Article

Elan Credit Card recently presented a webinar to financial industry decision makers on how to navigate credit card issuing in an uncertain economic environment. Brian Bugg, CFA, VP, Director of Strategic Partnerships at Elan identified three key areas for financial institution leaders to focus on when assessing their portfolio performance and profitability: liquidity, credit risk, and operational expenses.

1.       Liquidity

Liquidity, at its core, is the ability to match the cash flow (in and out) of your assets with your liabilities to be able to intermediate between your depositors and borrowers.

When thinking about liquidity, monitoring the duration (time related to interest rates) is paramount to your program’s success. For instance, the longer the duration of the loan, the more sensitive that current value is to shifts in interest rates.

To understand how these factors, including inflation, impact performance, it is important for financial institutions to conduct due diligence on their credit card portfolio’s sensitivity to interest rate changes.

Start by:

• Reviewing APR stratification by balance
• Determining revolve rate
• Calculating payment rate
• Running scenario tests

2. Credit risk

Our industry continues to see an uptick in delinquencies and managing your program’s risk exposure is critical.

According to data shared from the Federal Reserve, the delinquency rate for community banks is running close to 8% compared to an average of 3% for the largest banks that issue credit cards. For credit unions with portfolios between $1 million and $1 billion, since 2018, data shows that charge offs have increased 49% with it continuing to trend upwards.

Your financial institution should answer the following questions to analyze your credit risk exposure:

• Is your portfolio priced for the credit risk?
• How much capital is needed for your Loan Loss Reserves in compliance with CECL (current expected credit loss)?
• Is your underwriting criteria aligned with your risk tolerance and product strategy?

3. Operational expenses

In addition to the costs of funding loans and credit, there are operational expenses to be aware of and consider when analyzing your portfolio’s performance. As Bugg cautions, “Don’t forget the ABC’s — Activity Based Costs — of your business.”  Things like call center staffing, product design, marketing, and network fees are only a few of the line items often overlooked during profitability calculations.

To gain access to all the data, a yield analysis case study, and helpful market analysis, download the full presentation here or watch the webinar recording.