U.S. credit card asset-backed securities (ABS) new issuance volume totaled approximately $12.6 billion as of the first half of 2019, down 38.4% from $20.5 billion issued in the first half of 2018. Through the end of 2019, we anticipate total U.S. credit card ABS new issuance of $15-$20 billion, driven by the refinancing of maturing ABS notes, market conditions, cost of funds considerations vis-à-vis bank deposits, and issuer funding.

Credit card securitized trust performance remains stable and strong, with losses and delinquency rates across bankcard trusts continuing to trend broadly flat. Though there has been a slight uptick in these metrics within private label trusts, performance in our credit card quality index (CCQI) remains steady overall, and we expect our ratings on credit card ABS to remain stable.

Credit Conditions Remain Friendly For Now

As the U.S. economy continues into its decade-long expansion, the U.S. consumer has shown little sign in 2019 of reigning in spending growth, though trade headwinds and recent market volatility may begin to have an impact over the remainder of the year. According to the Federal Reserve Bank of New York, total household debt reached another record high in second-quarter 2019, at $13.9 trillion, the 20th consecutive quarter of debt growth. Credit card balances increased slightly in the second quarter, totaling $870 billion as of June 2019. In comparison, the U.S. CCQI bankcard and private label receivables represent approximately $220 billion.

S&P Global Ratings' economists recently increased their recession forecast to 30%-35% for the next 12 months from 25%-30% in the first quarter of 2019. While strong consumer fundamentals reduce the likelihood of recession, unpredictable trade policy and a persistently weak global industrial backdrop counterbalance these positives. Our economists expect the growth of the U.S. economy will likely slow over the next couple of years to a long-run growth potential level of 1.8% in 2020 from an estimated 2.5% in 2019, as the boost from fiscal policy fades amid uncertainties in global conditions and financial market sentiments.

The most recent (June 2019) Federal Reserve Dodd-Frank Act Stress Test (DFAST) results showed that credit card losses remain the largest category of loan losses in the severely adverse scenario, totaling $107 billion. Importantly, our base-case charge-off assumptions are set well above actual trust performance levels and are above current managed pool loss levels. Furthermore, our 'AAA' stress assumptions are greater than the Fed's severely adverse scenario for each of the large card banks (see table 1). Of note, the Fed announced that certain less complex banks would not be subject to the 2019 DFAST (including American Express and Discover); as such, only 18 of the 35 banks subject to Fed testing were tested this year as part of DFAST.

Table 1

Our analysis focuses on the banking industry, since banks remain the main drivers of the U.S. credit card securitization market. Broadly speaking, however, the percentage of loans financed by securitization is still historically low. This leaves the credit card securitization sector with significant room to grow with the support of steady credit demand from investors looking for yield.

Managed Pool And Trust Receivables Continue Modest Growth

Among the six largest lenders, managed pool receivables increased in the second quarter of 2019 approximately 5.4% year over year, driven by a combination of new account origination and an approximately 8.4% increase in purchase volumes over the same period. Despite the growth in managed portfolios, lower-cost deposits and high payment rates, among other factors, have led to the steady decline in trust receivables tracked in our U.S. bankcard CCQI, which have fallen by approximately $50 billion, or roughly 20%, over the past five years (see chart 1). There continues to be a positive shift in distribution to an increased percentage of higher FICO obligors in the securitizations, which offsets the lower amount of receivables.

Chart 1

Little Change To Steady Bankcard Performance

At the managed-pool level, average quarterly losses declined to 3.35% as of second-quarter 2019, while average delinquencies declined to 2.18% from 2.34% quarter over quarter (see chart 2). During the same period, the average quarterly loss rate increased for securitized pools to 2.36% from 2.30%. Average delinquencies increased slightly to 1.45% from 1.44%. Loss rates in the six largest credit card lenders' managed pools are slightly higher than in their securitized trusts because receivables in the managed portfolio include a larger percentage of newly originated, unseasoned accounts, as well as accounts that are seasoning and are not designated to the master trusts. The managed pools correspondingly have a higher percentage of accounts with lower FICO scores compared to accounts designated to the master trusts.

