IMGCAP(1)]
The UK aggregate credit card charge-off index has grown by 46.5% over the past year, surpassing the 10% mark for the first time since the index's inception in 2001.
The increase is a reflection of continued deterioration in the sector, according to Moody's Investors Service's latest index report for UK Credit Card ABS released last week. Moody's says it expects the trend to continue through 2010 as rising unemployment rates lead to increased charge-offs.
"UK unemployment is continuing to rise and Moody's Economy.com forecasts a 9.55% peak in Q1 2010," Cher Chua, Moody's assistant vice president, analyst and co-author of the report said of the findings. "This suggests that the economy has some way to go before recovery. Moody's believes that charge-offs will continue to increase, peaking in H2 2010, [lagging] approximately six months behind the peak in unemployment."
Moody's says that, assuming charge-offs increase in line with unemployment, an increase of 25% by the end of next year from today's 10.12% level should be expected, resulting in charge-offs exceeding 12.5% by the second half of 2010. However, the rating agency cautions that certain other factors could lead to an index charge-off rate of greater than 15%.
Furthermore, Moody's notes that the delinquency rate of accounts at least 30 days past due for numerous trusts have stabilized over the past quarter. "It is early to conclude whether this abatement is temporary or more permanent," said Durga Bhavani, Moody's analyst and co-author of the report.
"However, other key credit card indices such as the payment rate and yields remain broadly stable. Credit card excess spreads remain positive at present but are under pressure due to increasing defaults," Bhavani said. "It is possible that the passing of proposals in a recent Government White Paper could result in increased negative pressure in the future if proposals to restrict originators' ability to raise interest rates on existing credit cards is enacted."
Moody's continues to have a negative outlook for the UK credit card ABS sector. It has placed several classes of notes issued out of some UK credit card trusts on review for possible downgrade because of concerns surrounding performance deterioration and a review of the purchase rate assumption.
