Fitch: No Relapse for U.S. Credit Card ABS; Defaults Rebound

NEW YORK--(BUSINESS WIRE)--While U.S. consumer credit quality remains under pressure, U.S. credit card ABS performance improved across the board last month, according to the latest Credit Card Index results from Fitch Ratings.

“Excess spread is at new record highs, demonstrating very prudent management by issuers of their trusts and portfolios amid the turbulent economy”

Overall economic and employment declines are slowing, which is buoying credit card ABS performance. Other positive factors influencing the default and delinquency results include risk management initiatives undertaken by issuers and normal seasonal trends. "While the improvements are a welcome sign, we still have a ways to go before we are out of the woods," said Managing Director Michael Dean. "Consumers are still being stretched considerably and employment will remain under pressure for an extended period."

Senior credit card ABS are expected to remain stable given available credit enhancement, loss coverage multiples, and structural protections afforded investors. The outlook for subordinate tranches remains moderately more negative.

Fitch's prime credit card chargeoff index improved year-over-year for the first time in more than three years (since January 2007), and their first month-over-month improvement in three months. June chargeoffs decreased more than half a percentage point to 10.57%, 56 basis points (bps) lower than the prior month. Contributing to June's lower chargeoff level were the decreases of defaults within the larger trusts, which included Bank of America, Chase, Capital One and Discover.

Late stage delinquencies improved for the sixth consecutive month and dipped below the 4% threshold for the first time in 18 months, which may be a precursor to continued chargeoff improvement in the coming months. Fitch's 60+ day delinquency index decreased by 15 basis points (bps) to 3.86% during the June collection period while early stage delinquencies also continued to trend lower, with 30+ day delinquencies decreasing for the fourth consecutive month by 14 bps to 5.13%. All but one of the credit card issuers that make up Fitch's index, with the exception of Washington Mutual Master Note Trust, reported lower delinquency rates for the month.

"Excess spread is at new record highs, demonstrating very prudent management by issuers of their trusts and portfolios amid the turbulent economy," said Senior Director Cynthia Ullrich.

Barely topping the highest level historically, performance of gross yield improved again for the month of June. Gross yield reported at 22.67%, a 47 bp improvement and only 17 bps shy of its highest level ever. The results of discount option and repricing initiatives from different issuers continue to boost yield performance, which was up 26% compared to the same period last year. However, Fitch expects gross yield to decline by up to 10% in the coming months due to regulatory and legislative changes.

Excess spread results followed suit as the monthly improvement in gross yield continued. Monthly excess spread increased another 69 bps to 9.28%, which marked the highest one month excess spread level historically. With this, the three-month average increased eight bps to another high of 8.65%. Excess spread performance has improved for the fifth straight month and is 99% higher than the same period last year.

Monthly payment rate (MPR) performance improved again this month as well, breaking a 29 month high and reported a 59-bp increase to 19.61%. The level represented a 14% increase compared to the same period last year. Improving confidence in the U.S. consumer continues to lead to a faster payment rate.

Fitch's Prime Credit Card index was established in 1991 and tracks more than $224 billion of prime credit card ABS backed by approximately $301 billion of principal receivables. The index is primarily comprised of general purpose portfolios originated by institutions such as Bank of America, Citibank, Chase, Capital One, Discover, HSBC, etc.

Across-the-board improvements also showed up in retail credit card ABS, with delinquencies and chargeoffs maintaining its course. Late payments fell for the fifth consecutive month while defaults fared better for the second straight month. Late stage delinquencies for June improved another 12 bps to 4.68%, registering a 12-month low and below the same period last year. Chargeoffs decreased by another 28 bps to 12.94%, and now only remain approximately 2% above year ago levels. Early stage delinquencies rebounded from last month and improved by 16 bps to 6.71%.

Gross yield slipped 60 bps after a temporary reprieve the previous month to 25.48%. On the other hand, MPR performance rebounded after a one month dip, reporting an increase of 26 bps to 14.22% and represents a 10% improvement year over year.

With shrinking gross yield this month, monthly excess spread was down 103 bps to 7.53%. Additionally, the three-month average excess spread also fell for the third straight month to 7.80%. The level, however, is approximately 3% higher compared to the same period last year.

Fitch's Retail Credit Card index tracks more than $40 billion of retail or private label credit card ABS backed by approximately $55 billion of principal receivables. The index is primarily comprised of private label portfolios originated and serviced by Citibank (South Dakota) N.A., GE Money Bank, HSBC Bank Nevada, N.A. and World Financial Network National Bank. More than 165 retailers are incorporated including Wal-Mart, Sears, Home Depot, Federated, Loews, J.C. Penney, Limited Brands, Best Buy, Lane Bryant and Dillard's, among others.

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