Securitized credit card charge-offs in July rose from the previous month, but the jump was due to one-time factors. Charge-offs should resume their downward trend this month and reach about 4% by the end of the year, according to Moody's Investor Service.
The delinquency rate index on securitized card loans also reached an all-time low, while the payment-rate index rose to the same all-time high reached two months ago, Moody's says.
The Moody's Credit Card Index reflects the performance of asset-backed securities held in trusts, and the accounts primarily are at least five years old. As such, they tend to be relatively good performers because issuers have weaned themselves of lower-quality accounts, so the indices do not necessarily reflect the performance of managed portfolios, Jeffrey Hibbs, Moody's analyst and assistant vice president, said in an interview.
"Banks have begun to originate new borrowers, but they are not making their way into the trusts," he says. "To the extent the card issuers begin adding new originations into their trusts, then we will start to see more convergence between what's in the trusts and what's in the managed portfolios."
Before the economy crashed, the trusts were more reflective of the managed portfolios. Today, various issues have made securitizing card loans less attractive as a funding vehicle. Receivables aren't growing, and banks can fund their card outstandings through their deposits because the deposit rates are so low, Hibbs says.
Moreover, a change in accounting rules two years ago made securitization less attractive from an accounting standpoint, he adds.
The charge-off rate on securitized card loans last month rose 29 basis points, to 4.56% from 4.27% in June. The rate measures card-account balances written off as uncollectible as an annualized percentage of total outstanding principal balance.
Moody's says it expected the boost because of increases in the charge-off rates in the trusts of JPMorgan Chase and Citibank, which collectively constitute about 45% of the overall index.
"Each of the other four largest credit card trusts posted monthly declines in their respective charge-off rates, a trend that will continue next month and into the fourth quarter," Moody's said.
Chase in July saw its rate rise 87 basis points because of a technical change to the trust sponsor's charge-off recognition policy, which accelerated charge-offs but "is not indicative of any fundamental change in credit quality," Moody's said. "This one-time effect will reverse next month," it said.
The Citi trust charge-off rate increased after a sharp decline in June, partly because Citi now includes recoveries in its charge-off rates, Moody's said.
The delinquency rate, which measures the proportion of account balances where payment is more than 30 days late as a percentage of total outstandings, fell four basis points in July, to 2.36% from 2.4% in June, and Moody's expects the rate to continue declining the rest of the year.