U.S. Credit Card Chargeoffs

NEW YORK — U.S. consumer credit quality showed signs of life as credit card ABS chargeoffs declined last month, snapping a string of five consecutive record highs, according to the latest Credit Card Index results from Fitch Ratings.

The improvement comes as delinquencies stabilized further and other credit card ABS performance variables exhibited similar positive results. Despite the one-month improvement, most credit card ABS trusts remain pressured from a chargeoff perspective.

‘We still need to see some measurable improvement in the delinquency and personal bankruptcy figures and the employment situation overall before chargeoffs revert to more historical norms,’ said Managing Director Michael Dean. ‘For now, we expect chargeoffs to moderate at these elevated levels in the coming months.’

Chargeoffs had risen 45% from February through July and they still remain 63% above year earlier levels. Late stage delinquencies, or receivables more than 60 days past due, have held relatively stable albeit near record highs during the same period following a rapid increase over the prior six months that forewarned the chargeoff run-up.

Fitch’s Prime Credit Card Chargeoff Index declined 24 basis points (bps) to 10.55% for the July collection period. Despite the elevated level, Fitch expects current ratings of senior tranches to remain stable given available credit enhancement and structural protections afforded investors. The Outlook for subordinate tranches remains negative.

After increasing rapidly for more than a year, Fitch’s Delinquency Index leveled off over the last six months, with this month’s rate declining a slight five bps to 4.26%. Year over year delinquencies are 40% higher.

Though the Fitch Chargeoff Index usually increases in the fourth quarter each year, it seems less likely this year as delinquencies have exhibited stability for six months now. ‘The economic situation may have caused some front loading of losses this year,’ said Senior Director Cynthia Ullrich.

Monthly payment rates show signs of strengthening as well. While still almost 5% below year over year levels, Fitch’s MPR Index improved last month by 109 bps. Seasonal effects on MPR are typically mild in August, so this may be the beginning of a positive trend.

Portfolio yields and excess spread both increased, resulting from both significant repricing activity and increased discount option collections. Several trusts implemented a discount option earlier this year and it is now being applied to a greater percentage of receivables. Yield is up 140 bps month over month and monthly excess spread is up 143 bps. While three month average excess spread increased to 4.88%, several credit card trusts continue to trap excess spread for the benefit of noteholders.

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