For a long while during the recent spate of subprime MBS volatility, the most ardent proponents of credit card ABS told the industry that there was no discernible risk of contagion from troubled mortgage-backed securities products.
Recently, however, the Center for Financial Research and Analysis (CFRA), an independent debt and equity research firm, raised fresh questions about the credit card sector's ability to keep problems from the subprime MBS and the Alt-A sector from spilling over into credit cards. After assessing a group of major credit card trusts, the company asserted that credit quality had deteriorated for most trusts over the last 12 months.
"Charge offs have increased for nearly all trusts in our survey over the last year from depressed levels following the Bankruptcy Reform Act of 2005," Nathan Powell, a CFRA analyst wrote in a recent report.
To reach that conclusion, CFRA added the percentage of loans that were more than 60 days late to the charge-off rate. Taking that figure, CFRA then adjusted for differences in the timing of the charge offs, which gave them a smoother, more normalized measure of credit quality to allow for comparability across the major trusts.
Overall, trusts with the most deterioration included Metris, Fleet, MBNA, BA Master Trust II and Target. Nordstrom and Advanta, however, were the two trusts that saw declines in their credit risk measures.
The CFRA came up with a more mixed picture of overall credit card trust performance after sifting through the data for FICO scores, card usage rates and the percentage of borrowers making minimum payments. Also, several of the trusts had begun issuing ABS through private transactions, further limiting information that could be somewhat mixed across the sector. It did, however, identify HSBC and Capital One as having the highest percentage of trust receivables with FICO scores of below 660, the regulatory cutoff for subprime.
Recent data on consumer credit data from the Federal Reserve added to general concerns about the state of credit card usage. In March, revolving credit, comprised of credit card usage, went up $6.7 billion, or 9.2 percent. On a month-to-month basis, overall consumer credit rose to $13.46 billion in March, and jumped about $2.4 billion, or 6.7 percent on an annual basis.
Despite surface evidence of robust spending and indebtedness, analysts at Citigroup Global Markets said that stable employment, persistent growth in disposable incomes, and robust financial assets are important considerations in the general health, not frailty of the U.S. credit card market.
"We expect these fundamentals to underpin the consumer going forward," wrote Citigroup analyst Mary Kane.
Further, the current rate of consumer debt per capita growth is at the lower end of growth rates for the past 16 years, ranging from a high of 30% in 1985 to 1% in June 2004, according to Citigroup's report. In terms of that metric, the U.S. hit growth spurts between 1985 and 1986, and then again between 1995 and 1996.
"We attribute the significant growth rates to expansion in the credit card business during those periods," Kane wrote, adding that as the credit card business matured, growth rates slowed.
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