US card issuers are coming under attack from all sides,
but it is the economy that is causing them the most pain. Rising US
unemployment levels are fuelling an increase in card delinquencies
and charge-off rates, but there are a few glimmers of hope on the
horizon, as Charles Davis reports.

A US cards industry desperate for some good news instead received
several more body blows in recent days, with steep losses from
swelling delinquencies fuelling record charge-off rates.

The sense of pessimism was underscored when the Federal Reserve
reported that consumer credit plunged in March at the fastest pace
in 18 years, falling by $11.1 billion – the largest dollar amount
on record dating to 1943.

Global credit ratings agency Moody’s Investors Service then
reported that its prime credit card charge-off rate index through
the end of March rose 50 basis points from the previous month, to a
record high 9.3 percent of outstanding receivables. The delinquency
rate index for credit card accounts more than 30 days late also set
a new record of 6.4 percent, its highest point since peaking at
6.28 percent in December 1990, Moody’s said.

Charge-offs set to peak in 2010

Moody’s also revised its prediction for where the average credit
card charge-off rate will peak, saying that it now expects
charge-offs to peak at 12 percent in the first half of 2010, a huge
jump from its original forecast of 10.5 percent. The revised
forecast also assumes unemployment peaking at about 10 percent
during that same period, it said.

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“With little indication of unemployment rates peaking until at
least sometime in 2010, a double-digit charge-off rate for the
industry is a practical certainty, and is likely to be reached by
the middle of this year,” said Moody’s in the report, adding that
the increase of 50 basis points in March’s charge-off index to a
record high 9.30 percent was matched only once in the history of
credit card issuance.

“Aside from the fourth quarter of 2005, when changes to bankruptcy
legislation induced a sharp rise in charge-offs, the pace of
increase in the first quarter of 2009 represents the greatest
quarterly increase in the charge-off rate index ever posted,”
Moody’s said.

“Not coincidentally, the unemployment rate is also rising sharply.
In such a difficult macroeconomic environment, it is our
expectation that no issuer will be immune from significant
increases in their trust charge-off rates throughout the remainder
of the year.”

As if another sign of financial stress were needed, Moody’s added
that the delinquency rate increased to an all-time high of 6.4
percent – this at a time when US consumers traditionally use their
tax refunds to decrease debt.

Instead, this year ushered in the largest increase in delinquencies
ever recorded from February to March, and was only the second year,
besides the bankruptcy law-created episode in 2005, when
delinquency rates did not experience a February-to-March

Signs of stabilisation

Adding insult to injury, Fitch delivered an equally depressing take
on matters, albeit with a sliver of hope – the ratings agency found
that US consumers fell past due and defaulted on their credit cards
at record rates again last month, although the pace of
deterioration showed signs of slowing.

According to the latest Credit Card Index results from Fitch
Ratings, charge-offs increased 48 basis points to 8.89 percent, the
second consecutive record high. Charge-offs have risen 18 percent
since the beginning of this year and are now 44 percent above
year-before levels.

Fitch’s Delinquency Index, which tracks receivables greater than 60
days past due, posted its fourth consecutive record level, rising
to 4.44 percent. This reflects an increase of 11 basis points, the
smallest monthly increase in the last five months, during which
time delinquencies have risen 35 percent. Although this is likely
explained by seasonality, since Fitch usually observes a decline in
delinquencies at this time of year, it may be evidence of a nascent
trend toward deceleration.

“While the slowdown in rate of delinquency increase could prove
encouraging if it persists, it is too early to proclaim a trend,”
said Michael Dean, a managing director in Fitch Ratings’
Asset-Backed Securities group and head of the asset-backed
commercial paper group. “Charge-offs and delinquencies will likely
continue climbing over the near term.”

Fitch expects charge-offs to continue higher throughout 2009 and
approach 10 percent by this time next year.

“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, is becoming
increasingly negative, particularly given recent delinquency and
personal bankruptcy filing trends,” the ratings agency said.

In other performance measures, portfolio yield increased 96 basis
points to 17.79 percent, the highest level in the last 12 months.
This increase is attributable to re-pricing initiatives that
issuers began to implement toward the end of last year. The
increase in yield more than offset charge-off and funding cost
increases, resulting in one-month excess spread climbing 23 basis
points to 5.86 percent for the month.

Private-label cards ring alarm bells

Fitch’s Monthly Payment Rate Index improved to 17.79 percent from
16.83 percent, primarily as a result of seasonal

In comparison to the last few years, when levels hovered around 20
percent, the monthly payment rate appears weak, but Fitch noted
that the rate has averaged 16 percent since the inception of the
index, thus the current MPR is satisfactory.

Fitch’s charge-off index for private-label retail credit cards in
February also hit a record high of 12.31 percent, shattering the
previous record of 12.25 percent set in December 2004.

For now, Fitch is confident that the losses don’t pose a
significant structural threat to the industry.

“While we are in uncharted territory for credit card losses,
issuers’ proactive measures have offset the rapid run up in
charge-offs and helped preserve excess spread margins,” said

“Those actions and available structural protections have limited
the likelihood of widespread negative rating actions in the sector
at this time.”

No one can say when, or to what extent, recovery in the US cards
market will take place. With some 34 million US cardholders paying
at least one card bill late in the past quarter, it is safe to say
that the US market has not found its bottom yet.