Slowing Chargeoffs and Delinquencies a Glimmer of Hope for US Credit Card ABS

Recent indicators are providing a glimmer of hope that U.S. credit card ABS chargeoffs may soon plateau, according to Fitch Ratings.

While prime chargeoffs set another record high this month, the rate of increase has slowed significantly from earlier this year as delinquencies continued to stabilize over recent periods, according to the latest Fitch Prime Credit Card Index results covering the June collection period. The results, while partly driven by seasonal factors, point to chargeoffs leveling in the coming months.

'We typically observe a dip in chargeoffs during the third quarter following seasonal declines in delinquencies during the second quarter,' said Managing Director Michael Dean. 'The most encouraging trends at this stage are the deceleration in chargeoff increases combined with stabilization in delinquency rates.'

Chargeoffs rose 35 basis points (bps) in the most recent period pushing Fitch's Prime Chargeoff Index to 10.79% and 64% higher than year-earlier measures. Despite the elevated chargeoff levels, Fitch expects current ratings of senior tranches to remain stable given available credit enhancement and structural protections afforded investors. The outlook for subordinate tranches, however, remains negative.

After increasing rapidly for more than a year, credit card delinquencies have leveled off over the last five months, with this month's rate declining 14 bps to 4.31%. Year over year, however, delinquencies still are almost 40% higher.

'Delinquencies remain elevated and continue to hover near record high levels,' said Senior Director Cynthia Ullrich. 'We do not anticipate chargeoffs to recede meaningfully until we see some improvement in unemployment, delinquency and bankruptcy trends.'

Pricing initiatives and discount options continue to generate incremental yield, as evidenced by a 36 bp rise in this month's yield to 17.95%, representing the highest level in 15 months. Since the increase in yield completely offset the increase in chargeoffs this month, one-month excess spread improved slightly although the three-month average excess spread remains compressed at 4.35%. Excess spread measures the profitability of credit transactions and is the amount left over after chargeoffs, bond coupon, and servicing expenses are subtracted from yield.