Fitch: Smoother Sailing for U.S. Prime Credit Card ABS

NEW YORK--(BUSINESS WIRE)--Losses and delinquencies for U.S. prime credit card ABS chargeoffs continue to ride a wave of positive momentum as 2010 draws to a close, according to the latest Credit Card Index results from Fitch Ratings.

“ongoing improvements in delinquency trends indicate card chargeoffs may recede further in the coming months”

U.S. credit card loss rates remain high on a historical basis. That said, "ongoing improvements in delinquency trends indicate card chargeoffs may recede further in the coming months," said Managing Director Michael Dean. "We are starting to see positive divergence of loss rates from employment numbers, which indicates that credit card portfolio quality will improve further even as unemployment stays elevated."

"Credit card performance improvements have prevailed over typical seasonal trends," said Senior Director Cynthia Ullrich. "Chargeoffs and 30-day delinquencies have been in steady decline for the last several months at a time when they usually increase."

Fitch's Prime Credit Card Chargeoff Index remained relatively stable for the month, ticking down two basis points (bps) to 9.20%. This represents the lowest point in 19 months. The results, which cover the October collection period, show a 9% year-over-year improvement in chargeoffs. However, chargeoffs are lingering in stubbornly high territory at 55% above the long term historic average of 5.93%.

This month, Citibank (South Dakota), N.A. revised its loss recognition policy to write off uncollected balances of deceased noteholders within 60 days of notification. Before the implementation, accounts were charged off only upon the exhaustion of all collection efforts. This policy change resulted in a one-time acceleration of losses, creating a spike of over 125 bps in the net credit loss rate for the October due period of the trust. Absent the change, Fitch's prime credit card chargeoff index would have improved by 29 bps to 8.93%.

Late stage delinquencies trended lower for the tenth consecutive month and reached a 25-month low. Fitch's 60+ day delinquency index decreased another seven bps to 3.43% in October. Early stage delinquencies also continued to decline, with 30+ day delinquencies falling 10 bps to 4.51%. When compared to the same period last year, late stage delinquencies sit 98 bps lower, representing a 22% decline.

Gross yield fell slightly for the second straight month during October, registering a 12-bp decrease to 21.80%. Despite the decline, yield remained 11% higher year over year, a result of discount options and repricing initiatives from different issuers. However, Fitch expects performance to decline by up to 10% in the coming months as a result of regulatory and legislative changes.

Despite the small improvement of chargeoffs, the decline of gross yield during the month drove excess spread lower in October. Monthly excess spread decreased seven bps to 9.88% yet remained 32% higher during the same period in 2009. The three-month average excess spread also slipped by three bps during the month to 9.78% but still recorded the second highest level historically. Compared to last year, three month excess is 56% higher.

Monthly payment rate (MPR) fell again for the second straight month after registering a 31 month high back in September. MPR receded 42 bps in October to 19.23%. At the current level, MPR still represented a 4% increase compared to the same period last year and is more than 19% higher compared to the long term historic average of 16.15%.

Fitch's Prime Credit Card index was established in 1991 and tracks more than $190 billion of prime credit card ABS backed by approximately $279 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.

Retail credit card ABS painted a somewhat different picture for the October collection period highlighted by negative across-the-board trends, with the exception of delinquencies. Contrary to the prior month, both early and late stage delinquencies decreased. Delinquencies of 60 days or more for the month improved 13 bps to 4.56%, while delinquencies of 30 days or more fared better by 20 bps to 6.61%. Meanwhile, defaults surged after an improvement in October, worsening by 124 bps to 12.78%. Normalizing for Citibank policy changes, the defaults would have been 11.91%.

Gross yield fell for the second straight month, slipping 117 bps to 24.80% while MPR performance also deteriorated 91 bps to 13.47%. Accordingly, with a deflated gross yield and increased chargeoffs for the month, excess spread declined after three consecutive months of improvement. Excess spread on a three month average basis dropped 35 bps to 8.76%. However this level is still approximately 11% higher compared to the same period last year.

Fitch's Retail Credit Card index tracks more than $41 billion of retail or private label credit card ABS backed by approximately $52 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.

ABS ratings on senior tranches of both prime and retail credit card trusts 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.

Additional information is available at 'www.fitchratings.com'.

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