Fitch: U.S. Credit Card Chargeoffs 'Fully Digest' Bankruptcy Effect, Drop Resoundingly

The most recent Fitch Credit Card Index results indicate chargeoffs improving dramatically by declining 359 bps to 3.29%. Correspondingly, one-month excess spread improved in the latest period by 306 bps to a robust 8.38%, bringing the three-month average excess spread up 112 bps to 6%. Last fall’s spike in personal bankruptcy filings has finally worked its way through U.S. credit card master trusts’ performance measures. These results are positive for credit card ABS investors and issuers alike, although the magnitude of the improvement will be somewhat temporary.

“The pig in the python has been fully digested,” said Darryl Osojnak, Senior Director, Fitch Ratings. “The outlook for chargeoffs is positive over the near term and master trusts should benefit from increased levels of excess spread going forward. As such, Fitch expects to affirm substantially all of its outstanding credit card ABS transactions in the coming weeks.”

As Fitch forecasted back in Sept. 2005, U.S. credit card chargeoffs reached elevated levels in late fourth-quarter 2005 and early 2006. However, as of Jan. 31, personal bankruptcy filings have declined significantly, with a weekly average of 6,000 filings observed since Oct. 17. The weekly average for 2005 before the new bankruptcy law went into effect was 47,000 filings, with peak volume of 315,000 filings the week of Oct. 17. Year-over-year bankruptcy filings are down 75.8% through Jan. 31.

Credit card issuers must recognize bankruptcy filings and charge off the related balances within 60 days of notification; consequently, Fitch has observed chargeoff peaks for all of its rated issuers for the months of November through January. The timing of peak chargeoff volumes varied from issuer to issuer, depending on each issuer’s respective chargeoff policy. Some issuers charge off balances immediately upon notification of bankruptcy, while others take the full 60 days allotted.

The Fitch Credit Card index is published during the first week of each month and includes month end data from two months prior, resulting in about a 35 day lag. Fitch’s Credit Card Index for chargeoffs was 7.52% for Nov. 2005, a 144 bps increase over the same period in 2004. February’s prime chargeoffs of 3.29% represent an improvement of 423bps from the peak observed in the November reporting period. Fitch expects chargeoffs to remain below 6% for the remainder of the first half of 2006 for the majority of the prime issuers.

The acceleration of charge-offs also purged a significant percentage of receivables from the 60+ day delinquency status for many portfolios. The current Fitch Credit Card Index 60+ day delinquency rate was 2.19%, an increase of 10bps from last month, yet down 77bps from the same time last year.

Fitch’s February 2006 Credit Card Index is available on the Fitch Ratings web site at ‘www.fitchratings.com’ in the ‘ABS’ under sector page under ‘Surveillance’.