Synchrony Financial said that it expects credit card loan volumes and bad credits to rise in the second half of the year, assuming that the pandemic recedes and an economic recovery ensues.
The Stamford, Conn., company said Friday that it expects consumer spending to rise and that fewer customers will pay off their existing debts, which could juice loan receivables growth in the third and fourth quarters but could also result in more sour loans. U.S. consumers have been spending less and paying off more debt as their leisure options have dwindled.
“We are encouraged by recent developments, including the recently enacted stimulus, the proposed stimulus" from the Biden administration "and national rollout of a vaccine,” Chief Financial Officer Brian Wenzel said during the company’s earnings call. “We believe these factors will have a positive impact and should provide momentum as we progress through 2021.”
Like other large credit card issuers, the $95.9 billion-asset Synchrony benefited in the fourth quarter from excellent credit performance, though the company had to share more revenue than it usually does with partnering merchants.
Net income rose 1% to $738 million, as a smaller provision for credit losses largely offset a 9.2% decline in net interest income. Loan receivables fell 6% to $81.9 billion.
“Their profitability is strong, but the growth hasn’t accelerated,” said Moshe Orenbuch, an analyst at Credit Suisse.
The bulk of Synchrony’s business comes through store-branded cards developed with retailers such as Amazon, Sam’s Club and Verizon. The firm has different arrangements with different retail partners, the details of which are generally not made public.
During the pandemic, the percentage of Synchrony’s loans that went sour plunged, which is typically an unalloyed benefit in the card industry. But for Synchrony, which reported a charge-off rate of 3.16% in the fourth quarter, down from 5.15% in the same period a year earlier, unusually strong credit quality has had a flip side.
Synchrony shared 28.6% of its net interest income during the quarter with its retail partners, which was up from 22.4% in the fourth quarter of 2019, according to disclosures made Friday. The increase was partly due to the company’s improved loan performance, Wenzel said.
John Hecht, an analyst at Jefferies, wrote in a research note that he expects revenue sharing with retailers to decrease as the percentage of loans that have gone bad rises to a more normal level.
Synchrony expects late payment rates to rise in the coming months before peaking in the third quarter. Just 3.07% of its loan receivables were at least 30 days past due at the end of the fourth quarter, down from 4.44% a year earlier.
The company also said that it anticipates consumer spending trends in the first half of the year will remain consistent with those during the second half of 2020. Purchase volumes by Synchrony customers were down 1% year over year in the fourth quarter.
