Positive credit card charge-off trends resumed during May as the average charge-off rate for credit card receivables in securitized trusts fell, reaching its lowest point since October 2007, Moody's Investors Service Inc. said June 22.
And while Moody's is tracking an exceptionally low average charge-off rate of about 5% within the bulk of credit card receivables held by the top six issuers, that data doesn't tell the whole story, credit card industry analyst Robert Hammer, CEO of RK Hammer Associates, said in an interview.
The broader universe of credit card issuers, including smaller players and private-label card issuers, are operating with an average charge-off rate that is near 100 basis points higher than Moody's at about 6%, Hammer says.
One reason is that the largest bankcard issuers fund existing card receivables through securitized trusts funded by investors. But as the cost of funds has declined in recent years, many branch-based issuers are funding card receivables with consumer deposits, which are "nearly free," due to low interest rates, Hammer says.
Securitized credit card receivables still represent the bulk of all card accounts, "but it is less than it was four or five years ago because of legal and economic changes," he notes.
Even credit card receivables that are not securitized, and are instead held on issuers' balance sheets, are enjoying unusually healthy credit quality, Hammer says, as issuers maintain relatively tight discipline in extending credit to new customers following the economic crisis.
"Card issuers are loosening credit standards a bit, but they prefer to call it 'adjustments to business conditions,' and they are maintaining strong guidelines to avoid getting into trouble like what happened before the recession," Hammer says.
The average charge-off rate on credit cards in trusts belonging to the six largest bankcard issuers in the U.S. in May declined 31 basis points to 4.9%, from 5.21% in April, reversing what Moody's calls a "temporary spike" during the previous month, the firm said in its monthly report on card credit quality.
Citigroup Inc.'s charge-off rate jumped in April, driving up the average, Moody's said.
Only Discover Financial Services showed an increase in charge-offs during May, with an incremental rise of three basis points compared with April, Moody's said.
The overall improvement in credit card charge-offs is on track to continue through 2012, but it will fall at a slower pace in coming months, Moody's predicts.
One reason is that issuers are gradually loosening credit card underwriting requirements.
But "as long as issuers do not add receivables from new accounts to the securitizations, the credit quality of trusts will not deteriorate from current levels," Moody's said.
Delinquencies on securitized credit card accounts also improved in May, declining 12 basis points in May to 2.47%, from 2.59% in April, which Moody's called a "typical seasonal improvement."