Fitch: U.S. Credit Card ABS Performance Holds Up Despite Higher Chargeoffs

Overall U.S. credit card ABS performance continues to exhibit resistance to both a weakened consumer and increasing chargeoff rates, as observed in the most recent credit card indices by Fitch Ratings.

"While year-over-year chargeoffs have climbed almost 200 basis points and are increasing at a brisk pace, delinquency rates and bankruptcy filings, the leading indicators for near-term future chargeoffs, show signs of deceleration," said Senior Director Cynthia Ullrich. In addition, excess spread remains healthy and is still approximately 50 basis points (bps) above its long term average. "The latest performance numbers support Fitch’s view that negative rating actions for prime credit card ABS should remain limited for the remainder of the year," said Managing Director Gary Santo.

The Fitch prime chargeoff index for July 6.4%, a level not seen since the middle of 2004, excluding the temporary spike associated with the Bankruptcy Reform Act of 2005. Unemployment rates exert a significant influence on credit card chargeoff rates, so there remains longer term risk for the sector associated with the health of general economy. However, the short term leading indicators for chargeoffs suggest they may be abating. Delinquencies in the prime card index have begun to plateau at around 3.1% and while bankruptcy filings continue to rise gradually, the volume of weekly filings remains about 40% below those seen before bankruptcy reform.

Yield, which is comprised of both interest revenue on revolving balances as well as non-interest revenue from fees and interchange, decreased on an absolute basis. July’s gross yield of 17.4% is 144 bps lower than the average for 2007. However, both the retail pricing benchmark (U.S. Prime Rate) and the funding benchmarks (LIBOR) have decreased by about 300 and 250 basis points respectively over the same period. On a relative basis, yield is actually higher, which is partially offsetting the effect of the growing chargeoff rates and helping to preserve the excess spread within the ABS transactions. In addition, MPR performance in the prime index has remained stable over the past 12 months. The most recent rate of 19.54% is only 50 bps lower than its calendar year 2007 average, as consumers continue to use their credit cards for convenience spending.

As a result of the combination of these three key metrics, despite the challenging consumer credit environment, three-month average excess spread remains healthy at 7.08%, an increase of almost 50 bps over its pre-bankruptcy reform average of approximately 6.5%. Excess spread represents the amount of extra cash flow generated by a portfolio of securitized credit card receivables and is viewed as a barometer for the health of these transactions.

All three Fitch credit card indexes, covering prime, subprime and retail trusts, can be accessed at www.fitchratings.com.