Moody's Investors Service's U.K. credit card indices are starting to show signs of potential deterioration, according to a release from the rating agency. The aggregate index delinquency rate increased for the third consecutive
month.
Although the index charge-off rate remains relatively stable, Moody's expects a rise in the rate over the coming months based on increasing delinquencies in a more stressful economic environment.
"A combination of increased living costs, a potential rise in unemployment, decreased availability of credit and highly leveraged U.K. consumers will pose challenges to the credit card sector over the next few quarters, and hence, our outlook for the industry is negative," said Cher Chua, a Moody's analyst. Chua added that delinquencies and charge-offs are expected rise in 2008 , although by how much is hard to predict.
"Credit card originators generally expect performance to remain stable during the first half of 2008 but all have noted the degree of uncertainty surrounding possible performance trends in the latter part of the year given the expected macroeconomic softening," said Durga Bhavani, an analyst at the rating agency.
Moody's has witnessed credit card originators historically taking additional operational actions including increasing collections intensity or further risk base
pricing in an attempt to stem any negative effects of an economic downturn.
According to Moody's, it still remains to be seen whether such actions, taken in the future by originators, the corrective measures put in place by originators in response to the 2005 and 2006 downturn or the cautious steps taken by U.K. consumers to de-leverage and cut-back on spending, will be enough to protect card portfolios from these risks.
Moody's will continue to closely monitor the credit card sector's development.
