Credit card charge-offs hit record high in February
Credit card write-downs soared to record levels in February, representing an all-time high in the 20-year history of the Moody's Credit Card Index, as job losses mounted, the rating agency said Wednesday.
Credit card charge-offs, the write-down of uncollectable debt, advanced decisively to 8.82% in February, marking the sixth consecutive month of increases. The level, is more than 300 basis points higher than a year ago.
Sharp increases were experienced across several large issuers and have closely followed the surges in unemployment occurring over recent months, the rating agency said.
"We expect that the charge-off index will threaten double digits by the end of the year, in light of our expectation that the economy will worsen throughout the remainder of the year," Moody's said.
It predicts the charge-off rate index will peak at about 10.5% in the first half of 2010, assuming a coincident unemployment rate peak at 10%.
As deal performance continues to erode, the potential for additional rating actions increases, especially for the lower-rated subordinate tranches.
Despite the marked deterioration in collateral performance, Moody's said it has placed under review relatively few of the card-backed notes from the industry's largest credit card issuers. That's due, in part, to the explicit support through additional credit enhancement that some issuers have provided to their related ABS programs.
HSBC, Bank of America, GE and Citibank have, or announced intentions to, come to the aid of their ABS transactions. Still, it said, collateral performance, especially the charge-off rate, is expected to continue to deteriorate.
Delinquency rates on credit cards also advanced in February. Moody's delinquency rate index broke through the 6% level to 6.14%.
However, Moody's said, delinquency rates tend to exhibit a seasonal element, usually peaking in the early months of the year, followed by a reduction in delinquencies resulting in part from the spring tax refund season.
"We would expect these seasonal factors to help limit increases in the delinquency rate in the immediate months ahead, but the overwhelming influence of the negative economic environment should continue driving delinquencies to record-high levels by mid-year," the rating agency said.
Additionally, Moody's principal payment rate index, a measure of cardholders' willingness and ability to repay their credit card debt, plunged to 15.16% in February, due in part, it said to the continued secular trend of softer payment rates that it expects throughout 2009.
However, it said, the significant month-over-month drop was mostly due to the fact that February has the fewest number of collection days.
Moody's credit card yield index, which had been falling over the past couple of years, staged a rebound and rose above the 17% level in February, to 17.49%. The rating agency attributed the rise to issuers' continued implementation of cardholder re-pricing initiatives. An increasing proportion of balances in credit card trusts are becoming subject to higher interest rates.
The rating agency said widespread re-pricings across the industry, along with implementation by some issuers of yield-enhancing features, are jointly expected to have an increasingly positive effect on the index yield measure in the months ahead.
The excess spread index, which measures credit support, shrank to 5.62% in February, despite the impact of issuers' measures to enhance yield. The sharp climb in charge-offs compressed excess spreads across the industry.
"Looking ahead into 2009, we expect that the implementation of yield-enhancing actions by issuers will be the primary tool that mitigates erosion of excess spread," Moody's said.