Credit card ABS trusts are well-positioned to offset any performance repercussions from changes to credit card regulations that are effective today, Fitch Ratings said.
However, Fitch said that credit card firms are set to face more acute pressures.
"The impact on card performance variables will be felt most noticeably in gross yield, which will decrease slightly in the short to medium term," said Managing Director Michael Dean. "The resulting implications for performance measures are not likely to precipitate any rating actions for credit card ABS."
However, in terms of the corporate perspective, Fitch Senior Director Meghan Neenan "Negative rating actions are a possibility this year for credit card companies as Fitch assesses competitive responses to the legislation and the resulting impact on issuers' longer-term profitability."
Many issuers proactively altered their business models as well as implemented portfolio-wide pricing changes over the last 12 to 18 months. With today's changes, consumers can expect improved disclosure, a more favorable payment allocation, the removal of double cycle billing, and more predictable due dates.
With new limits on the issuers' ability to charge certain fees and to change interest rates dynamically, Fitch expects gross yield to decrease by 100-200 basis points (bps) over the coming months. Gross yield is comprised of interest, fee, and interchange income expressed as a percentage of principal receivables. Although it will be more difficult to change APRs going forward, the pricing on many accounts has already been increased in anticipation of these changes.
Additionally, many accounts with fixed APRs have been converted to variable APRs indexed to Prime Rate and will trend higher as prevailing interest rates rise. As a result of issuers repricing and other actions gross yield is currently running near record highs, according to the Fitch Prime Credit Card Index despite the low overall interest rate environment. January's reading for gross yield, which measures performance through December month end, was 21.15%. This is the third highest reading ever, and the highest since April 1992.
Another provision that could impact gross yield is the change to the payment hierarchy that makes issuers apply payments to balances pro-rata or with the highest rates first. Although this could pressure gross yield over time, most issuers have considerably curtailed the volume of balance transfer offers and the associated APRs, particulary those targeting existing customers instead of new accounts. As a result, they now have more uniform pricing across cardholder balances.
The changes also provide for added disclosure on the minimum payments and paydown speed as well as what payment is needed to pay off the principal balance in 36 months. Even though consumers will probably find this added information useful, the rating agency does not expect it to cause a material increase in monthly payment rates or a resulting decrease in gross yield.
For new originations, card issuers must look at the borrower's ability to repay the debt. Issuers can do this by reviewing documentation of an applicant's income or by using income estimator models based on credit bureau attributes. Either way, it is likely foster tighter underwriting, which should benefit portfolio credit quality over time.
The agency's corporate rating team is monitoring the effect on the longer-term profitability of card issuing entities. As an early read, "networks may fare better from a profitability perspective than issuers reliant on spread income because of their higher proportion of fee income," Neenan said. But, interchange fees have come under increased scrutiny and any resulting regulation would have an outsized impact on the networks.
Despite prospects for negative rating actions for credit card issuers, earnings are likely to improve across the board in 2010 as credit provisioning declines, portfolio re-pricing initiatives take hold, card spend volume rebounds following significant drops in 2009, and marketing expenditures remain cautious.
The changes result from amendments to Federal Reserve Regulation Z in response to the second implementation phase of the Credit Card Accountability and Disclosure Act of 2009 passed in May 2009. Further changes are scheduled for August 2010, such as mandatory review of APRs on accounts that are subject to penalty pricing after six months of timely payments.
