Abridged from the debut issue of Barclays European Credit Card Performance Indicators, by Kevin Flaherty of Barclays Capital. The BECC Indicators include over EURO8 billion in receivables held in trusts or vehicles of publicly rated credit card ABS. The various performance indicators are calculated on a weighted average based on publicly rated notes outstanding. Barclays Capital will publish the BECC Indicators on a monthly basis.
Many concerns have been raised regarding the slowdown in the U.S. economy and any possible contagion effects that may be carried over into Europe. However, charge-offs are down 6.14% and excess spread is up 4.71% from one-year ago figures indicating that both cardholders and issuers remain financially healthy. Complete performance indicators are shown in Exhibit 1.
Charge-offs
Shown in Exhibit 2 are charge-off rates and its trend line for both European and U.S. (represented by the S&P Bankcard Index) collateral. During 1H00, charge-offs in Europe and the U.S. were trending downward. Since 3Q00, the trend in both regions has reversed itself to increasing charge-offs. Although the trend lines appear similar, the absolute level of charge-offs in Europe has been averaging roughly 50% of the level experienced in the US. This represents the difference in ease in declaring bankruptcy in the U.S. (pending legislation would change this) and the relative lack of stigma associated with bankruptcy in the U.S. compared to Europe.
The increasing trend line in Europe is largely skewed by two factors. In December 2000, MBNA European Bank Limited recorded a one-time charge when it brought its accounts compliant with the U.S. Federal Financial Institutions Examination Council (FFIEC) guidelines. This accounts for the spike in December 2000.
Secondly, in 1Q01, there was a dramatic increase in charge-offs in the ARRAN (Royal Bank of Scotland) portfolio. This was not unexpected as we stated in 4Q00 that we expected to see increasing charge-offs in the ARRAN portfolio as the collateral. In essence, when the ARRAN portfolio was created in January 2000, only accounts that were current were placed into the trust. Additionally, at the time, 46% of the accounts had seasoning of less than 24 months (the traditional seasoning curve for a consumer asset is approximately 18-24 months).
Finally, the policy utilised by the Royal Bank of Scotland is to charge-off a receivable when it is 365 days delinquent. We suggested that the three factors (no delinquent accounts in the trust at issuance, low seasoning and a 365 day charge-off policy) would result in charge-offs being very low in 2000 and dramatically increasing in 1H01. This in fact has materialised in the first four months of 2001 and the increase in charge-offs in the ARRAN portfolio is mainly the cause of the increasing trend line in 1Q01. Based on the steep, upwardly sloping delinquency curve for the ARRAN portfolio (see Exhibit 3), we expect charge-offs to continue to increase in the foreseeable future (to over 5% by 3Q01), negatively impacting the indicator.
ESE and COC ratios
Two ratios we feel are good measures of the overall health of the portfolio and the overall ability of the issuer are our Excess Spread Efficiency (ESE) and Charge-off Coverage (COC) ratios.
Shown in Exhibit 4 are the ESE ratios across time. While the trend was decreasing during most of 2000, it appears that during 1Q01, issuers have been more effective in translating yield into excess spread. One reason may be a reduction in funding costs. Since the start of the year, one-month US-dollar Libor has decreased over 250 bp and one-month sterling Libor has decreased close to 50 bp. For many issuers, the increase in charge-offs since the start of the year have easily been absorbed by the reduction in funding costs, having no negative impact on excess spread (in fact, in some instance resulting in an increase in excess spread). We view this as an encouraging trend.
Another encouraging trend is the COC ratios across time. Although decreasing during most of 2000, it appears that the trend line has reached a plateau at 2.1. In essence, the current COC ratio of 2.1 implies that charge-offs could increase by 210% and still be absorbed by excess spread. This highlights the magnitude that charge-offs could increase from current levels without detriment to investors. As a point of reference, the current COC ratio for the S&P Index is 1.2 and it has been as low as 0.7 in the last 12 months. This ratio highlights the magnitude of excess spread available relative to charge-offs currently earned in transactions backed by European collateral as opposed to U.S. collateral. A very important concept, particularly in a weakening economic scenario.
Transactions backed by European collateral continue to show strength with a healthy level of excess spread earned relative to charge-offs, especially when compared to transactions backed by U.S. collateral. A reduction in charge-offs from one-year ago implies consumers remain healthy financially. Additionally, issuers have benefited from this trend in charge-offs and a reduction in funding costs that has translated into higher levels of excess spread being earned than one-year ago. For the most part, we continue to remain very positive on European credit card ABS, with the exception of the ARRAN transactions for reasons stated earlier.
