U.S. and Canadian credit card collateral performance has remained steady since the onset of COVID-19 restrictions in March, cushioned by originators' forbearance programs, unprecedented government pandemic assistance payments, and the strong credit profile of the collateral pools. However, S&P Global Ratings believes the expiration of supplemental unemployment insurance payments in both countries pose risks for future collateral performance--if the labor market doesn't return to normal soon.

Our base-case and stressed assumptions for credit card charge-offs, payment rate, and yield reflect our view of expected performance during multiple economic scenarios and forecasted economic variables such as unemployment levels and bankruptcy rates. As such, given our current macroeconomic outlook for the U.S. and Canada, we believe our assumptions for the trusts we rate adequately capture the risks and remain relevant (see Appendix I).

Collateral Performance Remains Steady

The widespread cessation of economic activity due to the COVID-19 pandemic resulted in severe economic dislocation in the U.S. and Canada. Second-quarter annualized real gross domestic product (GDP) declined 32.9% in the U.S. and 13.8% in Canada as of May 2020. Despite this grim backdrop, the collateral performance of U.S. and Canadian credit card trusts for the first half of the year remains steady (see tables 1 and 2) and in-line with non-recessionary norms (see Appendices II-IV).

Table 1

Table 2

We believe credit card collateral performance since March has been cushioned by:

• Forbearance initiatives (minimum payment deferral, late fees waiver, etc.) offered by originators to obligors experiencing COVID-19-related hardships;
• Unprecedented government pandemic assistance payments. In the U.S., The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided a supplemental $600 per week in unemployment benefit. In Canada, The Canada Emergency Response Benefit (CERB) provides C$500 per week to those directly affected by COVID-19; and
• The strong credit profile of the collateral pools. On average, 90%, 88%, and 83% of U.S. bankcard, U.S. private-label, and Canadian credit card receivables, respectively, are from obligors with credit scores of 660 and above; and about 0.20%-0.40% of the receivables are associated with obligors with no credit scores, which limits the fallout from the economic strata impacted most by the pandemic.

Forbearance

Across the managed portfolios (the domestic segment of total credit card receivables on balance sheet) of U.S. bank originators for the trusts we rate, the reported dollar amount of forbearance granted through June, as a percentage of the managed portfolio, ranged from of 3.0% to 9.6%. The percentage of receivables that remained under forbearance declined as of June and ranged from 1.0% to 5.5%, and include a significant portion that has made at least one payment. In Canada, the forbearance amount at the managed portfolio level was in the 1.0%-7.0% range through April. Although the amount that remains under forbearance will not be known until Canadian bank originators' July results are available, anecdotal evidence suggests a status similar to those of the U.S. We also noted that, in anticipation of higher losses, bank originators have increased their provision for credit losses across their asset portfolios, including credit cards.

We believe the reduction in amounts under forbearance, coupled with payments from accounts that are still in forbearance, is directly due to supplemental pandemic assistance payments through the CARES Act in the U.S. and CERB in Canada. To put this into perspective, regular employment insurance benefits are estimated to cover about 45% of lost wages in the U.S. (though actual amount can vary by state) and a maximum of 55% in Canada. Together with unemployment insurance benefits, the supplemental payments bridge that gap and, in some cases, provide weekly benefits that exceed the earning lost due to unemployment, particularly for self-employed, part-time, minimum, or lower waged workers--an economic strata generally associated with credit scores of 660 and less.

This normalization of income during the COVID-19 economic dislocation has allowed borrowers to fulfill financial obligations such as credit card payments, which has had a positive impact on collateral performance. With rated trust receivables averaging 20.0%-45.0% and 25.0%-60.0% of U.S. and Canadian bank originators' managed portfolios, respectively, the cushioned impact of forbearance and supplemental pandemic assistance payments for obligors with credit score of 660 and less is evident in credit card collateral performance as of June.

Charge-offs (loss rates)

Charge-offs were trending up in the first quarter, partly due to a denominator effect as receivable balance declined. However, there has been a noticeable reduction in 60-plus-days delinquencies and charge-offs since the onset of COVID-19-related forbearance programs in late March, which, when combined with payments, tends to make the account current and stop the delinquency clock. This is especially true in the U.S. retail-private label trusts, where there are a relatively larger proportion of obligors with credit score of 660 and less.

Yield

Yields declined immediately after March due to payment deferrals, waived late-fees, and lower interchanges from reduced spending, offset somewhat by reduced charge-offs and the denominator effect as receivable balance declined. However, excess spread remains robust.

Payment rates

Payment rates declined in April through June, driven by transactors/convenience users (i.e., obligors who charge their cards and pay the balance in full each month), shifting spending patterns as leisure and travel-related activities and nonessential purchases declined, as well as, to a lesser extent, accounts granted forbearance.

Receivables

The shift in spending has contributed to the decline in receivable balance. Each trust has an asset test requirement, in which early amortization could occur if the receivables fall below the minimum required level and are not cured. Some trusts, although not at risk of an asset test breach, have added receivables to their collateral pools. The excess receivables, which average 20.0%-60.0% across U.S. bank, U.S. retail, and Canadian trusts as of June and are higher than the required minimum of 2.0%-7.5%, mitigate the risk of an asset test breach.

