Credit card cos count cost of separation from banks

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The first half results of Israel's credit card companies show the effect of becoming competitors rather than extensions of the banks.

2019 has been a challenging year for Israel's credit card companies. This is for two main reasons. The first is the change in ownership of the companies. The second is competition, particularly the huge threat to the traditional strategic position of the credit card companies as the main intermediary between businesses and consumers.

To take the ownership change first: in the first half of this this year, Leumi Card, the credit card company formerly owned by Bank Leumi (TASE: LUMI) (80%) and Azrieli Group Ltd. (TASE: AZRG) (20%), became an independent company controlled by foreign private equity firm Warburg Pincus and its partners Clal Insurance, Menorah Mivtachim, and the Allied group. Meanwhile, Isracard was floated on the Tel Aviv Stock Exchange. Bank Hapoalim (TASE: POLI) now owns just 33% of Isracard, a stake which it will have to sell. Between these two is the third player in the credit card market, Cal-ICC, owned by Israel Discount Bank (TASE: DSCT) and First International Bank of Israel (TASE: FTIN), which for the time being can retain ownership of the company.

These changes have had a significant impact on the second factor as well, competition. If in the past the credit card companies belonged to the banks and didn't really threaten them, now the picture is quite different, with the companies acting as an alternative to the banks and not as an extension of them.

This is mainly evident in the way that the credit card companies have become providers of non-bank credit - both consumer and commercial credit. This is paralleled by the mighty effort of the three largest banks to establish their own online payment systems through payment apps that they hope will become an alternative to credit cards.

As far as the results of the credit card companies are concerned, so far it has not been a uniform year, with the switch by the customer club of supermarket chain Shufersal Ltd. (TASE:SAE) from Max (the new trading name of Leumi Card) to Cal-ICC in the background. The following are some of the numbers that tell the story of the credit card companies in the first half year.

The companies' total transaction turnover in the period was NIS 173 billion. These transactions were carried out using the 79% of the 11.27 million issued credit cards that are active. This works out at rather more than one credit card per person (not counting children, who are not entitled to credit cards). The number of non-bank credit cards grew 12% in comparison with the first half of 2018, to over 2.9 million cards.

There have been changes in market share in the sector this year, with Isracard, headed by Ron Weksler, accounting for 46.6% of all credit card transactions, down from 47% in the first half of 2018. The total of transactions for Isracard also includes transactions via American Express, which represented 7.7% of total transactions in the first half of this year, slightly down from 7.7% in the corresponding period of 2018.

The second largest company is Cal-ICC, headed by Levy Halevy. Its market share in the first half year was 29.3% of total transactions in the market, up from 27.8% in the first half of 2018. The change in Cal-ICC's activity occurred partly thanks to the fact that it is already benefitting from Shufersal's switch to it. In the first half of 2019, Cal-ICC recorded a 15% rise in transaction turnover on its cards, alongside 17% growth in the number of non-bank cards issued. Cal-ICC also holds the Diners brand, which yielded 5.6% of total transactions, up from 5.3% in the corresponding period of 2018.

Max, headed by Ron Fainaro, correspondingly suffered from Shufersal's switch to Cal-ICC. Its share of total credit card transactions in the first half of 2019 was 24.1%, which compares with 25.3% in the first half of 2018. Turnover on Max's cards grew by just 3%, while the number of cards issued grew by 2% despite the loss of Shufersal cardholders.

Revenue per card falling

The average monthly turnover of transactions on active credit cards in Israel in the first half of 2019 was NIS 3,234. The highest average turnover was on Diners cards, at NIS 5,381 per month on active cards. Second highest was American Express, followed by Max, Isracard (excluding American Express) and Cal-ICC (excluding Diners).

Credit card transactions still represent the main business of the credit card companies, with revenue from these transactions totaling NIS 2.06 billion in the first half of 2019. Nevertheless, the trend is clear, and shows the importance of revenue from credit cards declining, added to which is the effect of new regulation since the start of 2019, which has led to lower fee income. Revenue from credit card use amounted to 77.9% of total revenue for the three credit card groups in the first half of 2019, down from 79.7% in the first half of 2018.

The other revenue engine is credit. At the end of the first half of 2019, the non-bank credit portfolios of the three credit card companies totaled almost NIS 16.6 billion. This represents growth of 10% over the total at the end of June 2018, and 3% over the total at the end of last year.

The credit card companies, which in the past dealt only in the provision of payment platforms, have for some time been presenting an additional revenue engine - interest income, which was responsible for 21.7% of their total revenue in the first half of 2019, up from 20.1% in the first half last year. Aggregate interest income was NIS 576 million, 3.5% of the total credit portfolio, the highest return in this respect being recorded by Cal-ICC, followed by Isracard and then Max.

The consumer credit portfolios of Cal-ICC, Isracard and Max totaled NIS 13.7 billion at the end of June 2019, just 1% more than at the end of June 2018. Max's portfolio actually shrank, because of the loss of the Shuufersal customer club and lower credit for car purchases, while those of Cal-ICC and Isracard grew.

Cal-ICC recorded an interest rate on its consumer credit portfolio of 10.5% in the first half year. Isracard recorded 8.7%, and Max 7.6%. Credit losses for the three companies grew 3% in relation to the corresponding period last year.

The commercial credit portfolio of the three companies grew 11% to NIS 2.9 billion. These numbers indicate steady growth, but they are still far from significant in relation to bank credit or even to institutional non-bank credit, which is generally the province of large businesses.

High sales and marketing expenses

Because of the acute need of the three companies to become independent brands, since they no longer benefit from the backing of the banks, their marketing and sales expenses rose 7% in the first half of this year to an aggregate NIS 557 million. The trend was consistent across all three companies, and looks set to continue in the future.

Excluding one-time expenses involving bonus payments by the three companies on their change of status, their aggregate profit in the first half year was NIS 318 million, 6% less than in the first half of 2018.

The best looking financials in the sector were those of Cal-ICC, while Isracard suffered from the special payments it made to employees on becoming separate from Bank Hapoalim, and despite changes in its reporting methods posted a lower profit than last year, and Max too showed deterioration in important metrics.

Cal-ICC's results in the second half-year will be affected by its important agreement with El Al's Flycard customer club, which was extended this year and which will at first depress the company's profit because of expenses of running the customer club.

Published by Globes, Israel business news - - on August 19, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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