Fitch: Pressure On UK Credit Card Interest Rates may impact ABS Excess Spread
Friday November 14th, 2008 / 10h36
The following is a press release from Fitch Ratings: Fitch Ratings-London-14 November 2008: Fitch Ratings says pressure on UK credit card issuers to reduce interest rates, following the recent 1.5% interest rate cut by the Bank of England, will add further stress to the current performance of the asset class because it may lead to reduced levels of yield being achieved by credit card trusts. However, given that yield compression is factored into Fitch's rating analysis, the current developments are not expected to have an immediate impact on the ratings of notes issued from UK credit card trusts. As credit card trusts typically pay Libor-based interest, any reduction of yield in excess of reductions in Libor would reduce current levels of excess spread. However, Fitch notes that the impact of current developments is mitigated by the fact that current excess spread levels already reflect heightened Libor levels and that a further reduction in interest rates over the near- to medium-term is expected. Nevertheless, any limitations from governmental or regulatory bodies on the ability of credit card issuers to set interest rates will restrict the ability to increase (or maintain) yield to offset increased charge-offs, adding stress to the asset class. Since 2004, average credit card trust yield, as measured by the Fitch Yield Index, has increased gradually to 20.1% for 2008 (September YTD) from 18.6%. This has helped to offset some of the increase in charge-offs which, as measured by the Fitch Charge-Off Index, increased to an average 6.4% from 4.2% during the same period. Given the current UK economic outlook and the likely negative impact on credit card charge-off levels, the ability to increase yield would help to maintain excess spread levels. Recent developments in the US provide some indication of the pressures that UK credit card issuers may encounter. In the US, regulatory and legislative discussions have focused on the credit card issuer's ability to increase rates. Although the regulatory guidance has not yet been finalised and the legislation has not yet been passed, credit card companies are already beginning to prepare changes to their business model to preserve margins (e.g. reducing low rate offers). Ultimately, less flexibility on rate changes may result in fewer extensions of credit and higher base credit costs for cardholders as card issuers seek to maintain yield levels. In the event that UK issuers are unable to maintain yield levels this would have a negative impact on ABS transactions. Falling excess spread has the consequence of triggering cash trapping, in most trusts, and ultimately early amortisation, in all trusts, if three-month average excess spread falls to zero. Early amortisation would reduce the amount of funding available to credit card issuers. Fitch's rating approach applies simultaneous stresses to increase charge-offs and decrease yield. Yield is assumed to decrease from historically derived base case levels, as a result of market stresses, subject to remaining above the assumed Libor rate. Yield is maintained above Libor to reflect the view that issuers would have the ability to re-price credit cards during an increasing interest tare environment, albeit with reduced margins. Reported yield levels typically include fee and insurance income, to which Fitch gives limited credit when setting base case assumptions. For more information on excess spread trapping and amortisation triggers used in UK credit card trusts, please refer to Fitch's report "UK Credit Cards 'BBB' notes - Stress Testing' published 22 May 2008.Contacts: Steven Webber, London, Tel: +44 (0) 207 417 6349; Will Rossiter, +44 (0) 207 417 6301; Grant England, +44 (0) 207 070 5825. Media Relations: Julian Dennison, London, Tel: +44 020 7682 7480, Email: julian.dennison@fitchratings.com. Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/al?rnd=Zl42RD3mDSA12KI2spLZ%2Bg%3D%3D. You can use this link on the day this article is published and the following day.
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