Losses on US credit card debt reached a record of high of 10.4 per cent of outstanding loans in June, rating agency Fitch said in a statement released on Wednesday.
The report follows a similar assessment from Moody’s, which found US credit cards losses, as measured by the rating agency’s Credit Card Index, broke through 10 per cent in May. That is a record in the 20-year history of the index.The rising losses are putting pressure on securitisations of credit card debt, and on their investors therein. The excess spread on credit card ABS - which is a measure of the margin of protection for investors - “has contracted to levels not seen in more than 10 years,” Fitch said.
The three-month excess spread index dropped below 5 per cent for the first time since November 1998. From Fitch:
‘Excess spread remains a key measure of credit card ABS performance as it protects credit card ABS investors against early amortization and potential losses,’ said Michael Dean. ‘The declines we have seen recently have been muted somewhat by issuers’ actions to offset the rapidly rising chargeoff environment and current levels while low by historical measures still provide a healthy cushion against higher chargeoffs going forward.’
The FT’s Saskia Scholtes noted that the trend has put pressure on big US banks:
Rising losses on credit cards have in recent months pushed big US banks to come to the rescue of the off-balance sheet vehicles they use to transform hundreds of billions of dollars of consumer loans into securities sold to investorsBanks have also raised interest rates on credit cards in a bid to counter rising borrower defaults, late payments and boost profitability, underscoring how the deteriorating health of the US consumer is opening new fronts in the financial crisis.Small wonder that Citi has been sharply raising interest rates on up to 15m credit card accounts:
Holders of co-branded cards who failed to pay their balance in full at the end of the month saw their rates rise by an average 24 per cent - or nearly 3 percentage points - between January and April, according to a Credit Suisse analysis of data from the consultancy Lightspeed Research.
Similarly, JP Morgan on Tuesday said that from August, some of its customers would see their minimum payments rise from 2 per cent to 5 per cent of their unpaid monthly balances.
Whether these and other steps to prop up credit card securitisations will be enough to stave off what Scholtes calls a “doomsday scenario” remains to be seen:
As credit card loans held in trusts are paid off, the money is used to fund new lending, while interest and other charges are used to compensate bondholders and cover any losses. Any remaining funds are profits and are paid to the issuing bank.
Mounting credit card losses are depleting those funds, however, prompting banks to support the securitisation trusts.
Banks rely on such securitisations to fund their huge levels of credit card lending while keeping risk off their books.
The doomsday scenario facing banks is that credit card losses will rise to levels that force the vehicles to repay bondholders early.
Financial crisis - far from over.
Related links:
Meredith Cassandra Whitney - FT Alphaville
Yes Meredith, we know you’re worried about credit cards - FT Alphaville
Sorry sir, your credit-card has been rejected due to insufficient lender’s funds - FT Alphaville
