Credit card companies were among the worst performing stocks on Tuesday following Synchrony Financials SYF revelations relating to credit quality and reserves. The private-credit card issuer, which spun off from General Electric Company GE 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 Financials stock, thus plunged more than 13%, to close yesterdays session at $26.45 per share.
Synchrony Financials 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 , Discover Financial Services DFS and American Express Company AXP also tanked.
Later, speaking at the Morgan Stanley Financials Conference in New York, Chief Financial Officer of Synchrony Financial, Brian Doubles said, There doesnt appear to be anything that pertains to how were underwriting — it appears to be a general softening in the consumers ability to pay. Were coming off historic lows; we wouldnt 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. Lets take a look at certain asset quality metrics to better understand these companies credit card loan position.