Magazine article American Banker

Interest and Stress Rates Seen Ending Strong Run

Magazine article American Banker

Interest and Stress Rates Seen Ending Strong Run

Article excerpt

Analysts expect mostly good news when credit card issuers begin announcing first-quarter performance next week, but some say the good times could be nearing an end.

Card portfolios' overall performance in the past year has been good, with default and loss rates nearing historic lows for some issuers, mostly the prime ones. Economists say the low unemployment rate -- it dropped to 5.2% in March -- helps.

But with debt levels high, interest rates and gas prices rising, and signs that consumers are feeling stress, some say credit card losses and delinquencies cannot go much lower and may begin to rise.

David Hendler, an analyst with CreditSights Inc. in New York, tracks monthly changes in the excess spreads and losses of master trusts, which he says can provide early signs of weakness in card performance. In an interview this week, he said that chargeoffs showed some slight increases in March.

The main reason for the uptick is that because of rising interest rates, consumers have less money available to pay off debts, Mr. Hendler said. "The Fed wind is not at the consumer's back anymore. The glory days seem to be over."

Card credit quality improved last year over 2003, but "you are not seeing it anymore," he said. "There is negligible if any improvement."

In February, Mr. Hendler wrote in a note to clients, "We are concerned that losses could take a turn for the worse as interest rates rise, possibly tipping wobbly consumers over the edge into delinquency and some into default."

But Evan M. Momios, an equity analyst with Standard & Poor's Corp., said that "there is still some room for improvement" in credit quality.

"Over all, the economy remains strong," he said. "Employment numbers are improving, and that environment bodes well for lower credit losses."

James Chessen, the chief economist of the American Bankers Association, agreed with that assessment. …

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