Credit Card Chargeoffs Continue to Rise; 10% Rates May be Seen in 2009

Credit card chargeoffs are continuing to grow, with no immediate signs of any change despite some improvement in overall financial institutional performance in the last couple of months.

Financial institutions will likely be looking to sell off more of their credit card debt, however, Kaukin Ginsberg analyst Dimitri Michaud said that large supply of portfolios mean that debt sales will continue their trend of weak pricing.

“There doesn’t appear to be any sign of this trend slowing down,” Michaud said, pointing out that while many consumers have cut back on spending, they aren’t cutting back as fast as their earning power is eroding. Earning power continues to drop as people lose jobs and part-time workers lose hours – meaning less earning power, even if they are still employed.

“Chargeoffs have been increasing steadily since 2007,” Michaud added.

Michaud monitors credit card performance for his Credit Card Performance Index (CCPI), part of the Kaulkin Ginsberg Consumer Finance Report. The CCPI tracks the performance of securitized credit card receivables for the nation’s 10 largest credit card master trusts. The latest CCPI showed continued weakness in all three CCPI components: the card charge off rate was at 8.43 percent, the delinquency rate was 6.38 percent and the recovery rate was 0.54 percent.

Major credit card issuers have also reported deterioration in credit card performance.

Card loss rates during economic stress generally track the unemployment rate, but bankers at J.P. Morgan Chase and Bank of America have warned recently that the loss rates could exceed the unemployment rate in this severe downturn.

J.P. Morgan Chase said that charge-offs at its Chase card operations would likely hit 9 percent to 9.5 percent soon. The company said its managed net charge-off rate hit 7.7 percent in the first quarter, up from 5.6 percent the previous quarter and well above the 4.4 percent seen in the year ago period.

Capital One, in its first quarter earnings announced after the close of the stock market Tuesday, announced that charge-offs increased to 8.39 percent in the first-quarter from 7.08 percent in the fourth quarter.

Capital One set aside $124.1 million for loan losses, anticipating a further deterioration of its credit portfolio that is under pressure as unemployment rises.

The unemployment rate, as reported by the Department of Labor, for March was 8.5 percent, up from 8.1 percent in February.

The ARM Unemployment Rate, created by Kaulkin Ginsberg, rose 8.28 percent to 13.07 percent in February, according to the latest Kaukin Ginsberg Consumer Finance Report. The ARM Unemployment Rate is a measure of unemployment that gages the total impact of labor market weakness for the ARM industry by aggregating unemployment and underemployment among the demographics most likely to fall within the industry’s purview.

The report also shows that Consumer Default Risk Index rose 25.3 percent to $24.53 billion. The index is a monthly barometer of how bankruptcy and employment levels are likely to impact collections and bankruptcy account valuation. The indicator is a measure of risk and the associated dollar amount of outstanding credit that is at risk of non-contractual default due to bankruptcy. It is a forward-looking measure of how much debt could be charged-off in the future.