Delinquent balances on U.S. credit cards reached record levels while defaults surged higher in December 2009, as reported in the latest Fitch Ratings' Credit Card Index.
Chargeoffs are about to trend even higher in the coming months with consumers still struggling with debt in this challenging employment environment, Fitch Managing Director Michael Dean said.
"U.S. consumer credit quality remains under considerable stress due to persistently weak labor market conditions," Dean said. "As a result, chargeoffs will retest their recent highs throughout the first half of 2010."
The 60+ day delinquency rate reached a record high of 4.54% for the December 2009 index, which is based on performance data through November month end. This has gone over the previous high of 4.45% set in June 2009.
Chargeoffs rose to 10.68% from 10.09% in the prior month but stayed inside of the record high of 11.52% set in September 2009.
Fitch still expects current ratings of senior credit card ABS tranches to stay stable despite the unfavorable trends. This is looking at available credit enhancement, loss coverage multiples, and structural protections given to investors.
The subordinate tranches outlook is still negative. The rating agencyt thinks that unemployment will peak at 10.4% in 2Q10 and remain above the 10% threshold throughout 2010.
From 4Q08 to 2Q09, Fitch’s delinquency index rose 42% as the economic environment and employment situation worsened.
Chargeoffs then peaked in 3Q09 with Fitch’s index reaching 11.52% in September 2009 before receding in recent months. Even though the recent trends point to higher chargeoffs, future deterioration is not anticipated to be as severe given that unemployment is expected to plateau close to current levels.
"The recent acceleration in delinquencies has not yet approached levels experienced last year," Senior Director Cynthia Ullrich said. ‘With that said, seasonal patterns dictate further delinquency increases and higher chargeoffs in the coming months."
Gross yield, the measure of interest, fees and interchange revenue collected on outstanding balances, continued to rise, reaching 20.21%. With recent legislative changes will restricting issuers' dynamic risk-based pricing policies, they are preparing for potential future risk by increasing the APRs across their portfolios.
This is the first time since April 2001 that the rating agency’s Prime Gross Yield index has gone over 20%, Fitch said.
But, current credit is comparatively more expensive, as the prime rate averaged 8.32% back in March 2001, whereas it is now 3.25%. Despite gross yield rising more slowly compared with chargeoffs in the past year, yield has reached a point where it is able to cover the elevated
chargeoff and generate more robust excess spread. The one-month excess spread reached 6.90% while the three month average increased to 6.78%, the rating agency said.
The decompression is considerable considering that three-month average excess spread averaged only 5.50% for all of last year.
Fitch expects that excess spread could compress again in the coming months as elevated chargeoffs persist and yield increases slow. However, the rating agency's view is that early amortization risk is still a remote possibility.
Monthly payment rates (MPR), which is a measure of how quickly consumers are paying off their card balances, dipped to 17.64% from 18.57% last month.
These MPRs are low compared with 2006 and 2007 when the MPR index routinely topped 20%, although are still strong compared with the average MPR of 16% since the index's start in 1991.