Oct 26, 2011
Moody's: US credit card charge-offs down further, delinquencies flat
US credit card charge-offs improved significantly in September, according to Moody's Credit Card Index.Moody's charge-off rate fell to 5.27%, its lowest point since December 2007, with the six largest issuers each posting sizeable declines in their trust charge-off rates.
"September has routinely been a good month for the charge-off rate. Tax refunds in April mean that fewer obligors become delinquent, which has a ripple effect on the charge-off rate five months later," says Moody's Assistant Vice President and Analyst Jeffrey Hibbs. "And we expect the charge-off rate to continue to decline this year, and to fall below 4% by the end of 2012."
The charge-off rate measures credit card account balances written off as uncollectible as an annualized percentage of the total outstanding principal balance.
Meanwhile, the delinquency rate index, often a harbinger of future charge-off rates, held steady from August to September, at an all-time low of 3.04%, even though the six largest trusts saw rises in both their early- and mid-stage delinquency rates. The rise is largely seasonal and Moody's expects slightly higher delinquencies to persist throughout the fall months. The total delinquency rate remains at a record low, however, and collateral quality is exceptionally strong.
The delinquency rate measures the proportion of account balances for which a monthly payment is more than 30 days late as a percentage of total outstanding principal balance. The early-stage delinquency rate measures the proportion of account balances for which the monthly payment is 30 to 59 days late as a percentage of the total outstanding principal balance.
The cardholder payment rate, a good proxy for cardholders' willingness and ability to repay their credit card balances, remained strong in September, although it slipped 63 basis points, to 21.29%. The third-quarter average payment rate was 21.49%, an all-time high.
Record low delinquencies and high payment rates are reflecting the improvement in the borrower mix in credit card trusts, as weak borrowers charged off at historic levels during the recession and originators added few new accounts to the securitizations.
"Payments in all of the bankcard trusts have been consistently strong, as improving credit quality has lowered delinquency rates. The shift in trust composition towards higher-quality obligors following the charge-offs of weaker borrowers means that the proportion of cardholders who pay their balances in full each month has increased," says Hibbs.
The payment rate measures the average amount of principal that cardholders repay each month, as a percentage of total outstanding principal balance.The yield index also continued to decline in September, due mostly to the ongoing expiration of principal discounting, whereby issuers re-characterize a portion of principal collections as finance charge collections.
"Discounting added 1.8 percentage points to the overall yield index," adds Hibbs. "Most issuers are letting their discounting initiatives expire, as the improvement in collateral performance is mitigating the need to increase their trust yields by discounting."
Yield is the annualized percentage of income, primarily finance charges and fees, collected during the month as a percentage of total loans. The index measure of yield also includes discounted principal receivables.
Finally, the excess spread index remained above 11% in September, still near the all-time high, although it fell by ten basis points, as the drop in trust yields more than counterbalanced the decline in charge-offs.
"The excess spread is still healthy, however, and should remain so, as the expected decline in the charge-off rate to below 4% by the end of next year should offset the negative effect of the expiration of principal discounting on yield," says Hibbs.
Excess spread is an important measure of the overall performance of securitized pools of credit card receivables. If the three-month average excess spread falls below zero, the related credit card notes will begin to amortize ahead of schedule.