Fitch: US Subprime Credit Card Levels Not Pressuring ABS Yet
NEW YORK--(BUSINESS WIRE)--The recent increase in subprime credit card originations is unlikely to have a negative impact on credit card ABS as the sector's metrics are historically strong and other originations are not directly mirrored in ABS pools, Fitch Ratings says.
According to The Wall Street Journal, Equifax reported subprime's share of credit card originations grew to 39%, year over year, in the first quarter. It hit a low in 2010 of just over 20%. The number of credit card offers mailed in the US in the first quarter rose 7% to 992 million, according to Mintel Group.
Fitch data indicates that the increases of subprime originations are likely concentrated with private label issuers including Citigroup, Synchrony and Capital One as those companies typically have a greater proportion of subprime accounts. Fitch data first indicated domestic banks began loosening credit card underwriting standards in the third quarter of 2010.
In our view, overall ABS metrics will likely weaken if the mix of subprime loans (i.e. loans with FICO scores lower than 660) in ABS pools begins to gradually increase. However, that weakening is unlikely to have a negative impact on bondholders. Of the ABS transactions that Fitch currently rates, most have a proven track record and include a large mix of loans with FICO scores above 720. And, the credit environment remains benign, supported by some job growth and low interest rates.
We do not expect the growth in subprime card originations to result in a commensurate decline in the performance of Fitch-rated ABS credit card trusts. The mix of subprime loans in ABS deals that Fitch rates has actually declined in recent years. Between 2011 and 2013, the average subprime portion fell from 19% to 16%. The percentage of subprime originations during that period was also flat and related spending limits grew.
Fitch believes the drivers behind lower concentrations of subprime accounts in Fitch-rated trusts can be attributed to a reduction of lower credit quality accounts through chargeoffs and new regulations that have reduced the profitability of these accounts, resulting in downward pressure on subprime originations. We expect credit card ABS delinquencies and chargeoffs to remain at or near current levels over the near term. Over the longer term, we expect some normalization in credit performance as underwriting standards continue to loosen.
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