Fitch: US Credit Card Asset Quality Weakening as Underwriting Loosens

NEW YORK--(BUSINESS WIRE)-- U.S. credit card asset quality is likely to continue to weaken over the near to medium term, according to the latest U.S. Credit Cards 3Q16 Asset Quality Review report from Fitch Ratings.

"The competitive credit card market has given way to looser underwriting standards and should contribute to weaker credit performance, albeit better than pre-crisis levels," said Michael Taiano, Director, Fitch Ratings.

In Fitch's view, the recent convergence of general-purpose receivables growth and purchase volume growth has been driven by looser underwriting standards, pent up demand for credit, and strengthening consumer confidence. Some issuers, including Capital One Financial Corporation and Synchrony Financial, have publicly signaled expected credit deterioration in their portfolios and profitability has been weakened by higher reserve builds.

According to the Federal Reserve, revolving credit, which mostly consists of credit card loans, amounted to $978.8 billion, up 6.0% from 3Q15. Revolving credit was at its highest level since January 2009, when it last exceeded the $1 trillion mark. At 3Q16, revolving credit was only 4.2% below the peak level reached in April 2008, suggesting that underwriting standards have loosened to some extent.

Card profitability has been in decline since 2013 as credit loss reserves and rewards costs have risen, although returns remain attractive compared to other lending products. Fitch expects higher loss provisioning will be a headwind for profitability in 2017 as issuers further build reserves to cover future losses as loan growth accelerates.

Fitch's 2017 sector outlook for finance and leasing companies is negative, in part due to expected asset quality reversion which would challenge profitability. However, Fitch's 2017 rating outlook for finance and leasing companies is stable. "Fitch believes most card issuers are well positioned to benefit from a potential interest rate rise and will likely maintain strong capital and liquidity levels in support of current ratings," added Taiano.

The full report 'U.S. Credit Cards - Asset Quality Review 3Q16,' can be found at www.fitchratings.com or by clicking on the link.

Additional information is available at 'www.fitchratings.com'.

Related Research

U.S. Credit Cards -- Asset Quality Review 3Q16

https://www.fitchratings.com/site/re/890457

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Fitch Ratings
Michael Taiano
Director
Financial Institutions
+1-646 582-4956
Fitch Ratings
33 Whitehall Street
New York, NY
or
Jared Kirsch, CFA
Associate Director
Financial Institutions
+1-212-908-0332
or
Media Relations:
Hannah James, New York, + 1 646-582-4947
Email: [email protected]

Source: Fitch Ratings

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