Underlying Credit Card Delinquencies Return to Pre-Pandemic Levels, but ABS Ratings Remain Stable

During the Coronavirus Disease (COVID-19) pandemic, the U.S. consumer remained remarkably resilient, albeit buoyed by federal stimulus payments, along with forbearance and payment deferral programs. However, the latest NY Fed data indicates that for at least five consecutive quarters we have seen mostly upticks in both 30+ and 90+ day transitions into delinquency across credit card receivables as well as auto loans, revealing mounting pressure growing on the seemingly formidable consumer. Consumer credit performance has been gradually normalizing from the exceptionally strong levels that we saw during the pandemic, with delinquencies now approaching pre-pandemic levels. Main observations across DBRS Morningstar’s credit card ABS transactions:

-- Given the backdrop of inflationary pressures, rapid increase in interest rates, historically low overall savings rate, and a possible recession, some consumers will likely come under pressure. Nonetheless, DBRS Morningstar expects credit card ABS ratings to remain stable for the remainder of the year, supported not only by structural elements but also by excess spread levels in the 10% to 15% range, cash-trapping triggers, and early amortization triggers.
-- Subordinate classes are the most vulnerable to higher losses because they are typically supported only by excess spread. However, for the past several years, issuers have typically retained these subordinate classes.

“Seasonally-adjusted charge-off rates at commercial banks reached near historic lows at the end of 2021, clocking in at 1.66%,” said Christopher O’Connell, Senior Vice President, U.S. ABS. However, O’Connell also noted that charge-offs have been slowly creeping back up, hitting 3.15% in the second quarter of this year.

“We expect some consumers may get stretched due to the impact of higher interest rates and the resumption of student loan payments, which borrowers will have to start paying back in October if they do not qualify for exemptions,” said Stephanie Mah, Senior Vice President, Structured Finance Research. “One silver lining, however, has been the strong jobs market, where the unemployment rate stands at 3.5% as of July 2023, close to the lowest level seen in 50 years,” added Mah. While job growth seems to be slowing, wage growth remains strong. Workers have seen average hourly earnings increase by 4.4% over the past year.