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January 31, 2010

Falling delinquencies bring optimism

With the US now out of recession, the nations biggest credit card lenders are reporting that delinquency rates are starting to contract after hitting record highs in recent months The US credit quality picture remains muddled, with delinquencies improving slightly while other indicators remain mixed

By Verdict Staff

With the US now out of recession, the nation’s biggest credit card lenders are reporting that delinquency rates are starting to contract after hitting record highs in recent months. But as Charles Davis reports, there are still some troubling signs that issuers need to pay heed to before they consider themselves over the worst.


The US credit quality picture remains muddled, with delinquencies improving slightly while other indicators remain mixed. Major credit card issuers’ delinquency rates declined in December, supporting the cautious belief that loan losses are near their peak, and charge-off rates declined at most lenders, with the notable exceptions of Bank of America and Capital One.

But other national players reported significant improvement. JPMorgan Chase reported the biggest month-over-month drop in loan losses of all national issuers, as its charge-off rate tumbled 170 basis points to 7.11 percent. Early-stage delinquencies – loans 30 to 59 days past due – declined 10 basis points to 1.13 percent of its portfolio. Total delinquencies inched up 4 basis points to 4.94 percent.

American Express (Amex) reported that charge-offs in its US credit card business dropped for an eighth straight month, falling 50 basis points to 7.1 percent of managed receivables. Amex’s delinquency rate fell for the second month in a row to 3.7 percent, from 3.9 percent in November.

After three months of declines, Bank of America’s charge-off rate climbed 53 basis points to 13.53 percent. Losses on Capital One’s US cards portfolio increased 54 basis points to 10.14 percent.

Discover Financial Services said charge-offs in December totalled 8.68 percent of credit card loans that have been packaged into bonds, down from 8.98 percent in November. The 30-day delinquency rate fell to 5.49 percent from 5.65 percent in November.

Industry-wide, the November 2009 60-days-past-due rate of 4.62 percent is almost a full percent higher than the November 2008 rate of 3.76 percent. However, the rate still remains below the peak of 4.79 percent in May 2009.

Card issuers still wary of lending

Bankcard issuers continued a year-long trend of closing accounts and reducing credit lines. Card risk management programmes have accelerated since July of 2008, reducing card credit lines by $803 billion and the number of accounts by 93 million, according to credit ratings agency Equifax’s Credit Trend Report.

The number of bankcard accounts opened in September – 2.4 million – was 45 percent lower than September 2008. Year-to-date, the number of new accounts is down 46 percent from the same period in 2008. Also, lenders are being more selective about who they give credit to as the percentage of cards issued to those with credit scores greater than 740 grew from about 30 percent in 2007 to almost 51 percent so far this year.

“The story of 2009 continues to be one of consumer retrenchment and credit tightness as people strive to pay down debt and lenders more aggressively manage risk in their portfolios,” said Dann Adams, president of Equifax’s US Consumer Information Solutions unit.

US consumers reduced their debt by more than five percent, or $575 billion, from a year ago. First mortgage debt dropped 5.4 percent; credit cards by 7.3 percent and auto loans by 9.5 percent. The declines put overall consumer debt at September 2007, pre-recession levels of about $11 trillion, Equifax said.

Late payments cause concern

Another troubling sign can be found in late payments on outstanding US card balances, which rose again in December, falling just shy of record highs, Fitch Ratings said. Fitch’s report shows late payments rising to their highest levels in five months and indicates higher charge-offs in the months to come.

“Credit card delinquencies are on the rise again and cardholder defaults will retest recent highs as we head into the new year,” said Michael Dean, managing director of Fitch Ratings. “Consumer credit quality remains under significant strain as a result of the persistent weakness in the labour markets.”

Measured by Fitch’s 60-day-plus delinquency index, late payments rose 19 basis points to 4.41 percent in December following a similar increase in November. Early-stage late payments increased for the month as well, with delinquencies of 30 days or more rising 21 basis points. Late-stage delinquencies are now 31 percent higher than year-earlier levels and just below the record high of 4.45 percent set this past June.

During the month, Fitch’s Credit Card Charge-off Index declined 66 basis points to 10.09 percent, marking the third consecutive improvement. Despite the improvement, charge-offs remains 55 percent above year-earlier levels.

Store card defaults at near-record levels

Meanwhile, Fitch said that US consumers defaulted on store-branded credit cards at near-record levels during the holiday shopping season, with 2010 likely to bring more of the same.

Fitch’s Retail Credit Card Index shows that more than one in every eight dollars of receivables was written off as uncollectable during the November collection period on an annualised basis. Taken with the recent delinquency trends and Fitch’s expectation for unemployment, the ratings agency expects retail card charge-offs to remain elevated throughout the first half of 2010.

“We do not foresee any meaningful improvement in the retail card credit quality in the coming months,” said managing director Michael Dean. “US consumers remain under stress on a number of fronts, most notably on the employment front, and retail card charge-offs will continue to reflect those pressures.”

High unemployment and ongoing household deleveraging will continue to limit demand for consumer credit in 2010. Consumer confidence as measured by the Conference Board remains historically low despite rising in the most recent period and unemployment is expected to remain elevated, averaging 10.2 percent in 2010.

“Households will remain cautious with their spending and further curtail their use of retail cards in 2010,” Dean said.

Ominous signs remain, however, in the broader economy. Home mortgages at least 30 days late reached another record of 7.91 percent in November, up from 7.76 percent in October and 7.65 percent the previous month.

Home equity lines of credit available to consumers are now an estimated $68 billion lower and the number of accounts is an estimated 855,000 lower than the September 2008 peak of approximately 14.5 million accounts. On every front, US credit is tightening. It remains to be seen whether that contraction will translate into overall quality.

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