Moody's Investors Service reported that the U.K. credit card charge-off index is exhibiting a marginally increasing trend while the delinquency index generally rose in the past year.
The rating agency said that credit card issuers have revealed that roll rates in the early stage delinquency buckets have increased in recent months as consumers remain constrained as a result of the reduced availability of credit as well as extremely weak labor markets.
The current negative outlook on the U.K. credit card sector is driven by the severe recession in the U.K, rising unemployment, and the decreased availability of consumer credit.
"Unemployment rate forecasts indicate a sharp increase and given a high degree of correlation between the unemployment rate and charge-offs, we expect charge-offs to increase 25% to 30% from the current levels over the course of 2009," said Cher Chua and Durga Bhavani, analysts at Moody's. "As such, there is significant downward rating pressure on credit card receivables and a sustained deterioration could result in rating actions across all classes of notes."
Moody's also notes that there is linkage in the ratings assigned to the credit card receivable-backed notes and the ratings of the originating banks.
As the credit quality of originating banks deteriorates below certain thresholds or if Moody's has grounds to believe that the ongoing viability of the cards business is unsustainable, the rating agency will revise the purchase rate assumption downwards and it is likely to have marked impact on ratings.
