Moody's Raises Credit Card ABS Outlook to Stable as Charge-offs Decline

by: Research Recap

Charge-offs on U.S. credit cards fell 11 basis points in October, finishing the month at 8.79%, according to Moody’s Investors Service Credit Card Indices Report. The charge-off rate is now more than 12% below its year-ago level, which was 10.04%.

The continuing improvement in charge-offs follows the trend in the delinquency rate, which fell another 14 basis points in October to 4.51%, marking the twelfth consecutive month of lower delinquencies. The delinquency rate has dropped over 1.7 percentage points over the past 12 months and is now just shy of 30% below the all-time peak level set in March 2009.

In a related development, Moody’s is revising its outlook on the U.S. credit card ABS sector to stable from negative as the sector recovers from historically poor collateral performance amid a changing and uncertain regulatory environment.

“As the economy emerges from recession, important economic drivers of credit card performance, in particular, unemployment, have stabilized, according to Moody’s Vice President Matias Langer. “In addition, the credit quality of securitized portfolios of credit cards appears to be strengthening as evidenced by meaningful improvements in charge-offs and delinquency rates.”

These positive elements must be tempered by the still material (i.e., one-in-four) risk of a double-dip recession, which would lead to deteriorating performance, and persistent regulatory uncertainty, which could lead to the potential loss of systemic support for some of the main card issuers.

The charge-off rate measures those credit card account balances written off as uncollectible as an annualized percentage of total outstanding principal balance.

The early-stage delinquency rate, the rate on loans 30-59 days past due, was 1.19% in October. It is now at its lowest monthly level since June 2007. The delinquency rate measures the proportion of account balances for which a monthly payment is more than 30 days late as a percent of total outstanding principal balance.

The payment rate index, which measures the average amount of principal that cardholders repay each month, as a percentage of total outstanding principal balance, slid lower during October to 19.25% from 19.57% in September.

Moody’s says the still relatively high rate indicates that credit card trusts have increased their proportions of higher-credit quality obligors, who are not only less prone to be delinquent on monthly payments, but also more likely to be “convenience users” of their credit cards, who pay their balances in full each month.

The monthly yield index slipped below 22% in October, to 21.66%, the second consecutive month of decline. Expiration of some issuers’ principal discounting initiatives partially explain the decrease. Yield is the annualized percentage of income, primarily finance charges and fees, collected during the month as a percent of total loans.

For more see Moody’s Credit Card Statement (Newsletter) (fee)