Fitch: U.S. Retail Credit Card Chargeoffs to Surge

In yet another sign of mounting stress on U.S. consumers, U.S. retail credit card chargeoffs are poised to surge in the coming months as more borrowers fall delinquent, according to the latest Credit Card Index results from Fitch Ratings.

With consumers scaling back purchases and lenders actively curtailing credit overall, retailers are already navigating a difficult holiday season and increased borrower defaults on store cards will complicate matters further in 2009, according to Managing Director Mike Dean.

"Rising delinquencies will pressure card issuers and their retail partners during the coming year as Fitch expects a scenario akin to nearly one in eight cardholders defaulting on their store cards," said Dean. "Despite the worsening credit quality, negative retail card ABS rating actions are not expected near term given the current robust levels of excess spread available to cushion Fitch’s rising chargeoff expectations."

According to the latest Fitch Retail Credit Card Index results, 60+ day delinquencies have risen nearly 24% since August reaching 4.8% in the most recent period. As a result, Fitch expects chargeoffs to exceed 12% in first half 2009 from current levels of 9.1%. While in line with historical averages, the current chargeoff index is more than 40% above 2007 levels. Similar to general purpose card chargeoffs, the comparison is somewhat overstated as results from the 2005-2007 era, were extremely favorable following passage of the Bankruptcy Reform Act.

Despite the deteriorating credit quality environment, excess spread levels for retail card portfolios remain robust and should insulate against any negative retail card ABS rating actions near term. Excess spread on retail card trusts is bolstered by the relatively high portfolio yields on those portfolios, reflecting the generally higher annual percentage rates (APRs) charged to cardholders. The higher APRs help offset the higher chargeoff levels experienced by retail card portfolios, which generally include a greater proportion of lower quality borrowers than general purpose portfolios. Currently, at 9.4%, Fitch’s Retail Card Excess Spread Index is down 13% from year-earlier levels although it remains consistent with historical averages. Even with Fitch’s chargeoff projections, retail card excess spread should hold above 5%, a level considered healthy for credit card ABS, for the intermediate term. Fitch’s Retail Card Chargeoff Index generally runs 35%-40% higher than its prime index.

Fitch’s Retail Credit Card index tracks more than $72 billion in principal receivables backing approximately $40 billion of retail or private label credit card ABS. The largest issuers in the index are Citibank Omni Master Trust and GE Private Label Master Trust. Major retailers include WalMart, Sears, Home Depot, Federated, Loews, J.C. Penny, The Limited Stores, Best Buy, Lane Bryant, and Dillard’s among others.

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