Despite a torrent of price increases for credit card customers across the country, portfolio yields hardly budged most of last year.
One big factor has been poor credit quality, as writeoffs engulf finance charges and fees along with principal balances. But in recent months, with delinquencies easing, the upturn in yields has strengthened (see charts).
"More people are paying these finance charges," said Jeffrey Hibbs, an analyst with Moody's Investors Service Inc. "It's one thing for them to be billed. It's another thing for them to be paid."
Excluding emergency measures implemented by nearly every major issuer last year to treat some principal payments as income and protect securitizations from surging loan losses, yields edged up and retreated in a jagged course after January, only advancing 103 basis points by November, according to a Moody's index for receivables that back bonds. (Yields were not buffeted by changes in underlying interest rates — prime has been steady at 3.25% since the beginning of 2009.)
The percentage of accounts more than 30 days late fell 29 basis points from November — a high for the second half of 2009 - to 5.91% in February as the yield advanced another 72 basis points, to 18.33%.
Reflecting the improvement in credit trends and the time it takes to roll out new rates and fees across vast populations of cardholders — especially while experimenting with strategies designed to avoid alienating customers or overburdening them and pushing them into default — the move up in yields has "begun to gain some traction," Hibbs said.
Yields less the prime rate are currently at their highest levels in two decades. The measure has generally tracked with chargeoff rates as issuers change pricing to compensate for loan losses and overdue accounts generate more late fees. But the spike in bad debt has been so sharp in the most recent cycle that the comparatively modest increase in yields was not sufficient to keep chargeoffs from dangerously eroding money flows produced by securitizations without redirecting principal payments.
Now, momentum in yields is poised to clash with sweeping price restrictions under the Credit Card Accountability, Responsibility and Disclosure Act. The most significant of these — including a ban on rate increases unless an account is more than 60 days late — went into effect in February, and additional measures — including prohibitions against unreasonable penalty fees — are due in August.
"Those two effects are battling," Hibbs said. "We'll see that play out over the summer."
There is reason to expect yields to stick, and even continue to rise, as the industry enters a phase that some analysts expect will be characterized by higher returns than prevailed historically when credit conditions are benign.
William Black, a Moody's senior vice president, said that a lot of the price increases were "done in anticipation of the restrictions brought by the CARD Act" — and so were crafted to sustain margins under the new regulatory regime.
"It may take some time for that to play out in the pool," he said, but if delinquencies continue to improve, "you're going to see yields continue to rise."
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