U.S. credit card ABS performance remains stable as late-stage delinquencies continue to improve.
However, new regulatory restrictions limiting U.S. issuers from charging certain fees is likely to reduce overall gross portfolio yield despite improving figures seen in May, according to Fitch Ratings.
Fitch’s prime credit card index, which primarily comprises general purpose portfolios originated by banks, tracks more than $231 billion of prime credit card ABS backed by approximately $306 billion of principal receivables.
Index results showed that late payments have improved for the fifth consecutive month, with the index for delinquencies in excess of 60 days falling 17 basis points to 4.1% in May. Although the level is still high, it trends below the 2009 average of 4.33%.
Delinquencies of 30 days or more also improved, decreasing for the third consecutive month by 26 basis points to 5.27%.
Standard and Poor’s also reported an improvement in delinquency rates in May, with their credit card quality index reflecting a 20 basis point decrease, bringing total delinquencies to 5.2%
Fitch’s prime credit card charge-off index showed a slight increase of three basis points to 11.3%. Although the improvement was small, charge-offs were only 7% above 2009 levels. A 61 basis point increase of defaults within the Bank of America credit card trust could have driven this month’s higher charge-off level, according to the credit rating agency.
The same data from S&P indicated a 10 basis point decrease, bringing charge-off totals to 10.1% for the month.
Monthly payment rate performance also improved in May, with a marginal increase of 21 basis points to 19.02%. This represents an 11% increase since last year. Fitch attributed the rise to a higher number of collection days during the May collection period, consistent with seasonal patterns.
Gross yield also continued to increase, reaching 22.2% for May, its second highest level ever, Fitch reported. The results of discount option and re-pricing initiatives from various issuers has helped to boost yield performance, which was up 26% compared with the same period last year.
May’s improvement in gross yield drove excess spreads higher for the month, showing an increase of 58 basis points to 8.59%. The three-month average rose 29 basis points to 8.59%, a four year high. Excess spread has improved for the fourth consecutive month and is 77% higher than 2009 levels, Fitch said.
Despite these figures, Fitch expects gross yield to decline by as much as 10% in the coming months in light of recent regulatory and legislative changes impacting the industry.
Credit Card Act
The changes follow the June 15 decision by the Federal Reserve Board to approve the final step in a three-part implementation of the Credit Card Responsibility and Disclosure Act (CARD Act) of 2009. Although existing ratings should be protected, Fitch expects the decision to negatively affect gross yield and excess spread cushions on existing credit card ABS.
The amendment to the CARD Act reflects changes made to Regulation Z (the Truth in Lending Act). The Federal Reserve Board implemented the first two phases in August 2009 and January 2010. Credit card issuers will be forced to comply with the updated standards by Aug. 22.
As a result, issuers have been tightening credit and raising interest rates to account for higher losses caused by the economic downturn. These new limitations will place further restrictions on the ways in which issuers can generate fee revenue, said Fitch.
The rule will cap late fees at $25 and credit card issuers will not be able to charge a higher fee unless borrowers consistently pay late. It will prevent issuers from charging multiple late fees for the same late payment as well. This will also prohibit them from charging penalty fees, late payment fees, inactivity fees, and over-the-credit limit fees that exceed the dollar amount associated with the borrower’s violation of the account terms.
“The most profound implications will be on gross yield and, and to a lesser extent, monthly payment rate,” Fitch Senior Director Cynthia Ullrich said. “Retail and subprime credit card issuers stand to be most affected since the fee component is typically a significant portion of total revenue.”
“The operating environment for credit card issuers is significantly more challenging from a regulatory perspective during the past two years,” Fitch Managing Director Michael Dean said. “That said, credit card ABS still provides sufficient protection to support current ratings.”