DBRS Highlights the Improving Performance of Canadian Credit Cards in Its Q3 2011 Index

DBRS has today published the Q3 2011 Canadian Credit Card Performance Index. It shows that, at the end of September 2011, the average credit card losses in Canada (4.3%) continued to decline from a peak of 6.4% in November 2009 to the pre-financial crisis levels experienced in 2008 that ranged from 3.4% to 4.6%. The downward loss rate trend is in tandem with further declines in unemployment to 7.1% from 7.4% at the end of June 2011, as well as declining bankruptcies and an improving economic environment. The average loss rate declined by 81 basis points this quarter to 4.3% from 5.1% in the previous quarter. A combination of a rise in the payment and gross yield levels, as well as decreasing losses, provides further credit enhancement to the Notes and indicates improving performance.

Other highlights observed in this quarter include the following:

-- Despite declining average losses, some issuers continue to experience loss rates well above the industry average. The range of loss rates observed decreased slightly from the end of the previous quarter, with a maximum of 10.8% and a minimum of 2.5%.

-- The monthly payment rate saw a gradual increasing trend, reaching over 36% for the first time during this quarter. This positive trend may be an indicator of a change in consumer profile to a more conservative, convenience type user. However, the average payment rate stood at 34.4% at the end of this quarter, almost unchanged from the previous quarter. The range remained large, with a high of 56% and a low of 10%, indicating variability among credit card programs.

-- The gross yield levels also saw an increasing trend. The third quarter finished with an average yield of 21.7%, which is a historical high, up 21 basis points from the end of the second quarter and 57 basis points from the beginning of the year. The increase in gross yield combined with lower loss rates increases excess spread available to the Notes.

-- Excess spread also increased throughout the quarter, ending at 12.9%, 120 basis points higher than it was at the end of last quarter. The range stayed large, however, between the high of 16.3% and the low of 4.2%. Increasing excess spread provides more credit enhancement to the Notes. However, a large range is an indicator of inconsistency among different programs.

-- The aggregate custodial pool ended at $41.2 billion, down by $793.5 million from the prior quarter and by $4.0 billion from the beginning of the year. The outstanding debt balance decreased by $1.4 billion to $22.2 billion from the end of June. The decline is the result of $922.7 million of bond maturities and a total of $525.5 million of asset-backed commercial paper (ABCP) reduction without any new issuance in this quarter. In spite of this decline, credit cards continued to dominate the Canadian securitization market with 32.7% outstanding, slightly down from 33.7% at the end of last quarter, but up from 29.9% at the beginning of the year.

The index is published quarterly and provides data on key performance metrics, including gross yield, loss rate, payment rate and excess spread. To be consistent with other metrics, excess spread is also reported at the issuer level, taking into consideration the weighted-average cost of funds and expenses of all outstanding series. All securitization transactions rated by DBRS that are funded either in the term or ABCP markets are included in the calculation of industry averages. These averages are dollar-weighted and based on the receivables balance of custodial pools at the end of each reporting period. As such, these metrics are monthly results. The custodial pool is generally a subset of an issuer’s managed portfolio, depending on the mix of the issuer’s receivables and the manner in which eligible receivables are selected for securitizations.

In order to provide investors timely and insightful analysis, DBRS monitors each class of all credit card transactions on a monthly basis, focusing on the key performance metrics of securitization portfolios in recent months and, if appropriate, revising base-case assumptions and performing stress testing under various scenarios.

Copies of the index are available at www.dbrs.com or by contacting us at info@dbrs.com.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is DBRS Criteria for Canadian Credit Card Securitization, which can be found on our website under Methodologies.

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