Card Issuers Tumble After Synchrony Sees Higher Write-Offs

by Alex Johnson 0

From the department of completely unsurprising news, a large credit card issuer recently warned investors to expect slightly higher charge-off rates over the next year.

Synchrony, led by Chief Executive Officer Margaret Keane, expects write-off rates to climb 20 to 30 basis points over the next 12 months, and will increase reserves for soured loans beginning this quarter, the Stamford, Connecticut-based firm said in a regulatory filing before U.S. markets opened. Write-offs as a percentage of total average loans were 4.7 percent in the first quarter, up from 4.53 percent a year earlier, the company said in April.

While this specific announcement from Synchrony was not necessarily expected, the news that U.S. consumer credit quality may be starting to deteriorate is absolutely not a surprise.

“There doesn’t appear to be anything that pertains to how we’re underwriting — it appears to be a general softening in the consumers’ ability to pay,” Chief Financial Officer Brian Doubles said Tuesday at an investor conference sponsored by Morgan Stanley in New York. “We’re coming off historic lows; we wouldn’t view this as a step change in consumer behavior necessarily.”

Card issuers are warning that credit trends have deteriorated after years of historically low defaults. Capital One CEO Richard Fairbank said at a conference this month that soured loans are rising, while JPMorgan Chase & Co.’s Jamie Dimon said that credit is “going to get worse.”

What was suprising (at least to me) was how the stock market reacted to the news.

Credit-card issuers were among the worst performing U.S. stocks Tuesday after Synchrony Financial said it expects higher write-offs within the next year as consumers struggle to repay loans.

Synchrony tumbled 13 percent to $26.45, the biggest drop since its 2014 initial public offering, and American Express Co. fell 4.1 percent, the most in the Dow Jones Industrial Average. Capital One Financial Corp. slid the most in almost a year, and Discover Financial Services also declined.

In this instance, market perception seems to be lagging reality. The fact is that we are coming off a legnthy period of low deliquency rates and entering a period of rising interest rates and increased borrowing. Deliquency and charge-off rates are going to go up. The question is how credit card issuers will react to these changes.

Overview by Alex Johnson, Director, Credit Advisory Service at Mercator Advisory Group

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