Credit card stats gradually normalize in December as payment delays mount (NYSE:SYF)

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Credit card statistics continued to normalize, albeit gradually, in December, meaning some consumers are taking longer to pay their credit card bills and lenders have to write off some debts they deem uncollectible.

On average, the default rate increased by 1.68% from 1.67% in November and 1.65% in October; the net depreciation rate of 1.81% fell from 1.82% in November, but increased from 1.58% in October. See the table below.

However, monthly credit data can be volatile. Looking at the three-month average from October to December, the default rate of 1.67% rose from the three-month average of 1.52% for the third quarter. For net depreciation, the monthly average of 1.74% in the fourth quarter increased slightly from 1.71% in the third quarter.

Wolfe Research analyst Bill Carcache blames fears that credit normalization and operating costs will slow earnings growth in consumer finance (ex-American Express) stocks since January 14, when earnings season kicked off.

“In our view, it is too early in the recovery for Consumer Finance stocks to trade against late-cyclical valuations amid healthy consumer spending and fundamentally benign lending,” Carcache wrote in a note to clients. “Concerns about higher-than-expected cost growth and faster-than-expected credit normalization have fueled recent underperformance, but we continue to expect healthy consumer spending activity and a normalization of payment rates to drive strong revenue growth.”

The company that has raised these concerns is Synchrony Financial (NYSE: SYF), which reported earnings and its outlook Friday. While net credit card write-offs continued to surprise positively in the fourth quarter of 2021, Synchrony’s (SYF) outlook that write-offs normalize to prepandemic in H1 2023 raised concerns that a faster pace of credit normalization would create more-than-expected headwinds for growth. SYF’s view contrasted with that of his colleagues, who generally expected a more gradual pace of normalization, Carcache said.

On the upside, the normalization of payment rates is expected to gradually normalize in 2022, which will have a significant impact on loan growth, Carcache wrote. With modest normalization, Discover Financial (NYSE:DFS) and Synchrony (SYF) expect loan growth to rise to the high-single digit range versus the mid-single digit range in 2022 if payment rates remain flat, he added.

Evercore ISI analyst John Pancari cuts EPS estimates for Synchrony (SYF) to $5.58 from $5.61 for 2022 and to $5.71 from $5.98 for 2023, lowering its price target from $57 to $ 47. “While we adopt a more conservative view of SYF’s cost performance amid continued investment in the business, we remain confident in our expectation that receivables growth will strengthen in the coming quarters – paving the way for a positive operating leverage,” Pancari said in a note. .

Jefferies analyst John Hecht pointed out that end of December loan balances rose from November, while payment rates remained high. “As factors related to stimulus are behind us and as the deferral programs return to normal levels, credit will begin to normalize to historic levels.” In addition, J/Y payment rates remain high and on a historical basis. “All in all, we expect credit to gradually return to historic standards and receivables to grow sequentially.”

Even with increased payment rates, loan balances have risen for seven months and recovered to prepandemic levels, Hecht said.

Although not included in the accompanying table, auto lending shows similar trends. Direct debits of 0.77% rose 23 basis points from November and the 4.55% default rate rose 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 loans) given their ‘undemanding valuations’. He expects the “combination of positive estimate revisions and revaluations to yield ~69%/~52% equity gains, respectively”.

Business ticker Type December November October 3-month average
Capital One MEMORY delinquency 2.22% 2.13% 2.06% 2.14%
charging 1.76% 1.66% 1.04% 1.49%
American Express AXP delinquency 0.70% 0.70% 0.70% 0.70%
charging 0.70% 0.50% 0.60% 0.60%
JPMorgan JPM delinquency 0.66% 0.66% 0.65% 0.66%
charging 0.99% 1.05% 1.00% 1.01%
synchronization SYFU delinquency 2.60% 2.60% 2.50% 2.57%
custom charging 2.40% 2.50% 2.20% 2.37%
Alliance data systems ADS delinquency 3.90% 3.90% 3.90% 3.90%
charging 4.50% 4.60% 4.10% 4.40%
Citigroep C delinquency 0.81% 0.81% 0.79% 0.80%
charging 0.97% 1.19% 1.00% 1.05%
bank of America BAC delinquency 0.89% 0.92% 0.93% 0.91%
charging 1.35% 1.24% 1.15% 1.25%
Avg. delinquency 1.68% 1.67% 1.65% 1.67%
Avg. charging 1.81% 1.82% 1.58% 1.74%

For trading ideas, screen Consumer Finance names for Quant rating or any number of other factors in the SA stock screener.

Last week, Synchrony (SYF) stock fell after missing fourth-quarter earnings and the outlook for delinquency peaking in Q4 2022

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