"Record credit card delinquencies are just the latest sign that U.S. consumers are under considerable levels of stress," said Managing Director and U.S. Consumer ABS head Michael Dean. "The latest numbers point to even higher default rates and worsening consumer credit quality measures in the coming months."
Credit card issuers typically charge off receivables after 180 days of delinquency or within 60 days of a bankruptcy filing. This month's rise in delinquencies indicates that gross chargeoffs, at 7.40% as of January month end, are likely to rise significantly in the near term.
"As the unemployment rate accelerates and consumers' ability to service their debt weakens, Fitch anticipates that gross chargeoffs will surpass 8.5% by mid-year and approach 9% by year end," said U.S. Consumer ABS Senior Director Cynthia Ullrich.
Despite the trends, Fitch anticipates downgrades will be limited in credit card ABS, particularly at the 'AAA' level given available credit enhancement levels and proactive efforts by issuers to stem the deterioration and preserve existing ratings.
Fitch's Prime Credit Card Delinquency Index posted its second consecutive record high last month reaching 4.04% up from 3.75% in the prior month. The index has surged more than 23% in the last three months and the latest figures are 30% above historical averages. The index measures the percentage of credit card receivables that were reported more than 60 days past due through January.
Among other credit card ABS performance measures, three-month average excess spread increased to 5.80% from 5.43%. The improvement was largely driven by the exclusion this month of the low reading from October, when the effect of last fall's LIBOR dislocation was realized. Excess spread would have been further compressed by a drop in gross yield had it not been partially offset by lower trust funding costs, driven by one-month LIBOR rates. Fitch expects an additional 100-200 bps compression in excess spread in the coming months as chargeoffs mount.
The rising level of delinquent debt combined with seasonal effects is also exerting incremental downward pressure on gross yield. Fitch's gross yield index, currently at 16.00%, has trended into near-record low territory over the last year due to reductions in the prime lending rate, the index to which most credit card receivables are linked. The only lower reading of gross yield was 15.86% in Feb. 2004.
At 17.15%, Monthly Payment Rates (MPR) continue to slow from the 20% levels experienced in 2006 and 2007 when delinquencies were lower, consumer spending was robust, and refinancing opportunities were plentiful. However, as MPR has averaged around 16% since the inception of the Fitch Prime Credit Card Index, Fitch believes that a portion of this trend can be attributed to reversion toward an established mean.
