Growth in credit card issuance continues to be pressured by a slowdown in the rise of consumer borrowing and spending.
The slowdown was brought on by the increase in interest rates and subdued corporate earnings, which create a higher burden for households to repay their debt. Fitch Ratings said last week that, as a result, it will maintain its stable-to-negative sector outlook for the remainder of the year.
Fitch said that while U.K. credit card charge-offs fell during the second quarter, other performance indicators deteriorated. At the end of the second quarter, the Fitch Charge-Off Index stood at 7.3%, a reduction of 50 basis points from the end of the first quarter. The Fitch Yield Index ended the quarter at 19.9%, which represented a decrease of 30 basis points from March. The Fitch Excess Spread Index also declined by 30 basis points over the same period, to a level of 4.7%. The quarter also witnessed a decline in the Fitch Monthly Payment Rate Index to 17.2% from 17.7%.
"Comparing continental European card issuers with the U.K. programs, Karta 2005-1 reported charge-offs of 7.1% in December last year, decreasing to 4.8% by July 2007, while all continental European issuers reported levels higher than that, ranging from 6.7% to 9.3% in July," Royal Bank of Scotland analysts said. "However, the increase in charge-offs was accentuated by a sharp increase in Pillar's charge-off and delinquency rates in the first quarter (reporting charge-offs and 30-plus days delinquency of 9.3% and 11.4% in July, respectively), following changes to Egg's [the U.K.-based Internet bank, which is a heavy pusher of credit cards] calculation of default for rescheduled accounts."
But gross yields remained stable, resulting in decreasing excess spread levels.
According to RBS, the Affinity credit card transaction showed some improvement in the second quarter, after reporting a negative spread in March, and last reported the same level at the end of 2006 of 0.3%. Pillar 2002-1 experienced the biggest decrease in excess spread of 4.5%, to 2.7%, by the end of the first half of 2007.
Despite these positive indications, Fitch said that overall U.K. credit card ABS transactions reported performance levels consistent with the stressed environment they have been operating in. "In situations of financial distress, consumers and hence credit cardholders are likely to first defer payments on consumer credits, and prioritize mortgage or rent payment," the RBS analysts said.
European credit card issuance in the first half of 2007 totaled two deals worth 449.1 million ($602.8 million) of notes. Although RBS analysts expect issuance to pick up in the second half of the year and meet the bank's revised forecast of 2.5 billion for the whole year, spreads continue to widen across all asset classes.
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