Wednesday, November 18, 2009

Credit card curveballs

Posted on FT Alphaville by Tracy Alloway:

You’ve heard of mortgage loan modifications, now witness the effects of credit card loan modifications on banks.

On Monday, a number of US banks released credit card master trust data for October. Credit card master trusts are the off-balance sheet securitisation vehicles used by banks to bundle up their credit card exposure (they are also the things that will come back on balance sheet when accounting rules FAS 166 and 167 come into force).

Here’s a rundown of the October data:

  • Bank of America - BAC’s NCOs [net charge-offs] declined for the second consecutive month, decreasing 103bps in October to 13.22%. This follows a 28bps decline in September. Overall delinquencies rose for the second consecutive month, increasing 6bps in October to 7.59% (from 7.53%). . .
  • Citigroup - C’s NCOs declined for the second consecutive month in October falling 136bps to 8.79%, following its 199bps decline in September. Delinquencies also increased for the second straight month, rising 17bps to 5.67% after increasing 12bps last month . . .
  • JP Morgan - JPM’s NCOs declined for the second consecutive month, falling 10bps in October after declining 81bps in September. Overall delinquencies increased 26bps from September to 4.95% . . .
According to BarCap this is the second consecutive month that NCOs — or loans written off as uncollectable — declined at all three banks.But, it seems loan modifications and so-called payment holidays might have had a rather big impact.Here’s BarCap’s Jason Goldberg:
We believe that results at the banks are being impacted by modifications and payment holidays. BAC noted in its recent 10Q filing it had modified over $12 billion of credit card loans ($10.9bn domestic, $1.4bn foreign) or 7.5% of its $164.5 billion in managed card loans.

In June, JPM gave certain customers the opportunity to skip their next payment (i.e. a “payment holiday,”) which impacted delinquency and charge-off rates. JPM’s outlook calls for 9% charge-offs in 4Q09 and 11% in 1Q10 as the payment holiday will actually depress 4Q loss rates. Note, the payment holiday is expected to reduce NCOs by 75bps in 4Q and increase it by 50-75 bps in 1Q10. In addition, at 3Q09, JPM modified $4.6 billion of on balance sheet credit card loans (3% of managed). Its modification program may include canceling the customer’s available line of credit, reducing the interest rate, and placing the customer on a fixed payment plan (up to 60 months). If the cardholder does not comply with the modified terms, then the credit card loan agreement will revert back to its original terms, with the amount of any loan outstanding reflected in the appropriate delinquency “bucket” and the loan amounts then charged-off in accordance with JPM’s standard charge-off policy.

In its recent 10-Q filing, C noted that loss mitigation programs that entail a reduction in customers’ monthly payments obligation constituted less than 5% ($7bn) of its $141 billion total managed portfolio (Citi-Branded $84bn; Retail Partner $57bn) at 3Q09. According to C, these programs along with other loss mitigation activities have stabilized reported delinquencies and net credit losses.

An increasing number of credit card loan modifications is interesting since it seems to be happening at the same time that credit card companies are raising their rates (quite significantly in some cases) in an effort to make up their losses and head off a new law limiting the practice next year.

Which of these two things will have the greatest effect on master trusts — which have already seen their profit margins squeezed in recent months — and by extension the banks which support them, remains to be seen.

No comments: