In an announcement that could reverberate throughout the credit card industry, Chicago-based bank holding company Bank One (NYSE: ONE) warned last night that a growth slowdown and margin shortfall at its First USA credit card unit will result in lower-than-expected second half results. For the year, Bank One is guiding investors to expect EPS between $3.60 and $3.65, falling 7% to 8% short of analysts' estimates. Based on that guidance, the firm's overall growth rate this year will miss management's often-stated target rate of 15%.
The credit card business in general is getting tougher, and as the world's largest VISA issuer, Bank One is feeling the pinch. Year-over-year industry growth in total credit card balances outstanding (known as outstandings) has been slowing since early 1997 and rose by just a scant 2.1% in the first quarter. As a result of this reduced growth, Bank One is expecting industry outstandings in the second half to come in $3 billion to $4 billion below prior expectations, putting the screws to new account volume. Meanwhile, competition to attract and retain credit card customers is intensifying. Mail solicitation by issuers is increasing rapidly, and predominant introductory rates have fallen to 2.9% from 4.9% at the end of last year.
The competitive pressures have led to higher attrition rates at First USA, as customers have jumped ship to find better deals from other issuers. Bank One has been helping this process along by being too aggressive with its late fees policy and keeping a tight grip on credit standards. The aggressive fee policy will get the ax, but the company does not plan to budge on the credit quality issue. Instead, Bank One will devote more resources toward customer retention and try to cut operating expenses to the bone in order to regain its past credit card growth dynamics.
Just in case these efforts don't work out, though, Bank One has some other growth ideas up its sleeve. The biggest opportunity lies on the Internet, where the firm is looking to its WingspanBank.com online unit to lead the charge. Whether moving the First USA business online is in the cards remains to be seen. What is certain, however, is that the winds are changing in the financial services business. With WingspanBank.com, it's evident that Bank One is trying to keep those shifting winds from blowing away too much of its business.
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