U.K. Credit Card Charge-Offs Rise Above 9%

Delinquency and charge-offs among credit card-backed securities in the United Kingdom hit record highs again in May. Charge-offs increased 50 basis points while 60-to-180 day delinquency nudged up by 20 basis points. The Fitch “Charge-off Index” increased for the fourth straight month in May to 9.1%, compared to 8.6% in the prior month and 6.4% one-year ago. Fitch says it is particularly concerned that the increase in charge-offs is a result of the increased roll-through of delinquencies, with the stress on consumer payments brought about by the deterioration in the UK economy expected to continue throughout 2009. In May, the Fitch “Delinquency Index” increased for the ninth month in a row, moving to 5.5% from 5.3% in April and 3.7% in May 2008. On an individual trust basis, six of the eight trusts included in the “Index” reported new historical high delinquency levels in May. Fitch also reports that its “Monthly Payment Rate Index” fell 10 basis points in May to 15.4%. However, the Fitch “Yield Index” increased to 20.0% in May, compared to 19.4% in April.

U.K. CREDIT CARD ABS
Delinquency Charge-Offs
May 08: 3.7% 6.4%
Jun 08: 3.7% 6.9%
Jul 08: 3.7% 6.5%
Aug 08: 3.7% 6.3%
Sep 08: 3.8% 6.6%
Oct 08: 3.9% 6.6%
Nov 08: 4.1% 6.4%
Dec 08: 4.3% 7.2%
Jan 09: 4.5% 6.8%
Feb 09: 4.8% 7.5%
Mar 09: 5.0% 8.4%
Apr 09: 5.3% 8.6%
May 09: 5.5% 9.1%
Source: FitchRatings

MAY ABS

Delinquency and charge-offs amongst credit card-backed securities hit record highs again in May. Charge-offs leapt 50 basis points while 60-to-180 day delinquency nudged up by 20 basis points. The Fitch “Charge-off Index” increased for the fourth straight month in May to 9.1%, compared to 8.6% in the prior month and 6.4% one-year ago.
Fitch says it is particularly concerned that the increase in charge-offs is a result of the increased roll-through of delinquencies, with the stress on consumer payments brought about by the deterioration in the UK economy expected to continue throughout 2009. In May, the Fitch “Delinquency Index” increased for the ninth month in a row, moving to 5.5% from 5.3% in April and 3.7% in May 2008. On an individual trust basis, six of the eight trusts included in the “Index” reported new historical high delinquency levels in May. Fitch also reports that its “Monthly Payment Rate Index” fell 10 basis points in May to 15.4%. However, the Fitch “Yield Index” increased to 20.0% in May, compared to 19.4% in April.

Is There a Silver Lining in CARD Act Compliance?

A analysis of compliance with the new “CARD Act” suggests that instead
of just spending to meet new legal requirements, issuers should view the
new rules as an opportunity to sustain profitability. Diamond Management
& Technology Consultants says that improving customer segmentation and
other analytical capabilities can uncover as much as 20% of new revenue
from an issuer’s existing customer base, without increasing customer
churn. The firm notes that the annual revenue that card issuers earn
from interest revenue and penalties could decline as much as 15% in 2010
and beyond. Some card issuers will cope by blindly cutting costs, which
means that some reward programs will be abandoned, and cash-back
programs will be reconsidered. Among Diamond’s suggestions: Couple
deadline-driven compliance with a longer-term view toward a better
business design for competing within the constraints of the new
regulations and increase market agility by developing the ability to
test new products, monitor consumer attitudes, and roll out promising
new products quickly.

Credit Card ABS Charge-Offs Top 10% in May

Charge-offs among credit card-backed securities logged another record in May topping the 10% milestone. However, the delinquency ratio declined for the second consecutive month. The latest “Moody’s Credit Card Index” shows 30+ day delinquency dropped to 5.97% from 6.34% in April. However, Moody’s says the improvement is an expected seasonal phenomenon arising from the tax refund season and fully expects delinquencies to resume their upward trend. Charge-offs rose to 10.62% in May from 9.97% in April and 6.41% a year earlier. The May “Index” also shows payment rates slipping for the second consecutive month, to 16.01% from 16.20% in the prior month. The yield index rebounded from last month’s sharp decline, returning above the 18% level and reflecting discounting initiatives by Citibank and Bank of America. However the increase was not enough to keep excess spread levels from falling below the 5% level for the first time since 1998.

Moody’s Confirms & Downgrades AmEx ABS

Moody’s has confirmed the ratings on 34 classes and downgraded the
ratings on 22 classes of subordinated asset-backed securities issued out of
the “American Express Credit Account Master Trust” and the “American
Express Credit Account Secured Note Trust”. The
securities are backed by a $35.5 billion revolving pool of unsecured
consumer general purpose bank credit card receivables originated by
American Express Co. and its affiliates.
Approximately $3.3 billion of asset-backed securities are affected.
Moody’s performance expectation for the Trust charge-off rate is 12%-15%,
principal payment rate is 21%-24% and yield is 22%-25%. This range of
expected yield performance considers the recently employed structural
feature known as discounting that will bolster yield.

