LONDON, Feb 18 (IFR) - Following the Bank of England's
explanation last week of which factors will determine the level
of the base rate, Moody's has warned that a rise in short-term
interest rates could prove a setback for the UK credit card
asset-backed securities (ABS) market.
The Bank said in August that it was unlikely to raise the
base rate before the unemployment rate dropped below 7%. And
while this rate dropped to 7.1% last month, it clarified last
week that this is only one of many factors that will drive the
The Bank said there is no immediate pressure to raise rates,
but added that it expects the base rate to rise gradually once
the economy is able to sustain higher interest rates.
Moody's says that such a rise would decrease the excess
spread in UK credit card ABS, which would be credit negative for
the asset class. This is because originators would not be able
to raise asset yield in line with the rise in the Libor-linked
expenses of UK credit card transactions.
Asset yield comprises many components that cannot be changed
to reflect a rate increase, such as fees and recoveries, and
even the interest component of yield is generally subject to
certain restrictions and a time lag.
The rating agency estimates that, on average, around 25% of
trust yield comes from sources that are independent of interest
rate movements. While the majority of UK credit cards have a
variable interest rate, originators cannot reset it within the
first 12 months of the account being open, and no more than
every six months
Moody's further believes that the ability of credit card
lenders to reset variable interest rates could be curbed by
competitive pressures, noting that credit card interest rates
have poorly tracked base rate movements in the past.
Despite these potential pressures, Moody's says that the
prevailing high level of excess spread will cushion the effect
of interest rate increases. Trust excess spread levels are at
their historical peaks, owing to the low Libor rate and strong
The underlying credit card market is also showing tentative
signs of growth. UK credit card lending grew in 2013 for the
first time since 2008, according to British Bankers' Association
data released on February 7 2014, due to a deceleration in the
rate of debt repayment growth compared to the growth rate for
(Reporting by Robert Smith; Editing by Philip Wright and Julian