Card Charge-Off Reserves to Continue Rising
While credit card portfolio metrics are holding up well despite general concerns in the credit markets there are still challenges ahead. The FDIC recently reported a significant increase in both delinquencies and charge-offs during the second quarter for banks and according to CardData the latest issuer data also shows an continued uptick in both measurements. Charge-offs hit 4.89% in October, a new record for this year and the fifth consecutive month that credit card charge-offs have increased. Delinquencies came in at 4.79% for October, the highest since January 2005. TowerGroup released a report this week on asset-backed credit card securitizations, which shows that despite increases in the reserves for credit card losses, noncurrent loans are outpacing the rise in loan loss reserves. TowerGroup says it believes this trend indicates that delinquencies and loan loss reserves will continue to rise. In turn, the increased risk in credit card portfolios due to rising delinquencies will increase funding costs for ABS. For banks, the impact will be either higher funding costs or increased costs for credit enhancement in order to obtain favorable investment ratings from the rating agencies. Nevertheless, it is important not to overstate the negative effects of the subprime collapse on either the credit card business or the securitization market.