Rising Rates Increase Consumer Wariness, But Not For U.S. Credit Card ABS

NEW YORK – Moderate near-term improvement is likely to continue for the U.S. prime and subprime credit ABS markets even as rising interest rates have thrown caution to the wind for the U.S. consumer, according to Fitch Ratings in the latest edition of ‘Credit Card Movers & Shakers’.

‘The rising rate environment and higher energy prices have taken a toll on consumer cash flows as spending growth has slowed from its peak earlier in the year,’ said Richard Drason, Director, Fitch Ratings. ‘Despite the Federal Reserve’s announced intention to carry out future rate hikes at a measured pace, however, credit card ABS will likely withstand future increases and remain stable while credit metrics continue to rebound.’

Prime chargeoffs dropped 44 basis points (bps) to 6.01%, 77 bps below the level one year ago and the lowest level since October 2002, while subprime chargeoffs fell 110 bps to 15.58%, the largest monthly decline since August 2003. With 125,783 reported bankruptcy filings for the month of August, year-to-date statistics reached 1.06 million (down 3.8% from the same time last year), with Fitch expecting a total 2004 decrease in bankruptcy filings of approximately 1.59 million.

Excess spread also continued to exhibit stability with a 30 bp increase to 6.64% for the July collection period, 46 bps better than last year and the highest level since December 2002. ‘Though excess spread continues to best year-ago levels, higher interest rates may increase pressure on excess spread through rising funding costs over the near term, though improving delinquencies and chargeoffs may counteract the rate effects,’ said Drason.

The latest edition of ‘Credit Card Movers & Shakers,’ which covers the latest trends in the credit card ABS market, is available on the Fitch Ratings web site at ‘www.fitchratings.com’ in the ‘ABS’ sector page under ‘Newsletters’.