High April Chargeoffs Not a Bad Omen, Issuers Say

Evidence of increased chargeoff rates in April does not necessarily spell trouble, say some of the hardest hit credit card companies.

Issuers with the highest master trust chargeoff jumps in April were Citigroup Inc., 1.41%; Advanta Corp., 1.13%; People’s Bank, 1.1%; Capital One Financial Corp., 1.03%; and Metris Cos., 0.98%. Overall, the master trust credit loss rate was 6.65%, up from 6.05% in March. But issuers contend that the monthly chargeoff rates are assessed in a way that does not fully reflect what is happening in their portfolios and that signs of a coming problem are not as serious as they appear.

The rates are based on monthly reports that all issuers release about receivables that have been packaged for sale as asset-backed securities. These data, known as master trust chargeoff numbers, can offer a peek at how the rest of an issuer’s portfolio might be doing. They come in handy during the months outside the quarterly reporting cycle when issuers normally report profits, delinquencies, and chargeoffs.

Over the long haul, master trust chargeoffs do tend to track the overall numbers, said David Wyss, chief economist at Standard & Poor’s, but the figures can disagree for a few months at a time. Standard & Poor’s is predicting that overall chargeoffs will average 6.3% this year, up from 5.5% in 2000.

Paul Paquin, vice president of investor relations at Capital One in Falls Church, Va., called his company’s rise in master trust chargeoffs, to 4.03%, misleading.

“Our trust data do not reflect what is happening at the company or in the industry,” Mr. Paquin said. This is partly because the company has been “changing the mix of that trust,” he said — and issuers can quickly alter the trust numbers by adding more superprime or subprime loans.

A much better estimate of an issuer’s general credit quality, he said, is the so-called lag chargeoff measure, which is obtained by taking the dollar amount of chargeoffs for the quarter and dividing it by the receivables balance of three quarters earlier. That way, charged-off accounts are measured against the loan base from which they originated.

“If you grow fast, it knocks your chargeoff rate down, even if your charged-off dollars are up,” he said. Measuring chargeoffs against the total loan balance from nine months earlier, the age an unpaid account must be to be considered charged off, keeps the comparison more accurate, he said.

Capital One’s master trust contains about 50% of the managed loans on its books, and these loans do not have the same chargeoff rate as the company’s total portfolio, according to Mr. Paquin.

“You want the overall portfolio to mirror what is in the trust,” Mr. Paquin said, and it can be difficult to keep the two accounts in alignment. In recent months, the master trust has worsened compared to the rest of the portfolio, even as Capital One has worked to improve the mix of loans in the trust, he said. “Historically we keep them in line, but the mix got out of whack.”

Similar explanations were used by other issuers with large jumps in chargeoffs.

Metris Cos. of Minnetonka, Minn., reported an increase to 14.47% in its trust chargeoff rate for April. Its master trust contains about 62% of its managed loans.

David Wesselink, Metris’ vice chairman, explained that “over the last two years, we have been building a deposit base in the bank, and as we have grown deposits, we have held newer accounts with very low chargeoff rates on the balance sheet. With the seasoning in the trust, we have seen chargeoff rates go up somewhat over the last few months because we haven’t added any more receivables into that trust.”

Advanta Corp., which specializes in small-business credit and securitizes about 98% of its portfolio, had a jump to 7.93% in master trust chargeoffs. David Weinstock, chief accounting officer and vice president of investor relations at the Spring House, Pa., issuer, said the chargeoff rate reflects the overall picture at Advanta but with some caveats.

“You are looking at a change in a gross number,” he said. Also, recovered chargeoff funds are not reflected in the monthly loss data, Mr. Weinstock said.

Still, he acknowledged, the figures give a good indication of credit performance overall. “The end of the year will be higher than the beginning, but you won’t see 113 basis points every month,” he predicted. “Industrywide, this increase in bankruptcy filings is having an impact.”

Citigroup did not return calls seeking comment.

Mr. Wyss of Standard & Poor’s said that one month’s chargeoff data do not tell much of a story but that “over a quarter these trends are pretty accurate.”

Observers had different takes on the apparent rise in chargeoffs. Kenneth Posner, an analyst at Morgan Stanley Dean Witter & Co., said the chargeoff trend reflects the economy’s woes.

“We are starting what will be a classic consumer credit cycle,” he said. “Profits have become scarce in this economy, and companies have to trim head count in order to cut costs. Some folks who lose jobs won’t be able to pay back their credit card debt.”

But recent Fed interest rate cuts have reduced the cost of funds, giving issuers some breathing room, even as chargeoffs rise.

Mr. Wyss advised against excessive worry. “This is not a horrendous year,” he said. “Issuers are running a spread of 6% between what they charge above the costs of funds and running operations. Frankly, there is enough there to keep them happy.”