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S&P tempers expectations for credit card ABS issuance

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Rising funding costs in the securitization market appear to be discouraging new issuance of bonds backed by credit card receivables, at the margin, according to S&P Global Ratings.

Credit card asset-backed issuance chugged along at a steady pace over second-quarter 2018, though total volume to date of $28.7 billion tails the $36.3 billion in issuance at the same point in 2017. In a report published Thursday, S&P noted that spread widening has made asset-backeds comparatively more expensive versus bank deposits.

Compounding this, credit card receivables within securitization trusts have not kept pace with the growth in overall receivables on issuers' balance sheets, which have grown by about 1% over 2018. And receivables among issuers that S&P tracks in its U.S. Credit Card Quality Index (CCQI) have decreased even more, by more than 5% over the year.

S&P thinks that the low cost of deposit funding, along with higher payment rates, have contributed to the
steady decline in trust receivables tracked in its index, hich have fallen more than $50 billion, or roughly 22%, over the past five years. Accordingly, S&P expects issuance volume for the remainder of the year to match maturities. And that would put total issuance at the low end of its overall preliminary 2018 forecast of $40-$50 billion, compared to $47 billion in 2017.

Banks are the main drivers of the U.S. credit card securitization market. Broadly speaking, the percentage of loans financed by securitization is still historically low, S&P noted in its report.

S&P’s forecast is in line with that of Fitch Ratings, which expects issuance volume to decline to $40 billion in 2018 from $54 billion (by its measure) in 2017. In a report published in July, Fitch pointed to another reason for this year’s decline in issuance: There are fewer outstanding credit card asset-backeds maturing this year. “The primary driver behind 2017’s issuance increase was the rise in maturities, which nearly doubled 2016 levels,” the report states.

In the apparently unlikely even that asset-backed issuance volumes should grow this year, it is likely that there will be an increase in account additions to trusts, which could result in a shift in pool compositions, according to S&P. “We will typically review the credit quality and performance metrics for any receivables and account additions that exceed 15% of a trust portfolio in any three-month period and 20% in any 12-month period,” the report states.

At the managed pool level, average quarterly losses fell in the second quarter for the first time in three quarters, to 3.40%, while average delinquencies continued on a declining trend to 2.06%. The average loss rate increased slightly for securitized pools to 2.39%, against a fall in average delinquencies to 1.49%.

S&P said loss rates in the six largest credit card lenders' managed pools are slightly higher than in their securitized trusts because managed receivables include newly originated, unseasoned accounts, as well as accounts that are seasoning and were not designated to the master trusts. “Signaling an expectation of stabilizing losses, managed pool loss reserves decreased slightly over the quarter, in contrast to receivables growth of approximately 3%,” the report states. Bankcard securitized losses remain well below historical levels, tracking roughly 1.5 percentage points below the unemployment rate for second-quarter 2018, and performance remains strong across ABS trust portfolios.

Over the next two years, S&P anticipate bankcard loss rates to continue gradually rising from historical lows of 2.2% to about 3%-4% in securitized trusts and 4%-5% in the industry as a whole. Overall, however, performance is within S&P’s expectations and in line with its base-case assumptions. As a result, it expects its ratings to remain stable.

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