'At this point, any sign of a pullback from the rate of acceleration in delinquencies is welcome news,' said Managing Director Michael Dean. 'Whether it develops into a trend remains to be seen and since it will take time to work through, we expect continued increases in chargeoffs over the next few months.'
Despite the anticipated worsening performance, the current ratings of senior tranches are expected to remain stable given available credit enhancement and structural protections afforded investors. The outlook for subordinate tranches, however, has become increasingly negative, particularly given excess spread, chargeoffs and personal bankruptcy filing trends.
Despite declining for the first time in five months, delinquencies remain elevated near record levels and nearly 40% above year earlier rates. For the month, Fitch's delinquency index, which measures receivables more than 60 days past due declined 7 basis points (bps) to 4.37%.
The delinquency results come as chargeoffs set new record highs and excess spread contracted further. Fitch's Prime Credit Card Chargeoff Index climbed 77 bps to reach 9.66%, the third consecutive record result. The index is now 51% above year earlier levels.
Three month average excess spread meanwhile narrowed to 5.30%. Excluding the effect of the bankruptcy spike in 2005, excess spread levels have not been this low since early 2001. The compression in excess spread is being driven by both a decline in gross yield and an increase in chargeoffs. Funding costs, largely determined by one month U.S. dollar LIBOR rates, have remained low. Fitch expects further compression in the three month average excess spread, as the one month measurement declined to 4.39%.
Over the last 24 months, prime rate has dropped 500 bps to 3.25%, while gross yield has declined by only 122 bps. This resiliency is partially attributable to the significance of fee income relative to interest income in recent years, however, it also reflects the effectiveness of the pricing actions that many card issuers have taken in advance of regulatory and legislative changes. The incremental yield generation, while robust, is not substantial enough to completely offset the increase in chargeoffs, which have more than doubled during the same two year period, surging 503 bps, from 4.63% to 9.66%.
Fitch expects chargeoffs to exceed 10% over the next few months, and to remain elevated through the first quarter of 2010, when unemployment is expected to peak. However, 'the recent improvement in the delinquency rate could foreshadow a peak in chargeoffs later this year instead', said Senior Director Cynthia Ullrich. A further rise in bankruptcy filings could compromise this outcome, as weekly levels are approaching volumes not seen since early 2005.
Monthly payments rates have exhibited some fairly typical seasonal volatility early this year, but are now hovering around 17%. Though not as strong as the 20% payment rates frequently observed over the last few years when consumers were spending liberally and could bail themselves out by tapping home equity, payment rates are still in excess of the 16% average since the inception of the index in 1991.
