Despite declining payment rates and increased economic pains on borrowers, prime credit-card and merchant issuers have been able to maneuver around COVID-19 stresses with little impact on their securitized portfolios.
In a report Thursday, Fitch Ratings reported that despite month-over-month and year-over-year declines in payment rates recorded for its Prime Credit Card MPR Index, receivables performance in card portfolios “remained relatively stable despite the current environment” including the large-scale closure of “non-essential” stores and businesses across the country this spring.
Declining monthly payment rates (a risk indicator in portfolios that shows the ratio of the monthly payments as a percentage of the previous month’s loan balance) is one of the “first signs of impact to credit card performance stemming from the challenging macroeconomic environment,” Fitch’s report noted – with the monthly MPR index registered 27.07% in April, down from 29.94% in march and from 30.12% in April 2019.
But “issuers continue to proactively manage portfolios for any potential deterioration with deferrals and other types of account management,” the report stated. “Certain metrics has not indicated any material negative shifts so far” in the asset-backed portfolios of prime and retail credit cards.
A monthly decline in April is not unusual, given the shorter monthly period for collections that has averaged a 6.51% decline in each of the past five years, Fitch noted.
One factor aiding borrowers was a 13.4% spike in month-over-month in disposable personal income, mostly the result of federal stimulus efforts to help borrowers, “possibly offsetting and delaying the weaker performance expected in U.S. credit cards.”
Fitch's Prime Credit-Card Charge-off Index also improved, lowering to 3.27% in April from 3.37% the month prior, in in line with the April 2019 rate (3.29%). Sixty-day plus prime credit-card delinquencies were up slightly to 1.15% from 1.11% in March, but Fitch expects that rate to ratchet up as "credit card programs [become] subject to greater performance uncertainties and disruptions are anticipated once deferral programs employed by issuers reach its expiration."
Among the challenges issuers face is the growing pressure on yields, as consumers limit spending due to business lockdowns and concerns over the economy. Fitch's Gross Yield Index declined to 18.44% in April from 20.27% the month before. Yields are derived of interest, interchange fees and finance charges, all of which are in decline because of slowing receivables generation, Fitch reported.
Three-month excess spread of 13.64% also declined over the month, and is under 14% for the first time in the past year, according to Fitch.
Payment deferrals for retail cardholders during the coronavirus outbreak has likely skewed the monthly decline in retail card payments rates and charge-offs, according to Fitch. The payment rate fell only 23 basis points to 7.09% in April. Meanwhile the 7.82% charge-off rate is actually lower than April 2019.
"Despite new purchases declining across most credit cards, retail gross yield increased to 29.76% compared to 28.91% at the same time last year," Fitch's report stated. "Three-month average excess spread also increased, registering 18.64% in April 2020, up from 18.27% last month and 17.72% one year ago."
Fitch's credit-card ABS index tracks approximately $108.1 billion in prime credit-card ABS backed by $1.53 billion in principal receivables. The retail card index tracks $14 billion of retail or private-label credit-card ABS backed by an estimated $30.1 billion in receivables from retailers such as Sears, Home Depot and Lowe's as well as private-label card issuers including Citibank, Synchrony Financial and Comenity Bank.
