Normally, that would be a good sign of financial responsibility. But in the age of the pandemic, it might just be the calm before the storm.
“People got forbearance on credit cards, mortgages and auto loans. It was all pushed back,” Keane said. “As the abstention and stimuli wear off, we are definitely in a rockier place.”
In other words, the financial pain has been delayed, not canceled.
“It will almost certainly be darker from here,” Brian Wenzel, chief financial officer of Synchrony, told CNN Business.
Prepare for bad debts
Synchrony, whose share price is down 37% this year, is limiting the ability of consumers to take on credit card debt by lowering credit limits.
The credit card company said on Tuesday it increased its allowance for bad debts by $ 475 million, or 40%, in the second quarter. Soaring credit costs have led to a staggering 94% drop in Synchrony’s earnings.
And yet, Synchrony’s credit metrics don’t give the impression that the United States is in a deep recession. (He is).
Only 3.1% of the company’s loans are over 30 days past due. This is down from 4.4% a year ago.
Likewise, Synchrony is not experiencing a spike in losses on credit card defaults, at least not yet. Net write-offs as a percentage of total average loans were 5.4%, up from 6% a year ago.
Americans pay off their credit card debt
But these numbers are a bit of a mirage.
Synchrony’s forbearance program masks the financial pain. Customers enrolled in the relief program have no minimum to pay, which means they are considered “current” whether or not they choose to make a payment. And nearly a third of those customers haven’t paid off their credit card debt at all.
Synchrony has enrolled 1.7 million customers with $ 3.2 billion in balances in the forbearance program since its launch earlier this year. Encouragingly, the company said nearly 70% of those customers have since dropped the forbearance.
“The customers weren’t going to spend. They actually paid off their debts and got out of debt,” said Wenzel, the chief financial officer of Synchrony.
Job cuts are looming
History shows that credit card losses can be severe during recessions. This is because this expensive form of debt is unsecured, meaning that there is no collateral to protect lenders when consumers cannot pay.
“We believe this environment will prove difficult for Synchrony and expect low earnings for 2020,” Kyle Sanders, analyst at Edward Jones, wrote in a note to clients on Tuesday.
Sanders predicted that Synchrony may need to set aside additional funds for bad debt in the near future due to “high uncertainty over the extent and duration of the disruption due to COVID-19.”
Like other companies, Synchrony is seriously considering cutting jobs as it contemplates this uncertain future.
“We are looking at every penny we spend. We may have to make layoffs. I’m trying to do everything possible to minimize the number of layoffs we have to do,” Keane said, adding that the potential cuts would only be not “massive.”
The biggest wild card, of course, is what’s going on with the pandemic. A second wave in the fall could further hurt the economy.
“We should all be worried about the increase in the virus,” Keane said, referring to the recent spike in infections in the Sun Belt states.
Already, Synchrony is seeing signs that the resurgence of the pandemic is hitting the real economy.
After falling 31% year-on-year in early April, purchases on Synchrony cards turned positive at the end of June. However, Synchrony said spending in the first two weeks of July was down 2% from last year.
“We’ve seen a bit of pressure since the virus first emerged,” Keane said.
Surviving the retail apocalypse
“You will probably see more bankruptcies,” Keane said. “Guys who are successful just get stronger and more sophisticated.”
Still, the CEO of Synchrony has expressed cautious optimism about the industry, especially stores that innovate and improve the shopping experience.
“I don’t buy brick and mortar to go away completely,” she said. “People love to shop.”