Chargeoffs are poised to trend even higher in the coming months as consumers struggle with debt burdens in the still challenging employment environment, according to Managing Director Michael Dean.
'U.S. consumer credit quality remains under considerable stress due to persistently weak labor market conditions,' said Dean. 'As a result, chargeoffs will retest their recent highs throughout the first half of 2010.'
The 60+ day delinquency rate reached an all time high of 4.54% for the December 2009 index, which is based on performance data through November month end. This surpassed the previous high of 4.45% set in June 2009. Chargeoffs crept up to 10.68% from 10.09% in the prior month but remained inside of the record high of 11.52% set in September 2009.
Despite the unfavorable trends, Fitch continues to expect current ratings of senior credit card ABS tranches to remain stable given available credit enhancement, loss coverage multiples, and structural protections afforded investors. The outlook for subordinate tranches remains negative. Fitch expects U.S. unemployment will peak at 10.4% in second quarter-2010 (2Q'10) and remain above the 10% threshold throughout 2010.
From 4Q'08 through 2Q'09, Fitch's delinquency index rose 42% as the economic environment and employment situation worsened. Chargeoffs subsequently peaked in 3Q'09 with Fitch's index reaching 11.52% in September 2009 before receding in recent months. While recent trends point to higher chargeoffs, future deterioration is not anticipated to be as severe given that unemployment is expected to plateau near current levels.
'The recent acceleration in delinquencies has not yet approached levels experienced last year,' said Senior Director Cynthia Ullrich. 'With that said, seasonal patterns dictate further delinquency increases and higher chargeoffs in the coming months.'
Gross yield, the measure of interest, fees and interchange revenue collected on outstanding balances, continued to increase reaching 20.21%. Since recent legislative changes will restrict dynamic risk based pricing policies, issuers are mitigating against potential future risk by increasing APRs across their portfolios. This is the first time since April 2001 that Fitch's Prime Gross Yield index has surpassed 20%. However, credit is relatively more expensive now, as the prime rate averaged 8.32% back in March 2001, whereas it is currently 3.25%.
Although gross yield rose more slowly than chargeoffs over the past year, yield has reached a point where it is able to cover the elevated chargeoff and generate more robust excess spread. The one month excess spread reached 6.90% while the three month average increased to 6.78%. The decompression in significant considering that three month average excess spread averaged only 5.50% for all of 2009. Fitch expects that excess spread may compress again in the coming months as elevated chargeoffs persist and yield increases slow, however our view is that early amortization risk remains remote.
Monthly payment rates (MPR), a measure of how quickly consumers are paying off their card balances, fell to 17.64% from 18.57% last month. These MPRs are low compared to 2006 and 2007 when the MPR index routinely topped 20%, but are still strong compared to the average MPR of 16.00% since the inception of the index in 1991.
Additional information is available at 'www.fitchratings.com'.