Over the next two years, we forecast that bankcard loss rates will continue gradually rising to about 3.0%-4.0% in securitized trusts and 4.0%-5.0% in the industry as a whole from historical lows of around 2.0%. Overall, bankcard performance is within our expectations and in line with our base-case assumptions. As a result, we expect our ratings to remain stable.

Bankcard securitized losses remain well below historical levels, tracking roughly 1.3 percentage points below the unemployment rate for the second quarter, and performance remains strong across ABS trust portfolios.

The six bank trusts' average yield of 20.6% for second-quarter 2019 continues to benefit from higher interest rates and elevated interchange levels from higher purchase volumes. Higher yields and low losses continue to boost excess spread, which, currently at 14.3% for the second quarter, can provide cushion against potential increases in delinquencies and net losses. The trusts' average payment rate, 30.3% for the quarter, continues to be strong and demonstrates high levels of transactor-type activity. In our rating process, we consider the effects of high payment rates in the trusts, which could contribute to further declines in securitized receivables in 2019. This may be offset by an increase in trust additions, which could include a larger percentage of nonprime or new loans, which in turn could lead to higher trust losses. However, additions of eligible accounts and receivables to the trust portfolios beyond dictated quarterly and annual limits are generally subject to rating agency review.

Chart 2

Private-Label Performance Keeps On Truckin' While Traditional Retail Keeps On Sufferin'

The three-month average net charge-off rate for U.S. private-label CCQI receivables increased to 5.5% in second-quarter 2019, versus 5.3% in second-quarter 2018 (see table 2). The three-month average 30-plus-day delinquency rate decreased slightly to 3.1% from 3.2% over the same period. Private-label credit card receivables have historically exhibited about 2% higher default rates than general purpose bankcards. Lower use of private-label cards and lower payment priority, along with typically newer accounts and lower-credit-quality obligors, among other factors, have resulted in comparatively weaker retail credit card portfolios versus bankcards.

In spite of U.S. consumer spending growth over 2019, traditional retailers are struggling to adapt to digital shopping and successfully compete against now-established online merchants. The ease, personalization, and price competitiveness available to online shoppers continues to exert significant pressure on traditional brick-and-mortar retailers; in particular, those historically tied to the shopping mall business model. In many instances, such retailers are consequently suffering from high operating costs, thin margins, high debt loads, and weakening financial performance. This is compounded by brands increasingly investing in selling directly to consumers and skipping third-party retailers and department stores entirely. As a result, we are seeing more store closures, corporate credit rating downgrades, and an increasing likelihood of bankruptcy among sector participants. To date in 2019, there have been six defaults in the U.S. retail and restaurants subsector and two bankruptcies.

As the sector evolves in response to these new market dynamics, we expect to observe a marginal increase in performance volatility in private-label credit card receivables, particularly from trusts with less diversified merchants that offer discount programs. For private-label trusts, where a card is tied to a particular merchant, store closures could decrease card utility, which can negatively affect trust performance. If a private-label credit card program were terminated because a merchant is closing, cardholders' incentive to repay their loan would likely diminish, thus potentially increasing losses.

Importantly, when establishing our base-case performance assumptions and rating category stresses, we consider multiple stress scenarios, including the loss of merchant relationships and how their performance and size could affect a pool's performance, as well as the impact of merchant bankruptcies and their receivables on a pool's performance. As such, we believe our ratings on related ABS are likely to remain stable because our base-case and stress assumptions, as well as our performance simulations, account for these considerations.