V/MC Settlement Produces a Discover 2Q/09 Profit

Discover’s U.S. Card unit reported that pretax income for the quarter
ending May 31st rose 26%, compared to one-year ago, and more than double
the prior quarter, due largely to income from its antitrust settlement
with Visa and MasterCard. However, outstandings were flat sequentially,
volume declined by 4% year-on-year and charge-offs may approach 9% in
the third quarter. Pretax income was $387.9 million in the second
quarter as compared to $309.1 million for the second quarter of 2008.
Proceeds from the Visa and MasterCard settlement were $473 million
pretax for the quarter. Sales volume in the second quarter declined 4%
from the prior year to $24.3 billion. Sales volume declined 8% in the
prior quarter. Managed loans ended the quarter at $51 billion,
essentially unchanged from the prior quarter and up 7% from the prior
year, reflecting lower cardholder payments and growth in both personal
and student loans, partially offset by decreased consumer spending. The
over 30 days delinquency rate on managed loans was 5.08%, down 17 basis
points from the first quarter and up 127 basis points from the prior
year. The managed net charge-off rate increased to 7.79% for the second
quarter, up 131 basis points and 280 basis points from the prior quarter
and the prior year, respectively. Third-Party Payments segment volume
grew 25% from the prior year to $37 billion, including $6 billion of
Diners Club International volume. Net yield on loan receivables rose to
9.26%, an increase of 15 basis points from the prior quarter, and 70
basis points from the prior year. The increase from the prior year
reflects lower cost of funds, accretion of balance transfer fees and an
increase in revolving balances, partially offset by higher interest
charge-offs and lower yields on variable rate assets. For complete
details on Discover’s latest performance visit CardData (www.carddata.com).

U.S. CARD PRE-TAX PROFITS
2Q/08: $309.1 million
3Q/08: $245.2 million
4Q/08: $646.4 million
1Q/09: $167.0 million
2Q/09: $387.9 million
Source: CardData (www.carddata.com)

Credit Card Charge-Offs Top 9% for the First Time

Charge-offs continued its march northward in May, topping 9% for the first time. It is the third consecutive monthly record in the payment card industry’s history. There are already indications that charge-offs will likely head even higher in the third quarter. According to CardData, charge-offs are up 318 basis points from one-year ago. In May 2005 charge-offs industry-wide stood at 6.16%. Earlier this week, Capital One reported that its charge-off ratio rose from 8.56% in April to 9.41% for May, however the figure was about 50 basis points lower due to a change in the issuer’s bankruptcy policy. American Express reported its charge-off ratio edged down from a peak of 10.1% in April to 10.0% for May, thanks to the sale of some cardholder loans that had been previously written-off. Discover reported a managed net charge-off rate for the quarter ending May 31st of 7.79%, up 131 basis points and 280 basis points from the prior quarter and the prior year, respectively.
Discover noted that it expects the next quarter to produce charge-offs between 8.5% and 9.0%. For current and historical portfolio metrics visit CardData (www.carddata.com).

CHARGE-OFFS
May 2005: 6.16%
May 2006: 4.24%
May 2007: 4.65%
May 2008: 5.93%
May 2009: 9.01%
Source: CardData (www.carddata.com)

AmEx U.S. Delinquency Improves for the Fourth Month

American Express reports that delinquency for its U.S. credit card business declined for the fourth consecutive month in May. However, charge-offs remain in the double-digits. U.S. Card delinquency (30+ days) declined from 4.9% in April to 4.7% for May. Delinquency peaked at 5.3% in February. The charge-off ratio edged down from a peak of 10.1% in April to 10.0% for May. Managed card loans for the U.S. market at the end of May declined to $54.7 billion, from $55.4 billion in April and $56.5 billion in March. American Express notes that during March and May it sold off some cardholder loans that had been previously written-off. Therefore, the net write-off rates reported for March and May reflect the benefit of the sale proceeds being treated as a partial recovery of such previously written-off balances. For complete details on American Express’ first quarter and monthly performance, visit CardData (www.carddata.com).

American Express U.S. Card Metrics
Delinquency Charge-Offs
Dec 08: 4.7% 7.3%
Jan 09: 5.1% 8.1%
Feb 09: 5.3% 8.6%
Mar 09: 5.1% 8.8%
Apr 09: 4.9% 10.1%
May 09: 4.7% 10.0%
Source: CardData (www.carddata.com)

ActionOptimizer for EDS Test Cuts Charge-Offs 14%

ALI Solutions, f/k/a Austin Logistics, reports that after a year-long pilot of an “EarlyDetection System” it has been successful in cutting charge-offs. The “ActionOptimizer” for early detection scores new accounts on the first day’s transaction activity. The system aggregates application and bureau data with the day-one transaction activity to produce a risk score that predicts the likelihood that the cardholder will quickly run up balances and not pay them off. ALI’s test client recorded a 31% reduction in balances more than 30 days past due and a 23% reduction in number of accounts more than 30 days past due, compared to a control group. Charge-off balances are down 13.7% and charge-off rates are down 4.5%. However, customer attrition rates have not increased. “ActionOptimizer” can be deployed as a direct implementation as well as hosted through a card processing platform.

