Moody's Gives Credit Card Sector a Negative Outlook, Says Charge-offs will Rise

Under the pressure of rising credit card charge-offs, rating agency Moody’s has recently given a negative outlook to the U.S. credit card sector. Moody’s, however, noted that the negative outlook does not carry rating implications for credit card-backed securitizations. Total credit card-backed security issuance also hit a new record in 2007.

In its report, “2007 Review and 2008 Outlook: US Credit Card-Backed Securities,” Moody’s noted that although delinquencies and charge-offs are on the rise in credit card accounts, the levels are still nowhere near all-time highs. Current charge-off levels are still below long-term averages.

In the most recent month available, November 2007, charge-off rates were just under 5 percent, shy of the 5.5 percent long-term average. Credit-card charge-offs peaked at 7.05 percent in March 2003, as the economy was coming out of a mild recession. The report noted that charge-off rates have been higher in other months, but that those spikes were due primarily to other factors, such as the run-up to bankruptcy reform and the Sept. 11 terrorist attacks.

Moody’s does anticipate a rise in delinquencies and charge-offs over 2008, but how far they will rise depends on the economy. And the impact will be felt on a bank-by-bank basis.

“For some issuers, charge-off rates may increase close to the upper bound of Moody's range of expected performance by year end," William Black, Moody’s SVP and author of the report, told insideARM.

Black noted that since bankruptcy reform went into place in 2005, it’s harder for consumers to file for bankruptcy, reducing what was previously the largest category of charge-offs.

“We’ve seen a clear falloff in bankruptcy-induced charge-offs among credit card issuers,” said Black. “They’re right about half of pre-bankruptcy reform level.”

Black said that what Moody’s refers to as contractual charge-offs should rise “significantly” in 2008. A contractual charge-off occurs when a cardholder falls behind on payments by 180 days, prompting the issuer to write-off the debt.

The report also noted that banks issued $94.6 billion in credit-card backed securities in 2007, a new record and the third straight year of increasing totals. Moody’s projects that security issuance volume in 2008 is likely to surpass 2007, and set another new record.