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Here's Why Credit Card Stocks Plunged in Tuesday's Trading
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Credit card companies were among the worst performing stocks on Tuesday following Synchrony Financial’s (SYF - Free Report) revelations relating to credit quality and reserves. The private-credit card issuer, which spun off from General Electric Company (GE - Free Report) in 2014, disclosed that net charge-offs (NCOs) will increase 10–20 basis points (bps) over the next 12 months.
Considering this increase in NCOs, Synchrony Financial now expects rise in reserves, beginning second quarter of 2016. Further, allowance coverage ratio (allowance for loan losses as a percent of end of period loan receivables) will likely increase 20–30 bps sequentially.
Though NCOs were showing a rising trend in the first quarter, the new guidance was a bolt from the blue for analysts and investors alike. Synchrony Financial’s stock, thus plunged more than 13%, to close yesterday’s session at $26.45 per share.
Synchrony Financial’s management red flag regarding asset quality affected the credibility of other credit card companies as well. Hence, shares of companies like Capital One Financial Corporation (COF - Free Report) , Discover Financial Services (DFS - Free Report) and American Express Company (AXP - Free Report) also tanked.
Later, speaking at the Morgan Stanley Financials Conference in New York, Chief Financial Officer of Synchrony Financial, Brian Doubles said, “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. We’re coming off historic lows; we wouldn’t view this as a step change in consumer behavior necessarily.”
The above comments by Brain Doubles show that the overall ability of the consumers to repay debt has deteriorated in the recent times. The primary reason for this seems that consumers have taken on more auto and student loans.
As these companies issue branded credit cards with retailers, these tend to be slightly more risky than other bank-issued cards. Let’s take a look at certain asset quality metrics to better understand these companies’ credit card loan position.
Company
%age of Credit Card Loan with FICO Score of Less than 660 (As of Mar 31, 2016)
Capital One
35
Synchrony Financial
28
Discover Financial
18
As seen in the table, Capital One has the largest credit card loan portfolio with FICO score of 660 or less. Notably, the company expects domestic credit card charge-off rate in 2016 to be around 4% with quarterly seasonal variability driven by growth in loans, while in 2017 it is projected to be in the low 4% range. Moreover, the expectations for higher charge-offs, combined with anticipated loan growth, will result in elevated allowance additions, going forward.
Additionally, Discover Financial’s management, which also spoke at the Morgan Stanley conference, stated that they are not seeing any deterioration in asset quality. Further, the company expressed satisfaction about its loan book performance.
However, with Synchrony Financial’s disappointing outlook, other credit card financial companies are likely to witness a similar trend.
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Here's Why Credit Card Stocks Plunged in Tuesday's Trading
Credit card companies were among the worst performing stocks on Tuesday following Synchrony Financial’s (SYF - Free Report) revelations relating to credit quality and reserves. The private-credit card issuer, which spun off from General Electric Company (GE - Free Report) in 2014, disclosed that net charge-offs (NCOs) will increase 10–20 basis points (bps) over the next 12 months.
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Considering this increase in NCOs, Synchrony Financial now expects rise in reserves, beginning second quarter of 2016. Further, allowance coverage ratio (allowance for loan losses as a percent of end of period loan receivables) will likely increase 20–30 bps sequentially.
Though NCOs were showing a rising trend in the first quarter, the new guidance was a bolt from the blue for analysts and investors alike. Synchrony Financial’s stock, thus plunged more than 13%, to close yesterday’s session at $26.45 per share.
Synchrony Financial’s management red flag regarding asset quality affected the credibility of other credit card companies as well. Hence, shares of companies like Capital One Financial Corporation (COF - Free Report) , Discover Financial Services (DFS - Free Report) and American Express Company (AXP - Free Report) also tanked.
Later, speaking at the Morgan Stanley Financials Conference in New York, Chief Financial Officer of Synchrony Financial, Brian Doubles said, “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. We’re coming off historic lows; we wouldn’t view this as a step change in consumer behavior necessarily.”
The above comments by Brain Doubles show that the overall ability of the consumers to repay debt has deteriorated in the recent times. The primary reason for this seems that consumers have taken on more auto and student loans.
As these companies issue branded credit cards with retailers, these tend to be slightly more risky than other bank-issued cards. Let’s take a look at certain asset quality metrics to better understand these companies’ credit card loan position.
Company
%age of Credit Card Loan with FICO Score of Less than 660 (As of Mar 31, 2016)
Capital One
35
Synchrony Financial
28
Discover Financial
18
As seen in the table, Capital One has the largest credit card loan portfolio with FICO score of 660 or less. Notably, the company expects domestic credit card charge-off rate in 2016 to be around 4% with quarterly seasonal variability driven by growth in loans, while in 2017 it is projected to be in the low 4% range. Moreover, the expectations for higher charge-offs, combined with anticipated loan growth, will result in elevated allowance additions, going forward.
Additionally, Discover Financial’s management, which also spoke at the Morgan Stanley conference, stated that they are not seeing any deterioration in asset quality. Further, the company expressed satisfaction about its loan book performance.
However, with Synchrony Financial’s disappointing outlook, other credit card financial companies are likely to witness a similar trend.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>