Capital One Charge-Offs Resume a Steep Climb

After some slight improvement in April, Capital One charge-offs surged
northward gaining 85 basis points in May. If the issuer had not recently
changed its bankruptcy processing, charge-offs would have neared double
digits. However, delinquency decreased 14 basis points in May,
representing the third straight month of declines. The charge-off ratio
rose from 8.56% in April to 9.41% for May, however the figure was about
50 basis points lower due to a change in the issuer’s bankruptcy policy.
U.S. Card delinquency declined from 5.04% in April to 4.90% for May.
Managed loans at the end of May increased to $65.6 billion. Capital One
notes that its internal guidelines require bankrupt accounts to be
charged off within 30 days, its practice had been to charge off customer
accounts within 2 to 3 days of receiving notification of bankruptcy. Due
in part to an increase in the volume of bankruptcies, the issuer has
extended the processing window to improve the efficiency and accuracy of
bankruptcy-related charge-off recognition. The new process remains
within Capital One’s internal guidelines, as well as FFIEC guidelines
that bankrupt accounts must be charged-off within 60 days of
notification. Capital One previously reported that the U.S. Card
charge-off rate increased to 8.4% for the first quarter. For complete
details on Capital One’s first quarter and monthly performance, visit
CardData (www.carddata.com).

CAPITAL ONE HISTORICAL
DELINQUENCY CHARGE-OFF
May 08: 3.81% 6.28%
Jun 08: 3.85% 6.42%
Jul 08: 3.96% 6.08%
Aug 08: 4.07% 5.96%
Sep 08: 4.20% 6.34%
Oct 08: 4.48% 6.54%
Nov 08: 4.70% 6.98%
Dec 08: 4.78% 7.71%
Jan 09: 5.02% 7.82%
Feb 09: 5.10% 8.06%
Mar 09: 5.08% 9.33%
Apr 09: 5.04% 8.56%
May 09: 4.90% 9.41%
Source: CardData.com

Q1 Charge-Offs Soar Sequentially by a Record 25%

Charge-offs in the first quarter exploded at a rate never before seen
in the bank credit card industry, however the momentum appears to have
slowed in the second quarter. Compared to the final quarter of 2008,
first quarter charge-offs soared by 25% and are up 68%, compared to
one-year ago. Among the nation’s top issuers with at least $50 billion
in outstandings, the average charge-off rate for 1Q/09 was 8.12%,
compared to 6.51% in the fourth quarter and 4.84% for 1Q/08, according
to CardData (www.carddata.com). Since the end of the first quarter,
American Express reported that its charge-off rate rose to 10.1% in
April, compared to 8.8% in March and 8.6% in February. But, Capital
One’s charge-offs edged down to 8.56% in April, compared to 9.33% in
March and 8.06% in February. According to Moody’s “Credit Card Index”
the charge-off rate for all credit card ABS was 9.97% for April, almost
60% higher than a year ago. According to the latest “Credit Card Index”
results from Fitch Ratings, charge-offs for “prime” credit card ABS
climbed 77 basis points to 9.66%, the third consecutive record result
and 51% above year earlier levels. CardData reports that the upward
momentum in charge-offs for all managed portfolios tapered off somewhat
in April rising a mere seven basis points from the prior month to 8.74%.
(CF Library 5/15/09; 5/18/09; 5/28/09; 5/29/09; 6/5/09)

TOP ISSUERS CHARGE-OFFS
1Q/08: 4.84%
2Q/08: 5.55%
3Q/08: 5.81%
4Q/08: 6.51%
1Q/09: 8.12%
Source: CardData (www.carddata.com)

Moody’s Rates BofA and Target Card ABS

Moody’s Investors Service has assigned a definitive rating of Baa1 to
the “Bank of America Class
C” credit card notes and has placed under review for possible downgrade
the Aaa ratings of the senior classes of
asset-backed notes issued by “Target Credit Card Master Trust”. The
Bank of America rating is based on the quality of the underlying credit
card receivables, the transaction’s structural protections, the
expertise of FIA Card Services, National Association as servicer, and the
credit enhancement from subordinate classes of notes in the series of
which the notes are a part. On March 2 2009, BAC added
credit enhancement for the benefit of all classes of currently
outstanding Trust securities (classes A, B and C) by creating a
subordinated, Class D interest sized at approximately 8%. The Target
review is primarily driven by substantial deterioration in some of
the Trust’s key performance metrics such as the Trust’s charge-off rate
which has increased substantially over the last 12 months,
nearly doubling from a rate of 8.7% in April of last year to reach an
all-time high of 15.7% in April 2009. This pace of deterioration exceeds
that of the industry as measured by Moody’s Credit Card Index. In
addition, the Trust’s principal payment rate, a measure of the
principal payments that obligors make on their balances each month, has
been falling consistently since early 2007.