Credit Trends Continue To Improve, But Slow Growth Likely

Credit quality trends

Sterne Agee analysts Todd Hagerman, Robert Greene and Jennifer Dugan review February Master Trust Data, highlighting that underlying credit trends generally remain positive, while the outlook for growth remains challenging.

With delinquencies already trending at historically low levels, meaningful improvement in February Master Trust data was somewhat unlikely. As such, delinquencies and total charge-offs were mixed across the issuers. However, underlying credit trends generally remain positive, although the growth outlook remains challenging.

February Master Trust data results

February Master Trust data were released on Monday afternoon, overall reflecting a continued slowing of the cyclical improvement in underlying credit quality. Overall results were somewhat mixed, as total delinquencies ticked up, although NCOs (net charge-offs) decreased on a sequential month basis for most of the card issuers. That said, the February data appeared well within normal monthly variances. Altogether, credit quality continues to trend at levels not seen since the pre-crisis era, with both credit losses and delinquencies registering well below 3%. However, as credit metrics continue to trend at or below “normalized” levels, concerns remain surrounding continued contraction in overall outstanding balances.

February results were effectively within expectations

Total receivables outstanding of about ~$238B were down about down 2-3% from January levels, which we attribute primarily to seasonal paydowns following holiday-related spending. Overall, managed credit card losses were down from January results, registering at 2.16%, with most of the issuers posting a sequential month improvement. Discover Financial Services (NYSE:DFS) and American Express Company (NYSE:AXP) posted sequential increases in net losses, up 8 bps and 38 bps, respectively. From the prior year’s period, total average loss was 101 bps lower than the 3.17% posted in the prior year’s month.

Delinquency trends tick up somewhat

Overall delinquency trends have remained stable, meaningfully below 2007 (pre-crisis levels) and generally at historically low levels. Average total delinquencies of 1.60% represented a 2 bps decrease from the 1.58% posted in January. We would note that of the four companies that saw an overall increase in total delinquencies, the rate of increase was about 1-5bps, or very manageable, in our view.

credit delinquency

Despite continued credit improvement, growth remains a concern

While we remain encouraged by the steady credit quality results exhibited in the February Master Trust Data, it appears as though substantial improvements are unlikely at the current levels. Additionally, overall receivables volume remains a concern. At ~$233B (adjusted), this represents a ~37% decline from late 2008 levels. JPMorgan Chase & Co. (NYSE:JPM) current balances represent about a ~52% decrease from 2008 highs, followed by about a ~44% decrease for Bank of America Corp (NYSE:BAC).

Credit performance

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