Table 2

U.S. Credit Card Quality Index Performance

We observed the following performance trends in the U.S. bankcard CCQI in the second quarter (we rounded the numbers in this report to one decimal point, but percent changes are based on unrounded figures) (see chart 3):

• The three-month average principal receivables totaled $187.0 billion, down 0.5% year-over-year and 1.1% from first-quarter 2019.
• The three-month average charge-off rate was 2.5%, down 3.1% year-over-year and up 2.3% from first-quarter 2019.
• The three-month average 30-plus-day delinquency rate was 1.5%, down 1.0% year-over-year and 6.5% from first-quarter 2019.
• The three-month average total payment rate was 30.0%, up 5.3% year-over-year and 2.6% from first-quarter 2019.
• The three-month average yield was 20.5%, up 5.8% year-over-year and 1.4% from first-quarter 2019.
• The three-month average excess spread was 14.3%, up 7.0% year-over-year and 1.8% from first-quarter 2019.

Chart 3

U.S. Private-Label Credit Card Receivables Performance

We observed the following performance trends in the U.S. private-label CCQI in the fourth quarter (we rounded the numbers in this report to one decimal point, but percent changes are based on unrounded figures) (see chart 4):

• The three-month average principal receivables totaled $33.1 billion, up 11.8% year-over-year and down 0.2% from first-quarter 2019.
• The three-month average charge-off rate was 5.5%, up 4.0% year-over-year and down 2.5% from first-quarter 2019.
• The three-month average 30-plus-day delinquency rate was 3.1%, down 2.7% year-over-year and 11.4% from first-quarter 2019.
• The three-month average total payment rate was 19.3%, up 3.3% year-over-year and 2.7% from first-quarter 2019.
• The three-month average yield was 26.3%, up 0.2% year-over-year and down 1.7% from first-quarter 2019.
• The three-month average excess spread was 16.2%, down 2.0% year-over-year and 1.5% from third-quarter 2018.

Chart 4

Securitization Issuers Versus The Index

Table 3

Pools Include High-Credit Quality Accounts

Card securitizers have shown significant improvement in the asset quality of their trust pools since the crisis. Trust collateral remains highly seasoned, resulting in strong credit quality (see table 4 and charts 5-10).

Table 4

Chart 5

Chart 6

Chart 7

Chart 8

Chart 9

Chart 10

S&P Global Ratings' Assumptions And Stresses For Securitized Bank And Retail Credit Card Programs Rating Actions

Our base-case assumptions for bank and private-label credit cards are outlined in tables 5a, 5b, and 6.

Table 5a

Table 5b

Table 6

Rating Actions

See most recently, "2019 U.S. And Canadian Credit Card ABS Review," published Jan. 14, 2019.

Table 7

Appendix I: Largest Six Bankcard Trusts' Performance

Chart 11

Chart 12

Chart 13

Chart 14

Chart 15

Appendix II: CCQI Performance Variables

The CCQI is a monthly performance index that aggregates performance information across S&P Global Ratings' rated transactions in the following key risk areas: receivables outstanding, yield, payment rate, charge-off rate, delinquencies, base rate, and excess spread rate.

(We determine each master trust's weighting by dividing its outstanding eligible principal receivables by the total outstanding eligible principal receivables for all trusts included in the index. We then determine the CCQI weighted average performance variables by adding the result of each master trust's variables multiplied by each master trust's respective weighting.)

Receivables outstanding

The aggregate outstanding eligible principal receivables of credit card accounts backing each master trust at the end of the collection period.

Yield

The weighted average total trust income for the collection period, as a percentage of eligible principal receivables (annualized).

Total payment rate

The weighted average total monthly collections (obligor principal and finance charge payments), as a percentage of total outstandings.

Charge-off rate

The weighted average losses on principal receivables for the collection period, as a percentage of eligible principal receivables (annualized).

Delinquencies

The weighted average past-due amount for the collection period, as a percentage of the current month's eligible principal receivables.

Base rate

The weighted average cost of funding (the sum of the certificate rate on a securitization and the corresponding transaction servicing fee) for the collection period.

Excess spread rate

The weighted average surplus of cash inflow for the collection period (yield minus charge-offs minus the base rate).