Chargeoff rates have spiked in the securitized credit card portfolios of two major banks, raising yet another caution flag about consumer credit quality.
Banc One Corp. and Chase Manhattan Corp. reported last week that chargeoff rates in their respective credit card trusts had risen by more than 100 basis points in April.
The increases were attributed in part to a surge in bankruptcies, in turn an indication that conditions are becoming more perilous for consumer lenders in general. Bankruptcies are running at a near-record pace and delinquencies are on the upswing, according to statistics from the American Bankers Association and other sources.
Lenders that securitize could face higher costs if rating agencies require them to post larger credit enhancements to support the ratings on their securities.
Chargeoffs in Banc One Credit Card Master Trust Series 1994-B, which includes $920 million of loans, rose 115 basis points during April, to 7.28%.
Chemical Master Credit Card Trust I, which holds about $5 billion of credit card loans from what is now a Chase Manhattan subsidiary, saw chargeoffs soar to 11.4%, from 5.8% in March. That reflected the merger- related decision to write off loans that are 150 days delinquent, instead of waiting 180 days. Even excluding the accounting change, chargeoffs rose dramatically, to 7.15%.
Charles Edelsburg, a senior analyst with Moody's Investors Service who follows the Chase trust, said the higher chargeoffs would not initially lead to a ratings review on the securities backed by the trust.
"When we set credit enhancement levels, we thought that chargeoff levels of this magnitude could be reached relatively quickly," he said.
He warned, however, that "if chargeoffs continue to move up at this pace, we will review" the assumptions used in assigning ratings to these securities.
Dan Castro, an asset-backed securities analyst with Merrill Lynch & Co., said much of the increase in chargeoffs is related to unexpected increases in bankruptcies.
Chase, like Banc One, blamed a portion of the increase on unexpected rises in bankruptcy rates. Unlike delinquent accounts, which gradually evolve into chargeoffs over five to six months, bankruptcy can move a paying account into the chargeoff category without warning.
"This is something we're seeing more and more throughout the industry," said Mark Douglass, a Moody's senior analyst following the Banc One trust. "Everybody seems to be caught up in it."
Mr. Edelsburg said the biggest problem in Chase's trust is that loans made over the last two years under Chemical Bank's cobranding agreement with Shell Oil are of poorer quality than older loans.
"We were not surprised," he said. "We had looked at these loans separately, and the credit profiles of the new loans were very different."
So far, the asset-backed securities market appears unfazed by the disclosures. Chemical completed a $435 million offering of credit card- backed securities at 51 basis points over 10-year Treasury securities, close to levels on comparable deals.
Phil Weingord, a senior asset-backed securities banker with CS First Boston, said the news did not spook investors looking for well-known issuers.
"The appetite for credit card asset-backeds has been as good as ever," he said. "Pricing spreads are at historically tight levels."
The stability is largely the result of the credit enhancement levels designed to support investors if chargeoffs rise. For example, the securities backed by Banc One's loan trust carry a 10.5% enhancement. This includes a 6% subordinated tranch of securities and a 4.5% cash collateral account.
In the end, small issuers probably will bear the brunt of any market reaction to the surge in chargeoffs. Mr. Castro said investors could require higher spreads on securities issued by some sub-prime automobile lenders and credit cards issued by retailers and other non-financial companies.
While he said he expects chargeoffs to increase throughout 1996, he thinks the rate of increase reported by Chase and Banc One will not continue.
"Hopefully we've seen most of the increase," he said.
Ultimately, all originators will have to adjust their pricing to reflect the increased costs resulting from higher losses and funding costs, said Mr. Weingord.
"Managing portfolio yield for loss rates is as important as managing portfolio yield for your cost of servicing and financing," he said.
