Fitch Fundamentals Index: Credit Card Delinquencies Hit Bottom, Improved Earnings to be Short-Lived

NEW YORK--()--Link to Fitch Ratings' Report: Fitch Fundamentals Index 1Q14

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746196

The Fitch Fundamentals Index (FFI) remained stable at +2 for 1Q'14 on trends including a bottoming out of consumer credit delinquencies, a decline in the CDS outlook, and an increase in corporate earnings and banking scores that are unlikely to be sustained in the longer-term.

"Year-over-year the prime credit card performance score moved to neutral from positive, signaling that delinquencies may have hit historical lows. With the delinquency rate at half the 2005 rate, there is little room for future improvement," said Jeremy Carter, Fitch Ratings Managing Director. "Credit card ABS collateral performance should start receding in the latter half of 2014 as originators begin loosening lending standards and less-seasoned, lower-quality accounts are added to securitizations."

Added Carter: "While the quarter-over-quarter corporate EBITDA score improved, sustained gains seem unlikely. Five years after the start of the economic recovery, many U.S. companies have hit their cyclical peaks in revenue and EBITDA growth rates. A pick-up in U.S. GDP growth, steady employment gains, and further house price increases will be critical in offsetting earnings growth pressure."

Quarter-over-quarter, positive FFI component scores outweigh negative by four to one, with five at neutral.

Consumer Credit Weakening Likely After Delinquencies Reach Trough

The FFI credit card performance component score remained at +5, while year-over-year scores fell from +5 to 0, indicating a market bottom. This exceptional credit card ABS collateral performance should start to recede later this year as banks are easing underwriting standards, which will bring lower quality accounts into the mix.

Performance gains over the last two years have been due to the dominance of creditworthy accounts post-crisis because of high charge offs, in addition to the stricter origination standards. From 2008 to 2010 charge offs soared, eliminating 20 percent of outstanding receivables.

Auto loan delinquencies are starting to rise due to loosening underwriting standards and moderating used car values. February's prime annualized net loss rate of 0.49 percent was the highest in two years, and a 23 percent increase year-over-year. The subprime annualized net loss rose 7.5 percent month-over-month to 6.91 in February, 25 percent higher than a year earlier.

Corporate EBITDA Improves, But Sustained Gains Unlikely

The FFI corporate EBITDA performance component score rose to 0 from -5 quarter-over-quarter, while year-over-year it held at -5.

While earnings growth has stabilized in some industries, a sustained improvement in EBITDA score is not expected as Fitch expects marginal revenue and earnings growth over the coming year. Although the expansion in U.S. GDP growth is expected to accelerate in 2014 and 2015, weak consumer demand and uneven economic growth remain impediments to stronger corporate revenues.

Absent strong revenue growth in domestic and international markets, EBITDA margin expansion will depend heavily on further cost reduction. But diminishing contributions from restructuring initiatives at this point in the cycle will likely limit room for further cost-cutting and bottom-line growth.

Tightening CDS Spreads Highlight Investor Risk Appetite

Driven by a slight decline in the pace of tightening risk spreads in early 2014, the FFI CDS outlook component score fell to 0 from +5, with the year-over-year score staying in positive territory at +5.

Risk appetite remains strong despite Fed tapering, with the Fitch Solutions CDS index tightening for seven consecutive quarters. High investor demand, notably in high-yield, leveraged loans, and less creditor-friendly structures, has also fueled heavy debt issuance. High-yield and leveraged loan defaults remain low.

Investment-grade investors continue to regard share repurchases, increased dividends and M&A as significant uses of corporate cash, with 83 percent of investors in Fitch's Fixed Income Forum Survey expecting increased leverage over the next year. However, sentiment remains broadly positive and most investors continue to project further declines in default rates, suggesting no material reduction in risk appetite.

Fitch Fundamentals Index

The Fitch Fundamentals Index (FFI) tracks changes in credit fundamentals across key sectors of the U.S. economy. Analyzing the relative strength or weakness of the index or its sub components can provide insight into how conducive conditions in the U.S. are towards economic growth.

The trend in potential drivers or constraints on economic growth or decline is indicated by the relative strength or weakness of the FFI, ranging from +10 to -10. The FFI's components include mortgage and credit card performance, corporate defaults, high-yield recoveries, ratings outlooks, EBITDA and CapEx forecasts, banks, the CDS outlook, and transportation trend. Released quarterly, the FFI relies primarily on proprietary Fitch-sourced data.

To learn more about the FFI, please visit 'www.thewhyforum.com/ffi'.

Fitch Ratings

Fitch Ratings is a leading provider of credit ratings, commentary and research. Dedicated to providing value beyond the rating through independent and prospective credit opinions, Fitch Ratings offers global perspectives shaped by strong local market knowledge and deep credit market experience. The additional context, perspective and insights we provide help investors to make important credit judgments with confidence. For more information, visit 'www.fitchratings.com'.

Fitch Group is a global leader in financial information services with operations in more than 30 countries. In addition to Fitch Ratings, the group includes Fitch Solutions, an industry-leading provider of credit risk products and services, and Fitch Learning, a preeminent training and professional development firm. Fitch Group is jointly owned by Paris-based Fimalac, S.A. and New York-based Hearst Corporation.

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Contacts

Fitch Ratings
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com