Fitch Ratings Applies Stress Test to UK Credit Cards

Fitch Ratings has passed the UK credit card master trusts after putting it through a stress test. The test only tests the impact on the ratings should performance deteriorate in the areas of charge off, MPR and yield. Other factors include sovereign, counter-party risk, and transaction specific features. Many of the stress tests were better than Fitch expected. Three scenarios were run to demonstrate the amount of stress needed to cause multi-category downgrades of Fitch’s UK credit card ratings.

The moderate stress test reflects an unemployment rate between 11-13%. This would cause charge offs to increase by 75%. This scenario would result in five of six trusts remaining at ‘AAAsf”. With the first severe stress test, the unemployment rate would balloon to 18-21%. Charge-offs would then double from their current rate. However, all ‘AAAsf’ notes would remain investment grade.

The final stress test is the second severe scenario. It incorporates a 100% purchase rate stress, which would significantly reduce the repayment speed of credit card receivables. This would result in two ‘AAAsf’ being downgraded, with the rest remaining investment grade.