The gradual reopening of businesses across the U.S. and Canada since May 2020, together with the increase in consumer spending, has had a positive impact on collateral performance, particularly receivables, payment rate, and yield. Charge-offs and delinquencies continue to be influenced by strong collateral credit characteristics and forbearance programs, which have duration of one to six months and should start to expire in August through September. During this time, delinquencies and charge-offs are expected to remain low and range-bound. Accounts not regularized or granted further forbearance consideration at the end of the forbearance period will go through the delinquency cycle and charge-off. We expect delinquencies to increase in the fourth quarter and charge-offs to increase from the end of the fourth quarter through first-quarter 2021. The magnitude of the increase will depend largely on the dollar amount of receivables under forbearance and emerging risks that can impact future collateral performance.

Unemployment Supplement Reductions Pose Risks

The expiration of supplement unemployment payments under the CARES Act (which expired on July 31) and CERB (which will expire on Oct. 3), along with the rise in new COVID-19 cases and the existential threat a prolonged pandemic poses to the full reopening of businesses, are challenges that could undermine future collateral performance. Estimates suggest that supplemental payments have benefited approximately 25 million Americans and 3 million Canadians. Without unemployment supplements, employment insurance benefits are estimated to cover about 45% of wages in the U.S. and 55% in Canada.

The U.S. Congress is debating temporarily reinstating the supplement at a lower amount, while anecdotal evidence suggests the Government of Canada is considering changes to its program. Nonetheless, the final outcome remains to be seen.

The supplemental unemployment payments are not intended to be indefinite. However, with the increase in COVID-19 cases since July hindering the full reopening of businesses, the removal or reduction of supplemental unemployment benefits payments (without an almost immediate corresponding offset in employment earnings) will hurt obligors' ability to continue fulfilling their credit card payments and, by extension, negatively impact collateral performance.

Credit card receivables have a geographic distribution that is generally in-line with the populous states in the U.S. and provinces in Canada. Therefore, given the elevated unemployment levels in these states and provinces (tables 3 and 4), there is an increased likelihood of credit risk migrating up the credit curve, engulfing salaried full-time workers who are working from home and have not been severely impacted to-date. Nevertheless, we believe the long-term mitigant is not supplement unemployment benefits but the restoration of labor markets.

Table 3

Table 4

Our Rating Assumptions Capture Risks Adequately

Notwithstanding the possibility of the emerging risk to collateral performance, our base-case and stressed rating assumptions (see Appendix I) reflect our view of expected performance during multiple economic scenarios and forecasted economic variables such as unemployment levels and bankruptcy rates. We also consider adverse scenarios, such as insolvency of retail partners and the removal of receivables from the trust (see "2019 U.S. And Canadian Credit Card ABS Review," published Jan. 14, 2019). Our charge-off (loss rate) assumptions are generally above the trusts' current performance, and our payment rate and yield assumptions are generally below the trusts' current performance. As such, given our current macroeconomic outlooks for the U.S. and Canada, we believe our assumptions remain relevant (see "The U.S. Faces A Longer And Slower Climb From The Bottom," published June 25, 2020, and "Canada's Economy Faces A Patchy Recovery," published June 29, 2020).

When modeling credit card asset-backed securities (ABS) cash flows, we assign a purchase rate credit based on our credit rating on the originator. If the credit quality of the originator deteriorates, the purchase rate credit we assign may be lowered, which could result in negative rating actions across the capital structure, absent any mitigating factors such as excess credit enhancement. For U.S. and Canadian credit card ABS where we assign purchase rate credit, most of the originators currently benefit from having stable rating outlooks and/or could withstand a several-notch downgrade before reductions in our purchase rate assumptions would be required.

Our 2020 outlook for U.S. and Canadian credit card ABS collateral performance is somewhat weaker and our rating performance trend is stable. We will closely monitor the receivables performance and any updates to our macroeconomic outlook to determine if any credit or liquidity pressures warrant rating action(s).

S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The consensus among health experts is that the pandemic may now be at, or near, its peak in some regions but will remain a threat until a vaccine or effective treatment is widely available, which may not occur until the second half of 2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research at www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Related Research

• Global Banks Outlook Midyear 2020: Temporary Shock, Profound Implications, July, 9, 2020
• Ratings Component Scores For The Top 200 Banks Globally--July 2020, July 9, 2020
• Canada's Economy Faces A Patchy Recovery, June 29, 2020.
• The U.S. Faces A Longer And Slower Climb From The Bottom, June 25, 2020
• Canadian Banks Are Set To Face COVID-19 Related Headwinds From A Position Of Strength, April 16, 2020
• Assessing The Credit Effects Of COVID-19 On U.S. And Canadian Credit Card ABS, March 25, 2020
• 2019 U.S. And Canadian Credit Card ABS Review, Jan. 14, 2019

Appendix I – Charge-off (Loss) Rate

Table 1A

Table 1B

Table 1C

Table 2A

Table 2B

Table 2C

Table 3A

Table 3B

Table 3C

Table 4A

Table 4B

Table 4C

Appendix II – Charge-off (Loss) Rate Performance

Chart 1A

Chart 1B

Chart 1C

Appendix III – Payment Rate

Chart 2A

Chart 2B

Chart 2C

Appendix IV – Yield

Chart 3A

Chart 3B

Chart 3C

The analysts would like to thank Jonathan Zimmerman and Stefan Bratic for their contributions to this report.