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Large credit card issuers take long-term view of rewards competition

All four of the nation's largest banks reported year-over-year increases in the size of their credit card portfolios for a third consecutive quarter against the backdrop of a highly competitive marketplace for new accounts and wallet position.

Growth in period-end U.S. card outstandings in the first quarter ranged from 2.5% at Bank of America Corp. to 26.7% in the branded component of Citigroup Inc.'s North America cards business, or 17.7% when combining that segment with the Citi Retail Services portfolio.

Bank of America's U.S. card purchase volumes have been steadily rising for the past four years, but the 8.2% rate of increase it achieved during the first quarter represented its largest gain in any period since the third quarter of 2013.

"Spending levels and new issuances were solid," CFO Paul Donofrio said during a recent conference call. But, he added, "the industry's trend of increasing rewards continues to mitigate our overall card revenue growth." Donofrio cautioned against focusing too closely on income from the card business given a strategy to reward customers for deepening their relationship with the bank.

"The strategy, we think, is driving incremental deposit growth and making them stickier, and that helps [net interest income]," he said.

New accounts at Bank of America and Wells Fargo & Co. declined 2% and 46.1%, respectively, during the first quarter. For Bank of America, it marked a second-straight quarter of year-over-year decline; it was the fifth consecutive period of retreat at Wells Fargo and by far the largest drop it observed in recent memory, reflecting the impact of the bank's retail sales practices issues.

President and CEO Timothy Sloan, during a recent conference call, highlighted year-over-year growth in consumer credit card purchase volumes, point-of-sale active accounts and loan balances as evidence that activity among Wells Fargo's existing customers remains strong.

"New consumer credit card applications increased 10% from February on an average per-day basis, the largest month-over-month increase since September [2016]," Sloan said, but he cautioned that they remained down from a year ago. Wells Fargo reported that 45.5% of households that maintain a retail checking account with the bank had a Wells Fargo credit card as of February, consistent with the level reported in the fourth quarter of 2016.

JPMorgan Chase & Co. CFO Marianne Lake said during a recent call that new account acquisitions, which exceeded 2 million for the 13th time in the past 14 quarters and increased 8.7% from the first quarter of 2016, would "provide long-term value" to the bank. Lake credited the bank's marketing strategy for the "fantastic success" it has enjoyed with new products, particularly the Chase Sapphire Reserve card.

Credit card sales volume of $139.7 billion marked a 14.8% increase from the first quarter of 2016, which represented the largest year-over-year increase reported by JPMorgan Chase in any quarter in at least the last five years. New accounts are undoubtedly contributing to the growth in sales volume. The initial promotional offer for the Sapphire Reserve card of 50,000 bonus points requires holders to spend $4,000 in purchases in the first three months after account opening, for example.

Citi reports end-of-period open accounts rather than new accounts in its quarterly supplements. Its June 2016 acquisition of Costco co-branded accounts from American Express Co. continues to greatly impact year-over-year comparisons in that regard. But the bank has achieved sequential expansion in open accounts in each of the last three quarters, and CFO John Gerspach reported that the branded business portfolio achieved "modest" growth during the first quarter when excluding the effects of the deal.

From the perspective of revenue growth and the cost of credit, Gerspach said Citi is poised to benefit from tailwinds during the second half of 2017 from accretion related to Costco and the typical 24- to 30-month timeline for the kinds of new rewards products the bank introduced during the middle part of 2015 to generate positive net income.

"We like the way Costco is performing," Gerspach said during an earnings call. "We like the momentum that we've got in our proprietary cards products as well."

American Express, which reclassified loans related to partnerships with Costco and JetBlue Airways Corp. to held-for-sale in the fourth quarter of 2015, reported growth in total loans held for investment of 11.4% when it released first-quarter results April 19. The company touted higher cardmember spending after adjusting for the Costco business and the inroads it made in winning greater share of millennials' wallets through an expanded merchant network and enhanced benefits and services.