A report by Credit Sights, as recounted by Research Recap says that credit card delinquencies are increasing, but not to the degree where there is any threat to the performance of credit card ABS pools. Unlike Fitch, which expects the historical relationship between credit card defaults and unemployment to continue (they normally track each other closely), Credit Sights flags the possibility that lenders may see a change in that pattern this cycle.
From Research Recap:
In a new survey of US credit card Asset-Backed Security collateral performance, CreditSights finds and that pool performance has deteriorated significantly over the course of the last eight months. “Despite that deterioration, however, credit card ABS collateral delinquencies are still well within the normal historical range, and the ratings on credit card ABS senior tranches appear to be safe for now.”
While issuance and excess spread levels do help to offset concerns about rising delinquencies, we find some worrying evidence that delinquencies are rising more rapidly than what might have been historically normal given recent trends in unemployment.
“We would grant that the most recent unemployment data have been surprisingly low, so in the coming months we may simply see unemployment rise, validating the recent steep rise in delinquencies. But if something else is going on, especially if there has been some structural change in the behaviour of credit card borrowers that has made them more likely to default than they historically would have been given current economic conditions, then credit card ABS bondholders may have a more bumpy ride ahead than they might have expected.”
Stripping out master trusts which did not exist in 2001, CreditSights finds that most master trusts are approaching their mid-2001 delinquency levels, and one (the MBNA/BofA trust) is now well above that mid-01 level. Only the Discover master trust is still enjoying delinquency rates well below its 2001 levels.“Combining all six of the older credit card ABS master trusts’ delinquency rates into a simple average of the six, we find that average delinquency rates have jumped sharply over the last eight months, from an index reading of just under 70 (where the delinquency rate index stood at 100 as of May 2001) to a reading of 89.5 today. While that leaves average delinquency rates below their mid-2001 levels, and still well below the record index reading high of 114 in Early 2002, the increase since July 2007 has still been severe. It took 21 months – from April 2004 to January 2006 – to get this index level from just over 90 to just under 70. It has taken only eight months, however, for the index to jump from just under 70 back to around 90.”
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Some noise/compression in the numbers as bankruptcy reform took hold. Neverthelss, most card companies are looking for 5-5.5% charge offs with the tail risk it spieks to 7-8%. The incremental would cost card comapnies approx $30 billion given where they are provisioning to at the moment. A drop in the bucket, but still on a tangible equity basis this would erase the equity at WB and WFC (each).
Seems likely the draconian penalties for late payments will keep people paying their credit cards on time as long as they can — and certainly before their mortgages, with all the bailout talk abroad.
But a consequence may be that if (when?) stress builds to where they just can’t pay at all, there’ll be a flood of delinquencies, and on large balances.
One other thing to consider is that unemployment data are under-counting the real number of unemployed. There are other indicators of slowing employment, for example, daily data on tax witholding from the US Treasury, and states sales tax collections from the US Census. Those indicators show deterioration of income and expenditures by the consumer over the last year, especially in the fourth quarter.
jm, just wondering, are you also referring to the practice of merely making minimum payments per month, avoiding further punitive interest but not quite paying off any significant amounts.
That makes the visa IPO all that cleverer, shareholder banks get to book profits but deal with the credit card delinquency risk later. However should problems emerge there will be even less justification for any bailout measures however small they may be.
“Despite that deterioration, however, credit card ABS collateral delinquencies are still well within the normal historical range, and the ratings on credit card ABS senior tranches appear to be safe for now.”
AAA MBS tranches are also safe. And housing prices only ever go up. And Bear Stearns does not have a liquidity problem.
I’m curious what the media balance is on the delinquent accounts. Anyone else?
The models may not incorporate this, but it seems to me that if a person is getting behind on a mortgage that is for more than the home is worth, and is seriously looking at defaulting and then bankruptcy, that he might go ahead and max out the credit cards before pulling the plug. If you have no intention of paying any of it back, you might as well go for broke. I guaranty that this is the calculation that is being done by millions of people right now. And when they pull the plug, we’ll have another financial risk model ready for the garbage bin.