Credit Card Debt Performance Expected to Worsen

Credit card debt performance is expected to worsen in the second half of 2008, despite a slight dip in July’s charge-off rate from the prior month, according to Moody’s Investor Services’ mid-year review of the U.S. bank credit card sector.

Moody’s Credit Card Credit Indices track five key metrics of the $450 billion of U.S. bank credit card loans backing securities rated by Moody’s. Most remained negative, with first-half 2008 metrics down sharply compared with the first half of 2007.

For example, the charge-off rate rose at an annualized rate of 33.3 percent through July, compared with the first six months of 2007, and the delinquency rate rose 19.5 percent.

The payment rate index, which reflects cardholders’ ability and willingness to repay their credit card debt, continued to decline to 18.21 in July from 19.92 a year ago.

Moody’s noted that late-stage delinquencies rose more than early-stage delinquencies, meaning credit card borrowers are having a hard time recovering once they begin to fall behind in payments.

Further darkening the outlook for credit card charge-offs, Moody’s said, was the sharp jump in the August unemployment rate to 6.1 percent, the highest in five years, rising bankruptcy filings and proposals to restrict credit card companies from changing the terms of their agreements with consumers.

Several proposals from the Federal Reserve and federal lawmakers aim to restrict card companies’ ability to (among other things) re-price for risk, which, if enacted, could further challenge issuers’ ability to manage yield. The issuers’ ability to re-price is a valuable risk management tool, so should these proposals be put into practice, the implications for the card industry could be significant.

The U.S. credit crisis has made funding more difficult for some credit card issuers, a development that Moody’s said will become increasingly important in the coming months for its analysis and ratings in the sector.

Many banks are responding to poor credit conditions by tightening their credit standards, which Moody’s said could help ease, but not eliminate, future credit card charge-offs.

Comments

[Credit Card...:]

Good article covering the current state of credit quality in the credit card industry. However, the Moody's information was only updated through July of this year. Our research team has already taken a look at the August Master Trust data and as we concluded in our post (see below), the worst is yet to come....

(excerpt from www.creditcardindustry...)

The August Master Trust data continues to fuel concerns that the card industry has not yet reached the bottom of this credit crisis and given what we’re hearing, that bottom may not be coming soon. The mild plateau of loss rates that we observed in July was an obvious head fake given these results and the growing economic unrest as evidenced by 6.1% unemployment rate in August. All of this means that expectations for credit losses in the coming quarters should worsen. Net charge-off rates increased in the month of August for all six card issuers, namely American Express, JP Morgan Chase, Citigroup, Bank of America, Discover Financial Services, and Capital One Financial. The most significant month over month increase came from C “+94bps”, JPM “+60bps”and AXP “+51bps”.

C had the most significant gain and gives us reason to believe that it’s US portfolio is doing worse than even they anticipated. The C August trust statistics have launched them to the second highest rate amongst peers.

The off-balance sheet JPM portfolio is now at 5.5%, which shows that even JPM’s prudent underwriting policy is susceptible to the crisis. JPM did have some modestly positive news as they were the only issuer to have essentially flat 30+ day delinquency rates for the month of August.

AXP’s loss rate rose this month is at an unhealthy clip of “+51bps” while delinquency also climbed “+32bps” (the highest increase in delinquency amongst peers). The premium card issuer is providing little evidence that its customers are immune to market conditions. In fact, AXP’s current results coupled with its recent history of rapid loan growth are feeding expectations that their loss statistics could be the worst amongst the credit card peer set. COF had the smallest increase in loss rate at “+7bps”. The group is rounded out by DFS and BAC, who grew loss rates at “+34bps” and “+30bps”, respectively. BAC continues to demonstrate the worst performance in credit quality with trust data showing them experiencing a 7.62% loss rate.

Regards,
Dominic
Sr. Research Director

link to blog post. creditcardindustryrese.../

2008 Sep 22 04:48 PM