Credit Card Delinquencies on the Rise

June 14th, 2016 8:50 pm | by John Jansen |

Synchrony Financial (formerly GE Capital) announced today that it was seeing more delinquencies from credit card holders and was increasing charge offs to recognize that situation. The stock got whacked and credit card companies declined in sympathy.

I wonder if this is a one off for a first small hint of trouble at the consumer level.

Via Barron’s:

Uh Oh. Synchrony Financial Sees More Bad Loans…and That’s Bad News for Capital One, Discover Financial

Synchrony Financial (SYF) warned today that it’s seeing more bad debt than it had expected. Evercore ISI’s John Pancari and team explain why that’s bad news for shares of Capital One Financial (COF) and Discover Financial Services (DFS):

Synchrony Financial, a private label card company, is down 13.7% after it warned this morning that [net charge offs, or NCOs,] would increase 20-30bps over the next 12-months. Specifically, mgmt noted that consumers are having a harder time curing later stage delinquencies, resulting in higher NCOs. Accordingly, Synchrony expects “higher reserve builds” going forward. Bottom line: Synchrony’s warning should add to concerns about credit quality for subprime borrowers and credit cards. While Synchrony did not explicitly state that subprime credit is deteriorating, 28% of Synchrony’s portfolio is subprime.

Capital One and Discover are down 6.2% and 3.0%, respectively, in sympathy with the Synchrony news. As of March 31, 2016, Capital One’s combined subprime domestic credit card and auto loans total ~$49.7B, or 22% of of Capital One loans. This compares with subprime loan balances (credit card, personal, student) of ~15% for Discover. Specifically, 34% of Capital One’s domestic cards were subprime, versus 18% for Discover (domestic credit cards represent 37% of Capital One’s loans, versus 79% for Discover). Additionally, 49% of Capital One’s $43B auto loan book (19% of loans) are to subprime borrowers, though we note that Capital One has pulled back from deeper subprime auto lending in recent quarters. This compares to just 4% of personal and student loans that are subprime for Discover. Lastly, we note that Capital One is an active subprime lender, while Discover focuses in the prime space.

Capital One has previously guided to higher NCOs. Capital One expects credit card charge-offs of ~4% in FY16, and in the low 4%’s for FY17 as new credit card customers season. This compares to a 3.45% card NCO rate for FY15…

No update from Capital One. We spoke with mgmt today. While they did not provide an update, we note that Capital One will present tomorrow at an industry conference.

Discover Financial Services (BUY; $59 TP) indicated that they are not seeing signs of credit deterioration. Mgmt today spoke at a competitor conference and indicated that they do not see signs of credit deterioration. Specifically, they indicated that they are pleased with the credit performance of Discover’ card book, personal loans, and student loans.

Shares of Synchrony Financial have tumbled 15% to $25.90 at 2:36 p.;m. today, while Capital One Financial has dropped 7.1% to $64.12, and Discover Financial Service is off 3.9% at $53.34. I’m guessing American Express (AXP), which has dropped 4.5% to $60.79, is also being walloped by Synchrony’s bad news.


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