Now, feel a little less bad about paltry returns

[mschoenf]

Reading WSJ story on ROA of credit card companies lately, though in their case, due a lot to competition for very low int. rates and rewards, but also loss ratios increasing some; a bit of article that may be of interest to LC Investors:

Five of the largest credit-card issuers— American Express Co., Capital One Financial Corp., Citigroup Inc.,Discover Financial Services and Synchrony Financial  —generated a median return of 2.1% on their assets for common shareholders in the first quarter, up from 2% a year earlier but down from 2.6% two years prior, according to analysis by Autonomous Research. The recent peak was 3.7% in the second quarter of 2011, according to an industry analysis by Autonomous at the time.

The pickup in returns for most banks in the first quarter was primarily the result of tighter underwriting, which helped slow the rate of loan loss increases and the amount of money banks are setting aside for future losses. U.S. tax-law changes that lowered corporate tax rates also helped.

Meanwhile, banks and fintech lenders that originate personal loans have been increasing solicitations in recent quarters. Many of these offers are targeting consumers with credit-card debt and pitching the opportunity to roll over that debt into a personal loan at a lower interest rate. Their prime targets are the customers who card issuers want to keep most: those with high credit scores who carry a card balance each month.

A record 516 million personal loan solicitations were mailed out in the first quarter, up 46% from a year ago, according to estimates from market research firm Competiscan. This marked the fifth-consecutive record-breaking quarter.

[Fred93]

This is the article...
https://www.wsj.com/articles/why-the-credit-card-boom-may-have-just-peaked-1526463000

I would point out tho that the article is very misleading for most readers.  The statistic it touts is "return on assets" of the bank, the WHOLE bank.  It does this while talking about credit cards.   Many people may think the numbers are return-on-investment in credit cards because the article is about credit cards, but not so.

A bank's ROA is something that has no equivalent for an individual investor, so there's nothing in your personal investment numbers that you can compare with this number.  I spent some time thinking about how I might compute such a number, and gave up.

The article would have made much more sense if they had presented the banks' return-on-investment in credit cards, but banks don't report that number.

[bobeubanks]

A bank's ROA is something that has no equivalent for an individual investor, so there's nothing in your personal investment numbers that you can compare with this number.  I spent some time thinking about how I might compute such a number, and gave up.

It isn't that hard. Just pretend that you've incorporated the portion of your assets involved in your investments and figure out the net income and total assets for that pretend company. You could even subtract 1% of assets from net income to pay your self as your financial adviser to make things more realistic. 2% if you think you are worth it.

Certainly apportioning the asset value of things like your computer(s) you use both for personal and investment is a little difficult and if you further muddle your personal life with investments by doing something like renting out a room in your home, it gets even more complicated, but nothing that can't be ball-parked.

[Fred93]

A bank's ROA is something that has no equivalent for an individual investor, so there's nothing in your personal investment numbers that you can compare with this number.  I spent some time thinking about how I might compute such a number, and gave up.

It isn't that hard. Just pretend that you've incorporated the portion of your assets involved in your investments and figure out the net income and total assets for that pretend company. You could even subtract 1% of assets from net income to pay your self as your financial adviser to make things more realistic. 2% if you think you are worth it.

That's a start, but its not enough.  On the bank side there are all the strange bank accounting rules and on the personal side there are very large intangible assets (ie me!), brick-and-mortar assets (my home), etc. 

By the way, bank ROA has traditionally been on the order of 1%.   [Edited to add: Which just seems very odd, so low that I'm not at all comfortable with my understanding of it.]

[Rob L]

Maybe a bank's Net Interest Margin (NIM) would be a better reference? Net interest margin (NIM) is a measure of the difference between the interest income generated by banks and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets. If we use the Fed Funds rate as the cost of borrowing (1.69% today) then the interest rate earned would be 3.17 + 1.69 = 4.86%. Of course most banks are not paying the FFR to their depositors for the privilege of keeping their money. How long will the major name banks continue to be able to pay almost zero to depositors in a rising interest rate rising inflation rate time? The Marcus on-line bank is now paying 1.70% on savings accounts, Ally Bank 1.60%, and Northpointe Bank 2.05%.

[SLCPaladin]

I would love to be able to borrow from the Fed at 1.69% and then turn around and make loans on Lending Club...

