Secular challenges facing US retailers will negatively affect credit card banks and asset-backed securities (ABS) trusts due to their exposure to the private-label and co-branded credit card accounts, says a recent report. A small number of banks dominate US private-label card issuance, with top 5 accounting for 79 per cent of balances as of early last year.

"As retailers close stores in an effort to improve profitability over the coming years, the trend will put upward pressure on private label charge-offs, owing to the fact that some cardholders will lose access to geographically convenient stores, even as a portion of those cardholders shift at least a portion of their spending to online channels," said Jody Shenn, a Moody's vice president.

Moody's says co-branded cards will experience similar effects from store closures, though to a smaller degree. Co-branded cards can be used at any merchant that accepts general purpose cards utilising the associated payment network (e.g. Visa and Mastercard).

Additionally, sales challenges could create incentives for retailers to push for looser underwriting standards by their card issuing partners, which would weaken the credit quality of these accounts, especially new accounts.
However, private-label and co-branded cards represent only a modest source of credit risk and revenues for most banks and credit card ABS trusts and the negative effects will be limited by the size of their exposure.
"Among the largest private-label card issuers, only Synchrony and Alliance Data rely heavily on the business," said Warren Kornfeld, a Moody's senior vice president. "Private-label and cobranded cards account for almost the entire loan books of both, each with heavy retail card concentrations."

Citi and Capital One rely on private-label and co-branded card loans for a high single-digit percentage of their earnings, also with heavy retail concentrations. Wells Fargo and TD Bank have very modest retail private-label and co-branded credit card exposures relative to their overall loan portfolios.

As per the 'Cross Sector -- US: Store closures will hurt private label and co-branded credit card performance' by Moody's Investors Service, the largest issuers are Synchrony Financial Inc (unrated); Citigroup Inc (Baa1, stable); Alliance Data Systems Corporation (unrated) via its Comenity Bank (unrated) subsidiary, which was formerly known as World Financial Network National Bank; Capital One Financial Corporation (Baa1, stable); Wells Fargo & Company (A2, stable) and TD Group US Holdings LLC (A2, stable).