Credit Card Crunch

RGE Monitor

# Overview: In January, credit card delinquencies and charge-offs breached all-time highs for the second consecutive month and Moody's predicted numbers to increase in later months. Indeed, on March 16 AmEx reports worse February numbers, Capital One better ones. Meanwhile the $5trillion in outstanding credit card lines (of which $800bn is currently drawn upon) are being trimmed even for credit worthy borrowers with Meredith Whitney estimating that over $2 trillion of credit-card lines will be cut in 2009 and $2.7 trillion by the end of 2010. Research shows that unemployment is one of the most important drivers of credit card and auto loan loss rates. RGE (Kruettli) estimates that credit card charge-off rate could reach 13% in the worst case scenario.March 16: AmEx says U.S. credit card delinquencies rose in February to 8.7% from 8.3% in January as job losses accelerated and the economy deteriorated. The rate for loans at least 30 days delinquent increased to 5.30 percent from 5.10 percent.--> see AmEx Gets Access To TARP
# BNP March 16: AAA ABS Benchmark Spreads Improve In View of $1000bn TALF liquidity program , Fixed Rated ABS Spreads Stay High.
# Fitch March: In January, credit card delinquencies breached all-time highs for the second consecutive month according to the latest Fitch Credit Card Index results. At January month end, the 60 plus day delinquency rate was 4.04%. The results come amid an unending parade of troubling economic data from surging unemployment to steeper declines home and equity market values.
# Moody's: January credit card charge-offs reached a record-high 7.74%, and with an increasing number of borrowers falling behind on their credit card payments charge-off rates will almost certainly increase in the coming months. The seasonal post-holiday rebound in payment rates did not materialize this January, leaving the payment rate index, which has been falling since early 2007, near a five-year low. The payment rate has been falling since early 2007. (research recap)
# Meredith Whitney (via WSJ) March 10: Currently, there is roughly $5 trillion in credit-card lines outstanding in the U.S., and a little more than $800 billion is currently drawn upon. Just six months ago, I estimated that at least $2 trillion of available credit-card lines would be expunged from the system by the end of 2010. However, today, that estimate now looks optimistic, as available lines were reduced by nearly $500 billion in the fourth quarter of 2008 alone. My revised estimates are that over $2 trillion of credit-card lines will be cut inside of 2009, and $2.7 trillion by the end of 2010.--> see Credit Card Reform: What Impact On Consumers? On Banks? On Investors?
# cont.: Currently five lenders dominate two thirds of the market.
# SIFMA: Q4 2008 marked the first time ever that four of the major sectors
(home equity, credit card, student loan, and equipment leases) had no issuance.
# Graef (Deutsche Bank): Credit card debt grew strongly in absolute terms but was comparatively stable in relation to disposable income. In light of the virtually unchanged ratio of credit card debt to disposable incomes we cannot detect a credit card bubble-->we do not expect an above-average increase in credit card defaults, particularly in view of substantially lower credit card interest rates compared with earlier years.
# White (NBER/UCSD): Ratio of consumer debt to median income increased to 4.5 in 2007 from 1 in 1980 compared to a ratio of 3 for mortgage debt/median income--> "high debt/misuse of credit cards" is the primary reason for increase in bankruptcy filings since the mid-1980s.
# Wieting (Citigroup): Households shifted expensive credit card debt to less expensive, tax-deductible mortgage credit in the early/mid 2000s. Revolving credit grew at an average 4.3% year/year pace in 2002-2007 vs 12.4% for mortgage debt. As such, credit card delinquencies have been closer to “cyclical norms,” unlike housing. However, we believe the employment downturn will now drive cyclical delinquencies in cards too. Expect unemployment to rise to 8-10%.
# Mathias Kruettli (RGE): Given that lending standards are being tightened across the board, a jump in the unemployment rate is likely to increase the default rate on credit card debt, which might lead to higher write-downs on the banks credit card portfolios.
# cont.: The paper comes to the conclusion that write-downs in 2009 are likely to be significantly higher than in2008 (50 billion USD). In the worst case scenario the credit card receivable write-downs could be as high as 146billion USD in 2009. In the best case the write-downs will be around 64 billion USD. Currently, there are about $2.5T ABS receivables outstanding, incl. credit card, auto loan, HEL (SIFMA estimate as of Q2 08)
# Fitch, DBRS: report addresses the sensitivity of auto and credit card transactions to unemployment, one of the most important macroeconomic indicators for consumer finance. Results:
- Changes in the unemployment rate are strongly correlated with changes in auto loan losses and credit card chargeoffs;
- Auto loan and credit card ABS loss rates are expected to increase proportionately to the increases in unemployment rate;
- Prime credit card chargeoffs are expected to increase on a 1:1 basis wrt unemployment. Accordingly, a 100% increase in the base unemployment rate, from 5% to 10%, would lead to a 100% increase in the prime credit card chargeoff index, from 6.18% (April 2008) to 12.36% over the next 12 months;
- Subprime credit card chargeoffs and prime and subprime auto loan net losses are expected to increase at a rate closer to 1.2−1.3:1, meaning a 100% increase in unemployment could lead up to a 130% increase in losses;
- Consumers are more likely to default on credit cards more immediately than they default on auto loans following shocks to the labor markets;
- While, on average, the ‘BBB’ or ‘AAA’ bonds could withstand an unemployment rate of up to 11% or 20% respectively before a default occurs, downgrades during these stresses would be inevitable.

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