Latest WCI Research
Selected findings from recently updated markets. |
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Venezuela
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The Venezuelan business environment is proving more difficult and it will impact on bank results. Venezuelan banks, over the years have developed the capacity to mitigate, manage or reduce adverse situations, reaching above-average performance with conservative lending policies, careful risk management and cost cutting without affecting their product and services quality.
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Venezuela has been home to one of the healthiest credit card markets in Latin America reaching a peak profit per card of $53 in 2007. Since then industry profit per credit card had declined 26 percent reaching $39 in 2009. Billed volumes have grown steadily, but the elimination of card renewal fees, the application of interest and interchange rate caps and additional regulatory-related expenses reduced credit card profitability.
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Venezuelan consumers are naturally prone to spending and using credit, and in the past decade the government has heavily promoted credit consumption by distributing high oil price income into the economy. Nowadays, with the effects of lower oil prices, high inflation rates and VAT increases, consumer finance growth contracted 17.2 percentage points in 2009.
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Germany
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The German payment cards market remained stable over 2009 and the first half of 2010, despite the global credit crisis. Debit cards continue to be the preferred non-cash payment method and have a penetration rate of 156 cards per 100 adults in 2010. Credit card issuing (including deferred debit cards) remains low with a penetration rate of only 32 cards per 100 adults forecast by the end of 2010.
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The credit card issuer landscape has undergone a degree of change in 2009, with the emergence of two new retail bank brands – noa Bank and Targobank. The latter arose from the sale of Citi’s German retail banking operation to the French banking group – Crédit Mutuel. The credit cards market has also witnessed the demise of KarstadtQuelle Bank, which was a strong player in the co-branded cards segment and has been acquired by Valovis Commercial Bank.
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The German credit cards market is characterised by low loss rates and robust credit quality. Net-credit loss rates have been kept in check through careful risk management and the conservative approach German consumers take towards financing purchases.
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Colombia
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Colombia’s credit cards market experienced strong growth in the period from 2002 to 2007. This growth was founded on a flourishing economy and high consumer confidence, which made the Colombian people feel at ease with contracting personal debt. In 2008 and 2009, growth in Colombia’s credit cards market has moderated as the country’s economy has been severely impacted by the global credit crunch and the stagnant macroeconomic situation. This has led the country to its second recession in the past 10 years.
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Over the next couple of years, moderate growth is expected in non-mortgage consumer credit due to more prudent lending practice from banks, rising unemployment and high levels of indebtedness among the relatively small part of the population that has access to bank credit. At the end of 2009, the average household debt reached 22.4 percent.
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Card profitability is relatively high in Colombia, compared to other countries in the Latin American region. These results are a consequence of good revenue to expense ratios achieved over the past four years and most recently due to low funding rates. On the other hand merchant service charge had a strong decrease in 2008 and net credit losses have been on the rise for the past five years. Average industry profit per credit card is estimated to be $65 for 2010 and is expected to maintain this level until the end of 2012.
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South Korea
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With 5.6 cards per adult, South Korea has one of the highest penetrations of payment cards in the world. It is also one of the most developed credit cards markets in the Asia-Pacific region with 2.5 credit cards per adult, just behind Japan with 2.7 cards per adult.
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Between 1999 and 2002, aggressive marketing, combined with government incentives for credit cards, led to a huge boom in the number of cards in circulation. However, poor risk management and credit screening helped fuel indiscriminate spending on credit cards as consumers would withdraw cash from one card to pay off another. This led to a credit crisis in 2003, which saw some issuers suffer defaults of up to 35 percent.
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Despite going through a painful credit card crisis in early 2000s, South Korea’s credit card industry has weathered well the recent global financial turmoil, registering a 12.2 percent year-on-year growth in pre-tax profits at the end 2009 according to Lafferty estimates. Experiences and skills gained from the failure in the early part of the decade led to a change in practices, which has partially safeguarded issuers against the current risks.
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Slovenia
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Slovenia’s payment cards market is one of the most developed in the Central and Eastern Europe, both in terms of card penetration and card usage. Debit cards are the most popular card payment instrument, followed by deferred debit or charge cards. Due to the easy availability of consumer loans and bias not in favour of accruing debt, revolving credit cards are not popular.
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Other reasons for lack of popularity of revolving cards include absence of credit bureau until 2008, which meant that local banks have mainly focused on issuing credit cards to their current account holders and tended to avoid offering credit cards in the open market. In addition, a significant proportion of credit card issuing has come from retailers, which unlike banks, have often offered interest free and fee free instalment credit.
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The majority of issuers are currently focused on increasing the penetration of charge cards and revolving credit cards and growing overall card usage through loyalty and reward schemes. Also, Slovenian issuers are innovative and sophisticated in their card offerings. Prepaid cards, contactless cards and mobile payments are all available in the market.
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Kenya
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Formal consumer finance facilities in Kenya are in a nascent stage, although the country is more advanced than many other African countries. The Kenyan consumer finance market may be characterised by a large un-banked population, low bank branch penetration levels, the prevalence of micro-lenders, and the phenomenal success of the mobile payments system from Safricom – M-Pesa. It is estimated that around one-third of the population is un-banked in 2010. The lower and middle income earning population segment are often excluded from accessing credit due to stringent eligibility criteria and lack of adequate collateral, including proof of ownership and proof of dependable income.
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Kenyan consumer finance remains under-developed, reflected in the limited offerings from the regulated banks. There are few long-term lending products and banks have also not been expeditious in passing on the benefits of lower CBK interest rates to consumers. Banks have also tended to focus on investing in government securities instead of providing finance to the private sector.
