Consumer lenders ease fears over credit quality

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Credit quality metrics at four banks that specialize in consumer lending were generally better than expected during the first quarter, subduing concerns about the short-term outlook for U.S. households.

Companies that released their first-quarter earnings Thursday included American Express, whose customers include many wealthy consumers; Synchrony Financial, which focuses more on subprime credit card holders; and the auto lender Ally Financial. Also reporting late Wednesday was the private student loan specialist Sallie Mae.

Their latest disclosures suggest U.S. consumers are largely still able to meet their financial obligations, despite the long run-up in household debt.

“We continue to see positive signs around the overall health of the U.S. consumer,” Ally CEO Jeffrey Brown said during the firm’s quarterly earnings call. “Employment conditions remain robust. Wage growth has continued to accelerate in 2019, and the consumer balance sheet remains well positioned.”

Late-payment rates on both auto loans and credit cards reached seven-year highs in the fourth quarter of 2018, according to a recent report from the American Bankers Association. But consumer lenders have long argued that the trend represents a return to normalcy following a long post-recession stretch of unusually low losses, rather than a cause for alarm.

In the first quarter, Detroit-based Ally reported a consolidated net charge-off rate of 0.73%, down from 0.84% in the same period a year earlier. The company’s provision expense rose by $21 million to $282 million.

Although the percentage of Ally’s retail auto loans that were at least 30 days late ticked up slightly, the share of that portfolio that was charged off fell to 1.32%, down 15 basis points from the first quarter of 2018.

Much of the concern about credit performance in the U.S. auto lending market has focused on the subprime segment, which is not a major focus for Ally. Even as the unemployment rate fell below 4% last year, the percentage of subprime loans that became at least 90 days delinquent was significantly higher than in the boom years leading up to the Great Recession, according to a recent report by the Federal Reserve Bank of New York.

Santander Consumer USA Holdings, which specializes in subprime auto loans, is scheduled to report its first-quarter earnings on April 30.

Credit trends were also largely favorable at card specialist Synchrony.

While the percentage of Synchrony loans that were at least 30 days past due rose, the share that were charged off declined. The company’s results were complicated by its recent acquisition of a loan portfolio from PayPal and its planned sale of a portfolio of loans to Walmart customers.

Brian Doubles, chief financial officer at the Stamford, Conn.-based card issuer, said during a conference call Thursday that credit trends are showing improvement in line with the company’s expectations.

Analysts at Keefe, Bruyette & Woods expressed disappointment in the company’s loan growth but added in a research note: “The silver lining appears to be credit quality, which continues to be doing well and has been a big area of contention among investors.”

At New York-based Amex, the loss provision rose from $775 million to $809 million, but the 4% increase was the smallest rise in more than a year. It was also smaller than what analysts at both KBW and Sandler O’Neill had forecast.

The percentage of Amex loans that were at least 30 days late rose to 1.5% — up from 1.3% in the same period a year earlier — but Chief Financial Officer Jeffrey Campbell said the company does not see anything in its portfolio that would suggest a significant change in the credit environment.

At Newark, Del.-based SLM Corp., which is better known as Sallie Mae, 2.5% of student loans were at least 30 days delinquent, which was unchanged from a year earlier.

Sallie Mae and other private student lenders have long been at pains to distinguish their business, which typically relies on a financial guarantee by a parent, from the delinquency-ridden federal student loan program.

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