Credit card loss rates at the nation's largest issuers could drop 10% to 33% from a year earlier this autumn, if the slowed pace at which borrowers have been falling behind recently is an accurate guide.

For most of 2010, the number of account holders who are late by more than one month but less than two has been shrinking faster than would be indicated by typical seasonal patterns, continuing an apparent turn in the credit cycle that began last year.

In a report published June 7, Matias Langer, an analyst at Moody's Investors Service, wrote that estimates of future chargeoffs based on such early stage delinquencies, and the proportions in which they have translated into balances that are deemed uncollectible and written off five months later (about 57% on average from September through March), "confirm" that chargeoffs peaked in the first quarter.

Using May figures for securitized receivables that issuers posted on June 15, it appears that Bank of America Corp.'s chargeoff rate, which has been the worst among the big-six card lenders during an era of record industry losses, is due for the biggest improvement in the group through October (see chart).

So far this year, B of A's chargeoff rate has averaged 56% of the portion of its accounts that were in early stage delinquency five months before. With that delinquency rate having decreased 36 basis points from December to 1.44% in May, B of A's annual chargeoff rate is poised to fall 359 basis points from May to 9.7% in October, assuming the relationship between the two measures remains fixed.

Citigroup Inc.'s early stage delinquency rate has barely budged during the same time, by contrast, and its chargeoff rate seems poised to drift above B of A's. Meanwhile, American Express Co.'s chargeoff rate, which has already been steadily recovering for more than a year, appears set to improve further, heading for a near-precrisis level of 5% in October.

To be sure, the link between early stage delinquencies and chargeoffs is not fixed: economic conditions influence whether late borrowers recover, for example; bankruptcies lead to accelerated writeoffs; and seasonal factors affect month-to-month outcomes. Similarly, lender forbearance programs, which have become more expansive as consumers have come under intense stress, add kinks to the chain. Overall, far greater percentages of late balances have been charged off during the downturn than earlier in the decade.

Besides, early stage delinquencies have typically climbed from June through October, presaging increases in chargeoffs during the final three months of the year.

Still, in a report published June 16, Joseph Astorina, an analyst at Barclays Capital, attributed "stubbornly high" chargeoff rates despite a half year of improvement in late accounts to some issuers "accelerating defaults to clean up the delinquency pipeline." He projected that chargeoffs will "trend lower through summer and into early fall."


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