US Credit Card Defaults Remain High Despite Improvement

Performance of U.S. credit card ABS improved slightly in February as chargeoffs dipped and delinquencies continued to improve, according to the latest Credit Card Index results from Fitch Ratings. However, the sector will continue to feel substantial performance pressure, according to Managing Director Michael Dean.

'U.S. consumer credit quality remains under considerable pressure, although the pace of deterioration has moderated in recent months,' said Dean. 'Continued labor market strain means defaults and delinquencies will remain elevated for the coming months.'

The results cover the February collection period. Prime credit card chargeoffs dipped 10 basis points (bps) to 11.27% after reaching a six-month high last month. Despite the decline, the chargeoff index remains 34% above year earlier levels. Recent chargeoff results have seen increased volatility as a result of policy modifications such as payment holidays and other programs. This month, Citibank's 150 bp chargeoff increase offset an expected improvement following a normalization of Chase's results, which declined 196bps.

Measured by Fitch's 60+ day delinquency index, late payments fell another six bps to 4.44%. Early stage late payments followed suit for the month as well, with 30+ day delinquencies also decreasing for the second month by six bps. to 5.66%.

'Despite improvement over the last two months, 60+ day delinquencies remain above last year's average levels and have hovered within the 4-4.50% range for over a year,' said Director Herman Poon. 'We'll need to see some more measurable reductions before chargeoffs start to recede.'

With this improvement however, current levels remain at around 2.50% higher versus March 2009 results and could provide an early insight to a possible recovery for chargeoffs in the later months.

Fitch expects ratings on credit card ABS to remain stable given available credit enhancement, loss coverage multiples, and structural protections afforded investors. The Outlook for subordinate tranches remains Negative.

Gross yield outperformed another record high of 21.75% in March, surpassing the previous nine year high of 21.15% in January. The results of discount options and repricing initiatives from different issuers continued to boost yield performance, which was up 28% compared to the same period last year.

Following the spike in the chargeoff rate last month and the corresponding drop in excess spread, this measure significantly improved but normalized in March of more than 150 bps to 7.82%. This enabled excess spread on a three-month average basis to remain robust and experienced a 24 bps increase to 7.49%, maintaining a healthy the average above 7% for the third consecutive month and is 30% higher than one year ago.

Monthly payment rate (MPR) had a decrease of 55 bps. this month to 18.79%, but represents a 19% increase compared to the same period last year. Consistent with seasonal patterns, MPR usually experiences a drop in March due to the fewer number of collection days during the February collection period. However, the rate of decline this year was much lower, by only 2.84% month over month.

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