Credit card metrics gradually normalize in December as delinquencies rise (NYSE:SYF)

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Credit card metrics continued to normalize, albeit gradually, in December, meaning some consumers are taking longer to pay their credit card bills and lenders must repay certain debts that they deem uncollectible.

On average, the delinquency rate of 1.68% increased from 1.67% in November and 1.65% in October; the net imputation rate of 1.81% decreased from 1.82% in November, but increased from 1.58% in October. See table below.

However, monthly credit data can be volatile. Looking at the three-month average from October to December, the crime rate of 1.67% was up from the three-month average of 1.52% in the third quarter. For net charges, the monthly average of 1.74% in Q4 increases slightly from 1.71% in Q3.

Wolfe Research analyst Bill Carcache blames fears that credit normalization and operating expenses will dampen earnings growth on the underperformance of consumer credit stocks (ex-American Express) since the January 14, the start date of earnings season.

“In our view, it is too early in the recovery for Consumer Finance stocks to be trading at late-cycle valuations amid healthy consumer spending and fundamentally benign credit,” Carcache wrote in a statement. note to customers. “Concerns about higher-than-expected spending growth and faster-than-expected credit normalization have fueled recent underperformance, but we continue to expect healthy consumer spending and payment rate normalization. drive strong revenue growth.”

The company that has brought these concerns to the fore is Synchrony Financial (NYSE: SYF), which released its results and outlook on Friday. While net credit card charges continued to surprise positively in Q4 2021, Synchrony’s (SYF) outlook that charges normalize to pre-pandemic by the first half of 2023 raised concerns that a pace faster credit normalization creates stronger headwinds to growth than expected. . SYF’s view contrasted with those of its peers, who generally expected a more gradual pace of normalization, Carcache said.

On the upside, payment rate normalization is expected to gradually normalize in 2022, producing a substantial impact on loan growth, Carcache wrote. With modest normalization, Discover Financial (NYSE: SDF) and Synchrony (SYF) expect loan growth to reach the high single-digit range in 2022 from the mid-single digit range if payment rates remain stable, he added.

Evercore ISI analyst John Pancari cut EPS estimate for Synchrony (SYF) to $5.58 from $5.61 for 2022 and $5.71 from $5.98 for 2023 and lowered target to priced at $47 vs. $57. “While we take a more conservative outlook on SYF’s expense ratio amid ongoing investments in the business, we remain confident in our expectation of stronger receivables growth over the coming quarters, paving the way to positive operating leverage,” Pancari said in a note. .

Jefferies analyst John Hecht pointed out that loan balances at the end of December increased from November, while payment rates remained high. “As stimulus-related factors are behind us and deferral programs are returning to normal levels, credit has begun to normalize toward historic levels.” Additionally, payout rates remain high Y/Y and on a historical basis. “Overall, we expect credit to gradually return to historic norms and receivables to increase sequentially.”

Even with high payment rates, loan balances rose for seven months, returning to pre-pandemic levels, Hecht said.

Although not included in the attached table, auto lending is experiencing similar trends. Auto net charges of 0.77% were up 23 basis points from November and the delinquency rate of 4.55% was up 25 basis points sequentially, Hecht said.

Carcache’s Top Picks in Consumer Finance Are Automated Data Services (NYSE: ADS) and Ally Financial (NYSE: ALLY) (in car credit) given their “undemanding valuations”. He expects “the combination of positive estimate revisions and revaluations to drive stocks up ~69%/~52%,” respectively.

2021
Society Teleprinter Type December November October average over 3 months
Capital one COF delinquency 2.22% 2.13% 2.06% 2.14%
dampen 1.76% 1.66% 1.04% 1.49%
American Express AXP delinquency 0.70% 0.70% 0.70% 0.70%
dampen 0.70% 0.50% 0.60% 0.60%
JP Morgan JPM delinquency 0.66% 0.66% 0.65% 0.66%
dampen 0.99% 1.05% 1.00% 1.01%
Synchrony SYF delinquency 2.60% 2.60% 2.50% 2.57%
adjusted load 2.40% 2.50% 2.20% 2.37%
Alliance Data Systems ADS delinquency 3.90% 3.90% 3.90% 3.90%
dampen 4.50% 4.60% 4.10% 4.40%
Citigroup VS delinquency 0.81% 0.81% 0.79% 0.80%
dampen 0.97% 1.19% 1.00% 1.05%
Bank of America BAC delinquency 0.89% 0.92% 0.93% 0.91%
dampen 1.35% 1.24% 1.15% 1.25%
Avg. delinquency 1.68% 1.67% 1.65% 1.67%
Avg. dampen 1.81% 1.82% 1.58% 1.74%

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Last week, Synchrony (SYF) stock fell after failed fourth quarter results and default outlook peaking in fourth quarter 2022