U,K. credit card performance visibly deteriorated in February, with charge-offs rising in all but the Cumbernauld master trust, according to market data.
Fitch Ratings said that charge-offs in the U.K. credit card sector have further accelerated by 60 basis points to 7.4%.
The rise in charge-offs was most noticeable in the Sherwood trust, which reported 11.12% of charge-offs this month, the first time the market has seen this indicator rising above 10% in any trust. The concomitant fall in portfolio yields in the trust led to excess spread falling below trapping triggers in all deals in the trust.
"The rise in delinquencies across trusts indicates we can expect charge-offs to increase further in the coming months," reported Anca Gagea,a Barclays Capital analyst.
Portfolio yields also fell slightly on average during the month. However, they rose in certain trusts. Gagea said that this trend confirms that not all issuers are passing on the fall in base rates to borrowers. This, combined with lower expense rates as a result of the decline in Libor, helped keep excess spread broadly stable at 7.13%.
"The Bank of England cut interest rates further on 5 March, taking them down to 0.50%," Gagea said. "While this will likely benefit excess spread in ABS deals by lowering the expense rates at the respective reset dates in each transaction, it is unlikely to curb the trend of rising charge-offs."
The increase in unemployment as well as the fact that, on a percentage basis, the magnitude of these rate cuts is marginal compared with the typical APRs charged on credit cards means that the rate cut will have little impact on charge-off levels.
Fitch said that the U.K. economic downturn will further impact household affordability and, as such, the ability to service credit card debt in the future will decline.