Despite, the lowest levels of delinquencies and net charge-offs, US credit card asset quality are expected to weaken modestly in 2016. The slowdown in asset quality improvement does not signal material credit deterioration over the near to intermediate term, but portfolio seasoning and recent growth will also weigh more heavily on credit quality metrics in 2016.
Weighted average delinquencies of 90 or more days fell 5 bps year over year to 0.76% for third-quarter 2015, versus falling 11 bps year over year for third-quarter 2014. Weighted average delinquencies of 30 or more days improved nine bps year over year to 1.50% for third-quarter 2015, versus a 22-bps improvement for third-quarter 2014. The weighted average rate of chargeoffs declined by 22 bps year over year in third-quarter 2015 to 2.30% from 2.52% in third-quarter 2014. For the year-over-year change in third-quarter 2014, the chargeoff rate improved by 37 bps.
Average losses in the third quarter for the top six issuers are now 227 bps below their 2010-2014 averages. This level is likely unsustainable for an extended period. The above measures include data from American Express, Bank of America, Citi, Discover, JPMorgan Chase and U.S. Bancorp, where data is available.
Longer term, Fitch believes card asset quality metrics could stabilize at rates lower than the historical averages given changes in underwriting criteria and declines in subprime exposure. These factors have been driven in part by the implementation of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) and a broader industrywide focus on credit card “transactors” (purchase followed by balance payment) over “revolvers” (purchase followed by outstanding loan balance). Still, Fitch believes underwriting standards will likely continue to gradually loosen to support near-term corporate growth and earnings objectives.
Generally, other measures of the card sector were mostly stable. Purchase volumes were up 6.4% in the third quarter on average for the top seven general purpose card issuers. Growth in the third quarter of 2014 for the same group was 8.6%. Lower gas prices and tougher year-over-year high water marks are contributing to 2015’s slower purchase volume growth. Purchase volume metrics are based on the seven largest general purpose card issuers in the US.
Card portfolio returns, through the first nine months of 2015, fell to 4.0%, down from 4.2% for the first nine months of 2014. Declines were driven in part by lower reserve releases. Fitch expects provisioning expenses to be a larger headwind in 2016, primarily reflecting further portfolio seasoning and growth.
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