Credit card delinquencies declined in May for the second month in a row to 5.7% on the Bankcard ABS index, according to JPMorgan Securities June 15 Credit Card ABS Monthly Update.
This is evidence that there is an emerging improvement in delinquency trends. The lower roll rates should help slow rising charge-offs and also mitigate the effects of higher unemployment, JPMorgan analysts said.
The observed delinquencies in May were for each bucket of delinquencies, 30-59, 60-89, and 90+ (90-179). The 30-59 bucket reflected the timing of receivables rolling through, with the 60-89 and 90+ buckets lagging by one and three months, respectively. On bankcards, a charge-off doesnt occur until after 180 days (equivalent to five months after the borrower first entered the 30-59 delinquency category) of delinquency.
Although for most of 2008, delinquencies were on a steep climb, the drop in the month-over-month change in charge-offs and delinquencies support issuers assertions that delinquency roll rates are beginning to stabilize. Additionally, the improvement in delinquency tends should help to slow the pace of charge-offs increasing over the upcoming months, JPMorgan analysts said.
However, unemployment remains the key driver of charge-offs and further weakness is expected, despite the recent positive labor market data supporting the improvement in delinquency trends. The encouraging signs include that payroll losses are moderating, while initial and continuing unemployment claims continue to a mild downward trend.
The velocity of the increase in unemployment claims this past year, along with the budding signs of improvement, support the projection that the market is reaching the peak earlier than initially thought and at lower levels than the firms HPA view had suggested. As such, charge-offs will be closer to reaching the peak in the Bankcard ABS index, which will be followed by a decline sooner than JPMorgan analysts anticipated.
Initial claims fell 28,000 between May and June, while the four-week claims average fell 14,000. Along with the drop in continuing claims, the insured unemployment rate fell to 5.0% from 5.1%. Additionally, analysts projected that the V-shape recovery in home price changes should also help the economy as well as consumer credit stabilize.
JPMorgan analysts expect that bank card issuers and ABS structures are well positioned to survive this recession and the peak load caused by unemployment.