Fitch: U.S. Credit Card Profitability to Remain Challenged

2009-11-11 16:54:16 -

Near-term profitability for U.S. credit card issuers will remain challenged by credit and spend volume, with longer-term earnings prospects dependent on each issuer's ability to adapt to new legislation, according to a new Fitch Ratings report. Although, from a preliminary perspective, Fitch believes the networks, with a higher proportion of fee income, may fare better longer term.

Rising unemployment and credit

card loss rates did moderate during third-quarter 2009 (3Q'09) and early stage delinquencies came down from 2Q'09 peak levels, but Fitch expects higher loss rates into 2010 as delinquency roll rates remain high, bankruptcies increase, portfolio contraction continues, and elevated unemployment rates persist.

Purchase volumes were relatively flat in the third quarter from the prior quarter, but were down 13.7% annually, on average, at the top six card issuers. The fourth quarter should be an easier comparison, given the significant drop-off in consumer spend at the end of 2008, but card companies remain cautious about the holiday season outlook.

The Credit Card Accountability, Responsibility and Disclosure (CARD) Act, signed into law in May 2009, could have a significant effect on card profitability. The inability to re-price existing balances will necessitate higher rates for all cardholders, credit availability will decline, with tighter underwriting criteria and reduced credit lines, and competition in the prime market is likely to intensify. Ultimately, the impact on the longer-term profitability potential of the credit card product will have a lot to do with competitive reactions to the legislation.

While near-term profitability metrics are expected to remain under pressure due to elevated provisioning, smaller portfolios, and reduced purchase volumes, Fitch expects lower earnings will continue to be offset by greater contingent liquidity and stable capital levels at issuers. Still, Fitch is assessing the longer-term impact of the CARD Act on card profitability and, ultimately, on ratings.

In this Fitch Special Report released today: 'Credit Cards: Asset Quality Review 3Q09', Fitch discusses current asset quality trends in the credit card market and provides updated growth, asset quality, purchase volume, and profitability statistics for some of the largest credit card issuers. The full report is available on the Fitch Ratings web site ' www.fitchratings.com : cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww .. .', under the headers Financial Institutions >> Banks >> Credit Card Companies >> ABS.

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Fitch Ratings, New YorkBrian Bertsch, +1-212-908-0549 brian.bertsch@fitchratings.com : mailto:brian.bertsch@fitchratings.com Meghan
(Crowe) Neenan, CFA, +1-212-908-0121(Financial Institutions)Cynthia
Ullrich, +1-212-908-0609 (ABS)