Credit Card Chargeoffs to Head Higher

Chargeoffs for U.S. retail credit cards will likely rise along with those of prime and subprime credit card "asset-backed securities" (ABS), according to Fitch’s newly launched Retail Credit Card Performance Index.

With the absolute level of chargeoffs at 4.21% for prime and 6.11% and 9.23% for retail and subprime, respectively, Managing Director Darryl Osojnak says that chargeoffs are continuing to normalize from the bankruptcy reform implementation in October 2005, with the upward trend in losses expected to continue throughout 2007. ‘Prime, subprime and retail 60 + day delinquencies have shown a gradual upward trend in recent months,’ said Osojnak. ‘Historically, subprime and retail delinquencies are fairly volatile and sensitive to economic pressures, while prime delinquencies remain less volatile.’

Retail delinquencies are currently at 3.88%, above the current 2.59% level for prime and below the 5.68% level for subprime. The retail segment exhibited a yield of 26.37% comparable to the 25.82% yield in subprime but significantly higher than the prime yield at 17.78%. As a result, the retail and subprime sectors show higher three-month average excess spread levels of 12.33% and 9.93%, respectively, despite higher charge-off levels. MPR exhibits cyclical patterns year over year in the prime, subprime and retail indices. Fewer collection days and seasonal shopping cause predictable declines in March and increases in April, September and January. MPR levels in the retail index remain high compared to historical levels, however in 2006 MPR has shown a gradual decline, possibly a result of increased economic pressures weighing on many of the subprime borrowers within the retail portfolios. The MPR level for prime is highest at 19.32% followed by retail at 13.77% and 9.83%.

Fitch Ratings’ Retail Index is calculated using a debt weighted average of trusts that securitize only retail credit card receivables. The Retail Index tracks four primary metrics: gross yield, monthly payment rate (MPR), excess spread and 60+ day delinquencies. Upon its launch, the Retail Index will provide three years of historical performance data.

The retail card ABS sector includes both store cards owned by individual retailers and private label programs administered on behalf of retailers. Many retailers partner with large bankcard issuers in designing their credit products while a few directly issue their own cards. Merchants issue the cards with the purpose of increasing sales and fostering brand loyalty and are often viewed as an adjunct component of a retailer’s primary line of business. Retail cards generally have lower credit lines than general purpose cards and can be used to extend credit to borrowers who are unable to obtain credit from other sources. Underwriting criteria vary considerably among retailers, resulting in disparate pools of borrowers. As a result, the performance of retail trusts is differentiated from prime and subprime trusts. This can be attributed to many factors including: geographic concentration, brand loyalty, demographics, card value propositions and retail consumer behavior. However, over time, consolidation in the sector by large sponsors such as GE, Citibank, and HSBC has benefited performance through improved underwriting and servicing of portfolios.