In Brief: S&P Downgrades First USA Outlook

Credit quality concerns about the credit card industry have prompted Standard & Poor's Corp. to downgrade the outlook for First USA Inc. and First USA Bank to "stable," from "positive."

S&P said intense competition has led to sharp increases in the amount of credit card debt outstanding and that consumers are increasingly overextended and unable to service their debt, as shown by rising bankruptcies and chargeoffs.

The rating agency said First USA has been able to maintain its profitability through successful repricing of credit card rates to compensate for the increased chargeoffs.

First USA's capital has risen to a level consistent with its peer group, S&P said, and its financial flexibility has increased with the partial spinoff of Paymentech.

However, S&P noted, the external environment is expected to continue adversely affecting First USA's chargeoffs, precluding an upgrading in the near term.

Chargeoff rates have increased sharply at First USA, along with other credit card issuers, rising from 2.13% in the first quarter of 1995 to 4.01% in the second quarter this year, S&P said. Although the latter rate is in line with the industry average, Standard & Poor's said it expects further increases.

Seasoning of accounts from recent periods of high growth, as well as the strains of the mounting consumer debt burden, should push chargeoffs higher, Standard & Poor's said. As long as no recession materializes, however, chargeoffs should remain manageable.

The rating agency affirmed its BB-minus rating on First USA Inc.'s preferred stock, as well as its BBB-minus/A-3 ratings on First USA Bank's senior bank notes and deposit notes and BB-plus rating on the bank's subordinated debt.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER