Credit performance stabilizes at Synchrony

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Credit performance at Synchrony Financial remained steady in the second quarter, reflecting the enduring strength of the U.S. consumer economy.

The percentage of the credit card issuer’s loans that were charged off rose by less than 1% versus the same period a year earlier, but that comparison was complicated by the addition of a PayPal loan portfolio late last year as well as the impending sale of a Walmart loan portfolio.

Excluding both of those loan books, Synchrony’s net charge-off rate declined by nearly 1% compared with the second quarter of 2018.

Stamford, Conn.-based Synchrony is one of the nation’s largest issuers of store-branded credit cards, which typically have higher default rates than general purpose cards.

The company’s net charge-off rate, which is calculated by dividing the value of loans that get written off by total average loan receivables, had previously been on the rise. The ratio increased from 4.49% in the second quarter of 2016 to 5.97% in the same period two years later.

Synchrony has said that it tightened its underwriting around 2016 and 2017 in response to the worsening payment rates.

Now Synchrony's credit trends are showing improvement, which is in line with the company’s expectations, Chief Financial Officer Brian Wenzel said Friday during the firm’s quarterly earnings call.

“And we expect the trends to continue to show stability as we move forward, assuming stable economic conditions,” he added.

Wenzel also said that Synchrony is not currently making significant changes to its underwriting standards.

During the second quarter, the percentage of loan receivables that were at least 30 days past due rose to 4.43% from 4.17% a year earlier. But excluding the impact of the PayPal and Walmart loans, the 30-plus-day delinquency rate fell by about 10 basis points, the company said.

Synchrony's net charge-off rate was 6.01%, which beat the expectations of Bill Carcache, an analyst at Nomura Instinet, he said in a research note.

Wenzel said Friday that Synchrony expects its sale of the Walmart loan portfolio to Capital One Financial to be completed in October.

Walmart’s decision last year to make Capital One the exclusive issuer of its credit cards was widely seen as a major blow to Synchrony, which previously had a 19-year partnership with the Bentonville, Ark.-based retail giant.

But the damage has been softened by the addition of the PayPal portfolio. Synchrony CEO Margaret Keane said during Friday’s earnings call that the integration with PayPal is now complete.

“I think now we can refocus our attention on a list of initiatives we have that really are targeted to drive growth for the program,” Keane said.

Synchrony reported second-quarter net earnings of $853 million, which included a $186 benefit from a reserve reduction related to the sale of the Walmart portfolio.

Excluding that benefit, net earnings fell by $29 million, or 4.2%, from the second quarter of last year.

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Credit cards Credit quality Earnings Economic indicators Margaret Keane Synchrony Walmart PayPal Capital One