Banks keeping worst credits out of card ABS
Credit card losses are climbing as consumers take on more debt, but so far the performance of bonds backed by credit card receivables is holding up.
In fact, charge-off rates in credit card ABS pools remain near all-time lows, as banks hesitate to add newer accounts to consumers with weaker credit, according to Moody’s Investors Service.
This is true even for Capital One, which reported the highest year-over-year increase in the charge-off rate for its managed portfolio in the first quarter of 1.08% (to 5.31%). Yet charge-offs at the bank’s credit card ABS pools, by comparison, increased by just 0.16% over the same period.
Credit card companies implemented tight underwriting standards following the 2008 crisis, and card-based ABS have performed generally well under the stricter policies. However, consumer demand for debt has risen over the past year and portfolio data has indicated banks are loosening their credit standards to attract more borrowers.
Currently, securitizations of credit receivables consist mostly of contracts established under the tight underwriting standards of the post-crisis era and few new accounts have been added to the pools. As a result of this, charge-off rates in bankcard securitizations show a marginal increase despite a spike in bank portfolios.
“Many ABS trusts, including most in Moody’s Credit Card Index, have added very few new accounts in the past six years,” the report states. “Since issuance volumes have not been high, there has not been as much need for new accounts to increase pool growth.”
Industry-wide, charge-off rates for banks' managed portfolios remain well below historic averages in the first quarter, according to Moody’s. However, the ratio of current portfolio performance to the historical average varies significantly. For example, Capital One’s first quarter charge-offs almost reached their historical average, and Discover and First National of Nebraska’s climbed to just over 80% of their historical average, while those of Citigroup rose to about 70%.
But Amex, JPMorgan and Bank of America are in a much better position; performance would need to deteriorate much more before beginning to approach the historical averages for their books.