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Credit card issuing in Kenya remains low in 2010, with around 1 credit card per 100 adults. Factors inhibiting greater take up of credit cards include the requirement for customers to put up collateral upon application, low credit limits and high interest rates on outstanding balances (rates vary between 26 and 50 percent APR). These factors make credit cards more expensive and more difficult to obtain than many personal loans and overdrafts. Banks have indicated that education of consumers is of great importance in growing this market from the demand side.
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Nigeria
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Nigeria’s consumer finance market is in its infancy, and credit facilities remain targeted at the more affluent sectors of society. Nigeria has a large unbanked population, estimated in 2009 to be around 79 percent of all adults. This offers a number of challenges and opportunities for the participants in the retail banking industry.
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Lower and middle income earners are often excluded from accessing credit due to stringent eligibility criteria and lack of adequate collateral including proof of ownership and proof of dependable income. This has given rise to the formation of a large informal and micro-finance industry which offers lower value lending services to the poor and middle classes, a significant proportion of whom are located in rural areas.
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The payment cards market in Nigeria is in a developmental stage - the first credit cards were only launched in 2004. By the end of 2009, there were an estimated 26.8 million payment cards in issue in the country, translating to around 31 cards per 100 adults. Debit cards account for almost 99 percent of all issued cards.
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Italy
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Italy has a relatively undeveloped revolving credit cards market. The main barrier to growth of revolving cards is the Italian consumers’ preference for charge cards/deferred debit cards. The level of borrowing on credit cards has been growing at a steady rate and is likely to continue this trend over the next few years, albeit at a relatively slower pace. Although the potential for a higher level of credit card penetration exists, the focus for issuers will be to increase the level of usage among existing cards, as up to half of all current credit cards in circulation are inactive.
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The combined revolving credit, deferred debit and charge cards market realised pre-tax profits of $624 million in 2009, with profits per card at $17. However, there is scope for further growth in this market (and increased profitability) as profits per card are held back by 60 percent of the total credit cards portfolio being inactive.
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Consolidation is a key theme in the Italian banking market as banks and financial service providers jostle to ensure growth, or preservation, of market share. Nevertheless, there has been an increase in the number of issuers entering the credit cards market and adding to the already significant offering of credit card products. Most notably the level of foreign entrants either in a partnership with, or having ownership of, an Italian bank is rising. Whilst a handful of major players currently dominate the market, their share is decreasing.
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Austria
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The recession in 2008 and 2009 did not have any significant impact on credit card issuing or usage in Austria, as growth in rollover rates and net credit losses have remained relatively consistent throughout this period. This is due to Austria’s credit cards market being relatively conservative. Banks are not active in promoting credit card usage, instead treating credit cards as an ‘add on’ service to the existing array of savings, borrowing, and payment services offered to customers
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Credit card penetration levels are low, with just 35 credit cards per 100 adults. The revolving credit cards market is under-developed, and has been focused predominantly on premium card products for international usage. Borrowing on credit cards is low and revolving balance cards form only a small proportion of the market - the majority of cards are deferred debit cards - although revolving balance cards are now showing some growth. Overall, the number of credit cards (including deferred debit cards) and debit cards in issue increased by 3.3 percent in 2009, reaching a combined total of 10.3 million. The forecast for 2010 to 2012 is for similar low growth averaging 3 percent year-on-year.
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Due to low proportion of credit card revenues generated from interest, merchant revenues represent a key segment of income for the credit card industry. SEPA requirements regarding the opening up of the market to foreign acquirers, coupled with declining merchant service charges on both Visa and MasterCard networks has led to a narrowing of profit margins for the industry. Total credit card revenue is estimated to have increased by around 18.5 percent in 2009 to $392 million. The outlook for growth in 2010 and 2011 is forecast to be flat however, with cards market growth negated by falling net interest revenues due to an expected increase in the cost of funding as base interest rates are raised. On the upside, credit quality is strong as low borrowing means low loss rates.
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Chile
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The Chilean economy, one of the most open export-oriented in the world, was hard-hit by the global financial crisis especially in 2009 when it reached a negative GDP growth rate of 1.8 percent, worse than either the US and Brazil. Just when the Chilean economy began to come out of recession at the end of 2009 and early 2010, the country was devastated by one of the most intensive and destructive earthquakes in history. The earthquake hit the central zone of the country on 27 February 2010, killing hundreds and creating serious damage and discontinuities in the country infrastructure, properties, industries and services. Government official stated that initial damages estimates are close to $30 billion.
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It is expected that in the first half of 2010, consumer finance and credit cards billed volumes will slowdown and non-performing ratios increase especially on credit portfolios of customers near the earthquake’s most affected areas. From the second half of 2010, positive trends will resume. The Central Bank has stated that short term funding interest rate will maintain current levels in 2010 to support Chile’s reconstruction and this will continue to reduce consumer finance spreads.
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The private-label credit card business in Chile is bigger than the network cards business and is dominated by large retailers. The retailer private-label cards profit pool decreased 16.3 percent in 2009, from an estimated $649 million in 2008 to $542 million. This drop in profits can be explained by the 21 percent decrease in the number of active cards and its associated billed volume. Pre-tax profits in the network credit cards business will decline 18 percent in 2010 from $418 million to $342 million due mainly to rising operating costs. Nevertheless, this still represents strong profitability when compared to other Latin American countries.
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Research insights are compiled by members of the World Cards Intelligence research team based on the findings of recently updated markets, and delivered to clients through our weekly newswire. Please click on the link below to access Lafferty Cards News
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