“There Is A General Softening In The Consumer’s Ability To Pay” – Why Credit Card Companies Are Crashing


“There Is A General Softening In The Consumer’s Ability To Pay” – Why Credit Card Companies Are Crashing.” (InvestmentWatch)

On the day in which the government reported modestly stronger than expected retail sales for the month of May, signalling a return to strength for spending and the US consumer – the driving force behind 70% of US GDP – a far more ominous statistic was revealed by credit card company Synchrony Financial, which earlier today announced in a regulatory filing that it 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.

While the current quarter increase in bad loans was not too dramatic, with write-offs as a percentage of total average loans rising modestly to 4.7% in Q1 from 4.53% a year earlier, it was the company’s troubling guidance that has attracted the market’s attention. The company forecast that starting in Q2 2016 it expects higher reserve builds with allowance for loan losses likely to increase sequentially. Even more disturbing was its statement later during an investor conference, which sent the entire credit card space plunging, and putting a big question market yet before the so-called consumer recovery.

This is what the company’s CFO Brian Doubles said Tuesday: “There doesn’t appear to be anything that pertains to how we’re underwriting – it appears to be a general softening in the consumer’s ability to pay.”

And while he added that “we’re coming off historic lows; we wouldn’t view this as a step change in consumer behavior necessarily” the market disagreed.  As a result of the one-two punch of worse results and poor guidance the stock price of Synchrony, which went public in July 2014 after splitting off from General Electric and issues private-label credit cards for dozens of retailers, including Wal-Mart Stores Inc., Dick’s Sporting Goods Inc. and Men’s Wearhouse, tumbled as much as 15%, the biggest drop since its 2014 initial public offering.




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