Credit Card Performance Improved In May Despite A Weaker Job Market

Overall, revolving consumer lending has been lagging in the current recovery, in contrast with prior recovery periods. In the first quarter, total revolving credit, most of which is credit cards, declined 0.5% from the previous quarter as cardholders paid down debt they accumulated during the holiday season. However, revolving credit is still 0.4% higher than a year ago (see chart 1). Demand for credit appears to be strengthening, according to the Federal Reserve's April Senior Loan Officer Survey (SLOS), but we expect balances to remain relatively stable as steady payments offset increased demand. According to the SLOS, net demand for credit cards was 17.5% in the first quarter, more than double the net demand in fourth-quarter 2011. Although the number of credit inquiries in the six months ended March 31, 2012, declined by 0.5%, inquiries were still 15.5% above their first-quarter 2010 trough. However, borrowers' fiscal constraint continues. Average credit card debt per borrower (in absolute dollar amount) declined further in the first quarter, by $242 to $4,962--about $1,250 less than the second quarter of 2009.

(Watch the related CreditMatters TV segment titled, "Credit Card ABS Performance Improved But Receivables Keep Declining," dated June 27, 2012.)

Chart 1

Sector Performance Is Consistent With Individual Bank Results

Asset quality trends for the entire credit card industry support the conclusions drawn from individual bank's reports. The early delinquency rate (loans 30-89 days past due) for the overall industry was 1.43% in the first quarter of 2012, according to Federal Deposit Insurance Corp. (FDIC) data, the lowest it has been since 1991 and down significantly from its peak of 3.08% in third-quarter 2009. Meanwhile, the noncurrent rate (loans more than 90 days past due and those in nonaccrual status) was 1.63% in the first quarter, a small improvement from fourth-quarter 2011 and the lowest rate since 1996. In addition to fewer problem loans, the roll rate for credit cards has dropped as the decline in loans 30-89 days past has outpaced the decline in loans 90 plus days past due.

Chart 2

Net charge-off (NCO) and nonperforming loan (NPL) formation rates for the industry show similar improvements. NCOs in first-quarter 2012 were 40% of what they were two years ago, bringing the NCO rate for credit cards down to 4.3% from a high of 13.2% in 2010 (see chart 3). In comparison with the previous quarter, charge-offs declined $300 million, and the rate remained steady. The NCO rate is 82 bps below its long-term average and may have reached a sustainable level for the near future. The NPL formation rate--the change in noncurrent loans plus total charge-offs as a percent of average loans outstanding--has also improved. It declined to 4.65% in the first quarter from 5.56% in fourth-quarter 2011.

Chart 3

The Banking Industry's Delinquencies And Net Charge-Offs Are Below Long-Term Averages, But They Could Start To Creep Up

For all FDIC-insured banks, credit cards are among the few loan categories that have asset quality metrics that have converged to normalized levels. For example, early delinquency rates for credit card loans are now lower than their long-term averages--the average rate observed since 1984 (see table 1). Notably, the NPL formation rate for credit cards was 4.65% as of first-quarter 2012. This is more than four percentage points lower than its long-term average and is much better than other loan categories. In addition, the first-quarter loss rate of 4.25% for cards is already 34 bps lower than its long-term average.

Table 1

Given credit cards' strong performance to date, the potential for further improvement is limited, in our view, and we expect average delinquencies to rise slightly from current levels through the remainder of 2012. We expect NCOs to lag slightly and to inch up to 4.4%-4.5% by 2013. An unexpected weakening in unemployment or personal income would cause delinquencies or NCOs to worsen beyond what we currently expect. However, we expect both metrics to remain well below the highs reached during the recent financial crisis.

U.S. CCQI Performance Trends

As of May 2012, Standard & Poor's Ratings Services' U.S. Credit Card Quality Index (CCQI) tracked approximately $265.7 billion in bankcard receivables and approximately $52.8 billion in private-label/retail card receivables backing Standard & Poor's rated credit card asset-backed securities (ABS). In aggregate, the U.S. CCQI tracks the performance of more than $318.5 billion of receivables held in trusts of rated U.S. credit, 37% of the total U.S. revolving consumer debt balance.

We observed the following performance trends among U.S. bankcard and private-label trusts in May. (We rounded monthly numbers to one decimal point, though percent changes are based on unrounded figures.)

U.S. bankcard receivables performance

• Principal receivables totaled $265.7 billion, down 9.4% year over year and down 0.5% from April.
• Charge-offs totaled 4.1%, a 33.9% decrease from May 2011 and 7.2% lower than April 2012.
• 30-plus-day delinquencies were 2.5%, down 25.0% year over year and down 4.7% from April.
• The total payment rate was 23.1%, up 5.2% year-over-year and up 3.6% from April.
• Yield was 18.2%, down 11.8% year over year and up 0.7% from April.
• The excess spread rate was 11.1%, a 1.9% decrease versus May 2011 and up 4.2% from April 2012.

