Losses among the bankcard trusts in Standard & Poor's Ratings Services' U.S. Credit Card Quality Index (CCQI) dropped 60 basis points to 9.8% in July, from an all-time high of 10.4% a month earlier.
The index tracks, in aggregate, the performance of more than $491.1 billion of receivables held in trusts of rated U.S. credit card-backed securities, which represents approximately 53% of the total revolving consumer debt balance.
Declining losses could suggest the effects of stricter underwriting standards and a more cautious consumer base, however S&P analysts expect losses to again rise in the next few months.
"The relationship between credit card losses and the unemployment rate has been strong historically, and we believe the correlation between these two variables increases as unemployment rises," Ildiko Szilank, S&P's credit analyst, said of the report released yesterday. "For this reason, we expect to see continued pressure on credit card losses as long as unemployment remains high."
The report also noted that considering the recent delinquency roll rates observed for credit card trusts, S&P believes that the front-end, or 30-day, delinquency levels from four to six months ago suggest that losses will rise again in the next few months, as issuers typically charge off delinquent accounts at 180 days past due. "Similarly, we expect losses for the 2007 and early-2008 vintages to rise as the accounts season and reach their peak loss periods," Szilank said.
S&P also expects that the declines in consumer spending and a reduction in available credit will continue to result in falling receivables balances for credit card trusts, which will increase the loss rates expressed as a percentage of the trust balances. Moreover, as a result of certain originators' re-pricing efforts over the past few months, some accounts may have become unable to pay the higher balances, and the effects may begin to show up in trust losses in the next couple of months.
"In light of these factors and considering our chief economist's baseline and pessimistic unemployment forecasts of 10.4% and 12.7% over the next 12 to 18 months, respectively, we assume that CCQI losses for U.S. bankcard trusts will likely range from an average of 10.5% to 13.0% this year and remain in this range for the next 12 to 24 months," said S&P credit analyst Kelly Luo.
Losses for U.S retail cards also decreased noticeably in July from the previous month, falling 90 basis points to 10.8%, while losses for the trusts in Standard & Poor's Canada CCQI fell slightly, dropping 10 bps to 5.9%.