Fitch: Loss Reserving Tied to Credit Card Portfolio Growth

  Fitch: Loss Reserving Tied to Credit Card Portfolio Growth

Business Wire

CHICAGO -- December 20, 2012

Fitch Ratings expects fourth-quarter credit loss trends for the largest U.S.
card issuers to remain stable, with modest increases in loss reserves for
those exhibiting portfolio growth over the last several quarters. Discover
Financial Services reported today that it increased loss reserves by $38
million in the quarter ended Nov. 30, due largely to the seasoning of newer
vintage receivables, as its average portfolio has expanded 5.2% over the last
12 months. This compares with average credit card contraction of about 5.0%
for the largest three banks in the U.S.

Asset quality trends at Discover and the other large card issuers have
remained largely stable in recent months, with 30-day delinquency rates rising
modestly in November, due largely to seasonality, and net chargeoff (NCO)
rates remaining at historic lows. Still, the pace of improvement in Discover's
fourth-quarter NCO rate continued to moderate, falling 14 bps versus the
previous quarter, compared with a 36-bp sequential decline in third-quarter
2012.

Improvements in credit quality are clearly waning, particularly among those
issuers that are growing their portfolios -- including Discover, American
Express, and Capital One. In contrast, the largest bank issuers (Bank of
America, Citi, and JPMorgan Chase) are still seeing portfolio contraction,
which could modestly delay an uptick in loss rates relative to the issuers
posting consistent portfolio growth. .

Still, we expect card loss performance to begin a pattern of mean reversion
next year for all issuers, with some likely reporting modest deterioration in
NCOs and delinquency performance beginning in the first quarter.

While not part of its base case scenario, Fitch believes credit card asset
quality metrics would hold up relatively well in the short term should the
"fiscal cliff" occur. However, a protracted recession would be more likely to
yield a reversal in unemployment trends and more pressure on industry earnings
and, potentially, ratings.

The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article can be accessed at
www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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