Chart 4

U.S. private-label receivables performance

• Principal receivables totaled $52.8 billion, down 2.3% year over year and down 0.1% from April.
• Charge-offs totaled 6.1%, a 23.4% decrease compared with May 2011 and down 5.9% from April 2012.
• 30-plus-day delinquencies were 4.1%, down 17.5% year over year and down 4.6% from April.
• The total payment rate was 17.0%, up 6.4% year over year and up 3.0% from April.
• Yield was 25.8%, an increase of 4.6% versus May 2011 and down 0.6% from April 2012.
• The excess spread rate was 14.7%, up 26.2% year-over-year and up 0.7% from April.

Chart 5

Master Trust Ending Balances: Putting On The Brakes?

Notwithstanding indications of strengthening demand in the SLOS survey, ongoing consumer deleveraging continues to lead to declining trust balances, although the pace of decline has slowed in recent periods. According to Standard & Poor's CCQI, bankcard receivables decreased by 9.4% year over year to $265.7 billion, and private-label receivables declined 2.3% year over year to $52.8 billion. The decline in receivables is not surprising, given a drop in both retail sales and oil prices reported in May. Based on our most recent economic forecast that U.S. consumers will continue to save more and spend less the rest of this year, we will likely see lower receivable balances in our CCQI. As of May, CCQI bankcard receivables are at fall 1998 levels, and CCQI private-label receivables are back at 2004 levels. American Express Co. (AXP) and Discover Financial Services Inc. (DFS) were the only issuers to report positive growth in loan balances in May (see chart 6).

Chart 6

Master Trust Credit Card Performance Improves In May

Overall, securitized credit card receivables' performance improved in May despite a slight increase in the unemployment rate to 8.2%. Bank credit card loss rates decreased by 33.9% year over year to 4.1%, and private-label loss rates fell by 23.4% to 6.1%. The improvement is consistent with the S&P/Experian bankcard default rate of 4.35%, which is lower than the 4.49% rate in April and 5.93% in May 2011.

Issuers Versus The Index

Table 2

The Six Largest Credit Card Issuers

As of May 2012, the top six trusts accounted for more than 98% of the receivables outstanding in bankcard trusts (see chart 7).

Chart 7

Chart 8

Chart 9

Chart 10

Chart 11

Chart 12

Credit Card Delinquencies: Declining Across The Board

Issuer-level data indicate that delinquencies continued to improve to below pre-crisis levels. The improvement resulted partly from seasonal factors, including consumers' use of the last leg of tax returns in April and May to pay down card debt. Average delinquencies declined 12 bps over April to 2.35%. Delinquencies improved across all six issuers, with Citi improving the most, by -16 bps, followed by BAC (-13 bps), JPM (-12 bps), DFS (-11 bps), COF (-10 bps), and AXP (-8 bps) (see chart 13). Performance remained positive across all loan categories, with a steady delinquency rate for early past due loans and a declining rate for late stage loans. We expect the pace of delinquency improvement to moderate and flatten out in June and July as the tax return benefit fades. We also expect delinquency levels to eventually increase toward year-end.

Chart 13

Delinquency Roll Rates Are Mixed

To understand the performance of delinquent loans within credit card master trusts, we also examine the roll rate--the migration of 30-59 days past due loans to 60-89 days past due loans (see chart 14). COF continued to post the lowest rollover rate in the industry, closely followed by AXP, largely suggesting better collection efforts and higher-quality borrowers.

Chart 14

Table 3

Are Net Charge-Offs For The Top Six Banks Approaching A Bottom?

The master trust data corroborate the broader industry patterns in loss rates, which continued to improve in May. Average NCOs for the six largest credit card trusts declined 29 bps month over month to 3.8% after increasing by the same amount in April (see chart 15). Net losses declined the most for Citi, reversing, to a large extent, the significant increase in April, which we believe resulted from several factors, including the charge-offs of holiday loans as they reached the 180-day threshold. Following Citi were AXP (NCOs were down 36 bps), JPMorgan Chase & Co. (JPM) and Capital One Financial Corp. (COF)--both down 26 bps--and Bank of America Corp. (BAC), down 17 bps. DFS was the only issuer that posted higher NCOs month over month (up 5 bps). We note that after a dent in April, average loss rates retreated to their post-crisis low reached in March.

Chart 15

Trends in credit card loss rates for the six issuers on a managed basis (retained on-balance-sheet loans and loans in revolving credit card securitizations) also reinforce the positive message (see table 4). For most issuers, managed loss rates dipped for the three months ended in March. Although a couple of issuers (including Chase and Citi retail cards) saw rates edge higher from the fourth quarter, longer-term trends remain consistently positive across all major credit card issuers.

