Credit Card Losses Will Be Meaningfully Higher in Q2

Includes: AXP, BAC, C, COF, MA, NCC, V
by: Research Recap

Fitch Ratings believes end-of-quarter delinquency levels, combined with low recovery prospects, signal material deterioration in US credit card losses in the second quarter.

In a special report Credit Cards: Asset Quality Review 1Q09, Fitch discusses current asset quality trends in the credit card market and provides updated growth, asset quality, purchase volume, and profitability statistics for some of the largest credit card issuers.

Recent revisions to unemployment expectations, following the unexpected pace of deterioration in the first quarter, indicate that significant pressure on card credit metrics will remain over the balance of 2009 and into 2010 - Meghan Crowe, Senior Director at Fitch.

Furthermore, net charge-off levels will be hurt by industry portfolio contraction, which will make trends in absolute dollar losses more useful in coming quarters.

Higher portfolio losses combined with lower spend volume and smaller loan portfolios are expected to challenge card segment profitability in 2009 and 2010. Purchase volume dropped an average of 5% sequentially at the top six card issuers in the fourth quarter of 2008, and fell another 14.2% in the first quarter of 2009. These spending trends are expected to continue over the balance of the year. Fitch expects issuers with less dependence on interest spread income, like American Express Company (NYSE: AXP), will fare relatively better from an earnings standpoint.

[ Standard & Poor's downgraded American Express's credit rating to BBB+/A-2 with a negative outlook on April 30.]

“Portfolio contraction is expected to reduce funding needs across the credit card industry in 2009. The Federal Reserve Board launched its Term Asset-Backed Securities Loan Facility (TALF) on March 3, 2009 in the hopes of expanding credit availability. On March 26, 2009, Citibank (NYSE: C) became the first credit card issuer to issue notes eligible for the TALF program, but other large credit card issuers have been noticeably absent from the program, as historically low interest rates continue to make deposits a more attractive funding source. Fitch believes the regulatory capital implications of the SFAS 140 amendment, which will require all off-balance sheet assets to be recorded on balance sheet, may make ABS issuance less attractive for some card issuers going forward.”