Cred Card Charge-Offs Stable; Performance to Slip.

Business Editors

NEW YORK--(BUSINESS WIRE)--Standard & Poor's

Nov. 27, 2001--Bank credit card charge-off rates were stable in September 2001, but performance deterioration is expected in the upcoming months, according to Standard & Poor's Credit Card Quality Indexes (see list below). These indexes monitor the performance of approximately $366 billion in receivables held in trusts of rated credit card-backed securities, which make up nearly two-thirds of the total bankcard market. Issuers distributed September performance data on Oct. 15, 2001.

The monthly charge-off rate stayed flat at 6.50% in September, but charge-off levels are 140 basis points (bps) higher than they were a year ago. Furthermore, increases in loss numbers are expected before the end of the year. With unemployment rising, Standard & Poor's expects charge-off rates to rise as well. Standard & Poor's believes the current 5.4% unemployment number will climb to a peak level of 6.5%, resulting in an increase in loss levels to 8.4%.

September distribution reports showed increases in the number of delinquent accounts moving into the 30-plus, 60-plus, and 90-plus days delinquency buckets. Eighty percent of the trusts tracked by the indexes reported higher delinquencies compared with August numbers. The increase was expected, for the most part, given the disruption in mail service after the terrorist attacks. Delayed payments also affected collection efforts in September.

Additionally, the credit card market was impacted by the negative earnings announcements of Providian and NextCard, leading to greater scrutiny on credit card deal structures and the performances of the underlying asset pools.

In October, Providian announced lower-than-expected earnings and the resignation of its chief executive officer. As a result, the company's stock price lost close to 70% of its value in trading. Poor earnings were the result of charge-offs in the company's credit card portfolio increasing to 10.3%, with projections that losses will rise to 12%. Providian's main objective is to improve its portfolio performance by curtailing originations of its standard accounts (subprime). These accounts currently represent $9.4 billion of the company's total $31.7 billion portfolio. Losses in that segment are expected to increase to 18%-20%.

On Oct. 31, NextCard announced that it was offering to sell its portfolio. The company's stock price fell more than 80%. Due to the reclassification of some fraud losses to credit charge-offs, the company's loan-loss reserves increased to $80 million. Also, regulators told NextCard that its securitizations no longer qualified for low-level recourse, increasing the company's risk-weighted assets. The news resulted in NextCard's being "significantly undercapitalized," thus restricting NextBank, the holding company, from accepting brokered deposits.

The impact of NextCard and Providian's announcements on credit card ABS affected the stock prices of the other card issuers. Standard & Poor's expects that credit tiering within the sector will increase, given this recent news, combined with the industry's reported increase in loss rates. Spread levels also may widen, as investors demand a premium for participating in deals perceived to have greater headline risks.

Credit quality performance was mixed among issuers in September. Most of the major trusts (those with more than $5 billion in receivables) experienced modest increases in losses. In September, 55% of the trusts reported improvements. Among the 15 largest credit card trusts tracked, eight reported no change or improvement in loss trends for September compared with August levels. The largest improvements reported came from Advanta Master Trust II and American Express Credit Card Master Trust (Optima cards).

The other performance variables tracked by the indexes showed slight deterioration, reflecting the change in the economy's direction. Average yield dropped by 110 bps, to 19.0%. The drop in yield was due to day count issues for the collection period in September, the forgiveness of late fees by some issuers, and payment and mail service disruption.

However, federal funds are expected to drop again before the end of the year. This means that the master trusts' average cost to fund will continue to decline and excess spread should remain healthy. Excess spread for the month dropped 90 bps, but the current level of 6.60% continues to provide adequate protection for investors against potential base rate amortization payout event risk. Fixed-coupon deals' excess spread will be more directly affected as charge-offs continue to rise and the risk of an early amortization payout event for those deals is certainly greater.

Payment rate, an important measure of how long investors are exposed to portfolio deterioration, dropped this month to 14.8% from 16.7%, its lowest level since late 1997. Although one month does not make for a trend, the 190 bp decline may be the first sign that the pace of paying down existing debt is slowing as household income declines. Consumer confidence continues to show signs of weakness, with nervous U.S. consumers and the worsening job market. Portfolios concentrated more heavily on transactors (those obligors who pay off outstanding balances each month) felt the effect of declining payment rates more heavily. The biggest drop in payment rate (in excess of 300 bps, on average) came from trusts backed by receivables in which the issuer has a cobranded relationship with airlines or other entities for reward points.

Standard & Poor's Credit Card Quality Indexes

Distribution date      10/15/99 10/15/00 08/15/01 09/15/01 10/15/01
Performance month       Sept 99  Sept 00  Jul 01  Aug 01    Sept 01
Outstandings (bil. $)     298.0    330.6   363.2   366.7      366.1
Yield (%)                  19.2     18.9    19.9    20.0       18.9
Charge-offs (%)             5.4      5.1     6.6     6.5        6.5
Weighted base rate (%)      7.4      8.4     6.2     6.0        5.8
Excess spread (%)           6.4      5.5     7.1     7.5        6.6
Delinquencies (%)           4.7      4.4     5.0     5.1        5.1
Payment rate (%)           16.9     15.4    16.3    16.7       14.8