up bonus, triple points on travel and dining, airport lounge memberships, and credits that help offset its $450 annual fee. The bank got so many applications that it ran out of metal for the cards after about a week.
“The good news is volumes are going up, the bad news is the cost associated with volumes are going up along with it,” said Jeff Harte, an analyst at Sandler O’Neill & Partners, of the card industry.

“The key to it is, are these rewards programs things that will differentiate their cards enough from the rest of the industry to drive better loan growth? The big issue with that is everybody’s trying to push their rewards programs.”