[Fred93]

At this time I don't think the Fed Funds Rate matters much re banks cost of funds.  They're mostly paying essentially zero on checking accounts.  (Once upon a time, people all had savings accounts and checking accounts, and the savings accounts earned interest and the checking accounts didn't.  That line blurred and was essentially erased, so now checking account interest rates are what matters.  After that, rates fell, and people's expectations of receiving interest just evaporated.)



This is an amazing chart.  I tried plotting the 3-month T-Bill rate on the same chart, but the numbers are so different that when plotted on the same scale, the checking account rate curve can't even be seen.  I've included the text below the chart, to make it clear what this represents.  Yes, it is really an average of what is being paid at all banks.

Sure there are a few banks paying significant rates, ala 2% for some savings accounts now.  Those banks are using the high interest rate as advertising.  In other words, instead of paying an ad agency to run a lot of ads on TV and whatnot, they just post a high interest rate, and let a zillion bloggers and bank industry hangers-on (bankrate.com) do the advertising for them.

Rates have been low so long that the public at large has forgotten all about interest on bank accounts.  These few little banks advertising high rate accounts are not yet causing significant money to flow out of accounts at traditional banks.  Until they do, banks have no reason to significantly raise rates. 

I think that it will take SEVERAL YEARS before banks are paying reasonable rates on checking accounts.  They're all gonna play chicken and raise rates very slowly, watching the rate of customer complaints and/or withdrawals.  This should allow banks to be very profitable for the next few years.  That's why I've bought bank stocks.

[bobeubanks]

That's a start, but its not enough.  On the bank side there are all the strange bank accounting rules and on the personal side there are very large intangible assets (ie me!), brick-and-mortar assets (my home), etc. 

Go back and reread my post. I addressed both of those things.

[Rob L]

At this time I don't think the Fed Funds Rate matters much re banks cost of funds.  They're mostly paying essentially zero on checking accounts.  (Once upon a time, people all had savings accounts and checking accounts, and the savings accounts earned interest and the checking accounts didn't.  That line blurred and was essentially erased, so now checking account interest rates are what matters.  After that, rates fell, and people's expectations of receiving interest just evaporated.)

Sure there are a few banks paying significant rates, ala 2% for some savings accounts now.  Those banks are using the high interest rate as advertising.  In other words, instead of paying an ad agency to run a lot of ads on TV and whatnot, they just post a high interest rate, and let a zillion bloggers and bank industry hangers-on (bankrate.com) do the advertising for them.

Rates have been low so long that the public at large has forgotten all about interest on bank accounts.  These few little banks advertising high rate accounts are not yet causing significant money to flow out of accounts at traditional banks.  Until they do, banks have no reason to significantly raise rates. 

I think that it will take SEVERAL YEARS before banks are paying reasonable rates on checking accounts.  They're all gonna play chicken and raise rates very slowly, watching the rate of customer complaints and/or withdrawals.  This should allow banks to be very profitable for the next few years.  That's why I've bought bank stocks.

I have no disagreement with what you've posted. I'd like to take it a bit further. It's not only checking accounts, it's any form of bank interest bearing accounts that have dropped off the public radar. And it wasn't without very very good reason. The Federal Reserve decided to save the world with its zero interest rate policy (ZIRP). Maybe they did. Maybe the vote is still out. Helicopter Ben would have made good on his promise (and actually he did). We live in interesting times. All bank interest rates have been and are still are so low relative to "normalcy" expectations of the adult population they hardly seem worth the bother. Really; that's the point! Until relatively recently this has been true. At least that was my personal perspective and the reason for my experimentation with investments like P2P lending (as it was known back in the day). Now it's "exciting" to see a savings account at 2%. I opened my first "pass book" savings account as a teenager at 4% (guess I was definitely smarter back then) so I'm not "excited". That 2% is more like taking the crumbs that are thrown at my feet. I'm taking them. At 0.06% I wasn't. I have no idea what is normal; maybe there isn't one. The soothsayers seem to be saying that by raising interest rates the Fed will have a tool to use when the next bump in the road comes along. Gee, I hope so.

[rawraw]

Bank ROA is just the return on their investments without the benefit of leverage. If you don't use leverage, I don't know why it wouldn't be comparable to investment returns. Of course we don't have overhead like a bank, but that comes through as a servicing fee to Lending Club. It shows how competitive bank lending is. They don't need high returns to get fine returns on equity. A credit card bank f ROA of 2 is awesome for a bank, because that's the difference between a 10 percent roe and 20 percent roe

My belief is that bank deposit rates will not increase until liquidity decreases. So I think the money supply will impact it.