Table 4

Rating Changes On Credit Card ABS And Credit Card Originators/ABS Issuers

On June 11, 2012, we raised our ratings on two classes of notes issued out of two American Express Credit Account Secured Note Trusts to 'A+' from 'A' because of the increase in our purchase rate assumption, which follows the June 6, 2012, upgrades of American Express' core operating subsidiaries to 'A-' from 'BBB+'. (See "Two American Express Secured Note Trusts ABS Ratings Raised After American Express Core Operating Subsidiaries Upgraded," published June 11, 2012.)

On June 25, 2012, we placed our 'A+ (sf)' rating on the class A (2004-1) notes from BA Credit Card Trust on CreditWatch with negative implications, following the recent downgrade of Danske Bank (A-/Stable/A-2), which acts as the swap counterparty for the class A (2004-1) notes. We will evaluate the potential impact of the swap counterparty downgrade on this class of notes and expect to complete our review within the next 90 days (see "BA Credit Card Trust Class A(2004-1) Rating Placed On CreditWatch Negative After Counterparty Downgrade").

On May 11, 2012, we raised our ratings on four classes and affirmed ratings on 60 classes issued by seven issuers of U.S. cobranded and retail credit card asset-backed securities (ABS) transactions. The upgrades and rating affirmations concluded our recent review of each of the credit card ABS deals backed by the seven issuers of U.S. cobranded and retail credit card ABS that we rate. (For more information, see "Four Ratings Raised, 60 Affirmed On Seven U.S. Private-Label Card ABS Issuers" and "May 11, 2012, Ratings Raised, Affirmed On U.S. Private-Label Card ABS From Seven Issuers On Adjustments To Key Performance Variables.")

On May 11, 2012, we lowered the ratings on seven classes and affirmed our ratings on five classes issued out of the Advanta Business Card Master Trust. The downgrades reflect our view of the likelihood that these classes will not receive full repayment of their original principal amount at legal final maturity. For more information see "Advanta Business Card Master Trust Ratings Lowered On 7 Classes; Five Ratings Affirmed."

On June 6, 2012, Standard & Poor's Ratings Service raised its long-term issuer credit ratings on American Express Co.'s (Amex's) core operating subsidiaries, which include American Express Travel Related Services and its rated subsidiaries, to 'A-' from 'BBB+' and affirmed its 'A-2' short-term issuer credit ratings on the subsidiaries. At the same time, Standard & Poor's affirmed its 'BBB+/A-2' issuer credit ratings on Amex, the nonoperating holding company. The outlook on the long-term ratings is stable (see "American Express Core Operating Subsidiaries Ratings Raised To 'A-' From 'BBB+'; Amex Ratings Affirmed; Outlook Stable").

Amex performed well and did not post any quarterly losses during the credit crisis. Since becoming a bank holding company, Amex has improved its funding profile by adding direct-to-consumer deposit funding to its mix. Retail deposits now account for about 38% of total funding. The affirmation of the ratings on Amex reflects our view that there is a greater degree of structural subordination, given that the banks comprise about 47% of consolidated assets. As a result, based on our criteria, we now rate the nonoperating holding company one notch below the group.

Table 5

Appendix I: CCQI Monthly Summary

Table 6

Table 7

Appendix II: CCQI Performance Variables

The CCQI is a monthly performance index that aggregates performance information across Standard & Poor's rated transactions in the following key risk areas: receivables outstanding, yield, payment rate, charge-off rate, delinquencies, base rate, and excess spread rate.

(We determine each master trust's weighting by dividing its outstanding eligible principal receivables by the total outstanding eligible principal receivables for all trusts included in the index. We then determine the CCQI weighted average performance variables by adding the result of each master trust's variables multiplied by each master trust's respective weighting.)

Receivables outstanding

The aggregate outstanding eligible principal receivables of credit card accounts backing each master trust at the end of the collection period.

Yield

The weighted average total trust income for the collection period, as a percentage of eligible principal receivables (annualized).

Total payment rate

The weighted average total monthly collections (obligor principal and finance charge payments), as a percentage of total outstandings.

Charge-off rate

The weighted average losses on principal receivables for the collection period, as a percentage of eligible principal receivables (annualized).

Delinquencies

The weighted average past-due amount for the collection period, as a percentage of the current month's eligible principal receivables.

Base rate

The weighted average cost of funding (the sum of the certificate rate on a securitization and the corresponding transaction servicing fee) for the collection period.

Excess spread rate

The weighted average surplus of cash inflow for the collection period (yield minus charge-offs minus the base rate).