Assessing the riskiness and profitability of credit-card banks

This article measures the riskiness and profitability of financial institutions specializing in credit-card loans and related plans. Focusing on explicit accounting returns on explicit credit-card assets, we find that credit-card banks, whether subsidiaries of bank holding companies or independent banks, earned extraordinary returns over the years 1984 to 1991. On average, credit-card firms had pretax return on assets of 3.36 percent compared to .95 for noncredit-card banks. The costs of the higher returns are greater variability of ROA and higher probabilities of insolvency, indicating that credit-card banks are riskier than other commercial banks.After a decade of rapid and profitable growth, America's credit-card business is slowing down and turning cut-throat. Card companies must adap to survive.-The Economist, November 2, 1991