A research report issued by Chase Securities suggests that loss rates in the credit card portfolios of some big issuers will rise as much as 225 basis points above the levels currently reported.
The report predicts loss rates will rise as the accounts in the pools mature, and argues that a slowing economy could cut even deeper into the cash flow available to support securities backed by these loans.
Credit card specialists Advanta Corp., First USA, and Capital One Financial Corp., which have grown especially fast, could see the biggest increases in loss rates, according to the Chase Manhattan Corp. subsidiary.
A rise in the loss rates could affect how much investors are willing to pay for the card-backed securities sold by these issuers - who would therefore have a harder time funding new loans.
Though analysts have long recognized that loss levels tend to rise as pools of loans mature, the Chase report is believed to be the first that projects the loss levels for individual issuers.
The report estimates losses at Advanta would increase 225 basis points, to 4.72%, while First USA's would increase 158 basis point, to 5.38%. At Capital One, the projected loss rate would reach 3.92%, an increase of 133 basis points.
In making these estimates, the report assumes that the credit quality of the portfolio, as well as its size and yield, remain the same over a period of 24 months.
The problem, said List Anderson, the vice president in Chase Securities' asset-backed group who wrote the report, is that many of these credit card companies have relatively new portfolios, obtained through the use of cheap introductory rates and other aggressive marketing techniques. Because losses on new loans do not typically peak for 18 to 24 months, an abundance of new loans can distort the loss rate.
At the same time, she said, the loans are not generating the same amount of income because of the low introductory interest rates.
"What happens when you have a lot of growth is that the relative seasoning of the pool of loans is much less," said Linda Stesney, a vice president at Moody's Investors Service who follows the credit card-backed securities market.
In recent years, companies like Advanta, First USA and Capital One have shown these characteristics. Ms. Stesney said. "The question is whether these companies will continue to add new accounts at the same level they have been," she said.
An Advanta spokeswoman, Janet Point, disputed the Chase findings. For one thing, she said the report overstates the true level of losses caused by the normal aging of existing receivables. The company expects the level of losses would rise about 100 basis points, to approximately 3.50%, Ms. Point said, but not to the 4.72% projected by the Chase analyst.
"Other firms that have been successful users of teaser rates have not had losses going through the roof," Ms. Point said.
Nor does the report reflect the ability of the issuers to lower their cost of funds in a slowing economy, or reprice their loans, added First USA spokesman George McCane. "As a result of our having pricing below the market," he said, "we have the ability to reprice and still remain competitive."
The yield in First USA's loan pools would rise, he added, because the percentage of loans made up by low introductory rates is declining.
Other analysts said the sophisticated marketing techniques used by the card specialists enabled them to attract the most creditworthy borrowers.
"The card specialists are different and better in their solicitation, underwriting, and management practices," Thomas Brown, of Donaldson, Lufkin & Jenrette, wrote recently.
While Ms. Anderson said she agrees with Mr. Brown's analysis of the marketing techniques, she said it is unreasonable to assume that these companies can keep all of their new customers after the teaser rates expire.
And with fewer new accounts to shoulder the burden of losses on existing portfolios, it is likely that investors will become more discriminating.
"The asset-backed securities buyer just needs to be aware," she said.