May 25, 2017 / 1:54 PM / 8 months ago

Fitch: U.S. Credit Card Losses Likely to Continue Upward Trend

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: U.S. Credit Cards – Asset Quality Review 1Q17 here NEW YORK, May 25 (Fitch) Credit card loss rates are likely to continue rising over the next several quarters driven by a more pronounced increase in delinquencies following the recent acceleration of loan growth, according to the latest U.S. Credit Cards Asset Quality Review from Fitch Ratings. Credit card loss rates have been steadily rising since early 2016, though net chargeoffs increased more meaningfully in 1Q17 for retail and general purpose card as the long-awaited credit normalization began to materialize. Credit deterioration has been more pronounced in the retail card segment owing to the higher loan growth in recent quarters and higher composition of subprime borrowers using retail card products. More broadly, portfolio seasoning of the 2014-2016 vintages, which were characterized by looser underwriting standards, have been a meaningful contributor to the weaker credit performance. This trend is likely to continue into next year for many card issuers as the 2016 vintage reaches peak loss levels. Although not widely anticipated, an increase in unemployment claims could further exacerbate the upward trend in credit card loss rates. Profitability has been declining for the past several years, as reward costs have increased while reserve releases have largely been replaced by reserve builds. Higher loss provisions are likely to remain a challenge for profitability this year as issuers build reserves to reflect the seasoning of recent loan growth. Likewise, profitability could face pressure as revenues from new accounts tend to lag reserve building and card acquisition costs. Borrowers' monthly debt payments can be impacted by the level of interest rates and Fitch expects the Fed to continue steadily raising interest rates over the medium term. However, consumer leverage, as defined by household debt service as a percentage of disposable personal income, has fallen in recent years as a result of historically low interest rates and deleveraging by the consumer. At 15.40% in 4Q16, the ratio has been fairly stable over the past few years, although it remains well below the peak of 18.13% reached in 4Q07 and below the long-term average of 16.50%. Therefore, a moderate pace of interest rate increases over the medium term is unlikely to have a meaningful impact on borrowers' ability to make debt payments absent a more substantial increase in absolute debt levels. Despite recent deterioration in credit, the reduction in subprime exposure following the passage of the CARD Act in 2009 may constrain credit losses to a level below historical averages for most issuers. Notably, bank underwriting standards for credit card loans tightened in 1Q17 for the first time since 2Q10. This could indicate that issuers are becoming more cautious following the acceleration in consumer borrowing in recent years. Fitch believes underwriting standards could tighten further considering the increase in perceived risk, although some issuers are likely to continue to take advantage of attractive risk-adjusted returns. Additional analysis and detail can be found in Fitch's special report: "U.S. Credit Cards - Asset Quality Review 1Q17," published today and available to subscribers through the link above. Contact: Michael Taiano, CPA Director, Financial Institutions +1 646 582-4956 Fitch Ratings 33 Whitehall Street New York, NY 10004 Jared Kirsch, CFA Associate Director, Financial Institutions + 1 212 908-0332 Justin Patrie, CFA Senior Analyst, Fitch Wire +1 646 582-4964 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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