Increased Credit Card Write-Offs Lead to Falling Stock Prices for Card Issuers

June 16, 2016, Written By John H. Oldshue
Man Struggling With Large Debt

Synchrony Financial, the largest supplier of private label credit cards, reported that credit card write-offs would increase at higher-than-expected rates, as consumers are struggling to catch up on overdue payments.

Synchrony is now projecting the net charge-off rates to increase by 20 to 30 basis points in the next year.

“There doesn’t appear to be anything that pertains to how we’re underwriting — it appears to be a general softening in the consumers’ ability to pay,” Chief Financial Officer Brian Doubles said Tuesday at an investor conference sponsored by Morgan Stanley. “We’re coming off historic lows; we wouldn’t view this as a step change in consumer behavior necessarily.”

Defaults on credit cards, which have been in decline since April 2010, have started to increase recently. Bank charge-offs reached 3.10% during the first quarter of this year, which is up from 2.97% at the same time last year.

U.S. consumers have been borrowing and spending more in recent years. Revolving credit, which is mainly credit card debt, rose to nearly $1 trillion ($951.5 billion) in April, which is a 5.5% increase from last year.

However, while retail sales continued to rise in May, some believe weakening credit quality could hurt consumer spending. Jamie Dimon of JP Morgan Chase said credit is “going to get worse.”

Not everyone agrees with Dimon’s assessment, though. Amex’s Douglas Buckminster believes consumers and investors have nothing to fear.

“Everybody who follows this industry knows we’re at historic lows in terms of credit costs, and there’s largely only one direction for them to go,” Buckminster said. “Twenty to 30 basis points over the next year or two did not seem like an alarm bell to me.”

Daniel Werner, a Morningstar Inc. analyst, seems to agree with Buckminster’s assessment in a telephone interview with Bloomberg. “We’re not at a point where people should really be panicking,” he said, adding that “it’s more of a move to a normalization of losses.”

Synchrony’s announcement, which confirmed investors’ beliefs that the credit cycle was peaking, led to a decrease in stock prices on Tuesday. Synchrony’s stock fell 13% (to $26.45), Capital One’s dropped 6.6%, Ally Financial’s sunk 5.6% and American Express fell 4.1%.



The information contained within this article was accurate as of June 16, 2016. For up-to-date
information on any of the terms, cards or offers mentioned above, visit the issuer's website.