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Just a Flesh Wound
Advanta Corp., embattled small-business lender and sponsor of the renowned World TeamTennis league (wtt.com), has been winding down its credit card business over the past few weeks, another victim of the failed wholesale funding model. Today the company announced a dramatic increase in charge-offs on it's credit card lending book. The numbers are shockingly bad. As it happens, Advanta funded most of the credit card receivables it originated in the asset-backed securities market, via its Advanta Business Card Master Trust. Looking at the disclosed numbers behind the master trust we can get a sense for how their portfolio actually generated this kind of loss.
For background, see this ZH post.
As a quick review, the profitability of a credit card operation is generally proxied by how much excess spread the operation generates. Roughly speaking, the excess spread calculation is:
Portfolio Yield - Base Rate - Charge-Offs = Excess Spread
Portfolio Yield is the APR plus any late fees, charges, interchange etc.. Base rate is approximately the cost of funding. All these components are in annualized form.
Looking at Advanta's remit data from this month, we see a few things happening from June 20 to July 20:
1) Portfolio Yield dropped from 22.50% to 16.16%
2) 90+ delinquencies dropped from 5.69% to 2.26%
3) Charge-offs increased to 56.95% from 24.96% and excess spread went dramatically negative (-44.40% from -6.09%)
Turns out Advanta changed their charge-off policy, such that accounts over 120 days past due now have their entire balance deemed a loss (previously they waited until 180 days). Hence the drop in 90+ delinquencies after the reclassification. Since the folks who were past due probably had the highest risk-based pricing, the yield on the remaining portfolio drops. Finally, since the accounts over 120 days are now charged-off, excess spread takes a hit.
While the numbers may look better next month after this one-off change in accounting policy, Advanta serves as a good example of how quickly a lending business can turn sour once your financing goes away and you have to start trimming down the business. Caveat CIT.
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Articles like this are jewels for those of us who are not financial professionals. Where else can a layman like me find an snapshot like this that provides real information about credit card operations. Thank you very much!
So if I understand correctly, if I can somehow get to 120 days overdue, they'll write me off? Too freakin cool! I wonder if Chase will do that with my mortgage. I'm gonna call them and find out. I'm tired of paying.
PS: These fucking math problems to post are ridiculous. 13x17? Why does it have to be so tough? Why not 2+4 or something?
Advanta small-business cardholders, faced with 36%+ penalty interest rates are merely walking away. Charge off rates likely will deteriorate further from here.