Delinquencies are finally abating in the credit card master trusts at Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co., but it does not necessarily follow that an improvement in chargeoff ratios for the trusts is forthcoming.
Blame it on bankruptcies.
An increase in consumer debt defaults is likely to keep chargeoff ratios elevated for the remainder of the year, according to Fitch Ratings. That means the delinquency trend, which has finally turned in the banks' favor, may not amount to much for the trusts' bottom line.
If chargeoff ratios "were just based on delinquencies, you could say maybe there's some easing in sight. But because you've got the bankruptcy filings thrown in there as well, one could completely offset the other," said Cynthia Ullrich, a senior director in the asset-backed securities group at Fitch.
Bank of America, Citi and JPMorgan Chase all reported higher chargeoff rates for May versus April, according to the companies' monthly performance reports for securitized credit card receivables. The increase was most pronounced at Bank of America, where the chargeoff ratio spiked from just under 10.5% to 12.5%.
Chargeoffs rose from 10.2% to 10.5% at Citi, and from less than 8.1% to 8.36% at JPMorgan Chase.
The difference in chargeoff levels is "representative of the credit quality of the different pools," Ullrich said. "It's not always as clear-cut as that, but I definitely would say that with what they choose to securitize, Chase, for example, has been more conservative in selecting the receivables" that are put into the master trust pools.
Bank of America also has had the highest delinquency rates among the three banks, with 7.95% of accounts running more than 30 days overdue, compared with 4.52% at JPMorgan Chase and 5.58% at Citi, which considers accounts delinquent after 35 days.
But past-due accounts at all three banks dropped from the levels reported for April, when delinquencies across the industry set a record high for the fourth consecutive month, based on Fitch's Credit Card Index data.
Another month of improvement might help solidify the confidence of investors in asset-backed securities, including insurance companies, pension funds, mutual funds and hedge funds. Hedge funds in particular appeared to be drawn to the securities in greater numbers as dislocation in the credit markets drove up yields from historical levels.
Yields remain elevated from their pre-crisis levels, but spreads have started to move in as a result of the Federal Reserve Board's Term Asset-Backed Securities Loan Facility, Ullrich said. "That's creating some more investor demand than had been there previously," she said.
But even new investors eager for a window into the trusts' health might consider taking the monthly reports with a grain of salt.
"Trust performance data tend to be volatile from month to month and only represent the securitized portion of a credit card issuer's receivables," Jeff Harte, an analyst with Sandler O'Neill & Partners LP, wrote in a note to clients. "Nonetheless, these trust performance reports provide a useful guide to trends in credit card portfolio performance."