HSBC's U.K card program, Affinity 001, saw its 4% excess spread trigger breached last week, causing further cash trapping, but analysts at Fitch Ratings said the breach was not a cause for concern.
The transaction has seen negative trends in excess spread levels over the last two years with a more marked decline in the last six months, according to Fitch. Affinity's three-month average excess spread was reported as 3.81%, leading the trapping to increase to 3% from 1.5%. "Noteholders benefit from the trapped excess spread, if excess spread falls below 0%, early amortisation will occur," said analysts at The Royal Bank of Scotland. "Excess spread increased month-on-month in May and June as portfolio yields increased; however, charge-offs continued to rise to 5.76% in the latest period from 3.99% a year ago and payment rates slowed to 14.23% from 16.85%."
Fitch said the excess spread levels have experienced a marked decline over the past six months due to a reduction in the margin between the portfolio yield and the funding rates, as well as an increase in chargeoffs. Still, the numbers remain within the rating agency's base case scenarios. "HSBC has undertaken measures which are starting to feed through to improvements in the yield and excess spread levels," added Fitch analysts. "Increasing chargeoffs have been mainly driven by larger balances defaulting and HSBC has increased its focus on credit limit reviews. There has also been an improvement in the collections process, enabling delinquent customers to be contacted at an earlier stage."
While some market players are not concerned, cautious sentiment towards U.K. credit cards is growing. Deutsche Bank Securities reported last week that personal insolvencies remain at record high levels and said that credit card portfolios no longer appear to be immune to the negative economic backdrop. "For sure, arrears and chargeoffs have risen noticeably compared to as recently as a year ago," said analysts. "In the most recent reporting period, losses continue generally to trend higher in most trusts, with only CARDS and PILLR showing lower chargeoffs this past month."
On the flip side, analysts added that portfolio yields continued to rise in every securitized trust with the exception of Egg Bank's PILLR in the past month, suggesting that lenders may be using account pricing more aggressively in order to offset the weaker borrower payment behavior. "Higher cash yields in most trusts this month resulted in increases in excess spread," said Deutsche Bank analysts "Payment rates remain low, however, when viewed in a longer term context."
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