Credit-Card Securities Worsen, But Bank Still Bullish

The performance of credit-card asset-backed securities deteriorated further in March as debt-burdened consumers suffered increased job losses and defaulted on payments, but JPMorgan Securities remains bullish on the segment.

Consumers, whose spending accounts for two-thirds of economic activity, have come under increasing financial stress as the economy remains in its 16th month of recession and unemployment hit a 25-year high in March.

The write-down of uncollectable credit card debt or charge-offs, climbed to 8.82 percent from 8.40 percent in February, according to JPMorgan's Bankcard Index, in line with an increase in unemployment to 8.5 percent from 8.1 percent.

Still, despite the deteriorating performance, JPMorgan said it remains "very bullish" on consumer ABS, including credit cards, given the strong demand for deals sold under the Federal Reserve's new program aimed at reviving consumer lending and reopening securitization markets.

"The success of the WFN and Cabela new issues, that were upsized and oversubscribed, bodes very well for the sector, expanding potential spread tightening to beyond benchmark bank cards," said Christopher Flanagan, JPMorgan analyst.

World Financial Network and Cabela, were among the credit card issuers to sell securities in April under the Federal Reserve's Term Asset-Backed Loan Facility, known as TALF.

Since the Fed announced its program in November, consumer ABS spreads, including credit cards, have narrowed by a substantial 200 to 300 basis points, followed by another round of tightening since the program's launch in March.

The analyst said it expects to see further narrowing in spreads as demand increases.

"We expect tiering to compress, given the high likelihood of net supply contraction and growing investor demand in the search of yield. Subordinate bonds should also benefit from this dynamic," Flanagan said.

Still, credit card portfolios remain under pressure.

Capital One experienced a large 107-basis-points jump in net losses to 7.96, while Chase net losses were up 78 basis points to 7.13 percent, according to JPMorgan's index.

While remaining high on an absolute basis, Bank of America and Citibank experienced relatively small increases in their charge-off rates, which rose 19 basis points to 9.29 percent and 33 basis points to 9.66 percent, respectively, in March.

Despite an improvement in the payment and delinquency rates for credit card holders in March, JPMorgan said it expects to see further weakness ahead as unemployment rises, but he said continued support from credit card issuers will lend support.

HSBC , Bank of America , GE and Citigroup's flagship Citibank have, or announced intentions to, come to the aid of their ABS transactions, according to Moody's Investors Service.

GE is the parent company of CNBC.

Despite the marked deterioration in collateral performance, Moody's said it has placed under review relatively few of the card-backed notes from the industry's largest credit card issuers. That's due, in part, to the explicit support through additional credit enhancement that some issuers have provided to their related ABS programs, it said.

Despite the broad trend of rising charge-offs, the retail credit card ABS sector has held in fairly well as issuers actively manage their portfolios, according to JPMorgan. The firm's Retail Card Index, showed the write-down of uncollectable debt fell to 8.20 percent in March from 9.72 percent.

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