Most banks reported Monday on the performance of their credit card securities, and investors had ample reason to flinch.
Although some banks reported declining chargeoff rates, losses continued to rise in the securitized credit card portfolios of most.
At First Chicago NBD Corp., chargeoffs in securitized credit card pools fell in May to 9.76%, from April's 10.20%. At NationsBank Corp., chargeoffs dropped to 6.63% from 7.43%, according to Moody's Investors Service.
But losses rose to 6.43% in May at First USA Inc., from 6.10% a month earlier. And they jumped to 8.68% at Banc One Corp., from 7% a month ago. First USA and Banc One are set to merge later this month.
At Chevy Chase Savings Bank, chargeoffs rose to 10.06% from 9.26%. And at Household International Inc. they rose to 7.51% in May from 7.09%.
Investors were still awaiting data on Monday from Chase Manhattan Corp., where portfolios have significantly deteriorated lately. Chargeoffs at Chase in April were 8.25%, a 67% increase from November's 4.93% rate.
Such increases at big banks alarm some investors because, until recently, big loss rates were mostly confined to small issuers like Chevy Chase and Providian Financial Corp. Escalating losses at these community banks helped cause a "flight to quality," as investors began to seek banks with more stable loss rates.
But with loss rates up at big banks, and at specialist Advanta Corp., investors are finding fewer safe harbors.
"Only AT&T, Capital One, and Citibank have shown they can get their chargeoffs under control," said Jeffrey P. Salmon, asset-backed analyst at UBS Securities. MBNA Corp. has kept its chargeoffs low all along, he said.
As worrisome as rising loss rates are, what really concerns investors is how chargeoffs are cutting into excess spreads.
These spreads provide banks the cushion to absorb rising chargeoffs, pay servicing fees, and collect profits. When these spreads drop to zero for three months, the securizations terminate early. That has not happened yet, but at several banks, spreads are getting a little close for comfort.
"At 2%, investors start getting nervous," Mr. Salmon said.
The amount of excess spread has dropped to 1.28% in a portfolio of securitized credit cards issued by Chase Manhattan Bank. First Union Corp. in the first quarter said it would foresake its servicing fee to maintain spreads at comfortable levels. In NationsBank Corp.'s portfolio, the excess spread has fallen to 2.16% in April, though analysts believe it recovered somewhat in May.
Analysts and investors said they were surprised by the rapid deterioration of the portfolio of credit card securities issued by Chase before it merged with Chemical Bank. The loss rate on those securities is 8.25%.
Tom Hourican, asset-backed analyst at Chase Manhattan Corp.'s securities unit, attributed the sharp rise in losses at Chase to the fact that new receivables are no longer being added to the portfolio. As consumers fall behind on their bills, no new bills are added, so the percentage of the total that is delinquent tends to rise dramatically.
Nevertheless, the rapidly rising losses "are surprising to many of us," Mr. Hourican said. Most of the loans contained in the portfolio are with reliable, longtime customers, he said, "so we expected to see stable performance."
Despite such signs of distress, investors are still flocking to credit card securities.
At MBNA Corp., where chargeoff rates are only 4.55%, an offering last week was boosted to $706 million from its original $462.5 million due to investor demand.
Edward M. Stevens, managing director at PNC Asset Management Group Inc., Philadelphia, said so long as banks cut back on the number of new credits offered, investors will ride out a few storms.
"By all accounts, originators have been tightening underwriting standards," Mr. Stevens said. "Delinquences and chargeoffs, especially chargeoffs, should continue to rise, but we expect the situation will improve by the end of the year."