Part one of our examination of prospectuses for recent credit card securitizations focused on higher-end balance activity among the top issuers (see StructuredFinanceNews.com for article titled Dissecting Issuer Accounts posted Dec. 28). In this installment, it's lower-balance accounts' turn.
As mentioned in the previous article, a healthy amount of bonds backed by credit cards have been issued this year — a stark contrast to what has happened in the residential mortgage and commercial mortgage sectors. This has kept open a window of information on how the issuers are doing business.
Recent policy changes in the area of consumer protection make the lower-balance end of the business one that is in line for change in the coming year. And among the big six issuers, Capital One Financial Corp. is the one considered to sit most squarely at that end of the spectrum of credit limits and balances.
Some analysts have argued that profits at Capital One are particularly vulnerable to the restrictions on credit card practices being imposed under May's landmark Credit Card Accountability, Responsibility and Disclosure Act because the company has a low-limit, fee-reliant model. But Capital One has pushed back, standing out among competitors by proclaiming that, though the legislation will cause shifts in the importance of various tactics, it will be able to adjust to the new regulatory regime with returns intact.
The data does bear out a perception of Capital One's intense concentration on smaller-balance customers: About 61.9% of its accounts had limits of $5,000 or less, and accounts with balances of $5,000 or less made up 47% of its receivables. Accounts with limits of $5,000 or less also made up 32.4% of receivables, compared with 7.3% to 10.3% at the others among the big six.
Standard caveats on prospectus data apply: The documents offer an imperfect vantage because about half of U.S. receivables have not been packaged into bonds and issuers can move accounts in and out of the trusts that back the securities. Comparisons are also complicated because issuers sell bonds at different times, so snapshots of portfolios on the same date are not always available.
The data shows that Discover Financial Services sits in the middle of the spectrum, holding a unique position in cards with limits of $5,000 to $10,000, which make up 35.9% of its accounts — compared with 14.5% to 25.4% at large rivals — and 32.5% of its receivables, compared with 13.2% to 18.8% at large rivals.
That distribution could reflect the importance that low-rate balance transfer offers have had for the company's business — a tactic that stands to be crimped in part by regulations that will require payments to be allocated first to balances that carry the highest rates. Discover has slashed such loans and, in September, said it expected them to make up less than 10% of receivables by the end of November, compared with about 20% the year earlier.