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7 Improving Credit Card Stocks

NEW YORK (TheStreet) -- For most of the nation's largest credit card lenders, delinquency rates continued to decline during February, while card portfolio profitability increased.

Based on master trust filings, KBW reported on Friday that the seven largest credit card securitizers in February saw their average annualized loan charge-off rate decline to 4.15%, from 4.25% in January, and 6.61% in February 2011.

Meanwhile, the average card portfolio yield increased to 21.28% in February, from 20.06% in January, although it was down from 22.51% a year earlier.

Factoring in the improved loss rates, the average excess spread -- a profitability measure showing how much of the portfolio yield is kept by the secrutizer, after netting-out the securities' coupon rate, loan losses and servicing fees -- increased to 13.19% from 12.25% the previous month, and 12.55% a year earlier.

KBW analyst Sanjay Sakhrani said that in "average industry charge-offs still remain in favorable territory below normalized levels of roughly 5%," and that in February "there was a clear industry-wide movement downward in delinquency rates, which should potentially be a positive for future charge-off rates."

The average 30+ days delinquency rate (except for Citigroup (C) which reports delinquencies of 35 or more days) was 2.99% in February, improving from 3.05% the previous month and 4.02% a year earlier.

Regarding the overall health of the major card securitizers, Sakhrani said "credit quality is trending better than our expectations. Delinquency rates continued to remain constructive with sequential movements in line to slightly better-than-typical seasonal trends seen in February. In terms of loan growth, balances contracted sequentially in February, but for the most part still remained in-line to slightly above our 1Q12 estimates.

The following is a quick review of all seven securitizers covered in the KBW report, along with stock performance and price multiples, and KBW's recommendations. The seven are listed in ascending order by excess spread for their card securitizing subsidiaries.

Sakhrani says that it's not really fair to compare excess spreads, because "during the downturn, some issuers [including Discover (DFS) and American Express (AXP)] provided subordination to their trusts, so their excess spreads are inflated by an effective subordination subsidy."

But for the card securitizer with the highest excess spread, "there was no subordination" according to Sakhrani, so we're looking at a pure number.

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