Certain large credit card issuers, including Bank of America Corp., last year dramatically altered the funding sources for their credit card loans in reaction to shifting market conditions, according to data Moody’s Investors Service released last week. And Moody’s expects more such shifts this year.
With interest rates at rock-bottom levels and overall credit card securitization markets performing sluggishly, BofA, American Express Co. and Capital One Financial Corp. last year sharply reduced their reliance on the securities markets to fund new credit card loans, relying instead on funding from consumer deposits, which generally have become relatively cheap funding sources.
BofA’s securitized credit card issuance plunged 95.3% last year, to $650 million from $13.9 billion in 2008, Moody’s reported. AmEx’s securitized issuance dropped 86.3%, to $2.6 billion from $19 billion, and Capital One’s securitized issuance dropped 62.3%, to $2 billion from $5.3 billion.
In contrast, Citigroup Inc. and JPMorgan Chase & Co. last year sharply boosted their reliance on securitization issuance for new card loans. Citi last year boosted its securitized credit card issuance 82.6%, to $22.1 billion last year from $12.1 billion in 2008. Chase’s credit card securitization issuance last year rose 13.8%, to $22.3 billion from $19.6 billion. Chase and Citi last year accounted for 37.6% and 37.1% respectively of all Moody’s-rated credit card securitizations.
The widely varying trends in card-loan funding sources underscore the diverging strategies each issuer pursues, given their asset mixes and options, William Black, Moody’s senior vice president, tells PaymentsSource. “The question of how loans are funded is usually a subjective decision made by the issuer’s chief financial officer or treasurer, based on their available alternatives and costs,” he says.
When the economic downturn worsened in 2008, securitization generally became a more-costly source of funding than consumer deposits for some card issuers, Black says. That was apparently the case last year with BofA, which opted to switch from its previous heavier reliance on securitization, he says.
“Deposits have increasingly become a cheap and convenient source of funding for large issuers in the last couple of years as consumers and investors have fled from equity markets and other investment vehicles to savings,” Black says.
Though Chase and Citi have strong deposit-gathering capabilities through their large branch networks, they chose to rely more heavily on securitized issuance last year, based on their various options, Black says.
Despite reducing its reliance on credit card securitization last year for funding new loans, BofA remains one of the nation’s largest securitizers of credit card debt, Black notes. “Just because (BofA) sat out the year in the securitization market doesn’t mean they are not one of the largest securitizers, if not the largest. They still have a lot of securitized debt outstanding,” he says.
In 2010 “for a variety of reasons, the comparative advantage of securitization as a funding source has diminished, and we expect card companies with alternatives will rebalance their funding profiles accordingly,” Moody’s says.
Total securitized credit card issuance reached $59.5 billion in 2009, down 21.7% from $76 billion in 2008, Moody’s says. The firm expects total securitized issuance volume to be “tepid” this year, ranging between $40 billion and $65 billion.
Moody’s last week reported that credit card delinquencies fell in December to the lowest level since September, but the company expects charge-off rates to rise later this year (see story). The average charge-off rate for securitized debt Moody’s tracks reached 10.32% in December, up 259 basis points from 12.91%? a year earlier. Moody’s expects charge-off rates to peak in the middle of this year at around 12% to 13%, if present economic conditions continue.