BoA's Card Fee Income Down on Recession and Regulations

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The total service fees that Bank of America ( BAC ) earns from its debit and credit card business was relatively stable prior to 2009 aided by high interchange fees and card fees in the US relative to the rest of the world, which helped generate strong revenues for the card industry. However, the fees declined sharply in 2009 due to a decline in card income resulting from lower cash advances and lower interchange fees  caused by changes in consumption patterns in the recessionary environment. Bank of America cards competes with other banks offering credit card services like JP Morgan ( JPM ), Citigroup ( C ) and Wells Fargo ( WFC )

The Credit Card Accountability Responsibility and Disclosure ( CARD ) act passed in 2009 proposes many credit card reforms that benefit customers. But the act also imposes several regulations on card companies which are expected to impact service charges and other fees, which could cost Bank of America up to $2 billion annually.

Hence we expect fee income to remain at the current levels of 1.70% going forward. Trefis members however expect a slightly higher level of 2.20% suggesting a slight upside to BAC stock. We currently have a Trefis price estimate of $16.12 for Bank of America's stock , about 14% above the current market price.

Impact of Recession on Asset Backed Securities and Consumer Spending

The financial crisis greatly impacted the Asset Backed Securities (ABS) market. The credit card securitization market accounts for nearly 20 to 50 percent of credit card accounts for major issuers. It also enables issuers to charge lower interest rates or no annual fees as the bank is only the servicer of the loans. As the ABS market weakens, we expect it to significantly impact the service fees that banks collect.

The recession has impacted consumer spending, which in turn has reduced fee income. As the economy recovers and consumption increases we expect fees to gradually increase over time.

Reduction in Penalty Fees and Removal of Inactivity Fees to Reduce Earnings

As part of the CARD act banks will no longer be able to charge inactivity fees for users who have not used their cards. In addition credit card issuers will be prohibited from charging penalty fees that are higher than the amount associated with the violation. Late / over-limit fees are expected to go down about 35% as well.

Our complete analysis for Bank of America's stock is here .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: BAC , C , CARD , JPM , WFC

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