US Consumer Credit Quality has Improved Rapidly

Location: New York
Author: Sandro Scenga
Date: Wednesday, September 14, 2011

The results also show credit card chargeoffs ticking up for the first time in four months and excess spread reaching new heights in the latest period.

'U.S. consumer credit quality has improved rapidly since the beginning of the year and delinquency trends bode well for further gains,' said Managing Director Michael Dean. 'We're at a point now, however, where seasonal factors will likely temper the pace of further collateral improvements for credit card ABS.'

Registering its 19th straight month of decline, 60+ day delinquencies shed another 31 basis points (bps) to settle at 2.15%. The ongoing rapid improvement has pushed the delinquency index 52% below peak levels of 4.50%, reached just 18 months ago. Early stage delinquent balances, associated with borrowers who have missed at least one payment, also declined 32 bps to 3.02%.

After posting the second largest monthly decline since the Bankruptcy Reform Act went into effect in late 2005, credit card defaults tacked on eight bps from July to 6.41%, ending a positive four-month streak. The increase was driven by two of the larger trusts - Citibank and Bank of America -posting higher losses. Current chargeoff levels are 35% lower year over year and post crisis are now closely tracking the historical average of 6%.

Excess spread on a three-month average basis shattered a new record as it broke past the 11% mark for the first time ever. Performance increased 37 bps to a new high of 11.1% and is now almost doubled the levels experienced at the end of 2009. One month excess spread dipped from the previous month but also remained above the 11% mark.

After setting a historical high last month, monthly payment rate performance halted and decreased 62 bps to 21.14%. Despite the dip, current levels remain well above the index average of 16.3%. Gross yield for the month also dropped slightly, slipping right below the 20% mark at 19.99% for the first time in roughly 21 months. 'The historically high monthly payment rates are indicative of strong credit quality borrowers in the underlying credit card pools," said Director Herman Poon.

Fitch's Prime Credit Card index was established in 1991 and tracks more than $144 billion of prime credit card ABS backed by approximately $252 billion of principal receivables. The index is primarily comprised of general purpose portfolios originated by institutions such as Bank of America, Citibank, Chase, Capital One, Discover, etc.

On the retail front, chargeoffs improved for the third consecutive month, while breaking below the 9% mark for the first time in nearly three years. Chargeoffs declined 61 bps from the previous month to 8.84% and are 25% lower year over year. Similar to the prime index, 60+ day delinquencies hit its own six month streak as cardholders continue to make more on time payments. Late stage balances held steady and strengthened another three bps to 3.25%.

The three-month average excess spread also jumped 57 bps to 11.96% in July while recording the highest level in 4 1/2 years. Since the inception of the retail index, excess spread averaged close to 8%. Both gross yield and MPR dropped during the month. Yield declined slightly to 25.58% while payment rate decreased to 14.28%

Fitch's Retail Credit Card index tracks more than $33 billion of retail or private label credit card ABS backed by approximately $50 billion of principal receivables. The index is primarily comprised of private label portfolios originated and serviced by Citibank (South Dakota) N.A., GE Money Bank and World Financial Network National Bank. More than 165 retailers are incorporated including Wal-Mart, Sears, Home Depot, Federated, Loews, J.C. Penney, Limited Brands, Best Buy, Lane Bryant and Dillard's, among others.

ABS ratings on both prime and retail credit card trusts are expected to remain stable given available credit enhancement, loss coverage multiples, and structural protections afforded investors.

Additional information is available at 'www.fitchratings.com' .

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