UK credit card indices showed improving trend in December

Moody’s Investors Service’s UK credit card indices continued to display an improving trend in December 2007 as measured by key performance indicators compared to the previous year.

The rating agency’s latest index report said that although performance in the UK credit card market has been supported by a relatively strong economic backdrop and actions taken by credit card originators, some uncertainty persists with regard to performance trends from the latter half of 2008 onwards.

“The majority of credit card trusts exhibited stable to improving performance metrics over the fourth quarter of 2007, in line with the UK‘s strong economic performance,” explained Sebastian Hoepfner, a Moody’s Senior Associate and co-author of the report.

Both charge-off and delinquency rates decreased slightly. The aggregate index charge-off rate in December 2007 was 6.04%, 133 basis points lower than the figure one year previously, whilst the aggregate index delinquency rate was at 5.83%, 37 basis points down on the year.

The Moody’s report noted that trends in payment rates and gross yields have also been positive, ignoring the seasonal factor applicable to the month of December. Although the index aggregate payment rate decreased in December 2007 to 16.38% from 17.69% in November, it remains in line with typical December levels seen in recent years. Gross yields also fell somewhat compared to November but, at 19.50%, were up from the year-ago figure.

“Although UK economic growth figures in the final quarter of 2007 proved to be stronger than most had expected, the peak in the economic cycle passed in the middle of the year and expectations are for a slowing of GDP growth to around 2% in 2008 — somewhat below trend. Some credit card obligors may be vulnerable to this slowdown in the context of consumer debt levels remaining elevated,” cautioned Nitesh Shah, a Moody’s Economist and report co-author.

“Credit card originators generally expect performance to remain stable during the first half of 2008 but all have noted the degree of uncertainty surrounding possible performance trends in the latter part of the year given the expected macroeconomic softening,” said Cher Chua, analyst and report co-author.

Specifically, Moody’s believes that pressures such as a rise in unemployment levels or living costs could lead to a deterioration in credit card portfolio performance over 2008.

“However, we also note that trust excess spreads remain positive and few series are currently in breach of their excess spread trap triggers,” Chua added.