Observations On Deteriorating Credit Card ABS Trends

As recent scary results out of American Express and other credit card companies demonstrated only too well, it is but a matter of time before consumers decide to not make any more credit cards payments at all. Credit card portfolios, along with pretty much every other security over the past 5 years, got securitized to an insane degree, with subsequent splits into loss tranches (e.g., AAA, A, BBB, etc). What is (or should be) becoming a prevailing concern, is that the increased level of payment delinquencies and outright non payments will have mounting adverse impacts on credit card asset-backed securities and on holding bank liquidity profiles. A report by S&P that came out recently (luckily mostly facts and little opinion) presents some good perspective on the potential deterioration in lower-rated credit card backed ABS tranches.

As S&P announced back in May 2008, in a piece of uncharacteristic objectivity: "U.S. credit card securitizations have been a matter of concern lately, thanks to a variety of factors that are combining to test the performance of credit card portfolios. Among these forces are a recent rise in card losses and delinquencies, a decrease in alternative financing sources for card obligors, weaker consumer confidence due to higher food and oil prices, and a general weakening of the housing market and the overall U.S. economy."

The updated report provides an analysis of a stressed what if perspective (we all know how S&P defines stressed), in which it concludes that the top 8 bankcard pools can sustain 14% losses for the BBB ABS tranche to be impaired, 31% for the A tranches, and 61% for the AAA (that seems way too high but we haven't recreated their work so let's assume that's what excel spews out when you plug in their assumptions - Appendix A in the presented document). Indicatively S&P presents the current three month average loss as 6%, and a pessimistic economic forecast scenario as 10% loss.

More facts: the banks that make up the largest bankcard pools, and associated 2008 year end three months average losses are as follows:

Amex: 6.7%
Bank of America: 7.85%
Capital One: 6.26%
Chase: 4.89%
Citibank: 7.05%
Discover: 5.99%
FNBO: 4.61%
Nat City: 5.63%

I am Tyler's total lack of surprise: BofA and Citi have by far the worst recent average credit card losses. The only companies that have higher average losses are Advanta, WaMu (oopsie there, despite only 11.5% losses, granted they had some other lovely toxic assets), Target (oopsie there too for Billy Ackman), and Charming Shoppes and WFN.

So the double whammy here: 1) as delinquencies mount (which they will), the lower rated ABS tranches will see accelerated sell offs (in anticipation of tranche defaults) putting more pressure on the $500 billion + credit card ABS market (the secondary market impact), leading to fixed income investors (and of course taxpayers) suffering increasingly more losses, and 2) the bank the hold the receivables portfolios will generate less and less income from these assets, thereby putting their assorted capitalization and tier 1 ratios at further stress, pushing their liquidity to new dangerous levels (systemic liquidity impact)

The S&P piece below : good lunch hour reading.

creditcards - Free Legal Forms

Comments

[Anonymous (not verified)]

useful blog.

balancetransfer.citicards.com
applyonline.citicards.com