Delinquency as well as charge-off rates for credit card asset-backed trusts are still increasing on a year-over-year and month-over-month basis, according to a report released today from Merrill Lynch/Bank of America.
According to the firm, almost all trusts saw a drop in terms of monthly payment rates. In general, portfolio yield dipped on a year-over-year basis, although it went up in terms of month-over-month. The amount of change was different in the trusts.
Merrill/BofA said that credit statistics for card ABS as well as other performance measures for consumer debt have been affected by the economy's weakening.
Evidently, the increase in unemployment has resulted in higher delinquencies, roll rates, bankruptcy filings as well as defaults.
In fact, according to Merrill/BofA, bankruptcy filings have been moving closer to levels seen prior to the 2005 changes in the bankruptcy law, which saw a considerable number of filings into 4Q05.
Re-pricing efforts by some lenders have contributed to higher portfolio yields, although a reduction in interchange fees because of the lower spending levels has placed downward pressure on portfolio yields.
Less spending as well as tighter underwriting standards have caused the slowing in receivable growth, analysts stated. The relatively short number of days in February also affected the level of collections and the calculation of certain performance statistics.
"We expect the credit performance of consumer ABS will remain under pressure, as the economy continues to weaken," Merrill/BofA analysts said. "The employment situation is a key variable in the level of credit card charge-offs, along with the level of bankruptcy filings and the availability of credit as measured by receivables growth and underwriting standards."
Analysts said that assuming the firm's economic team's forecast of 9.9% unemployment rate by the end of 2009 is true and 100% correlation between the unemployment rate and credit card charge-offs, the industry might experience charge-off rates moving up to 10% from the 7.40%, 7.74% and 7.38%. These levels were recently reported by Fitch Ratings, Moody's Investors Service and Standard & Poor's, respectively.
The credit card industry could exceed the 10% level, if mortgage loan modification programs prove to be unsuccessful and/or proposed changes to the bankruptcy code are enacted into law, analysts said.
Many credit card lenders have or intend to support their credit card trusts by discounting principal receivables to support finance charges and, as a result, excess spread.They will probably also resort to increasing subordination levels.
The excess spread for the industry is about 5.75% to 5.80%, according to the credit rating agencies. Merrill/BofA added that the performance is projected to vary among the different credit card trusts.