Location: New York
Author: Michael Dean
Date: Thursday, February 5, 2009
Late payments on U.S. credit cards topped record levels and defaults rose sharply to just below all time highs last month as consumers struggled further amid the deteriorating economic environment, according to the latest Credit Card Index results from Fitch Ratings.
As anticipated, the negative chargeoff results were offset by lower funding costs helping to maintain excess spread cushions for credit card ABS. In addition, monthly payment rates snapped back from the prior month's four-year lows although they continue to exhibit slowing trends on year-earlier comparisons.
Consistent with previous indications, Fitch expects credit card ABS performance to worsen further given recent delinquency and bankruptcy trends and the rise in unemployment levels. Nevertheless, negative rating actions are expected to be limited in the near term.
'U.S. consumers continue to struggle in the face of mounting pressures on multiple fronts from employment to housing to net worth,' said Managing Director Michael Dean. 'While we expect these issues to further impact credit card ABS performance going forward, available credit enhancement and structural features help reduce the risk of widespread downgrades.'
Fitch anticipates chargeoffs will breach 8% in the coming months and approach 9% during second half-2009. Deterministic stress testing on Fitch rated trusts indicate existing ratings can withstand such scenarios with potential negative rating actions limited to subordinate classes. Additional information is available in Fitch's Dec. 15, 2008 report 'U.S. Credit Card 'What If?' Stress Scenario', available at www.fitchratings.com.
Prime general purpose card results for the December collection period show Fitch's Chargeoff Index rising 66 basis points (bps) to 7.50%, the highest level since the bankruptcy reform spike in late 2005 when chargeoff rates reached 7.53%. Current levels are now 40% higher than year earlier results.
Late stage delinquencies continued to rise as well with the Fitch's 60+ day Index rising 47 bps to a record 3.75%. The previous high was 3.73% in February 1997. Although late stage delinquencies were elevated throughout 2008, they escalated rapidly in fourth quarter-2008 by 18% to current levels.
In other prime card performance measures, monthly payment rates partially rebounded from a substantial drop in November, rising 131 bps to 17.27%. This is indicative of some seasonal correction, as the index typically exhibits a slow payment rate in November. However, MPRs are still 174 basis points lower than one year ago. Excess spread levels increased by 12bps as they continue to benefit from falling LIBOR rates; the base rate, a measure of trust expenses including debt servicing costs fell 36 bps month over month and 311 bps lower than last year. Meanwhile, portfolio yields normalized to 17.21% after last month's drop caused by day count issues in November. Although yield is 245bps lower than last year, this is attributable to the drop in prime rate, which is down by over 300bps year over year.
Retail Card chargeoffs were flat to month earlier and retail card delinquencies rose further. At 10.51%, Fitch's Retail Card Chargeoff Index remains 44% above year earlier levels. Despite climbing 12 bps to 5.20%, the rate of increase in Fitch's Retail Card Delinquency Index slowed for the second straight month. Retail card excess spread (three-month average) dropped to 8.49% from 9.34% largely due to a decline in portfolio yields. MPRs remain low but seasonal trends show an average increase in the January collection period of 80-120 bps in prior years.
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