Synchrony Loss Warning Jars Market

Is a new round of consumer credit losses on the way for financial institutions?
Matthew HellerJune 15, 2016

Credit card stocks suffered big losses after Synchrony Financial warned that it expected writeoffs on its consumer loans would be higher than anticipated over the next year.

In a regulatory filing, the largest supplier of private-label credit cards in the U.S. said Tuesday that while the loss rate in its portfolio is at “historically low levels,” it was now expecting a 20 to 30 basis-point increase in net charge-off rates and, as a result, it would build up reserves for bad loans starting this quarter.

In April, Synchrony guided that net charge-off rates would be consistent with the very low levels of the past couple of years. Its shares plunged 13.3% to close at $26.45 on Tuesday, while American Express and Discover both dropped 4.1% and Capital One tumbled 6.6%.

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Synchrony CFO Brian Doubles cited problems with late-stage delinquencies as the main reason for the higher loss rate.

“The consumer’s ability to cure themselves when they get into those later due stages has been challenged,” he told a conference on Tuesday. “It’s been challenged all year and we’ve seen just in the most recent data a little bit of the deterioration there.”

According to the Financial Times, credit card units have been a rare bright spot for the big U.S. banks in recent quarters but Synchrony’s announcement “suggests that the cycle for cards has begun to turn.” More than a quarter of the lender’s loan receivables have scores of 660 or below on the FICO scale, which is typically regarded as subprime.

The “weakening performance of three major areas of consumer credit — credit cards, auto loans, and student loans — suggest[s] that a new round of borrower delinquencies and losses for financial institutions could be on the way,” the Wall Street Journal said.

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