PETERBOROUGH, N.H.–One of the most profitable CU business lines coming out of the recession—credit cards—may be under pressure from the new risk-based capital rules, asserts one payments analyst.
Tim Kolk, principal at TRK Advisors, believes that when RBC takes effect in 2019, and possibly sooner, the rules could prompt credit unions to lower credit line limits, hamper their ability to grow through merger, and someday lead more credit unions to sell off their credit card portfolios.
Kolk emphasized that RBC places CU credit card programs—which outperformed bank card programs during the economic downturn—at a competitive disadvantage with banks once RBC rules go into effect.
“Under risk-based capital, credit unions above $100 million in assets have to hold 10% of their capital against their credit card balances, just like they have to do with their other consumer loans,” said Kolk. “However, the new rules also require credit unions to keep capital against unused but available credit card lines—something that RBC does not require for mortgages and personal loans. Credit cards, dollar for dollar, will now have the highest capital requirement of any consumer loan.”
Lowering Lines
With an average CU credit card line of about $8,000 and the average member balance being about $2,500 of that, Kolk estimates that the effective risk-based capital ratio on credit card balances will be 12% to 13%.
“This is not a huge number, but it does make a difference when the credit union decides what businesses are worth their capital investment,” said Kolk.
Kolk predicts several things may eventually happen. He thinks credit unions will begin to look closely at member usage of their credit lines and start lowering lines for those whose balances are well below their limits.
“This will definitely place downward pressure on all members’ credit card limits,” said Kolk.
He also predicted that eventually more credit unions may begin selling their credit card portfolios as a result of the new rules.
“Mortgages and consumer loans are at 10% but credit cards are at an effective 13%. Some may say why am I still doing credit cards?” Kolk said.
Tim Kolk, TRK Advisors
Kolk does not think that kind of hard decision will be made today by many credit unions with such a valuable income stream and in an improving economy, when capital is building.
“But if this rule were in place when the recession hit, when capital was a real concern for many, this rule would have placed a lot of pressure on credit card programs,” said Kolk.
Selling Portfolios
One credit union however, is not waiting for hard times to evaluate credit cards. The CU projected performance of its business lines several years out and has made a strategic decision on credit cards.
“I am aware of a credit union that recently decided to sell its credit card portfolio because they looked at RBC, looked ahead at their strategic plans—they want to grow their business and do some mergers that will consume capital—and decided to get some risk off the table. So they are selling their credit card portfolio to free up capital to do other things.”
Kolk sees capital-consuming mergers as reasons credit unions will look closely at credit cards when RBC is in place.
“If the credit union is coming under pressure and approaching its 10% RBC well-capitalized ratio and wants to do a merger, they will look at businesses consuming the most capital,” he said.
Kolk explained that the new rules give bank card programs an advantage.
“Banks don’t have to reserve against unused lines and they will be able to offer higher card limits, which is what most consumers want,” he said. “That’s an important competitive advantage for banks, and a big competitive disadvantage for credit unions.”
NCUA Missed The Problem
Kolk believes the potential negative impact on card programs is not something NCUA noticed as it constructed RBC. “The agency does not want these things to happen to credit unions. The average CU credit card program now is running about 5% of the balance sheet and generating about 20% of the bottom line. Credit card programs have become disproportionately important to the bottom line. And now we are seeing additional pressure being placed on this line of business?”
Kolk restated that when economic times are good, he does not think large numbers of credit unions will make the tough choice and sell the credit card portfolio. But that could change.
“In today’s economic environment, no,” he said. “But we don’t know how many credit unions could be pushed into selling the portfolio during the next troubled financial cycle.”